CREDIT RISK MANAGEMENT

Question 3 Maximum Word Count 1800 words In order to gain full marks, please show full workings step by step. Levine plc is a Scottish based company that has been growing fast and is looking to expand operations overseas. Levine had up until this point in time been a UK only trading company with no overseas sales or contracts. They had operated in the real estate office construction market, which had been a reasonably good business in the UK. Now they felt it was time to seek some overseas contracts. They planned to move into North Africa and the Middle East to participate in the growing markets in those regions. Levine needs extra capital to embark on this expansion. Levine has been a good customer of your bank for a number of years and now they have come to the bank seeking a loan of 50m to fund its overseas expansion plans, which is considerably large for a single customer. Your bank has set a limitation on its credit exposure to the real estate sector. In its loan application, Levine stated that the repayment of this loan will be made using the cashflows generated from its overseas activities. You have been asked to conduct a credit risk assessment on Levine's loan application. Required: a What are the additional factors that need to be taken into account when assessing the credit quality related to this loan? (7 marks) What methods can a bank use to control credit risk? Describe and discuss each method and apply them to Levine's loan. (8 marks) C Describe in detail four firm-specific causes of financial distress. (5 marks) Question 3 Maximum Word Count 1800 words In order to gain full marks, please show full workings step by step. Levine plc is a Scottish based company that has been growing fast and is looking to expand operations overseas. Levine had up until this point in time been a UK only trading company with no overseas sales or contracts. They had operated in the real estate office construction market, which had been a reasonably good business in the UK. Now they felt it was time to seek some overseas contracts. They planned to move into North Africa and the Middle East to participate in the growing markets in those regions. Levine needs extra capital to embark on this expansion. Levine has been a good customer of your bank for a number of years and now they have come to the bank seeking a loan of 50m to fund its overseas expansion plans, which is considerably large for a single customer. Your bank has set a limitation on its credit exposure to the real estate sector. In its loan application, Levine stated that the repayment of this loan will be made using the cashflows generated from its overseas activities. You have been asked to conduct a credit risk assessment on Levine's loan application. Required: a What are the additional factors that need to be taken into account when assessing the credit quality related to this loan? (7 marks) What methods can a bank use to control credit risk? Describe and discuss each method and apply them to Levine's loan. (8 marks) C Describe in detail four firm-specific causes of financial distress