2019 CBAO Commercial Lending and Underwriting Bootcamp Part 2
All Things Cashflow
May 2, 2019 - May 3,2019
Registration is $595 for CBAO members, $895 for non-members
Single day registration is available for $295 for CBAO members, $449 for non-member
Program Description: If you are a lender or credit analyst, are you ready to improve your skills? If you manage or review commercial relationships, what are the key cash flow drivers that affect borrower performance before and after the loan has been closed? Are you ready to improve your commercial and industrial (C&I) cash flow analysis and go beyond earnings before interest, taxes and depreciation (EBITDA)? How should you compile commercial real estate (CRE) cash flow to determine debt service coverage (DSC) and make an update, informal valuation estimate? Do you understand how to best use your bank’s global cash flow model?
This two-day course has the answers, with a focus on how to compute and compile both C&I and CRE cash flow. With C&I, the course goes beyond the basics of financial ratio analysis to provide a deeper look at sources and uses of cash, plus how these cash flow items can distort the picture obtained from EBITDA. On the CRE side, we’ll look at best practices for cash flow development and provide an overview of how capitalization or “cap” rates work.
Bring a pencil and a calculator, and be ready work through some cases.
Day One: C&I Cash Flow
Participants will use a case study to learn how to calculate both a statement of cash flows (SCF) and a Uniform Credit Analysis (UCA) model, plus how to use both tools to evaluate business cash flow in conjunction with traditional ratio analysis. The Uniform Credit Analysis (UCA) cash flow model was developed by bankers and is an important analytical tool provided as output from business financial statement “spreading” software used for commercial and industrial (C&I) loans. We will demonstrate how the UCA model is derived and compare it to the SCF prepared by accountants.
Overview/Review of Traditional Ratio Analysis
- Describe key liquidity, leverage and efficiency conclusions from the case study
- Identify where traditional debt service coverage ratios fall short in a typical analysis
- Describe the evolution of Statement of Financial Accounting Standards (SFAS) 95 and the resulting SCF, plus development of the UCA model
- Explain the cash flow impact of efficiency ratios
- Identify sources and uses of cash for both SCF and UCA, plus the three main categories of cash flow
- Compare the indirect and direct methods for compiling a SCF
Building a Statement of Cash Flows (SCF)
- Construct a SCF on the indirect method from the case study
- Construct the operating section of a SCF on the direct method as a bridge to the UCA model
Building, Understanding and Using the UCA Cash Flow Model
- Compare the formats of SCF and UCA
- Construct a UCA model from the case study
- Compare key subtotals between a SCF and UCA (from case study)
- Identify the three basic questions for which the UCA model provides answers
- Identify the cash flow coverage ratio components imbedded within the UCA format
- Develop the drivers of operating cash flow consistency and reliability as a source of loan repayment
- Explain the cash flow effect of capital expenditures, adjusted for related long-term financing
- Re-position distributions/dividends within the UCA format in order to improve cash flow conclusions for privately-held businesses
- Compare SCF and UCA analytical conclusions with earlier conclusions from traditional ratio analysis
Day Two: CRE Cash Flow and Overview of Global Cash Flow Usage
Banks continue to deal with CRE loans as a major portion of their loan portfolios. Also, many borrowers have large holdings of income-producing or rental real estate. Whether directly financing these assets or including the income stream(s) in your overall credit analysis, it is important to understand key analytical concepts in evaluating commercial real estate cash flow. This program introduces (from a case study) the key variables and concepts for determining real estate cash flow and transaction-level stress-testing. We’ll learn that CRE cash flow involves more than EBITDA for a debt service coverage DSC, and that we should be using it to help update underlying collateral value.
Building, Understanding and Using CRE Cash Flow
- Net operating income (NOI) concepts
- Understanding key variables: vacancy, management fees and replacement reserves
- The missing link: Using NOI along with a cap rate to estimate current property value
- Moving from NOI to cash flow available for debt service (CFADS) and DSC
- Stress-testing of debt service coverage (DSC) and loan-to-value (LTV) at transaction level
- How to use a sample worksheet to explore the major issues, including stress-testing
To get a complete picture of your borrower, most banks use global cash flow. While there are many formats and models, few bankers understand why certain calculations are made. In this segment we will look at a handful of issues and obstacles to GCF.? Do you know the cash flow demands that may lurk behind guarantees your borrower has extended? This seminar covers the two primary approaches to global cash flow (GCF) analysis being used by bankers, with example formats and several key analytical and conceptual issues that must be addressed.
One area of concern is the income listed on page two of Schedule E compared to withdrawals or contributions shown on the related K-1s. Another issue is how to adjust or reduce the personal cash flow for income taxes and living expenses. This leads to a discussion of the advantages and disadvantages of adjusting for income taxes and living expenses, versus adjusting the required coverage factor.
Overview of Issues in Developing and Using Global Cash Flow
- Versions of GCF being used by bankers
- Regulatory concept of global analysis
- Analytical and conceptual issues:
- Mixing two approaches to debt coverage
- Giving credit for business earnings or amount distributed
- GCF and the larger, global analysis of CRE owners/guarantors and related contingent liabilities
Who Should Attend: Community bankers, small business lenders, private bankers, commercial lenders, loan review specialists, lending managers and credit officers involved in the commercial lending process.
Meet our Senior Lender Forum Facilitator:
Richard has been training bankers for 27 years, designing and delivering courses specializing in commercial lending and credit, including portfolio and risk management, commercial real estate (CRE) and appraisals, plus selling and negotiating skills, and director training. During his banking career, he was active within RMA’s chapter structure and served on several committees at the national level. Richard is a facilitator at Barret School of Banking and the Graduate School of Banking at Wisconsin. He has published 20 articles in The RMA Journal.
If you are having issues with registering online, please contact CBAO's Education & Training Coordinator, Lianne Simeone, (614) 610-1877.