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.