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Credit Administrative Work 2. 1. Analysis on Profitability. (1) Funding cost (2) PD,LGD (3) Eligible guarantor (4) Profitability Analysis Table. 2. Stand-by L/C. (1) Limit confirmation procedures prior to acquisition as collateral (2) Stand-by L/C Documentation

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1 analysis on profitability

Credit Administrative Work 2

1. Analysis on Profitability

(1) Funding cost

(2) PD,LGD

(3) Eligible guarantor

(4) Profitability Analysis Table

2. Stand-by L/C

(1) Limit confirmation procedures prior to

acquisition as collateral

(2) Stand-by L/C Documentation

(3) Cautions in Acquiring & Managing Collateral

(4) Others

3. LOC (Letter of Comfort)

(1) What is LOC?

(2) Contents

(3) Supplementary Measures

(4) Others

1 analysis on profitability

1. Analysis on Profitability

(1) Funding cost

  • Calculation Method of Funding Cost


Calculation with

Weighted Average


Borrowing Interest from Headquarter

“Libor for each Period+ KEB Premium + Liquidity Premium”

To be quoted on a daily basis after completion of IT development of Profitability


  • Cost of Loan

Borrowing Interest Rate from Headquarter (Libor for each Period +

KEB Premium + Liquidity Premium) + E/L

  • E/L Rate



U/L rate

(to be added)

Borrowing Interest Rate

from Headquarter

Borrowing Interest Rate

from Headquarter

E/L Rate

E/L Rate




(2) PD, LGD

  • E/L Calculation Formula

Expected Loss = PD × LGD

Net Exposure = {Monthly Average Balance × (LGD for each Product or

Credit Conversion Factor(CCF)) – Realization Value of Collateral }×Unsecured LGD

Realization Value of Collateral = (1- LGD for each Collateral)

  • PD (Probability of Default)

Probability of Default for each Credit Rating

PD for each Credit Rating

  • LGD (Loss Given Default) Loss in case of Default

○ Repayment rate (probability) varies according to type of loan and presence of Collateral

○ Type of LGD

○ Off-Balance Asset : CCF to on-balance asset

Secured LGD

LGD for each Product

Unsecured LGD

Secured LGD

Loss amount exceeding the realization

value of collateral among loan

Secured LGD = 1-

Realization Value of Collateral

LGD for each Product

Loss Rate based on Traits of Product

1 analysis on profitability

Excess after partial collection through subrogation & voluntary liquidation of


Unsecured LGD

○ Unsecured LGD: Indiscriminate application of 64% to corporate loan

○ Unsecured portion of Loan: 36% would be collected through subrogation & voluntary liquidation of


Credit Conversion Factor

Risk for default with conversion of off-balance asset to on-balance asset



L/C Issuance


Loss after

subrogated payment: 9%

No settlement

Off-Balance Asset

(3) Eligible Guarantor

Guarantee by

creditworthy guarantor




in Profit


in E/L

1 analysis on profitability

Comparing Credit Rating of

Local Company & Parent Company

Comparing Credit Rating of

Debtor and Guarantor


Credit Rating of

Parent Company

Credit Rating

Of Parent Company

In Korea

Credit Rating

Of Local Company


Credit Rating

of Guarantor

Credit Rating

Of Guarantor

Credit Rating

Of Debtor

In case of dependence on Parent Company

  • Qualification of Eligible Guarantor

○ Rating of Guarantor > Rating of Debtor

○ Rating of Guarantor of 5(0) or higher

○ Applicable when satisfying more than 3 among 5 financial indexes

Financial Index Standard


Net Income>0

Net Working Capital>0

Interest Coverage Ratio>1.0

Cash Coverage Ratio>1.0


  • When not fully meeting qualification of eligible Guarantor

○ Distortion of performance assessment results & error in decision of approval authority

○ Refer to the loan officer of Headquarter when it is difficult to grasp current status of parent

company in Korea

(4) Drawing Profitability Analysis Table

  • Drawing E/L Table

Calculation of expected loss for each foreign transaction

final credit rating

E/L reflection for each credit rating

put the month (mandatory),

yearly E/L average loan balance (a),,

Definition of Term

1. Credit Rating of Debtor: Mandatory Item 2. Joint Collateral (realization value) Amount: If there are joint collateral, put amount 3. average loan balance (a): put average loan balance for the year during the period

4. LGD for each product or average loan balance after reflection of CCF: average loan balance (a) X LGD for each product or CCF

6. average loan balance after reflection of joint collateral (d): average loan balance after reflection of LGD for each product or CCF – joint collateral amount (b)

7. Net Exposure (e): average loan balance after reflection of joint collateral (d) – apportionment of joint collateral realization value on loan of the year X credit LGD

1 analysis on profitability

  • ○ Select Borrower Rating for Final Credit Rating (mandatory item)

  • → In case of applying guarantor rating as qualified guarantor, select credit rating of guarantor

  • ○ Put realization value of joint collateral for target debtor to ‘joint collateral amount (realization value)’ cell

  • →in case of acquiring comprehensive collateral

  • ○ Selection of loan category

  • ○ Put average balance amount (average balance estimated for next 1 year)

  • ○ If there are special collateral, put in the category.

  • Put separating general loan and guarantee

    ○ Confirm on E/L Rate on bottom of table

  • Drawing Profitability Analysis Table

After E/L Reduction

After E/L Reduction

After E/L Reduction

○ Drawing Fund Operation

Put Int. Rate → Put Interest rate or guaranty rate of the loan

Funding Cost= Funding Cost Market Interest (libor) + KEB Premium + Fluidity Premium

※Scheduled to be registered to international loan board weekly before completion of computation (Board for personnel in charge

– data room)

※For the Int. Rate of Deposit, funding cost application interest shall be calculated with cost.

○ Draw same as past from Guarantee ~ Other None interest income

○ Put in green cell only

* Since E/L rate may change with change in rating of debtor or increase in loan, draw E/L Table of past 1 year and next 1 year separate

1 analysis on profitability

2. Stand-by L/C (mandatory item)

(1) Confirmation Procedures for Limit before Collateral Acquisition

Acquisition of Stand-by L/C collateral from domestic and foreign financial institutes

Request for Limit


Foreign Branch


Field Corporation

Sales Department

Of Financial Institution

Acquisition of Limit

Confirmation Approval

○ Request for Limit Confirmation : Send official letter including the L/C Issuance Bank, Guarantee

Amount, Guarantee Period, Contents of Loan for Guarantee Target, Etc.

(2)Stand-by L/C

  • Procedures when acquiring Stand-by L/C collateral

In-Advance Issuance to

Issuing Bank

Request for Stand-by

L/C Issuance

Drawing L/C Writing

  • Ex) In case complex transaction cannot expect the guarantee effect by Stand-by L/C writing

=>Conclusion after in-advance consultation with reviewers in charge of international loan team on L/C writing

Stand-by L/C Writing

We, Daehan Bank Myungdong Branch, hereby issue our irrevocable stand-by letter of credit No. 1234 in your favor for account of ABC Corporation America, Inc., (borrower’s name) up to an aggregate amount of USD 5,000,000 (Say U.S. Dollars Five million only) plus accrued interest and overdue interest as a security for your credits (including working capital loans, T/R Loans, L/C issuance) extended to ABC Corporation America, Inc. This stand-by letter of credit shall be available against your tested TELEX / SWIFT stating that ABC Corporation America, Inc has failed to repay any principal and/or accrued interest due to yourselves effected under this letter of credit.

This stand-by letter of credit shall expire on July 20, 2000 and any claim must be received by us on or before July 31, 2000, after which date this letter of credit shall become null and void.

This stand-by letter of credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500.

(3) Cautions in Acquiring and Managing Collateral

(A) Guarantee Amount

○ Impossible to request to perform liabilities for guarantee on accrued

interest and deferred interest

Loan handling same

As Stand-by L/C


○ Claim separating principal and interest

○ ex)

  • “up to an aggregate amount of U$5,000,000 (principal)

  • plus accrued interest and overdue interest”

○ Loan handling under Stand-by L/C amount considering generation of

Accrued interest and deferred interest

Acquiring collateral in

Stand-by L/C amount

Indicated of only

loan principal

○ ex)

In case Stand-by L/C amount is U$5,000,000, loan is handled

for U$4,800,000,

Difference U$200,000 is for cushion on accrued interest and

deferred interest

1 analysis on profitability

(B) Beneficiary (mandatory item)

Prevent objection of issuing bank

when requesting performance

of liabilities for guarantee

○ Ban sale between branch of Stand-by L/C collateral loan and

field corporation

○ Control transfer between branches and in-advance consultation

with international loan team

(C) Document for requesting performance of liabilities for guarantee

○ Promote convenience in requesting performance of liabilities for guarantee in charge of condition notifying default of debtor by TELEX or SWIFT


SWIFT Message

○ Mandatory confirmation on acceptance of issuing bank after sending

TELEX / SWIFT Message via phone

(D)L/C Expiration Date and Period for Requesting Liabilities for Guarantee

○ Set period for requesting liabilities for guarantee after the L/C expiration date

(over at least 1 week)

L/C Expiration Date

○ Securing the period necessary in requesting the liabilities for guarantee after

L/C expiration date

In case L/C expiration date is

Same as period for requesting

Liabilities for guarantee

○ Set period of loan at least 1 week prior to L/C expiration date

○ Commonly 1 month before is adequate

(4) Others

In case L/C issuing bank is intentionally

delaying the performance of

liabilities for guarantee

○ send official letter or swift message requesting performance of liabilities for guarantee

and notify same contents to international loan team

○ International loan team examines the collection through contacting bank or

their A/C charge)

○ Thorough analysis on primary repayment source of debtor

○ Prevent loan determination depending on Stand-by L/C collateral

○ Minimization on probabilities for performance of liabilities for guarantee of domestic branch

In case acquiring our bank issued

Stand-by L/C as collateral

○ Original copy of Stand-by L/C is stored within fire-proof vault

○ Attach copy to credit file

Safekeeping of Stand-by L/C

4)Management of Stand-by

L/C Expiration Date

○ Place and manage separate book

1 analysis on profitability

3.LOC(Letter of Comfort) (mandatory item)

(1) What is LOC?

Guarantee type where there is no legal binding but commitment to credit or reputation of

holding company or government when subsidiary or public organization gets emergency loan,

Problem of LOC

No Legal Binding

○ Actually there is no legal binding since guarantee is abstract or there is no explicit agreement

○ It cannot be used in important transaction where creditor wants to secure legal right of claim

○ Means to substitute guarantee when guarantee with legal binding cannot be performed

(2) Contents of LOC

2,Maintenance of

Ownership of Interest)

3,Support for Main Debtor

1.Recognition on Case of Loan

  • Contents on Management of Subsidiary Company

  • “Do best so that subsidiary company can be operated based on appropriate accounting policy”

  • “Exercise voting right so that subsidiary company can perform liabilities on date of payment.”

  • Guarantee on Maintenance of Asset of Subsidiary Company

  • “Do not withdraw asset from subsidiary company in scale liabilities of subsidiary company cannot be fulfilled.”

  • “Provide means necessary for subsidiary company to fulfill the liabilities”

  • Promise on maintenance of ownership

  • of interest based on certain standard

  • until the fulfillment of obligation

  • Stipulation of guarantee of debt

  • for creditors

  • No claim for damages on violation

  • of promise

  • Recognition on liabilities of guarantor

  • Recognition on purpose of approval

  • Prevention on avoiding responsibility for guarantee

(3)Supplementary Measures

Issues regarding legal effect or binding of LOC differ based on the contents

Measures of bank to utilize LOC as effective means

for preservation of bond

○ Stipulation of holding company to provide guarantee satisfactory to bank when requested

○ Effect of stipulation :

* Accusation on responsibility for claim of damage: Accusation on responsibility for

claim of damage when holding company violates guarantee submission stipulation,

* Mandatory indication of one’s intentions for conclusion of guarantee contract

regarding the holding company.

Stipulation on

Submission of Guarantee

○ Provision of holding company within Korea to holding company

* Conclude competent court for resolution of conflict based on governing law and LOC

Governing Law

Competent Court


Letter of Comfort


○Standard : Standard supplementing the issues of LOC

○ Request LOC in the direction as profitable to bank as possible.

1 analysis on profitability

LOC Writing Standard (mandatory item)

X X X Corporation

To : Korea Exchange Bank, X X Branch (the “Bank”)

Dear Sirs,

Re : Letter of Comfort

We refer to the banking facilities of up to U$ (US$ ) (the “Facilities”) extended by the Bank to our subsidiary, X X X Ltd.,(the “Borrower”)having its registered office at . pursuant to the Loan Agreement dated . , (the “Agreement”) between the Bank and the Borrower.

We hereby acknowledge your granting the Loan Facility and confirm that we will not change % ownership of the Borrower without your prior written consent.

We, X X X Corporation, also agree that we will maintain control over the management of the Borrower. Further, we will exercise our influence as parent company to the end that the Borrower will observe the highest standards of professional conduct so as to be in a position to meet its obligations at all times.

Further, if and when the Bank requires parent guaranty from our party based on the Bank’s regular review of the Borrower, we hereby unconditionally and irrevocably promise to provide joint and several guarantee to fully cover the obligation of the Borrower under the Facilities maintained hereinabove substantially in the form acceptable to the Bank

This Letter of Comfort hereunder shall remain valid and effective until full payment of all sums shall have been made under the Facilities.

This Letter of Comfort shall be governed by and construed in accordance with the laws of the Republic of Korea and we hereby submit to the jurisdiction of Seoul Distric Court.

IN WITNESS WHEREOF, the undersigned has executed this Letter of Comfort on the day of . , .

Sincerely yours,

X X X Corporation



(4) Others


○ LOC signed by unauthorized person : Of no help to preservation of bond

○ Must confirm whether or not it is signed by authorized person

Examination on


Of Signee

○ Put corporate seal together with signature, request certificate of corporate seal

and Minutes of board of directors meeting

○ Request submission of document confirming the authority to personnel in charge

* Method to present authority differs a little for each company