Credit Memo Template (Lender Credit Application, DSCR, RAROC)

Credit Memo: [Borrower name], [Facility type and amount]

Credit application and approval memorandum that a lender's relationship manager and credit analyst prepare for a corporate or mid-market facility: request and recommendation, borrower and group profile, purpose and structure, industry and business risk, financial analysis, projections and downside cases, repayment capacity (DSCR, leverage and interest cover), guarantees and recovery, covenants and conditions precedent, internal rating and expected loss, pricing and RAROC, ESG risk, policy exceptions and the approval record. Based on the EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06, applying from 2021-06-30), the internal ratings-based provisions of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2024/1623 (CRR3), and US interagency safety and soundness guidance. Replace every [bracketed] value and every row marked Example. This is a document format, not financial, credit, legal, regulatory or accounting advice; obtain the guidelines and the law for the normative text.

Document control

Approvals

Revision history

Contents

1. Request summary and recommendation
2. Borrower and group profile
3. Purpose, structure and terms
4. Industry and business risk
5. Financial analysis
6. Projections and sensitivity
7. Repayment sources and refinancing risk
8. Guarantees, collateral and recovery
9. Covenants, undertakings and conditions precedent
10. Risk rating and expected loss
11. Pricing and RAROC
12. ESG and climate risk
13. Compliance, KYC and policy exceptions
14. Key risks and mitigants
15. Approval, conditions and sign-off
16. Glossary and references

1. Request summary and recommendation

[Two to four paragraphs: the request, the borrower in one sentence, the primary and secondary sources of repayment, the key strengths and risks, the rating and the recommendation.]

Example: Corvid Commerce Group (Corvid) asks Fernhollow Bank to arrange and act as agent for EUR 50,000k of three-year senior unsecured facilities, originated 2025-06-30: a EUR 30,000k bullet Term Facility and a EUR 20,000k Revolving Facility, both maturing 2028-06-30. The Term Facility refinances EUR 22,000k of amortising bilateral loans; the balance and the revolving facility fund growth in the US and UK and general corporate purposes. Fernhollow will hold 60% (Term EUR 18,000k, Revolving EUR 12,000k); a second club lender takes 40%.

Corvid is a profitable, growing group: FY2024 revenue EUR 110,000k (+14.6%) and EBITDA EUR 12,100k (11.0% margin). Pro forma net debt including leases is EUR 10,500k, or 0.87x EBITDA. Repayment of the Term Facility at maturity relies on refinancing, which the borrower will need to sign about a year before maturity (by mid-2027), supported by base-case EBITDA of EUR 16,200k in FY2026 and EUR 18,600k in FY2027; operating cash flow covers interest and lease service with a pro forma DSCR of 1.49x on FY2024 figures. The binding covenant is debt service cover, because capital expenditure is high; in our severe case it falls to 1.06x unless capex is cut, which management has shown it can do. The recommendation is to approve at internal grade FH-6 (PD 0.85%), facility LGD 32% and a first-year RAROC of 13.2% against an 11.0% hurdle, subject to the conditions in section 15, including the cash management mandate on which the return depends, and with one policy exception (DSCR headroom, EXC-001).

2. Borrower and group profile

Describe the legal and economic group, the shareholders and ultimate beneficial owners, the management team and its track record, and the history of the relationship with the bank. Link the KYC file rather than repeating it (section 13). State the group of connected clients used for large exposure and concentration limits, and whether any member already borrows from the bank.

Example: The parent borrows and on-lends to subsidiaries. Germany carries most of the fulfilment operation and the largest share of EBITDA; Vietnam houses software development and a regional warehouse and, at 4.1% of EBITDA, is below the material subsidiary threshold, so it does not accede as guarantor at signing. Management has led the business since 2016; the CFO joined in 2022 from a listed retailer.

3. Purpose, structure and terms

3.1 Sources and uses at closing

3.2 Facilities and terms

Margin ratchet (both facilities, tested on each compliance certificate):

Explain why the structure fits the purpose. A bullet term loan suits a growing borrower whose free cash flow is reinvested, but it moves repayment risk to refinancing at maturity; section 7 must then show why refinancing is likely. A committed revolving facility gives the borrower liquidity, so assess the drawn amount the bank should expect in stress (the EAD in section 10), not only today's nil utilisation.

Example: All facilities sit at the parent, which owns the operating subsidiaries. Structural subordination of lenders to subsidiary creditors is mitigated by upstream guarantees from every material subsidiary (section 8) and a guarantor coverage test of 80% of EBITDA and gross assets.

4. Industry and business risk

Cover market size and growth, cyclicality, competitive intensity, barriers to entry, supplier and customer concentration, technology and regulatory change, and the borrower's position: scale, diversification, pricing power and cost flexibility. Use original analysis; cite market data by source and date.

Example: Corvid's revenue mix in FY2024 was about 55% subscription, 37% commerce and 8% services. The subscription base gives visibility: gross revenue retention was 92% in FY2024. The commerce segment is the main business risk, with thin margins and exposure to consumer demand and carrier costs. The plan to grow in the US raises execution risk; the bank's base case assumes US revenue grows at half the rate in management's plan.

5. Financial analysis

5.1 Income statement and cash flow summary

Check (FY2024): 12,100 - 4,700 = 7,400; 7,400 - 1,400 = 6,000; 6,000 x 25% = 1,500; 12,100 - 900 - 1,300 - 5,600 = 4,300.

5.2 Balance sheet and debt at 2024-12-31

Check: 22,000 + 5,600 = 27,600; 27,600 - 18,000 = 9,600; cash 18,000 + 30,000 - 22,000 - 900 = 25,100; 35,600 - 25,100 = 10,500. Fees are shown as a reduction of equity for simplicity; under IFRS they are deducted from the carrying amount of the loan and amortised, which does not change covenant net debt if the agreement uses nominal amounts.

5.3 Key ratios

Example: Pro forma finance charges of EUR 1,580k are Term Facility interest at an assumed all-in 4.40% (EUR 1,320k), the commitment fee on the undrawn revolving facility (EUR 70k) and lease interest (EUR 290k), less interest received (EUR 100k). Working capital is negative for the subscription business (customers pay annually in advance) and positive for commerce inventory; the cash conversion cycle was 18 days in FY2024, up from 15 days, because of inventory build for the US launch.

Comment on quality of earnings: development cost (Example: expensed in full in FY2024, so EBITDA is stated after all development spend and capex contains none; the group capitalises development only from FY2026 onwards, so adjust trend comparisons once it does), one-off items, revenue recognition for annual subscriptions, related-party transactions and any auditor emphasis of matter. Where figures are management accounts, say so and state the reliance placed on them.

6. Projections and sensitivity

6.1 Bank base case

Net debt rolls forward as opening net debt minus (Cashflow minus finance charges minus dividends) plus new leases and fees. Check FY2025: 9,600 - (4,100 - 1,550 - 2,000) + 2,100 = 11,150, where 2,100 is new leases of 1,200 plus closing fees of 900. Lease principal is excluded from the roll because it reduces cash and lease liabilities equally.

6.2 Downside and severe cases (FY2026)

Stressed cases start from the FY2025 base net debt of EUR 11,150k and assume finance charges of EUR 1,500k and new leases of EUR 1,200k. Check (severe): 9,720 - 300 - 800 - 5,500 = 3,120; 3,120 / 2,950 = 1.06x; 11,150 - (3,120 - 1,500 - 0) + 1,200 = 10,730.

Example: Leverage and interest cover stay well inside their limits in every case. DSCR is the binding covenant because Corvid spends heavily on capex. In the severe case it breaches unless management cuts capex to the maintenance level of about EUR 4,500k, which it did in FY2020. The bank therefore asks for quarterly capex reporting (CON-004) and treats DSCR headroom below 15% as an early warning indicator.

6.3 Covenant headroom at signing

State the headroom the credit policy expects at signing (commonly 20% to 30% on each covenant, as the bank's own policy sets) and explain any covenant set tighter or looser than that. Here the leverage covenant is loose by design because it serves as a margin ratchet trigger and dividend lock, while the DSCR covenant does the protective work. Example: Fernhollow's policy minimum is 20% on every financial covenant; the DSCR headroom of 19.1% falls just below it and is recorded as policy exception EXC-001 in section 13.

7. Repayment sources and refinancing risk

For a bullet facility, show the debt capacity at maturity: the multiple of projected EBITDA that the outstanding principal represents, the market conditions assumed and the borrower's other maturities. EBA/GL/2020/06 paragraph 262 expects lenders to monitor bullet and balloon loans separately and to assess refinancing risk throughout the life of the loan, so carry this analysis into each Annual Credit Review (finance/annual-credit-review).

Example: With a three-year tenor the refinancing falls inside the bank's projection period. At 2027-12-31 both facilities will have less than 12 months to run: the Term Facility becomes a current liability in Corvid's accounts and the undrawn revolving facility stops counting as committed headroom under its treasury policy. The borrower therefore has to refinance about a year before maturity, on FY2026 results and the FY2027 budget. The bank's base case gives Term Facility debt of 1.9x FY2026 EBITDA (30,000 / 16,200) and 1.6x FY2027 EBITDA, which is comfortably refinanceable in normal markets; the risk is a closed market in 2027, which the first annual review must test.

8. Guarantees, collateral and recovery

Guarantor contribution at signing (FY2024, EUR thousand):

Obligors (borrower plus guarantors) contribute 11,600 of 12,100, or 95.9%.

8.1 Recovery analysis

The facilities are unsecured, so recovery depends on the value of the group as a going concern in a default scenario:

Check: 9,720 x 5.0 = 48,600; 48,600 x 0.95 = 46,170; 50,000 + 5,600 = 55,600; 46,170 / 55,600 = 83.0%. Lease liabilities are held at the signing level on the assumption that new leases broadly replace repayments; if leases grow, recovery falls (with 8,000 of leases it would be 46,170 / 58,000 = 79.6%). The recovery estimate supports, but does not replace, the modelled LGD in section 10, which also reflects downturn conditions, discounting and the bank's historical workout data.

9. Covenants, undertakings and conditions precedent

Check: interest cover headroom 1 - (4.00 x 1,580) / 12,100 = 1 - 6,320 / 12,100 = 47.8%; liquidity at closing 25,100 + 20,000 = 45,100, headroom 45,100 - 15,000 = 30,100.

Information and other undertakings: annual audited accounts within 120 days, quarterly accounts and compliance certificate within 60 days, annual budget before the start of the year, dividends permitted only while leverage is below 2.00x, hedging of at least 70% of Term Facility interest to maturity, and material subsidiaries (5% of EBITDA or gross assets) to accede as guarantors.

Compare the proposed set with the bank's covenant standards for the segment. Explain any covenant the borrower negotiated away and what replaces its protective function. Name the agent's and the bank's responsibilities for monitoring, and confirm that the definitions in the final agreement match those used in sections 5 and 6 before first drawdown.

10. Risk rating and expected loss

Corvid's consolidated sales are below EUR 500 million, so it is not a "large corporate" under CRR Article 142(1)(5a) as inserted by CRR3, and the bank may use own LGD and CCF estimates if it holds the permission. For a large corporate the bank would apply the foundation LGD of 40% for senior unsecured exposures to non-financial corporates (CRR Art. 161(1)(aa)) and the standardised conversion factors. Under IFRS 9 the exposure is Stage 1 at origination, and the origination PD recorded here becomes the reference point for later significant-increase-in-credit-risk tests (see ECL Methodology, finance/ecl-methodology).

11. Pricing and RAROC

Check: 288 + 42 + 100 + 40 + 150 = 620; 620 - 75 - 130 - 65 = 350; 350 x 0.75 = 262.5; 24,000 x 0.663 = 15,912; 15,912 x 0.125 = 1,989; 262.5 / 1,989 = 13.2%. Without ancillary income, profit after tax is (470 - 75 - 130 - 65) x 0.75 = 150 and RAROC falls to 7.5%, below the hurdle. The return therefore depends on winning the cash management mandate, which is a condition (CON-002).

The risk weight comes from the corporate IRB formula in CRR Article 153(1) as amended by CRR3 (which removed the former 1.06 scaling factor). Because the bank uses own LGD estimates, CRR Article 162(2) requires a calculated effective maturity, floored at one year and capped at five; for bullet facilities with three years to run, M = 3.0. Do not keep the 2.5-year default of Article 162(1), which applies only without own-LGD permission: for a longer tenor the difference is large (a five-year bullet at the same PD and LGD would carry a risk weight of about 84%). The arrangement fee is spread over the tenor, so RAROC in later years is lower unless ancillary income grows.

Explain how the price compares with the bank's pricing grid for the grade and tenor, with recent comparable transactions and with the club lender's terms. If the price is below the model price, record the pricing exception and who approved it (section 13).

12. ESG and climate risk

Explain whether the facility qualifies under the bank's sustainable lending framework, whether any sustainability-linked margin is offered and how its key performance indicators would be verified. The EBA Guidelines on the management of ESG risks (EBA/GL/2025/01) set further expectations for banks' ESG risk management; they apply from 2026-01-11, and from 2027-01-11 at the latest for small and non-complex institutions.

13. Compliance, KYC and policy exceptions

14. Key risks and mitigants

15. Approval, conditions and sign-off

Keep the analyst and the approver independent of the business that benefits from the decision, record every vote and dissent, and file the final memo with the decision. After approval, any change in amount, tenor, pricing, covenants or guarantor package needs a new decision at the right authority level.

16. Glossary and references

16.1 Glossary

16.2 References

Standard and licence note

Based on the EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06, reproduction authorised with acknowledgement of the EBA as source), Regulation (EU) No 575/2013 as amended by Regulation (EU) 2024/1623, and US federal guidance (12 CFR Part 30 Appendix A and SR 20-13, US government works). Section and article numbers are cited and requirements are described in original wording; no text is reproduced. IFRS 9 and Loan Market Association documents are cited by name and section number only; this template is not affiliated with or endorsed by the EBA, the IFRS Foundation or the LMA. Fernhollow Bank, Corvid Commerce Group and every figure are fictional. Credit policies, rating scales, hurdle rates and covenant levels in the example are illustrations, not regulatory thresholds. This template is original text written for this collection. Check the current official versions of the cited texts before use. Template licence: MIT.