A Multi Dimensional Risk Analysis for a Middle Market Lending Deal

This paper explores the rationale and analysis of a global financial institution and the methodologies used to underwrite a deal between the commercial bank and a middle market client looking to renew existing commercial loans; particularly a real estate term loan, long-term revolving line of credit, guidance line of credit (GLOC), equipment line of credit, and an interest rate swap contract. Typical analysis in the form of risk allowance, collateral due diligence, industry observation, and company-specific financial and operational strength has been performed and the deal has been approved by JPMorgan Chase & Co. Additionally, the frequency of covenant default has been determined by a pro forma income statement simulation based on a combination of both normal and uniform distributions to determine various outcomes for sales and cost of goods sold growth in future years. The results of the simulation are used to determine probability of default on specific financial covenants in the deal to gain a better understanding of the risks associated with the proposed exposure amount and the client's future financial situation.