Corporate Loan

From Open Risk Manual

Definition

Corporate Loan denotes any of a wide array of loan products used by commercially oriented legal entities: It ranges from bilateral loans extended to companies of different legal forms (SME) to syndicated loans to Large Corporates.

Loan Types

There is a very large variety of corporate loan types. Loan attributes include the following

  • Duration: Loans are typically of short to medium duration (up to a few years)
  • Interest rate calculation: can be fixed or variable (floating) and reference various rates, even foreign currency rates
  • Whether the loan is unsecured or secured with collateral (e.g. company assets)
  • How the funds are advanced (line of credit, term loan, installments)
  • How the funds will be used
  • Loan Covenants

Loan Covenants

Corporate loans typically incorporate a range of Loan Covenants which can potentially significantly alter the rights and obligations of both borrower and lender

Credit Risk

The primary risk with loans is Credit Risk. More specifically it is corporate credit risk, namely the legal entity that may default on the loan contract is a corporation, typically with limited liability. The obligations and legal framework that is applicable in the case of default or bankruptcy are determined by the laws governing the responsibilities of such commercial entities. These laws vary considerably from country to country

In common with other credit risk types, loan credit risk can be decomposed into Default Risk and Recovery Risk.

Issues and Challenges

  • For better quality corporates there is a shortage of empirical data when trying to create quantitative models of default and/or recovery

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