Learning Objectives:

  • Evaluate collateral and its role in credit risk mitigation.

  • Understand personal and corporate guarantees.

  • Assess credit enhancements and their impact on risk.

6.1 Collateral Evaluation

Collateral evaluation is a critical element of credit risk assessment . The Campbell University course places “special emphasis… on asset-based lending facilities, valuation of collateral, the collection of credit information and its analysis” . Collateral valuation determines the loan-to-value (LTV) ratio and advance rate. The Illinois Bankers Association course covers “Calculating Loan to Value, Loan to Cost, and Lendable Equity” .

6.2 Guarantees

Personal and corporate guarantees serve as secondary repayment sources . The Illinois Bankers Association course covers “Analyzing the Personal Financial Statement” and “Calculating Global Debt Service Coverages for Business Owners/Guarantors” . Understanding the financial condition of guarantors is essential for assessing the strength of the guarantee.

6.3 Credit Enhancements

Beyond collateral and guarantees, other credit enhancements may be used:

  • Covenants: Financial and non-financial restrictions .

  • Hedging: Interest rate hedges to mitigate risk .

  • Subordination: Establishing priority of claims among creditors.

 
PreviousNext