What is the best way to draft a monitoring memo from a borrower's latest financials?
Spread the new statements first, then compare them with the prior period and with the last approved analysis. Recalculate covenants and headroom, decide whether the risk grade still fits, and write a short memo that states what changed, why, and what happens next. Lead with the conclusion, not the numbers.
A monitoring memo is shorter than an annual review and narrower in scope. It answers whether anything in the new numbers changes the bank's view of the loan, and if so what the bank will do about it.
What is a loan monitoring memo?
A loan monitoring memo, sometimes called a portfolio monitoring memo or interim review, is a short written review of a borrower's condition prepared when new information arrives between full reviews. The trigger is usually quarterly or interim financial statements, a compliance certificate or a borrowing base report, though it can also be an event such as a lost customer or a missed payment.
Its readers are the credit officer who approves it, the next person to review the relationship and, later, loan review or an examiner. Each of them needs to see that the bank looked at the new numbers, understood them and acted where it needed to.
What sections should a loan monitoring memo include?
The template below works for most commercial relationships. Keep each section short. For a borrower whose results are steady, several sections can be a single line.
| Section | What it covers | Typical length |
|---|---|---|
| Summary and conclusion | What was reviewed, the overall finding and any change to grade or actions | 3 to 5 sentences |
| Relationship snapshot | Exposure, facilities, maturity, current grade and last review date | A small table |
| What changed | Revenue, margins, earnings, liquidity and leverage vs prior period and plan, with causes | 1 to 2 paragraphs |
| Covenants and headroom | Each covenant: required level, actual, headroom, trend and next scheduled level | A table |
| Repayment and liquidity | Coverage, line usage, cash position and payment history | 1 paragraph |
| Collateral and guarantors | Any change in collateral value, borrowing base or guarantor support | A few lines |
| Risk grade | Whether the grade still fits the rating definitions, and why | 1 paragraph |
| Actions and follow-ups | What the bank will do, who owns it and by when | A short list |
How do you draft the memo, step by step?
Draft in the order the work is done, then rearrange so the conclusion comes first. Writing the summary last means it reflects what the analysis actually found.
- 1Spread the new statements into the bank's template and run the standard tie-outs.
- 2Build trailing twelve months figures where covenants are tested that way.
- 3Compare with the prior period, the same period last year and any projections from the last approval.
- 4Recalculate each covenant using the agreement's definitions and the level in force, and note headroom against the next scheduled level.
- 5Check line usage, payment history, borrowing base and guarantor information for changes.
- 6Identify the two or three changes that matter most and find out their causes, asking the borrower where needed.
- 7Decide whether the risk grade still fits and what follow-up actions are needed.
- 8Write the summary and conclusion last, and put it at the top.
What does a finished monitoring memo look like?
Example only, with made-up round numbers. A distribution business with $5,800,000 of exposure delivers second-quarter interim statements. Trailing twelve months revenue is $18,200,000, down from $19,500,000 a year ago. EBITDA is $2,400,000, down from $2,900,000, mainly because freight costs rose and were only partly passed on. Funded debt is $8,880,000, so leverage has risen from about 3.1x to about 3.7x against a 4.00x maximum, leaving headroom of about 7.5%. The maximum steps down to 3.75x at year-end.
A good summary for that memo would read: "Second-quarter results show weaker margins from higher freight costs. The borrower passes all covenants, but leverage headroom has fallen to about 7.5% and would be under 2% against the 3.75x step-down at year-end. We recommend moving the grade from 4 to 5 (watch), requesting monthly statements through year-end and meeting with management on pricing actions before the third-quarter test."
| Measure | Prior year TTM | Current TTM | Change |
|---|---|---|---|
| Revenue | $19,500,000 | $18,200,000 | -6.7% |
| EBITDA | $2,900,000 | $2,400,000 | -17.2% |
| Funded debt to EBITDA | 3.1x | 3.7x | Up 0.6x |
| Headroom vs 4.00x maximum | 22.5% | 7.5% | Down 15 points |
| Headroom vs 3.75x (year-end) | Not applicable | 1.3% | New |
How do you write the 'what changed' section so it explains, not repeats?
The spread already shows that revenue fell 6.7%. The memo should say why, whether it is likely to continue and what it means for repayment. Pick the few changes that move the credit picture and explain each one: a lost customer, a price increase that did not stick, a buildup of inventory, a large capital purchase funded from the line.
Separate one-time items from trends, and say how you know which is which. If the borrower explained a change, record the explanation and whether it was checked. If a change has no explanation yet, say so and make getting one a follow-up action rather than leaving it out.
When should a monitoring memo recommend a grade change?
Recommend a change when the evidence matches a different grade under the bank's rating definitions, not only when a covenant breaks. Steady erosion in coverage or headroom, rising line usage with no matching growth in sales, or a weaker guarantor can each justify a move to a watch grade while the borrower is still in compliance.
If the evidence is mixed, say so and explain the call either way. A memo that keeps the grade should still name the factor that would change it, such as "a further fall in EBITDA below $2,368,000 would bring leverage over 3.75x", so the next reviewer knows what to look for.
What should the actions section include?
Every action should have an owner and a date. Vague follow-ups such as "continue to monitor" do not tell anyone what to do, and they are a common finding when loan review reads monitoring files.
- Specific information requests, such as monthly statements or an updated forecast, with due dates.
- Meetings with the borrower, with who will attend and what will be discussed.
- A date to re-estimate covenant headroom before the next formal test.
- Any change to reporting frequency, the watch list or the review schedule.
- Escalations, such as referral to a special assets group, where policy calls for them.
How long should a monitoring memo be?
For a steady borrower, one page is usually enough: the summary, the snapshot, the covenant table and a line or two on each remaining section. For a borrower with a falling trend, thin headroom or a proposed grade change, two or three pages is reasonable. Length should follow the amount of change, not a fixed template size.
How Aarvion helps
Aarvion Risk OS Commercial Credit spreads the latest statements into the bank's template, recalculates covenants and headroom against the levels in force, and drafts the monitoring memo from that work, with each figure traceable to its source document. The analyst edits the draft, and the proposed grade sits next to the grade a named reviewer assigns.
Every step is checked against the bank's own credit rules and recorded with who proposed it, who approved it and when. Follow-up actions are tracked against their owners and dates, so the next memo starts from what was promised in the last one.
