Vinu: Hey Manu, we’ve received an OD loan proposal where the TOL/TNW ratio is quite high, around 14:1. But the thing is, all the other financial ratios are within the benchmark, and overall, the loan proposal looks really good. How do we substantiate this proposal despite the high TOL ratio?

Manu: Hmm, that’s an interesting case, Vinu. The Total Outside Liabilities to Tangible Net Worth (TOL/TNW) ratio being high indicates that the company is heavily leveraged. But if the other financial ratios, like profitability, DSCR, current ratio, etc., are strong, that gives us some flexibility. One of the key steps you can take is to dig deeper into why the ratio is so high.

Vinu: Makes sense. What specific areas should I look into to understand this better?

Manu: First, you should check whether the high liabilities are tied to long-term strategic investments. Sometimes companies have a high TOL because they’re investing in new projects or expanding their operations. If the investments are expected to generate future cash flows, this could be a reasonable justification for the higher leverage.

Vinu: That’s a good point. But how do I present that to support the proposal?

Manu: You can present it by explaining that while the TOL is high, the company’s cash flow projections from these investments are robust. Link the future cash flows to the repayment capability. You could also focus on the fact that the company’s debt service coverage ratio (DSCR) and other liquidity ratios are solid, meaning they are still in a good position to service the debt despite the high leverage.

Vinu: I see. So we can show that despite the high leverage, the company can comfortably repay the loan through future cash flows. What else can we do to strengthen the proposal?

Manu: Another approach is to analyze the company's industry standards. If it's in an industry where high leverage is common, like infrastructure or capital-intensive sectors, you can use industry comparisons to show that the high TOL ratio is not unusual.

Vinu: Ah, industry benchmarking! That could definitely help. Anything else I should consider?

Manu: Yes, you could also highlight the company's track record. If the company has a strong history of managing high debt levels and consistently meeting its obligations, that adds credibility. Show their historical performance and how they’ve managed similar situations in the past.

Vinu: That’s a great point, Manu. A solid track record will certainly help.

Manu: Definitely. Also, you might want to propose some additional security or collateral to mitigate the lender’s risk. If the company can offer more security, it could help offset the concerns around the high leverage.

Vinu: Great idea. So, to summarize: we can justify the high TOL ratio by focusing on future cash flows, benchmarking with industry standards, highlighting the company’s track record, and potentially offering additional security.

Manu: Exactly, Vinu! With those points, you’ll be in a strong position to substantiate the proposal. Just ensure you communicate clearly how the risks associated with the high TOL ratio are mitigated by other factors.