Credit Review Office Paul Kerr

1. Credit Review Office Paul Kerr

2. What is the Credit Review Office • The Credit Review Office is here to help SMEs & farms access bank finance. • We are employed by the Department of Finance, under the section 210 of the NAMA act. • We are a team of experienced (retired) lending bankers, chartered accountants and Enterprise Development Agency staff. • Primarily we work with AIB & BoI borrowers, but also have contacts in Ulster Bank (RBS Group) • This covers @ 75% of the SME / Farm market in the Republic • CLIP

3. History & Operations • 2009 – NAMA legislation / recapitalisation of banks • Additional Goal – ensure flow of credit to small business • 5 Banks eligible (BOI, AIB, Anglo, Irish Nationwide, EBS) • 2 lending to SME’s – AIB and BOI (approx. 60% of market) • Commenced Operations April 1st 2010 • First cases in June 2010 • Reports quarterly to Minister of Finance and weekly to DOF

4. Staff • 3 Staff – Credit Reviewer, Deputy CR and Administrator • Panel of 12 Assistant Credit Reviewers (paid on a case by case basis) • John TrethowanHead of Credit Review Office • Catherine CollinsDeputy Head of Credit Review Office

5. Objective Two Aspects: • Credit Review Process-ensure viable businesses get credit (like commercial ombudsman) • Monitoring and reporting banks target of lending €3bn each in 2010 and 2011 (€12bn in total)

6. What we do • The Credit Review Office may be able to help, if a borrower believes that they have been wrongly: • (i) refused credit - new, or additional facilities, up to €500K. • (ii) have an existing facility withdrawn or reduced. • (iii) have had fees or interest increased to unreasonable levels. • The appeals process is ‘borrower initiated’Step One- Internal Bank Appeal We will have the bank take another look at the case – in some cases this results in an immediate resolution of the case • Step Two – Credit Review Office Appeal • If this is unsuccessful we work with the borrower to:(i) In some cases recommend a straight overturn of the banks’ decision • (ii) Understand (and possibly correct) why the bank has said ‘no’(ii) Try to structure an alternative deal acceptable to the bank • We currently have a ‘step two’ success rate of over 50%

7. Review Process • Applications for new loans or restructured credit facilities up to €500K (€500k incremental borrowing, not existing level of debt) • EU SME Criteria: • Up to 250 employees • T/O up to €50M • +/Or Balance sheet value €43M • Company/sole trader/partnership

8. Eligibility • Borrower has a written application that was • Refused • Offered reduced amount • Approved but with attached terms and conditions making loan unacceptable • Or existing credit facilities removed • and borrower believes bank actions unfair

9. Application • Borrower asks for decision to be appealed through banks internal appeals process • Both banks have dedicated appeals unit • If Internal Appeal overturns initial decision: • no Credit Review Office case • Credit Review Office undertakes independent and impartial review of the credit application • Outcome: an opinion on the bank’s credit decision. • Business Viability is key • Credit Review Office overturns > 50% of bank refusals

10. Credit Review Office Credit Committee Meeting • Assistant Reviewer undertakes independent and impartial review of the credit application, may seek additional information, then presents case to committee • Output – written opinion to issue to bank, seeking Bank Next Actions • Opinion and Banks actions issued to borrower

11. Credit Reviewers Opinion • Lists all info provided by both bank and borrower • Comments on behaviour of bank-history with borrower, timeliness, terms and conditions(price, security etc.) • Focus on Viability • Financial history and projections • Can borrower repay proposed lending: ‘as is’ and ‘to be’ • Summary of Income and Expenditure (funding) • Cash flow and working capital • Capitalisation/borrowers stake/bank exposure • Conclusion and Recommendations for Borrower and Bank • Always conscious of social implications/jobs • I will discuss two case studies, one successful and one not, and how I came to the decision in a few moments.

12. Our Record to date Step 1 Banks’ Formal Internal Appeals

13. Step 2 Credit Review Office Interventions (re: arising from column 2 on previous slide = 304 declines)

14. Start-Ups Bank finance probably not appropriate Alternatives: • 3F’s and bootstrapping • Business Angel/Venture capital/County Enterprise Boards/Enterprise Ireland • Microfinance – First Step, LEDP, new government fund 2012 OR mix of above plus bank funding

15. Existing Businesses-Non Viable • Perfect storm over past two years-collapse of property market and domestic demand • Beyond repair • Borrowing to pay bills or creditors • No chance of recovery • Current issues would jeopardise any future improvements NEED TO CULL-BUT SLOWLY! Domino effect for creditors

16. Existing Businesses-May be Viable Undercapitalised OR No Reserves due to non core investments Try to separate core business (employer) and save it - park non-core if possible Sources of Capital: • Bank debt to grow profits – gearing issue • Government Loan Guarantee Scheme • Microfinance if rejected by banks • Capital Injection: • Promoters (3F’s) • Business Angel • Government Agencies:CEB/EI

17. Application process Part 1 - FACTS ABOUT THE BUSINESS • Basic info- contacts, banking details, legal structure, business profile, management and experience • Existing financial commitments- lending, guarantees, security pledged, pref. creditors • Details about the declined lending application-amount, term, how it will be repaid • List available accounting and financial info- • audited/management accounts • business plan • projections • aged debtors and • creditors, revenue/tax clearance

18. Borrower Application Form Part 2 - OPINIONS ABOUT THE BUSINESS

19. Bank Form-make the bank do the work FACTS AND OPINIONS ABOUT THE BUSINESS • Same as for borrower: Track record with bank, existing commitments of borrower & personal commitments of principals if non-ltd business • Details about the declined lending application-amount, term, how it will be repaid • Borrowers stake • Hardcoreborrowing • Financial info-turnover trend, profit margins, net cash flow • Cost of borrowing • Reason for decline Bank & Borrower ‘Facts’ - ALMOST NEVER AGREE!!!

20. Case Assessment Breakdown Assessing viability / ability to repay • What market is the enterprise involved in-growing or declining? • Promoters Experience/Capability • Past Performance - historic profit/cash flow (past 2 years may not be indicative) • Future Potential - projected profit/cash flow have steps been taken to improve situation • Performance against projections so far • Sales pipeline • Aged Debtors and Creditors • Statement of Assets and Liabilities of promoters

21. can the business survive?Viability can it service the loan? Current Position (with current debt levels) • Historic and projected Turnover, Profits, Gross and Net Margins • What is the trend? • EBITDA – approximation for cash generation of the business • Working Capital: trends, payment arrangements, stock levels • Is the business undercapitalised or overtrading? • Decouple core business from non-core

22. Opinion issued to borrower Aim: Make this proposition bankable • ‘make a deal’ • An art not a science! Issues for Bank: • risk reduction • gearing/matching funds • security – pg’s / assets If not bankable, point out other funding options which may depend on type of business

23. Case 1 (Successful) - Background • Seeking €500k loan over 12 months • 20 year family run business servicing the construction industry and they survived the downturn in the economy through shrewd business decisions. • In negotiation to write off bank debt of €1.45m with one bank with loan of €500k from the bank in question. • Business wants to develop new site to move business and change direction by targeting a different market. Loan is intended to free up capital after bank write off deal. • All planning is completed and site already in development. • The borrower intends to repay loan over 10 year period through sales or from sale of personal assets. • Bank refused application because of Bank policy on sites that require further development and that they consider application in its totality so they can assess the full risk

24. Strengths of application • Business in operation for 20 years and between the borrower and family members they have nearly 60 years’ experience in the industry. • Full planning permission obtained and redevelopment work started on site. • 20 year history with bank with an impeccably controlled account, they never had any issues. • Borrower strongly demonstrated its ability to survive the downturn and shows potential for strong growth. • Strong business plan prepared for relocation of premises and all necessary documentation provided to make an informed decision. • Business rebranded itself and became a Ltd company in anticipation of the move and change in direction. • Profitable business and in good standing to service the loan. • Selling assets including current premises to develop site in question. Cash flow is not an issue.

25. Weaknesses of application • Debt with another bank that is in the process of being written off but is not finalised • Possibility of not selling personal assets in current market • Bank unsure of how overall project funding will be structured

26. Reason why we supported the appeal • Borrower has the capacity to repay the loan. Positive outlook displayed for both profitability and growth of the business • Opportunity of debt write-off, thus immediately improving viability of entity and is in the final stages. • Risk for bank can be mitigated if they are open to it. There is access to considerable personal security here which could support this proposition and reduce/remove risk and improve viability.

27. Case 2 (Unsuccessful) - Background • Seeking €15k loan over 60 months • 10 Years as a sole trader • Business is currently borderline overcommitted to its current lending obligations • Stable business with growth not anticipated aligning with previous years • Requesting loan of €15k from bank where it does not have an account with, information provided show it operates a ‘cash type’ business • Loan is required to pay current lending obligations and debt arrears

28. Strengths of application • Stable Business in existence for 10 years • Small profitable business c€27,000 per annum

29. Weaknesses of application • Poor application to begin with, little information provided • No business account existing with bank • Currently in arrears on existing HP & Leasing obligations • Poor ICB History with a history of unpaids • No demonstration of ability to repay • Basic errors made in subtraction in the accounts to 30/12/2009 gross profit which is a little concerning • No figures provided for 2011 • Repaying current debt on his own terms rather than set out in the HP & Lease agreements • No security provided and high risk to bank • Was turned down in another local branch of which he is applying for loan of the same amount.

30. Reasons why we upheld the banks decision • No repayment capacity demonstrated • Poor ICB history showing borrower already overcommitted severely impacts application • No working business account available to make judgement on account performance • Already declined by another local branch of the same bank. • Poor application with little information provided and simple errors in accounts provided • No assets sufficiently liquid as borrower heavily committed to HP & Lease agreements

31. Some Findings • SME’s - Fail to prepare, prepare to fail – importance of business planning and forecasting • Banks - need to work on deal-making Tiger Effect: Lazy Borrowers and Lazy Lenders

32. Continued…. • Most cases are restructuring, not ‘new new’ money • Legacy issues – working capital used for capital items • Legal issues - Bad decisions made under pressure, not bad people • Issues of Reserves/Capitalisation/Security (BTL) • Cost of Funds increasing- interest rates charged increasing Demand is subdued at present but availability and Cost of Working capital will be key when demand strengthens and companies need to expand

33. Conclusion • 1 out of every 2 credit applications refused by the bank are overturned by the Credit Review Office • Helpline advice can resolve issues without a formal process • Watchdog effect – banks looking more closely at their decisions Thanks for Listening