Current Credit Environment:
Despite the current global economic woes and the turmoil in the credit markets, there is hope for those wishing to get loans. The good news is Australian Banks are still lending to those with solid performance and future prospects. This section outlines the way in which financial institutions determine debt eligibility and capacity for particular organisations.
Earnings available for debt servicing:
Earnings available for debt repayment is a measure used to calculate how much spare cash flow an organisation has to repay debt while meeting other ongoing operational requirements. The following is a guide for calculating earnings available for debt servicing:
Less Income Tax
Less Working Capital and minor CapEx**
Earnings available for Debt Service
* EBITDARD stands for earnings before interest, tax, depreciation, amortisation, rent and donations/sponsorship. EBITDARD removes both non-cash items (depreciation and amortisation) and cash items that are not related to the operational performance of the Club (gearing, abnormal items, donations and sponsorships). Interest, tax and rent are removed so as to remove capital structure influences. We have calculated the Club’s EBITDARD in order to benchmark its core licensed operational performance against industry standards.
**CapEx stands for Capital Expenditure and would include minor improvements to facilities as well as the purchase of capital goods such as gaming machines and catering equipment.
General criteria for lending to organisations:
For example, an organisation has $500,000 earnings available for debt service per year and an interest cover of at least 2 is required. Calculating this using the above formula, we get interest expenses $250,000 per year. In other words the organisation, at two times interest cover, has the ability to borrow an amount that results in interest repayments equalling $250,000 per year. If interest rates were 10%, then a loan of $2.5 million would result in $250,000 per year in interest repayments.
Getting a valuation:
Most banks require a recent valuation of the organisation. When the valuation has been carried out the bank will measure the amount of debt being requested with the valuation. Generally there are three aspects to a valuation which a bank may be interested in. These are:
Banks generally require debt to be less than 60% of the "as is going concern" or "alternative use" valuation; that is the amount of debt an organisation is requesting must be less than 60% of either the "as is going concern" or "alternative use" valuation (which ever is largest). However, banks still need to see that the organisation will be able to service the level of debt through cashflow. For example a particular venue may have very valuable land, however that organisation will not secure 60% of the value of land in debt if it is unlikely cashflows will not meet debt repayments.
One characteristic of equipment finance is that the equipment being purchased can act as the collateral for the loan. That means the valuation and the value of net assets is not always relevant when assessing the likelihood of the organisation obtaining the debt requested.