Comprehensive Due Diligence Checklist for Corporate Credit Analysis

Introduction

Thorough due diligence is the bedrock of sound credit analysis and prudent lending decisions. This checklist provides a comprehensive framework for gathering and analyzing information about a corporate borrower. It is designed to be adaptable and should be tailored to the specific industry, size, and complexity of the company being analyzed, as well as the nature of the proposed credit facility.

Purpose: To ensure all critical areas are systematically reviewed, leading to a well-informed credit assessment and mitigation of potential risks.

Audience: Credit analysts, loan officers, risk managers.

Using This Checklist:

This is not necessarily a linear process; information gathering often happens concurrently across areas.
Mark items as N/A (Not Applicable) if they genuinely do not apply, but consider why.
Document sources for all information.
Focus not just on what the information is, but why it's relevant to the company's creditworthiness.
This checklist should be used in conjunction with detailed financial modeling and ratio analysis.

I. Company Overview & Business Profile

Objective: Understand the company's core business, history, strategy, and operational footprint.

1.1. Basic Information:

[ ] Legal Name of Borrower & Any Guarantors
[ ] Address of Headquarters and Key Operations
[ ] Legal Structure (e.g., Corporation, LLC, Partnership) & Jurisdiction of Incorporation
[ ] Date of Incorporation/Establishment
[ ] Ownership Structure (Public, Private, PE-backed, Family-owned; list major shareholders if known)
[ ] Company Website & Key Contact Persons
[ ] Purpose of Loan / Use of Proceeds

1.2. Business Description & Operations:

[ ] Detailed Description of Products and/or Services Offered
[ ] Core Business Segments and their contribution to revenue/profit
[ ] Key Geographic Markets Served
[ ] Overview of Operational Process (Manufacturing, Service Delivery)
[ ] Key Physical Assets (Plants, Equipment, Distribution Centers) - Location, Age, Condition (high-level)
[ ] Capacity Utilization (if applicable)
[ ] Sourcing of Key Raw Materials/Inputs

1.3. History & Strategy:

[ ] Brief History of the Company, Key Milestones
[ ] Current Strategic Objectives and Growth Plans (Organic, Acquisitive)
[ ] Recent Significant Events (M&A, Divestitures, Restructurings, Major Product Launches)
[ ] Mission, Vision, and Values (if articulated)

1.4. Organizational Structure & Management:

[ ] Organizational Chart (Key Departments/Functions)
[ ] Management Team & Key Personnel:
- [ ] Names, Titles, Tenure with Company, Relevant Experience
- [ ] Background Checks/Reputation (if warranted, for key individuals)
- [ ] Management Depth and Succession Planning (especially for smaller companies)
[ ] Board of Directors (if applicable): Composition, Independence, Expertise
[ ] Employee Base: Number of employees, unionization status, labor relations history.

II. Industry & Market Analysis

Objective: Understand the competitive landscape, industry trends, and external factors affecting the company.

2.1. Industry Overview:

[ ] Definition and Scope of the Industry
[ ] Size and Growth Rate of the Industry (Historical and Projected)
[ ] Key Industry Drivers (e.g., economic cycles, technological change, regulation, consumer trends)
[ ] Stage of Industry Lifecycle (Growth, Mature, Decline)
[ ] Barriers to Entry
[ ] Seasonality (if any)

2.2. Competitive Landscape:

[ ] Identify Key Competitors (Direct and Indirect)
[ ] Company's Market Position and Market Share (and trends)
[ ] Competitive Advantages / Disadvantages of the Company (e.g., brand, technology, cost structure, distribution)
[ ] Basis of Competition in the Industry (e.g., price, quality, service, innovation)
[ ] Porter's Five Forces Analysis (Threat of New Entrants, Bargaining Power of Buyers, Bargaining Power of Suppliers, Threat of Substitutes, Intensity of Rivalry)

2.3. Customer Analysis:

[ ] Major Customers / Customer Segments
[ ] Customer Concentration Risk (% of revenue from top 5-10 customers)
[ ] Typical Contract Terms with Customers (Length, Payment Terms, Switching Costs)
[ ] Customer Relationships and Loyalty

2.4. Supplier Analysis:

[ ] Major Suppliers
[ ] Supplier Concentration Risk
[ ] Availability of Alternative Suppliers / Inputs
[ ] Typical Contract Terms with Suppliers

2.5. Regulatory Environment:

[ ] Key Regulations Affecting the Industry/Company (e.g., environmental, safety, labor, financial)
[ ] Impact of Potential Regulatory Changes
[ ] Licenses and Permits Required

2.6. Macroeconomic Factors:

[ ] Sensitivity to Economic Cycles (GDP, inflation, interest rates, unemployment)
[ ] Impact of Foreign Exchange Rates (if applicable)
[ ] Geopolitical Risks (if operating internationally)

III. Financial Analysis

Objective: Assess the company's historical financial performance, current financial condition, and projected future performance. (This section assumes a detailed financial model will be built).

3.1. Historical Financial Statements (typically 3-5 years + interim):

[ ] Obtain Audited Financial Statements (if available); otherwise, Reviewed or Compiled. Note quality of statements.
[ ] Income Statements
[ ] Balance Sheets
[ ] Cash Flow Statements
[ ] Notes to Financial Statements (CRITICAL - read thoroughly)
[ ] Management's Discussion & Analysis (MD&A) if public company

3.2. Financial Spreading & Ratio Analysis:

[ ] Spread financials into a standardized format.
[ ] Calculate and Analyze Key Ratios (and trends):
- [ ] Liquidity: Current Ratio, Quick Ratio, Cash Ratio, Defensive Interval, CCC (DSO, DIH, DPO)
- [ ] Solvency/Leverage: Debt/Equity, Debt/Capital, Debt/Assets, Financial Leverage, Debt/EBITDA, FFO/Debt
- [ ] Coverage: Interest Coverage (TIE), EBITDA Coverage, Fixed Charge Coverage (FCCR), DSCR
- [ ] Profitability: Gross Margin, Operating Margin, Net Margin, ROA, ROE, ROC/ROIC
- [ ] Activity/Efficiency: Asset Turnover, Inventory Turnover, AR Turnover
[ ] Benchmark ratios against industry peers and historical trends.

3.3. Quality of Earnings (QoE) Assessment:

[ ] Identify Non-Recurring or One-Time Items (and adjust EBITDA/Net Income)
[ ] Review Revenue Recognition Policies (for aggressiveness)
[ ] Analyze Expense Recognition (e.g., capitalization vs. expensing)
[ ] Scrutinize Working Capital movements (are they sustainable sources/uses of cash?)
[ ] Compare Net Income to Cash Flow from Operations (large divergences are a red flag)

3.4. Cash Flow Analysis:

[ ] Detailed analysis of CFO, CFI, CFF.
[ ] Sustainability of CFO.
[ ] Capital Expenditure analysis (Maintenance vs. Growth CapEx).
[ ] Free Cash Flow (FCFF, FCFE) generation and its adequacy for debt service.

3.5. Financial Projections / Forecasts:

[ ] Obtain company-prepared projections (if available).
[ ] Critically assess assumptions underlying projections (revenue growth, margins, CapEx, working capital). Are they realistic and well-supported?
[ ] Develop independent base case, upside, and downside/stress case projections.
[ ] Sensitivity analysis on key drivers.

3.6. Debt Structure & Terms:

[ ] Detailed schedule of existing debt: Lender, amount, maturity, interest rate, security/collateral, covenants.
[ ] Analysis of proposed new debt facility.
[ ] Off-Balance Sheet Financing (Operating Leases - pre-ASC 842/IFRS 16, Guarantees, Take-or-Pay Contracts, etc. - review footnotes).

3.7. Tax Position:

[ ] Effective Tax Rate vs. Statutory Rate
[ ] Status of Tax Payments / Any Disputes
[ ] Net Operating Losses (NOLs) available

IV. Legal & Regulatory Due Diligence

Objective: Identify any legal or significant regulatory issues.

4.1. Corporate Structure & Good Standing:

[ ] Verify legal existence and good standing (articles of incorporation, bylaws).
[ ] Review organizational documents for any restrictions or unusual provisions.

4.2. Material Contracts:

[ ] Review key customer contracts, supplier agreements, leases, loan agreements.
[ ] Identify any change-of-control provisions, restrictive covenants, or termination clauses.

4.3. Litigation:

[ ] Inquire about any pending, threatened, or past material litigation or regulatory investigations.
[ ] Assess potential financial or operational impact.

4.4. Regulatory Compliance:

[ ] Verify possession of necessary licenses and permits.
[ ] History of compliance with industry-specific regulations.
[ ] Environmental compliance (Phase I ESA may be needed for real estate collateral).

4.5. Insurance Coverage:

[ ] Adequacy of insurance coverage (property, liability, D&O, etc.).
[ ] Named as additional insured/loss payee if lending secured.

4.6. Intellectual Property (if material):

[ ] Ownership and protection of key patents, trademarks, copyrights.

V. Collateral Analysis (If Secured Lending)

Objective: Assess the value, quality, and liquidity of assets pledged as collateral.

5.1. Accounts Receivable:

[ ] Aging schedule review (concentration of overdue accounts).
[ ] Customer concentration within receivables.
[ ] Dilution analysis (credits, returns, bad debts).
[ ] Eligibility criteria for borrowing base.
[ ] Independent field exam / AR audit results.

5.2. Inventory:

[ ] Composition (raw materials, WIP, finished goods).
[ ] Valuation method (FIFO, LIFO, Avg. Cost).
[ ] Obsolescence risk.
[ ] Net Orderly Liquidation Value (NOLV) appraisal (if available/warranted).
[ ] Location and control of inventory.

5.3. Machinery & Equipment (M&E):

[ ] Detailed listing, age, condition.
[ ] Appraisals (Fair Market Value, Orderly Liquidation Value, Forced Liquidation Value).
[ ] Liens search (UCC filings).

5.4. Real Estate (RE):

[ ] Legal description, location, type, condition.
[ ] Appraisals.
[ ] Environmental assessment (Phase I ESA).
[ ] Title insurance, property insurance.
[ ] Liens search.

5.5. Other Collateral (e.g., Intellectual Property, Securities):

[ ] Valuation and perfection of security interest.

VI. Risk Assessment & Mitigants

Objective: Synthesize findings to identify key credit risks and potential mitigants.

6.1. Identify Key Credit Risks:

[ ] Business Risks (Industry, Competition, Customer/Supplier Concentration, Management, Operational).
[ ] Financial Risks (Leverage, Liquidity, Profitability, Cash Flow, Interest Rate, FX).
[ ] Structural Risks (Loan terms, collateral, guarantees).
[ ] Other Risks (Legal, Regulatory, Environmental, Event Risk).

6.2. Assess Potential Mitigants:

[ ] Collateral coverage.
[ ] Guarantees (personal, corporate).
[ ] Loan covenants (financial, affirmative, negative).
[ ] Loan structure (amortization, term, pricing).
[ ] Hedging strategies by the company.
[ ] Management experience and track record.
[ ] Equity sponsor support (if PE-backed).

6.3. SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) from a Credit Perspective.

VII. Loan Structuring & Documentation (Considerations)

Objective: Ensure the proposed loan structure aligns with risk assessment and protects lender interests.

[ ] Appropriateness of loan type (Revolver, Term Loan, ABL).
[ ] Amount and Term.
[ ] Pricing (Interest Rate, Fees) commensurate with risk.
[ ] Repayment Schedule (Amortization, Bullet).
[ ] Collateral & Security (perfecting liens).
[ ] Covenants (Financial, Affirmative, Negative) - ensure they are meaningful and provide early warning.
[ ] Guarantees.
[ ] Reporting Requirements.
[ ] Conditions Precedent to Closing.

Disclaimer: This checklist is a general guide and may not cover all aspects relevant to a specific credit. Professional judgment is always required. Always refer to your institution's credit policies and procedures.