Q: Our board gets a little nervous when we're dealing with a borrower who has a bunch of corporations. Any suggestions for board education as it relates to this, ideally including some information about how we can structure our loans to mitigate some of these risks?

A: There is really little to protect the lending institution from cash demands on the company or on the owner from other companies in the group. This appears to be a classic global cash flow situation where the lender has to be assured the other non-borrowing but related companies are unlikely to collapse and puts great cash flow pressure on the lending institution's borrower and on the owner/guarantor.

If the lending institution were the single lender to every company in the group, it would have considerable leverage in setting performance standards and limiting cash outflows to the owner. However, there are likely numerous lenders involved, which gives no one lender much, if any, leverage.

One option is to require monthly or quarterly bank and brokerage statements so the lending institution has some idea of cash support in a crisis. Personal income tax returns are worthless in this respect. The lending institution also needs a list of all guarantees granted by the owner. With these two sets of information, it can match likely liquid assets with guarantees to determine if there is any possible cash support in a crisis. In addition, the lending institution should require an abundance of collateral and security. The more concern it has, the more security it should demand.

In addition, the lending institution should ask for a cross default clause in which an event of default triggered by any related company triggers an event of default for the borrower. It might also ask for a clause that prohibits additional borrowing by any related company without the consent of the lending institution, but such a covenant may not be feasible in a competitive environment.

The lending institution may have considered all of the above. In such circumstances, there is no substitute for a very comprehensive cash flow based credit analysis on a global basis.