Presenting your application to the credit committee is perhaps the most important step in a bridging loan application. The credit committee is the final decider on the outcome of your application, choosing to approve or decline it based on the information provided to them. In order to maximize your chances of a successful credit committee application, it is important to understand how they work and what questions they will ask.
Understanding How a Credit Committee Works
The credit committee is a group of senior decision makers at a lender responsible for reviewing loan applications and deciding to approve or decline them. The committee is established by the lending institution to ensure that their capital is adequately protected and that any loan aligns with the lenders risk appetite and policy. While credit committees are a department within the lender, their decisions are independent and unbiased, based solely on the facts of the case. Credit applications are submitted by business development managers or case managers and include all the relevant information relating to the transaction, including: information on the borrower, information on the property and information on the loan. The importance of a strong credit application cannot be understated and, while each credit application is different, here are five common questions asked by credit committees.
What is the clear and credible exit?
This is perhaps the single most important question asked by credit committees when evaluating bridging loans. In order to repay bridging loans, borrowers must have an exit strategy in place. While the exit strategy may differ, bridging loans are commonly repaired through the sale of the property, the refinance of the property or through cash flow from other property sales or operations. In order to evaluate the exit strategy, credit committees will need evidence such as a property listing, indicative terms from another lender or proof of funds for the repayment. In order to ensure that exit strategy is suitable, it is important to discuss it with your mortgage broker and your case manager.
Is the loan adequately covered today and on exit?
Outside of the clear and credible exit, lenders will also scrutinize their protection on day 1. Bridging lenders are highly focused on their downside protection, which ensures that they are protected should something go wrong with the facility. Credit committees will assess the loan-to-value of the facility at day one and analyses how it compares to their policy limits. When analysing a their exposure to downside risk, credit committees will consider forced sale scenarios, costs of enforcement, interest roll up and whether the property is suitably liquid and marketable. Strong credit applications are conservative in their assumptions, demonstrating that even in the worst-case scenario, the lender is still adequately protected from loss.
What problem is the bridge solving?
Bridging finance is a short-term financing solution, giving borrowers access to funds for a short period of time, until longer term funds can be accessed. With this in mind, lenders and their credit committees will heavily scrutinize the reason for the bridging loan. A strong credit application will demonstrate that the bridging loan is solving a problem and leaving the borrower in a better position post-bridge.
Who is the borrower and what is their track record?
As with any loan, the borrowers profile is of utmost importance to the credit committee. Credit committees will review the borrower’s track record to ensure that they have relevant experience in similar transactions. In this way, transparency is crucial. Committees are generally comfortable with complexity if it is explained in a simple and honest manner. Previous failed projects are not always deal breakers, but undisclosed ones are. A strong credit application will sufficiently explain the borrower’s profile, their relevant experience and their forward goals.
What happens if the exit is delayed?
One of credit’s most important questions is “what is the exit is delayed”. This is an important question, that needs to be answered comprehensively. Markets shift, planning can be delayed, refinances can fall through. Credit committees need to see that, in the case of a delayed exit, the loan structure can withstand these delays. While there are a number of ways in which this can be done, the most common are: sufficient interest coverage, longer loan terms and alternative exit options.
In conclusion, credit committees are not looking to be “sold” on a project, instead, they are looking to limit their exposure to risk and ensure that their interests are protected. In order to ensure that your application addresses all of their concern it is important to compile a comprehensive, certain and truthful application.
