credit-memo

Credit Memo Skill

A credit memo has one job: let a committee member who has never met the borrower decide whether the bank gets its money back. This skill writes that document — the story, the structure, the numbers, and the risks — with the discipline that every risk carries a mitigant or an explicit acceptance, and every rating has a stated rationale.

What This Skill Produces

• A borrower story (business, ownership, management, why they need the money)
• A facility structure table (amount, tenor, pricing, security, guarantees, covenants)
• Repayment sources: primary, secondary, tertiary — each tested
• A financial-ratio spread with trends and covenant headroom
• Risk factors, each paired with a mitigant or an explicit acceptance
• Risk-rating rationale and a clear recommendation

Required Inputs

Ask for what's missing; from a thin brief, draft with every inferred figure labelled [assumed — verify]:

• Borrower — business, ownership, years operating, management
• Request — facility type, amount, tenor, purpose, proposed pricing and security
• Financials — 2–3 years of revenue, EBITDA, debt, interest expense, working capital; projections if available
• Existing exposure and relationship history
• Proposed covenants and the institution's rating scale, if available

Credit Framework

Borrower story. What the business does, who owns and runs it, and why they need the money now — growth, refinance, working-capital cycle, or distress dressed as growth. The purpose must match the tenor and structure (don't fund long-term assets with short-term debt).

Repayment sources — the core of the memo:

• Primary: operating cash flow. Test with DSCR = cash available for debt service ÷ total debt service. Common framing: ≥1.25x is conventional comfort; 1.0–1.25x is tight and needs a covenant fence; <1.0x means the deal relies on the secondary source — say so in those words.
• Secondary: collateral. State value, valuation date and basis, advance rate, and realistic liquidation value under stress — not appraisal value.
• Tertiary: guarantor/sponsor support. Verified net worth and liquidity, and the honest note that guarantees are a negotiating position, not cash.

Ratio spread. Show at least: leverage (Debt/EBITDA), DSCR, interest coverage, current ratio, and any sector-critical metric — 2–3 years of trend, not a snapshot. Frame thresholds as conventional reference points and calibrate to the institution's grid. For each proposed covenant, compute day-one headroom: (actual − required) ÷ required.

Risks and mitigants. Every risk gets a structural mitigant (covenant, security, guarantee, pricing) or an explicit acceptance with rationale ("accepted: single-customer concentration, mitigated partially by 3-year contract; residual risk accepted given…"). A mitigant-free risk list is a memo that hasn't finished its job.

Rating and recommendation. State the rating driver in one sentence (cash-flow strength, leverage, collateral quality, or sector) and what would move it a notch either way. Recommend: approve / approve with conditions (name them) / decline.

Output Format

Credit memo: [borrower / facility / date]

1. Recommendation & rating — up front: approve/conditions/decline, proposed rating, one-paragraph why.

2. Borrower story — business, ownership, management, purpose.

3. Facility structure — table: facility | amount | tenor | pricing | security | guarantees.

4. Repayment sources — primary / secondary / tertiary, each tested with numbers.

5. Financial spread — table: metric | FY-2 | FY-1 | current | proj | covenant | headroom.

6. Risks & mitigants — table: risk | mitigant or explicit acceptance | residual.

7. Conditions & covenants — with day-one headroom.

End with: "This memo is analytical support, not a credit decision. Approval authority, rating, and terms follow your institution's credit policy and applicable regulation."

Quality Checks

• [ ] Purpose, tenor, and structure are consistent (no long assets on short money)
• [ ] All three repayment sources are addressed; if primary DSCR <1.0x the memo says the deal leans on collateral
• [ ] Collateral is valued on realistic liquidation basis with valuation date stated
• [ ] Every risk has a mitigant or an explicit, reasoned acceptance — none is bare
• [ ] Ratios show trend, not a single year; covenant headroom is computed
• [ ] Rating rationale names its driver and the notch-mover in both directions
• [ ] Assumed figures are labelled [assumed — verify]

Anti-Patterns

• [ ] Do not list a risk without a mitigant or an explicit acceptance — bare risk lists are unfinished analysis
• [ ] Do not let the borrower's narrative substitute for the numbers — reconcile story and spread, and flag where they disagree
• [ ] Do not count a guarantee as a repayment source without verified guarantor liquidity
• [ ] Do not use appraisal value as liquidation value
• [ ] Do not bury the recommendation at the end — committee reads it first
• [ ] Do not fabricate financials from a thin brief — label every inferred number