I'm trying to understand how credit teams reason about contradictory evidence in financial statements when working through credit workflows in practice.
For example, say a borrower's package includes the following:
Financial statements: Total Debt = $50m, Cash = $8m, Covenant EBITDA = $12m
Management/lender report: Total Debt = $54m
If the covenant is Net Leverage = (Debit - Cash) / EBITDA, then depending on which document is used as a source of truth, the ratio can be either 3.5x or 3.83x, which may be above or below the covenant threshold of 3.75x.
I'm trying to understand the typical real-world workflow in such cases: does the analyst
- reconcile the documents,
- follow a certain document precedence (e.g. always use management numbers over financial statements),
- follow a certain metric precedence (e.g. always use EBITDA from financial statements, total debt from management, etc),
- go back to the borrower,
- use the most recent version of a document,
- escalate to a senior reviewer,
- treat different metrics differently,
or something else?
I'm particularly interested in the workflows in private credit, commercial lending, underwriting, portfolio reviews, covenant reviews, etc. For the purposes of this question, let's say that I'm looking to understand the current practices, not necessarily what should be done.
If you work in such a team, any input would be appreciated, even if it's just a single sentence.
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