The Credit Committee in Banking. Here we will look at what is a Credit Committee, the composition of Credit Committee materials, the transaction, background, deal summary, target company overview, sponsor company overview, the financial analysis and the risk analysis and mitigants. First, let's start with what a Credit Committee is. Credit Committee is a term often used in the financial industry, and when it comes to a leverage buyout, lender banks will have a Credit Committee to approve the transaction. In a Credit Committee, there are official members. They usually include the head of the business, the head of the credit risk, credit analysts, et cetera. In a Credit Committee, banks decide whether they provide financing to a specific deal. It depends on the particular bank, but some transactions that are viewed as lower risk, such as a rollover transaction and/or a limited credit exposure thanks to significant collateral, will not need to go to the Credit Committee. However, in general, a leverage buyout is a high risk transaction by nature because of high leverage, and therefore, most of the cases go to the Credit Committee. In the Credit Committee, a deal team presents a finance package with details of the transaction. A deal team is comprised of bankers who cover private equity clients, a loan syndication team and debt capital markets. Of course, it changes from deal to deal, but these three teams are typically involved in private equity sponsored leverage buyout deals. Then the Credit Committee members decide to approve it or not. A Credit Committee does not necessarily need to meet in person, but it depends on the bank's general guidelines and the importance of the deal. For example, if a transaction needs significant commitment from a bank, it most likely goes to an in person Credit Committee.

The beginning is always a summary of the credit request. This executive summary outlines a deal with very high level information about a transaction. It helps Credit Committee members, who you can generally assume are very busy, grasp an overview of the deal. For example, you may want to include who is the borrower, what the amount of debt is, the bank's commitment, target company, deal structure, et cetera. Then we would go into more detail with the transaction background and further detail on the deal.

We would then explain in detail about the target company. It is also important if there is a private equity sponsor to talk about their history, background and relationship.

Financial analysis for both historical and projections are critical. We then need to shift to the risk analysis which helps committee members to decide if risks around a specific transaction can be justified with regard to the bank's appetite. Finally, we would wrap this up with a conclusion with a recommendation. Of course, each package's components depends on the deal and there may be more or less. For example, if a transaction requires a considerable bond offering, we may need to include information about the certainty of bond syndication. However, the components listed here are generally seen in most Credit Committee materials. Let's take a look at the transaction background and deal summary section. Here we will focus on the nature and the size of the opportunity and what a bank has to commit in terms of the finance package. We would navigate the Credit Committee members through a brief description of the background of the deal, the relationship history of the sponsor, why this transaction occurred, for example, is it a carve out or exploring a new deal, et cetera. Also, we would want to talk about the stage of the transaction. For example, are we in the bidding process after receiving a request for a proposal or are we just pitching the sponsor? Then we would look at what the expected deal timeline is, talk about what the sponsor's true interest in the deal. The proposed financing package would also include the expected equity contribution from the sponsor. It is important to mention what this particular bank is expected to provide. When discussing the bank's potential commitment, it is important to look at the possible return to the bank in terms of both the fees and the spread on the borrowing. Included in this might be opportunities for the bank to make additional profits from this relationship in other areas of the bank. A sample term sheet would be very informative here. That would discuss the facility type, the purpose of the loan, the maturity, the related fees, collateral, covenants, et cetera.

A traditional sources and uses page would look like this with the sources on the left identifying the financing package and the uses of those funds on the right. We also might want to consider a sample of the deal structure that includes the holding companies and any financing companies involved as well as the management's commitment to the deal. In the target company overview, we would discuss the company's history, including their acquisitions, bankruptcy, restructurings, ownership and management changes. Also, key products and business geography. We may want to introduce some of the actual financials here in terms of revenues, gross profit and EBITDA. Any key information that summarizes the company can be included in this section. Sometimes key corporate events are visualized in a diagram similar to what we're seeing here. We may include a specific corporate timeline that helps the Credit Committee better understand the history of this target company.

In the business description section, we'd go into more detail about the operations of the company. We would start with what the company's business is, the market, the industry, where the target company performs its operations and include data on the market size, the segments, the projected trends. We would describe their specific products and technology, pace of innovation, the product lifecycle. In addition, we would want to talk about their customers, the size, the length of the relationships, et cetera.

Sponsor overview would discuss the company history, key management, such as the CEO and CIO. Also, potential relationships that already might exist between areas of the bank and the sponsor. We would need to include the coverage team's view on management capability, for example, their expertise and experience in this particular industry. Next would be a summary of the sponsor's funds. Here we would discuss the total assets under management, fund detail by year and how much dry powder remains, and in other words, how much additional cash do they have to invest. It's also important to explain the fund's investment thesis because sometimes a bank's credit policy does not allow some sectors such as gaming, military, et cetera. You might want to state the sector focus, the geography focus, the key investment thesis, such as how this firm generates its returns. Lastly, we might want to include a list of current portfolio companies and the investment history as some private equity sponsors aim for business synergies among their portfolio companies. In the financial performance analysis, we will justify the financial stability of the target company as a borrower. Here we'll discuss how the company's revenue, profit, EBITDA have changed over time. It might be helpful here to break out the numbers by geography or by segment. However, it best explains the trend. In the financial projections, we will lay out different scenarios. It helps to have both a base case or an expected case as well as a conservative case. More cases perhaps might be needed including a downside case. A conservative scenario will explain that even if expected growth is not achieved, the loan will not be in jeopardy. Profit margin is particularly important given the low margin for error with leverage buyouts. Even a 1% decline in EBIT could significantly reduce the deal profitability. As we know, EBITDA estimate is critical because it is typically the base of the company valuation and the covenants, so the EBITDA bridge or reconciliation is often included in the financial analysis. This is an EBITDA adjustment line by line identifying non-recurring items and subtracting or adding them back from an accounting or accrual based EBITDA. It would also be helpful here to present some comparable transactions in an effort to justify the transaction value as well as the financing structure. In risk analysis and mitigation, we would discuss the potential risks around the transaction and target businesses. Any potential risks around the deal should be included in this section. There is no deal without risks, so what is important is that we are aware of the potential risks. We need to identify risks from different perspectives. For example, the competitive issues, such as the barriers to entry being too low, customer risks, such as high concentration of specific customers, or finance risks, such as higher leverage than similar transactions. Also, regulatory risks are sometimes looming as a barrier to the transaction, especially in cross-border deals. We may need to pay attention to employee matters that will lead to a loss of operational capabilities. Finally, litigation, such as one for patents, is a typical risk that might be faced. It is good to have risk mitigants or counter opinions on these risks to convince Credit Committee members in favor of the loan.