For example the 1 billion cash that home depot

Info icon This preview shows pages 5–7. Sign up to view the full content.

View Full Document Right Arrow Icon
For example, the $1 billion cash that Home Depot received from the notes issued in September 2010 was used to repay $1 billion of Senior Notes that matured August 15,2010. Supply of Credit There are numerous parties that supply both operating and nonoperating credit to meet compa- nies'demands. Trade credit Trade credit from suppliers is routine and most often non-interest bearing. Companies apply for credit and provide the supplier with relevant financial information. This is especially important for private companies that want trade credit. Whereas suppliers can use publicly available data to evaluate the credit risk of public companies, such information is not available for private companies. Once approved, customers formally accept suppliers' credit terms that specify the amount and timing of any early payment discounts, the maximum credit limit, payment terms, and other restrictions or specifications. Suppliers tailor these contractual terms to the particular customer's existing and ongoing creditworthiness. For example, suppliers can set lower credit limits for riskier customers or impose interest payments if credit risk worsens. ANALYSIS DECISION Bank loans Banks structure financing to meet specific client needs. Balancing client needs are the myriad rules and restrictions imposed by bank regulators. For example, bank regulators require that banks hold capital (shareholders' equity) in proportion to their loan portfolio (banks' main asset). The riskier the loan, the more capital a bank must hold for that loan. Holding capital is costly and, therefore, banks carefully assess each and every loan application. Bankers often
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Module 4 I Credit Risk Analysis and lnterpretation 4-6 -e long-term relationships with their customers; bankers call this "relationship banking," which vides the bank with access to information needed for detailed credit analysis for different types -loans. Revolving credit lines are loans that companies draw on as needed. Revolvers, as they are ed, are like credit cards because a company takes cash out as needed and makes payments as is available (in uneven amounts). Interest rates on revolving credit lines are often floating, . h means the bank adjusts the rate up or down according to the prevailing market rate of inter- This adjustable interest rate feature limits the bank's interest-rate risk. Lines of credit are guarantees that funds will be available when needed. To increase liquid- _. ompanies negotiate lines of credit with their bank or with a consortium of banks. These lines -credit act as backup or interim financing. Often companies use their lines of credit to repay -term commercial paper (discussed below) until more commercial paper can be sold. Ratings __ cies such as Moody's and S&P will not rate a company's commercial paper unless there is . e of credit to secure the commercial paper. In the year ended January 2011, Home Depot's ercial paper program is supported by a $2 billion backup credit facility with a consortium banks. Companies pay for lines of credit in two ways. First, the bank charges a percentage for
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern