Annual Credit Review Template (Covenant Monitoring, Early Warning, Watch List)

Annual Credit Review: [Borrower name], [Review date]

Periodic review of an existing corporate borrower by the lending bank: review summary and recommended action, exposure and limit utilisation, borrower update, performance against the original credit case, updated financial analysis, covenant monitoring and recalculation, guarantor and collateral review, early warning indicators, watch list assessment, rating confirmation, IFRS 9 staging and expected credit loss, refinancing and forward-looking assessment, follow-up of approval conditions and the review decision. Based on the EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06, section 8, applying from 2021-06-30), Regulation (EU) No 575/2013 Article 173 (annual review of rating assignments) and the US Interagency Guidance on Credit Risk Review Systems (2020). Replace every [bracketed] value and every row marked Example. This is a document format, not financial, credit, regulatory or accounting advice; obtain the guidelines and the law for the normative text.

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Revision history

Contents

1. Review summary and recommended action
2. Exposure and limit utilisation
3. Borrower update
4. Performance against the original case
5. Updated financial analysis
6. Covenant monitoring
7. Guarantor and collateral review
8. Early warning indicators
9. Watch list assessment and risk classification
10. Rating confirmation
11. IFRS 9 staging and expected credit loss
12. Forward-looking and refinancing assessment
13. Conditions, compliance and relationship follow-up
14. Review decision and actions
15. Glossary and references

1. Review summary and recommended action

[Two to four paragraphs: performance against the original case, covenant status and headroom, early warning indicators, rating and stage, recommended action.]

Example: Corvid has performed ahead of the bank's original base case for two years. FY2026 revenue of EUR 140,000k was 1.4% above the case and management EBITDA of EUR 16,800k was 3.7% above it. Covenant leverage was 0.62x at 2026-12-31 (0.70x a year earlier) and DSCR rose to 1.71x; every covenant was met at all four 2026 test dates and certificates arrived on time. The independent recalculation agrees with the certificate.

Two early warning indicators are amber. First, the FY2027 budget raises capex to EUR 12,000k, a third above the bank's original FY2027 case, which brings budgeted DSCR down to 1.50x; a 10% shortfall in commerce volume would take DSCR to 1.07x, below the 1.20x covenant, unless EUR 375k or more of capex is deferred. Second, the Vietnam subsidiary is now a material subsidiary that is not a guarantor, as permitted by the 2026 amendment. The grade stays FH-5 (PD 0.60%) after a one-notch downward override, the exposure stays in IFRS 9 Stage 1, and the recommendation is to confirm all limits and place the borrower under enhanced monitoring with quarterly DSCR forecasts (ACT-001). The main forward risk is refinancing: both facilities mature on 2028-06-30, 13 months after this review, and the borrower's board has mandated new facilities for signature by 2027-06-30. Fernhollow's participation in them is a new credit decision (ACT-004).

2. Exposure and limit utilisation

Example: Peak revolving utilisation was 25% of Fernhollow's commitment (3,000 / 12,000), drawn for inventory ahead of the US peak season and repaid from operating cash flow. Fernhollow is counterparty for EUR 12,600k of the group's EUR 21,000k pay-fixed hedge (70% of the Term Facility), which runs to 2028-06-30, the facility maturity. Total group exposure is within the single-name and sector limits.

Reconcile the limit table to the limit system and the general ledger on the review date, and explain any difference. Include exposures booked in other units of the bank (for example a US branch or a leasing subsidiary) when they belong to the same group of connected clients, because concentration and large exposure limits apply to the total.

3. Borrower update

Summarise meetings with management, site visits and the relationship manager's contacts during the year. Note any delay or reluctance in providing information, because information behaviour is often the first sign of stress.

Also check public sources: company registry filings, court records, press and trade publications, and any credit data service the bank subscribes to. A charge registered in favour of another lender, a change of registered address or a late statutory filing can contradict what the borrower reports and may breach the negative pledge or information undertakings.

4. Performance against the original case

Check (FY2025 actual): Cashflow 14,600 - 1,000 working capital - 1,800 tax - 7,600 capex = 4,200; debt service 1,450 finance charges + 1,400 lease principal = 2,850; DSCR 4,200 / 2,850 = 1.47x; leverage 10,200 / 14,600 = 0.70x; interest cover 14,600 / 1,450 = 10.07x.

Example: The original case used management EBITDA without add-backs, so compare like with like: management EBITDA beat the case in both years. Covenant EBITDA in FY2026 includes EUR 1,000k of net add-backs (restructuring 900 plus share-based payment 500, less a disposal gain of 400). Net debt is below the case because Cashflow beat the case in both years; new leases (EUR 1,700k in FY2026) were above the assumed EUR 1,200k. Net debt rose from 10,200 to 11,000: Cashflow of 4,800 less finance charges of 1,300 and dividends of 2,600 reduced it by 900, offset by 1,700 of new leases (10,200 - 900 + 1,700 = 11,000). The restructuring add-back does not flatter DSCR, because Cashflow deducts the EUR 900k paid; only the non-cash share-based payment and disposal gain adjustments differ between covenant and management EBITDA.

5. Updated financial analysis

Check: 124,500 / 110,000 - 1 = 13.2%; 140,000 / 124,500 - 1 = 12.4%; 37,800 - 27,600 = 10,200; 38,000 - 27,000 = 11,000; 27,600 + 20,000 = 47,600; 27,000 + 20,000 = 47,000. Lease liabilities moved from 7,800 to 8,000 (principal repaid 1,500, new leases 1,700).

Analyse revenue quality (subscription retention, price increases, customer concentration), margin drivers (gross margin by segment, people cost), working capital (days sales outstanding, inventory days, deferred revenue), capex split between maintenance and growth, and currency exposure. Example: Subscription revenue reached about 57% of the total in FY2026 and gross revenue retention stayed above 90%. Commerce inventory days rose for the US launch, absorbing EUR 1,500k of working capital. About 30% of revenue is in GBP and USD; the group hedges forecast flows for 12 months, so the sensitivity of covenant EBITDA to a 10% euro appreciation is limited to roughly EUR 400k in the first year.

Where interim figures are available after the audited year end, add a year-to-date column and compare it with the budget. A review completed five months after year end that ignores the first quarter misses the most recent and most relevant information.

6. Covenant monitoring

6.1 Test history

Quarterly certificates are due within 60 days of quarter end and the annual certificate within 120 days of year end; every certificate in the period arrived on time.

6.2 Recalculation of the latest certificate

Example: As a challenge test, removing the share-based payment add-back (EUR 500k) would give covenant EBITDA of 17,300 and leverage of 11,000 / 17,300 = 0.64x, with no effect on compliance. The restructuring add-back is supported by the board paper and invoices reviewed by the agent. Non-financial undertakings (information delivery, hedging, dividend basket, material subsidiary accession) were all complied with; the FY2026 dividend of EUR 2,600k was paid while leverage was below 2.00x.

7. Guarantor and collateral review

Obligor coverage: 16,300 / 17,800 = 91.6% of EBITDA and 104,000 / 112,000 = 92.9% of gross assets, against an 80% minimum. Example: The facilities are unsecured, so there is no collateral to revalue. Guarantee limitation language for the German guarantor was reconfirmed by counsel after a change in local case law reporting; no impact. The Vietnam exception was approved in 2026 because local law restricts upstream guarantees; the bank caps the exception at 10% of group EBITDA and will reassess if Vietnam exceeds it (EWI-009).

8. Early warning indicators

Check (EWI-008): 12,000 / 9,000 - 1 = 33.3%.

Set thresholds so that indicators trigger early enough to act, and calibrate them against the bank's own default and migration history. Each trigger needs an owner and a deadline for the follow-up action; an indicator without escalation is only a report.

Review the indicator set itself once a year. Remove indicators that never trigger or always trigger, add borrower-specific ones that reflect the risks named in the credit memo, and confirm that the data feeding each indicator arrives on time.

9. Watch list assessment and risk classification

Example: Corvid is placed under enhanced monitoring because of EWI-008 and EWI-009. It does not meet any watch list criterion: no indicator is red, no breach is forecast in the base case, and no forbearance is in place. For a US branch the equivalent regulatory classification would be Pass; the bank's internal categories map to the US classification terms used in its credit policy (Pass, Special Mention, Substandard, Doubtful, Loss).

Where a borrower is placed on the watch list, record the strategy (for example reduce, hold or exit), the actions agreed with the borrower and the date of the next review. If forbearance is granted, classify the exposure as forborne in line with the bank's policy and consider the transfer to the workout unit.

10. Rating confirmation

Example: The override reflects the FY2027 capex step-up, the add-backs in covenant EBITDA and the unsigned refinancing. The amber indicators in section 8 and the override point to the same risk, which confirms that monitoring and rating are aligned.

11. IFRS 9 staging and expected credit loss

Check: 0.50 x 0.50% + 0.20 x 0.35% + 0.30 x 0.90% = 0.250% + 0.070% + 0.270% = 0.59%; 0.0059 x 0.28 x 24,000 = 39.6. The scenario weights (base 50%, upside 20%, downside 30%) are the bank-wide weights approved by the ECL committee in 2026-09 (ECL Methodology parameter PAR-03); never set weights per borrower. The accounting LGD of 28% excludes the downturn add-on used for capital; discounting is ignored for a one-year horizon in this simplified example. If this loan were booked by a US GAAP reporting entity, CECL (ASC 326) would require a lifetime allowance from origination.

12. Forward-looking and refinancing assessment

Check: budget cash flow 21,600 - 2,100 - 3,300 - 12,000 = 4,200; debt service 1,200 finance charges + 1,600 lease principal = 2,800; 4,200 / 2,800 = 1.50x. The shortfall case cuts EBITDA by EUR 1,620k (the budget's own estimate) and tax by 25% of that (405): Cashflow 4,200 - 1,620 + 405 = 2,985 and DSCR 2,985 / 2,800 = 1.07x. Restoring 1.20x needs Cashflow of 3,360, so at least EUR 375k of capex must be deferred. Budget net debt: Term Facility 30,000 plus leases 6,400 (8,000 less principal of 1,600; no new leases budgeted) = 36,400, less netted cash of 25,400 (closing cash 26,400 less 1,000 in Vietnam) = 11,000; 11,000 / 21,600 = 0.51x. The group budget reports 0.17x on its own management definition (net debt excluding leases and including Vietnam cash: 30,000 - 26,400 = 3,600; 3,600 / 21,600 = 0.17x); the covenant definition adds 6,400 of leases and 1,000 of trapped cash, giving 0.51x. Quote both with their definitions.

Example: Leverage is not the risk; cash cover is. About half of the FY2027 capex is capitalised platform development that management can phase. The bank asks for a quarterly DSCR forecast with each certificate and for management to identify deferrable capex in advance (ACT-001). The Term Facility bullet of EUR 30,000k and the revolving facility mature on 2028-06-30, 13 months after this review. The bullet equals 1.69x FY2026 covenant EBITDA (30,000 / 17,800), so the credit is refinanceable, but timing now matters: at 2027-12-31 both facilities have less than 12 months to run, the Term Facility becomes a current liability in Corvid's accounts and, from 2027-06-30, the undrawn revolving facility no longer counts as committed headroom under the borrower's treasury policy (cash alone, about EUR 27,000k, is below its EUR 35,000k minimum). The borrower has a board mandate to refinance by 2027-06-30 (Liquidity and Funding Plan, finance/liquidity-funding-plan). Refinancing is therefore the main forward risk: it is tracked by EWI-013, and the bank's participation in the new facilities is a new credit decision with its own credit memo (ACT-004).

13. Conditions, compliance and relationship follow-up

Check: 288 margin + 42 commitment fee + 100 arrangement fee amortisation (300 over 3 years) + 40 agency fee + 185 ancillary = 655; 655 - 75 - 130 - 46 = 404; 404 x 0.75 = 303; RWA 24,000 x 45.1% = 10,824 (IRB formula, PD 0.60%, LGD 32%, effective maturity M = 1.5 years remaining at 2026-12-31, CRR Art. 162(2)); capital 10,824 x 12.5% = 1,353; 303 / 1,353 = 22.4%. The return looks high partly because the shrinking remaining maturity lowers the risk weight; compare it with the origination RAROC (13.2%) and do not use it to price the refinancing.

14. Review decision and actions

Load each action into the monitoring system with its owner and due date. If an action is missed, treat it as an amber indicator at the next quarterly check.

15. Glossary and references

15.1 Glossary

15.2 References

Standard and licence note

Based on the EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06; EBA material may be reproduced with acknowledgement of the source, and none is reproduced here), Regulation (EU) No 575/2013 as amended, and the US Interagency Guidance on Credit Risk Review Systems (SR 20-13, a US government work). Section, article and paragraph numbers are cited and requirements are described in original wording. IFRS 9, IFRS 18 and FASB ASC Topic 326 are cited by name, topic and paragraph number only; this template is not affiliated with or endorsed by the EBA, the IFRS Foundation or the FASB. Monitoring categories, EWI thresholds and SICR criteria in the example are illustrations, not regulatory values. Fernhollow Bank, Corvid Commerce Group and every figure are fictional. This template is original text written for this collection. Check the current official versions of the cited texts before use. Template licence: MIT.