Would you credit it?

Credit manager:

So, you want to give these guys some clean lending on top of the existing transactional and collateralised facilities. What for?

Account officer:

Well it’s not exactly clean lending… I’ve explained that on page two. It’s two million dollars for margin calls, actually… to protect the integrity of the other facilities.

Credit manager:

How does lending them more money protect what we’ve already got out? It doesn’t make sense.

Account officer:

Well, if you read the request, it should make sense. Look there, pages three and four, it’s all explained… I’ve even given an example.

Credit manager:

Do you know how many requests we get a day? We haven’t got time to read them verbatim. Look, the numbers just don’t stack up for any more lending... profits are down on the previous year, turnover has fallen, EBITDA [earnings before interest, taxes, depreciation, and amortisation] is lower… I just don’t like it.

Account officer:

Let me put it this way… we’ve financed some fifty million dollars of structured pre-export deals for them where repayment is tied to the proceeds of commodities. We’ve rightly insisted that the client take out a hedge to support the financing, and now that commodity prices are rising, and the client needs additional funds to maintain the hedge. You’re suggesting we don’t give them any?

Credit manager:

Why should we? You said yourself, commodity prices are rising. So, when shipments are made, the commodity is worth more than when we lent. What’s the problem?

Account officer:

The problem, aside from the obvious, is that the client has entered into forward contracts on the exchange to mitigate his price risk, and because the price has moved increasingly against his position, he’s being called for more and more margin. It’s stretching his resources. If he can’t maintain the positions he’ll be forced to close out at a loss… a significant loss. But if we finance those positions for him, he can run them till maturity and properly offset them against his physical position as originally intended. It’s a win:win.

Credit manager:

Win:lose more like. He wins and we lose. What’s to stop him taking the money and running?

Account officer:

Us. We pay directly to the exchanges for him… well, through the broker. We’ve set up a tri-partite agreement.

Credit manager:

I still don’t like it. Profit was down 20% on the previous year. Turnover… EBITDA… just look at these numbers, they’re worse yet you expect me to give them more.

Account officer:

Have you read… no, of course not. Look, here on page five, I’ve shown their results for the past eight years. Not a single loss. And compare the previous year with all the rest… it was exceptional, their best ever. They may be down 20% on that now, but they’re still up 15% on the year before. There’s certainly volatility in the numbers, but there’s also a certain consistency in the eight- year pattern. In fact, you could say that they’ve consistently managed inconsistency. Looking at the trend, rather than the absolute, gives a completely different perspective.

Credit manager:

Yes, okay, I see that. But turnover… EBITDA…

Account officer:

Any fool can trade turnover. It’s profitability that counts. Turnover was down because commodity prices had fallen, but they’d actually traded more volume. As for EBITDA, well it’s not that relevant… we’re not dealing with a capital-intensive group, borrowing heavily against fixed assets. We’re dealing mostly with self-liquidating assets where working capital and cash flow are far more relevant and they’re both very healthy.

Credit manager:

Hmm… but the balance sheet…

Account officer:

The balance sheet is already nine months old, the markets and the company have moved on, and so should we. I know that some of the numbers are not as good as the previous year, but again the relative trend is positive. The ratios are consistent. There’s really nothing in the financials to give cause for concern.

Credit manager:

But …

Account officer:

No more ‘buts’. Give them the two-million-margin line and sleep at night. Don’t give it to them and stay awake worrying about the other fifty million.

Credit manager:

Where do I sign?