Key takeaways
- Banks ask one question in many forms: what money will this debt be repaid from, and if the first plan does not happen, where will repayment come from?
- A good credit package answers the credit attention points before they are asked, and shows the figures in Base, Downside and Stress cases.
- Complete information usually speeds up the review and reduces the tendency to overstate risk.
Reading it as a credit analyst
Credit analysts do not start from IRR but from the sources of repayment. The project owner looks at the profit it will earn, while credit looks at whether the debt will be repaid if things do not go to plan. The project's upside does not belong to the bank, which receives only interest and principal, so it gives more weight to the downside.
- First source of repayment Transfer proceeds from buyers, or operating income
- Second source of repayment The strength of the sponsors, guarantees, and equity that can be called in
- Last source of repayment Collateral, which is costly and slow when it actually has to be enforced
Credit Attention Points
The points the credit committee presses repeatedly follow a clear pattern and should be answered in the documents from the start.
| Issue | Concern | Evidence that answers it |
|---|---|---|
| Market Demand | Is the market real, or is there oversupply? | Comparable sales data, absorption rate |
| Cost Certainty | Cost Overrun | Fixed-price contract, QS review |
| Timeline | Delays | Buffer in the programme, contractor track record |
| Exit | Who is buying, and where does the money come from? | Presale, buyer profile |
| Sponsor | Has the sponsor done this before, and does it have enough money? | Track record, financial statements |
| Regulatory | Are the permits ready? | EIA, clean title |
| Currency | Buyers or debt in foreign currencies | Buyer mix, hedging plan |
| Market Cycle | Market timing | Cycle and price analysis |
Project document structure
The Project Information Document is the core document the bank uses to assess a project. After reading it, one should be able to answer how much is being borrowed, for what, and what it will be repaid from.
- Executive summary of 2–3 pages stating the requested facility, its purpose and the sources of repayment
- Project overview: location, type, size and timing
- Sponsor's background and track record
- Market analysis
- Product and pricing strategy
- Development plan and programme
- Construction plan and budget
- Financial projections and indicators
- Capital structure and Sources & Uses
- Risk analysis and risk mitigation
- Exit and repayment plan
Supporting documents
Project documents
- Financial model and Feasibility Study
- Market study and valuation report
- EIA or evidence of progress
- Building permit or preliminary approvals
- Construction contract, if available
- Sponsor's financial statements for 3 years
- Management team profiles
Legal entity and collateral documents
- Company affidavit, memorandum of association and articles of association
- Board and shareholder resolutions as required by the articles of association
- Shareholder structure
- Director documents
- Title deeds and encumbrance search
- Powers of attorney
Tables of figures to prepare
Example shows the actual value, the threshold and the explanation on the same line
| Ratio | Project | Assumed threshold | Meaning |
|---|---|---|---|
| DSCR | 1.42x | ≥1.25x | Headroom 13.6% |
| LTC | 68% | ≤75% | Within range |
| LTV on completion | 55% | ≤70% | Collateral sufficient |
| Interest Coverage | 3.2x | ≥2.0x | Headroom 60% |
| Net Debt/EBITDA | 2.8x | ≤4.0x | Headroom 30% |
| Equity Contribution | 32% | ≥25% | Above threshold |
| Presale | 60% | ≥40% | Above threshold |
Banks usually want to see three cases. The Base case is what is expected to happen, the Downside case is what the bank worries about, and the Stress case is the severe scenario that asks whether DSCR still stays above 1.0x. These come with sensitivities on the key variables: selling price, sales speed, construction cost, interest rate and delay.
Sample term sheet
This example is a hypothetical case used only to explain terms and ways of thinking. It does not refer to any particular bank or customer.
Sample project Mixed-use residence and small hotel, total cost THB 1,800 million. Unit: THB million
| Source of funds | Amount | % |
|---|---|---|
| Equity from the lead sponsor | 360 | 20.0% |
| Equity from the co-investor | 240 | 13.3% |
| Land Loan | 150 | 8.3% |
| Construction Loan | 900 | 50.0% |
| Presale cash at peak | 150 | 8.3% |
| Total | 1,800 | 100.0% |
| Conditions | Bank's first offer | After negotiation |
|---|---|---|
| Facility amount | THB 1,050 m | THB 1,050 m |
| Margin | MLR + 2.50% | MLR + 1.75% |
| Tenor | 4 years | 5 years |
| LTC ceiling | 60% | 65% |
| DSCR Covenant | ≥1.50x | ≥1.35x |
| Upfront Fee | 1.00% | 0.75% |
| Grace Period | 18 months | 24 months |
| Prepayment Fee | 2% | 1% |
| Presale condition | 50% | 40% |
A facility of THB 1,050 m equals 58.3% of total cost. The 65% LTC ceiling therefore does not increase the facility immediately, but it opens up headroom of THB 120 m if costs or the facility need to be adjusted.
Interest saved = 0.75% × average outstanding balance of THB 735 m × 5 years = THB 27.6 m
Upfront fee saved = 10.5 − 7.9 = THB 2.6 m. Total saving is about THB 30.2 m.
The figures use an average outstanding balance of 70% of the facility and a 5-year tenor in both cases, in order to compare the effect of the margin alone.
What changes the negotiation
- Obtain offers from several banks, not just to compare prices but to test market interest
- Preliminary Presale before applying for the loan shows market acceptance
- A co-investor with a track record and financial standing strengthens the credit
- Decide what matters most: margin, Covenant or flexibility
- The CFO, financial adviser and lawyer work as one team
Bank relationships
Most developers have one or two principal banks that provide the main facilities and know the business well. However, relying on a single bank carries risks in facility limits, concentration and bargaining power, so groups that have grown often have 2–4 banks. Large projects of about THB 1,500 m and above may use a syndicated loan, with a lead arranger, an agent bank and a security agent.
Bundling facilities with a single bank helps in negotiation, but check cross-default and shared collateral conditions as well, because one project in trouble can drag others down with it.