Pre Exam CICC Day 9

Numerous music CD stores are seeing plunging sales and profitability levels as consumers prefer to purchase music online. Many stores have started to default on their loan payments. What is the likely cause of default for such a business?

• Overcapacity.

• Fundamental change in underlying business.

• Deregulation.

What is an early warning sign related to business and operations?

• Change in product quality.

• Increasing use of debt financing.

• Increase in prices of major inputs.

Which indicators related to financial markets should you monitor?

• Operating leases.

• Credit default swaps.

• Covenants.

What type of change should you be alert for in the client relationship?

• There are major differences in terms and conditions negotiated with multiple lenders.

• The client refuses to work with more than one or two lenders.

• An increase in communication through phone calls, emails or scheduled meetings

Under what circumstances should it concern you if a potential client wants to leave a lender with whom it has a long-standing relationship?

• The client is shopping around for more favourable pricing.

• The client might be aware of future business issues and may be trying to buy time.

• The client is too demanding and the existing lender is not agreeing to some of their demands.

Why should Relationship Managers question why a new client is leaving its existing bank?

• New clients only discuss business with new lenders to spread the risk around.

• New clients are only interested in finding the best prices.

• New clients represent a disproportionate source of bad loans.

Which key factor is most likely to be the cause of loan default in a cash crop business?

• High financial leverage.

• Drought.

• Failed acquisition.

Who is responsible for generating business from the client relationship?

• Special Loans Department.

• Relationship Manager.

• Credit Department.

What is the action that should be initiated by the Relationship Manager if a client reaches the cash crunch state?

• The Relationship Manager should put the account on a watch list.

• The Relationship Manager should talk to the management about how the situation can be turned around.

• The Relationship Manager should continue business as normal but be alert to early warning signs.

What factor is in itself a consequence of a substantial problem loan portfolio and causes further negative consequences of its own?

• Lowering of rating by rating agencies.

• Increased legal costs.

• Increased monitoring and audit checks.