Credit Memo Skill
A credit memo has one job: let a committee member who has never met the borrower decide whether the bank gets its money back. This skill writes that document — the story, the structure, the numbers, and the risks — with the discipline that every risk carries a mitigant or an explicit acceptance, and every rating has a stated rationale.
What This Skill Produces
- A borrower story (business, ownership, management, why they need the money)
- A facility structure table (amount, tenor, pricing, security, guarantees, covenants)
- Repayment sources: primary, secondary, tertiary — each tested
- A financial-ratio spread with trends and covenant headroom
- Risk factors, each paired with a mitigant or an explicit acceptance
- Risk-rating rationale and a clear recommendation
Required Inputs
Ask for what's missing; from a thin brief, draft with every inferred figure labelled [assumed — verify]:
- Borrower — business, ownership, years operating, management
- Request — facility type, amount, tenor, purpose, proposed pricing and security
- Financials — 2–3 years of revenue, EBITDA, debt, interest expense, working capital; projections if available
- Existing exposure and relationship history
- Proposed covenants and the institution's rating scale, if available
Credit Framework
Borrower story. What the business does, who owns and runs it, and why they need the money now — growth, refinance, working-capital cycle, or distress dressed as growth. The purpose must match the tenor and structure (don't fund long-term assets with short-term debt).
Repayment sources — the core of the memo:
- Primary: operating cash flow. Test with DSCR = cash available for debt service ÷ total debt service. Common framing: ≥1.25x is conventional comfort; 1.0–1.25x is tight and needs a covenant fence; <1.0x means the deal relies on the secondary source — say so in those words.
- Secondary: collateral. State value, valuation date and basis, advance rate, and realistic liquidation value under stress — not appraisal value.
- Tertiary: guarantor/sponsor support. Verified net worth and liquidity, and the honest note that guarantees are a negotiating position, not cash.
Ratio spread. Show at least: leverage (Debt/EBITDA), DSCR, interest coverage, current ratio, and any sector-critical metric — 2–3 years of trend, not a snapshot. Frame thresholds as conventional reference points and calibrate to the institution's grid. For each proposed covenant, compute day-one headroom: (actual − required) ÷ required.
Risks and mitigants. Every risk gets a structural mitigant (covenant, security, guarantee, pricing) or an explicit acceptance with rationale ("accepted: single-customer concentration, mitigated partially by 3-year contract; residual risk accepted given…"). A mitigant-free risk list is a memo that hasn't finished its job.
Rating and recommendation. State the rating driver in one sentence (cash-flow strength, leverage, collateral quality, or sector) and what would move it a notch either way. Recommend: approve / approve with conditions (name them) / decline.
Output Format
Credit memo: [borrower / facility / date]
1. Recommendation & rating — up front: approve/conditions/decline, proposed rating, one-paragraph why.
2. Borrower story — business, ownership, management, purpose.
3. Facility structure — table: facility | amount | tenor | pricing | security | guarantees.
4. Repayment sources — primary / secondary / tertiary, each tested with numbers.
5. Financial spread — table: metric | FY-2 | FY-1 | current | proj | covenant | headroom.
6. Risks & mitigants — table: risk | mitigant or explicit acceptance | residual.
7. Conditions & covenants — with day-one headroom.
End with: "This memo is analytical support, not a credit decision. Approval authority, rating, and terms follow your institution's credit policy and applicable regulation."
Quality Checks
Anti-Patterns
Example Trigger Phrases
- "Write a credit memo."
- "Write up this loan for credit committee."
- "Prepare a deal for credit committee."
- "Spread these financials and check covenant headroom."