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QUESTION/SITUATION: You do know that the lender has risk rated these loans as Pass/Watch. You are not able to determine the current financial condition of the borrower to rate it otherwise. If you don't have current financials and the loan is delinquent, you should risk rate it Special Mention or worse. You will be asked to determine an independent risk rating for each loan (Pass, Special Mention, Substandard or Doubtful). You may review these and determine a risk rating that is different from the Pass/Watch rating of the bank. Once you have made your assessment and decision, briefly summarize your justification for each rating. There are two questions: Riverview Dental and Big Bear Motel 1) Riverview Dental Student Risk Rating Outstanding $7,500,000 Unfunded Commitment $2,500,000 Bank Risk Rating Pass 1 Borrower Synopsis: John Smith is a dentist in Culver City, CA. Loan Description: This revolving line of credit was established in 2011 for the purpose of buying out Mr. Smith's partner, Mr. Collins. This line provided funds to purchase the partnership assets totaling 57.9MM and to provide a working capital line for future equipment needs. The primary source of repayment (PSOR) is cash flow from the business with a required monthly borrowing base certificate (BBC). The secondary source of repayment is liquidation of the pledged collateral. Collateral consists of eligible Accounts Receivables (A/R) and dental equipment. Terms of repayment call for interest only monthly at the Bank's prime rate plus 1%, with a floor of 5% and principal due at maturity. Per the loan history dated 8/31/20 the loan has paid as agreed over the last 12 months. The Bank's risk rating is based on the following: The PSOR appears to support the debt. Per the bank's spreads of the borrower prepared 12/31/19Financial Statement, cash available to service debt of $1,250K, after cash distributions, was sufficient to support required interest payments of $193K for a 6.47x interest coverage ratio. Assuming the bank termed out the $7,500K outstanding balance at 5% for seven years, the resulting $1,020K in annual Principle and Interest (P&I) would be covered by the $1,250K cash available to service debt for a 1.22x debt service coverage ratio. However, the prior years' available Company Finance (CF)of $950K would not have supported a term out using this hypothetical structure. The borrowing base certificate as of 12/31/19 showed a total eligible borrowing base of $10,785K, limited to the commitment amount of $10MM, compared to the 8/31/20 outstanding balance of $7,500K for excess availability of $2,500K. The cash value of pledged life insurance policies of $235K (after an 80% margin) add additional support. The Personal Financial Statement (PFS) dated 5/19/20 listed cash on hand of $600K and marketable securities of $75K. a Net Worth (NW) of $28.8M largely centered in the equipment value of the dental practice of $17.5MM (pledged to the borrower's loan) and Real Estate (RE) of $6MM. The guarantor's only debt was a real estate mortgage of $801K. Sales Operating profit Net income Depreciation Interest Cash flow before distributions Cash Distributions CF after distributions Total debt service DSCR An analysis of the last three years Financial Statement, plus the last period end is as follows: 12/31/17 12/31/18 12/31/19 $5,432K $10,789K $29,312K $186K $276K $330K $479K $(122) K $(84)K $124K $233K $155K $393K $415K $217K $996K $526K $288K 8/31/20 $21,508K $1,828K $1,080K 0 $193K $1,273K $134K $62K $224K $297K $862K $464K $64K $1,250K $393K $415K $217K $193K 2.19x 1.12x 0.29x 5.76x Per the bank spreads of the 12/31/19 company prepared Financial Statement, A/R days have increased to 57 days, up from 6 days at 12/18, 36 days at 12/17 and 37 days at 12/16. Accounts Payable (A/P) days have also increased to 34 days at 12/31/19 from 3 days at 12/18, 10 days at 12/17 and 6 days at 12/16. A monthly borrowing base certificate (BBC) is required. Per the Bank, no over-advances were noted during the last 12 months. No collateral audit is required. The BBC received as of 12/31/19 reflected the following: Stated Value $5,046K Margin 75% Allowable Value $3,785K Appraisal date N/A A/R, net of $494K over 90 days Equipment Total Value $10,769K 65% N/A $7,000K $10,785K Big Bear Motel, LLC Outstanding $2,800 Unfunded Commitment $0 Bank Risk Rating Pass Student Risk Rating 1 Your Justification for their risk rating: Borrower Synopsis: The borrower was formed to own and operate a 110 room hotel in Big Bear, CA The borrower is owned by Robert and Julia Barnes, real estate investors. Loan Description: The loan originated in August 2016 for the purpose of acquiring this property. The primary source of repayment (PSOR is operating income. The loan is secured by a 1- trust deed on the property and the liquidation of collateral and guarantor support. Mr. and Mrs. Barnes provide unlimited guarantees. In 2018 the interest rate was lowered from 7% 50 6.5%. Current terms call for Principle & Interest payments (P&l) monthly of $21,372 amortized over 25 years with a 5 five-year maturity. The loan is current The Bank's risk rating is based on the following: Borrower history shows no delinquencies. However, a note to file indicates that the borrowers have asked for a further rate reduction to ease cash flow. Although a current Financial Statement has not been received, the PSOR appears to exceed debt service requirements based on the loan officer's note to file that the current 70% occupancy rate results in a 1.10X the Debt Service Coverage Ratio (DSCR). Property taxes are current The July 2016 appraisal shows a Net Operating Income (NOI) of $330K with an 8% cap rate, resulting in a $4,155K appraised value and a 67% of Loan to Value (LTV). The last guarantor Financial Statement dated June 2020 showed a NW of $10M centered in Real Estate investments of $7M, marketable securities of $2.5M and cash on hand of $500K. Big Bear Motel, LLC Outstanding $2,800 Unfunded Commitment $0 Bank Risk Rating Pass Student Risk Rating 1 Your Justification for their risk rating: Borrower Synopsis: The borrower was formed to own and operate a 110 room hotel in Big Bear, CA. The borrower is owned by Robert and Julia Barnes, real estate investors. Loan Description: The loan originated in August 2016 for the purpose of acquiring this property. The primary source of repayment (PSOR)is operating income. The loan is secured by a 1st trust deed on the property and the liquidation of collateral and guarantor support. Mr. and Mrs. Barnes provide unlimited guarantees. In 2018 the interest rate was lowered from 7% to 6.5%. Current terms call for Principle & Interest payments (P&I) monthly of $21,372 amortized over 25 years with a 5 five-year maturity. The loan is current. The Bank's risk rating is based on the following: Borrower history shows no delinquencies. However, a note to file indicates that the borrowers have asked for a further rate reduction to ease cash flow. Although a current Financial Statement has not been received, the PSOR appears to exceed debt service requirements based on the loan officer's note to file that the current 70% occupancy rate results in a 1.10X the Debt Service Coverage Ratio (DSCR). Property taxes are current. The July 2016 appraisal shows a Net Operating Income (NOI) of $330K with an 8% cap rate, resulting in a $4,155K appraised value and a 67% of Loan to Value (LTV). The last guarantor Financial Statement dated June 2020 showed a NW of $10M centered in Real Estate investments of $7M, marketable securities of $2.5M and cash on hand of $500K. QUESTION/SITUATION: You do know that the lender has risk rated these loans as Pass/Watch. You are not able to determine the current financial condition of the borrower to rate it otherwise. If you don't have current financials and the loan is delinquent, you should risk rate it Special Mention or worse. You will be asked to determine an independent risk rating for each loan (Pass, Special Mention, Substandard or Doubtful). You may review these and determine a risk rating that is different from the Pass/Watch rating of the bank. Once you have made your assessment and decision, briefly summarize your justification for each rating. There are two questions: Riverview Dental and Big Bear Motel 1) Riverview Dental Student Risk Rating Outstanding $7,500,000 Unfunded Commitment $2,500,000 Bank Risk Rating Pass 1 Borrower Synopsis: John Smith is a dentist in Culver City, CA. Loan Description: This revolving line of credit was established in 2011 for the purpose of buying out Mr. Smith's partner, Mr. Collins. This line provided funds to purchase the partnership assets totaling 57.9MM and to provide a working capital line for future equipment needs. The primary source of repayment (PSOR) is cash flow from the business with a required monthly borrowing base certificate (BBC). The secondary source of repayment is liquidation of the pledged collateral. Collateral consists of eligible Accounts Receivables (A/R) and dental equipment. Terms of repayment call for interest only monthly at the Bank's prime rate plus 1%, with a floor of 5% and principal due at maturity. Per the loan history dated 8/31/20 the loan has paid as agreed over the last 12 months. The Bank's risk rating is based on the following: The PSOR appears to support the debt. Per the bank's spreads of the borrower prepared 12/31/19Financial Statement, cash available to service debt of $1,250K, after cash distributions, was sufficient to support required interest payments of $193K for a 6.47x interest coverage ratio. Assuming the bank termed out the $7,500K outstanding balance at 5% for seven years, the resulting $1,020K in annual Principle and Interest (P&I) would be covered by the $1,250K cash available to service debt for a 1.22x debt service coverage ratio. However, the prior years' available Company Finance (CF)of $950K would not have supported a term out using this hypothetical structure. The borrowing base certificate as of 12/31/19 showed a total eligible borrowing base of $10,785K, limited to the commitment amount of $10MM, compared to the 8/31/20 outstanding balance of $7,500K for excess availability of $2,500K. The cash value of pledged life insurance policies of $235K (after an 80% margin) add additional support. The Personal Financial Statement (PFS) dated 5/19/20 listed cash on hand of $600K and marketable securities of $75K. a Net Worth (NW) of $28.8M largely centered in the equipment value of the dental practice of $17.5MM (pledged to the borrower's loan) and Real Estate (RE) of $6MM. The guarantor's only debt was a real estate mortgage of $801K. Sales Operating profit Net income Depreciation Interest Cash flow before distributions Cash Distributions CF after distributions Total debt service DSCR An analysis of the last three years Financial Statement, plus the last period end is as follows: 12/31/17 12/31/18 12/31/19 $5,432K $10,789K $29,312K $186K $276K $330K $479K $(122) K $(84)K $124K $233K $155K $393K $415K $217K $996K $526K $288K 8/31/20 $21,508K $1,828K $1,080K 0 $193K $1,273K $134K $62K $224K $297K $862K $464K $64K $1,250K $393K $415K $217K $193K 2.19x 1.12x 0.29x 5.76x Per the bank spreads of the 12/31/19 company prepared Financial Statement, A/R days have increased to 57 days, up from 6 days at 12/18, 36 days at 12/17 and 37 days at 12/16. Accounts Payable (A/P) days have also increased to 34 days at 12/31/19 from 3 days at 12/18, 10 days at 12/17 and 6 days at 12/16. A monthly borrowing base certificate (BBC) is required. Per the Bank, no over-advances were noted during the last 12 months. No collateral audit is required. The BBC received as of 12/31/19 reflected the following: Stated Value $5,046K Margin 75% Allowable Value $3,785K Appraisal date N/A A/R, net of $494K over 90 days Equipment Total Value $10,769K 65% N/A $7,000K $10,785K Big Bear Motel, LLC Outstanding $2,800 Unfunded Commitment $0 Bank Risk Rating Pass Student Risk Rating 1 Your Justification for their risk rating: Borrower Synopsis: The borrower was formed to own and operate a 110 room hotel in Big Bear, CA The borrower is owned by Robert and Julia Barnes, real estate investors. Loan Description: The loan originated in August 2016 for the purpose of acquiring this property. The primary source of repayment (PSOR is operating income. The loan is secured by a 1- trust deed on the property and the liquidation of collateral and guarantor support. Mr. and Mrs. Barnes provide unlimited guarantees. In 2018 the interest rate was lowered from 7% 50 6.5%. Current terms call for Principle & Interest payments (P&l) monthly of $21,372 amortized over 25 years with a 5 five-year maturity. The loan is current The Bank's risk rating is based on the following: Borrower history shows no delinquencies. However, a note to file indicates that the borrowers have asked for a further rate reduction to ease cash flow. Although a current Financial Statement has not been received, the PSOR appears to exceed debt service requirements based on the loan officer's note to file that the current 70% occupancy rate results in a 1.10X the Debt Service Coverage Ratio (DSCR). Property taxes are current The July 2016 appraisal shows a Net Operating Income (NOI) of $330K with an 8% cap rate, resulting in a $4,155K appraised value and a 67% of Loan to Value (LTV). The last guarantor Financial Statement dated June 2020 showed a NW of $10M centered in Real Estate investments of $7M, marketable securities of $2.5M and cash on hand of $500K. Big Bear Motel, LLC Outstanding $2,800 Unfunded Commitment $0 Bank Risk Rating Pass Student Risk Rating 1 Your Justification for their risk rating: Borrower Synopsis: The borrower was formed to own and operate a 110 room hotel in Big Bear, CA. The borrower is owned by Robert and Julia Barnes, real estate investors. Loan Description: The loan originated in August 2016 for the purpose of acquiring this property. The primary source of repayment (PSOR)is operating income. The loan is secured by a 1st trust deed on the property and the liquidation of collateral and guarantor support. Mr. and Mrs. Barnes provide unlimited guarantees. In 2018 the interest rate was lowered from 7% to 6.5%. Current terms call for Principle & Interest payments (P&I) monthly of $21,372 amortized over 25 years with a 5 five-year maturity. The loan is current. The Bank's risk rating is based on the following: Borrower history shows no delinquencies. However, a note to file indicates that the borrowers have asked for a further rate reduction to ease cash flow. Although a current Financial Statement has not been received, the PSOR appears to exceed debt service requirements based on the loan officer's note to file that the current 70% occupancy rate results in a 1.10X the Debt Service Coverage Ratio (DSCR). Property taxes are current. The July 2016 appraisal shows a Net Operating Income (NOI) of $330K with an 8% cap rate, resulting in a $4,155K appraised value and a 67% of Loan to Value (LTV). The last guarantor Financial Statement dated June 2020 showed a NW of $10M centered in Real Estate investments of $7M, marketable securities of $2.5M and cash on hand of $500K
