Risk Adjusted Debt Valuation
The nominal risk associated with debt as an investment is often determined by the covenants imposed in the facility agreement.
These covenants provide a loose cover for poorly defined collateral risk. One consequence of this is to reduce the effectiveness of the collateral, and increase the chance of default on the loan.
In the event of default, the analysis can focus on the full cash flow and asset value of the collateral and accommodate the possibility of disposal. The Crucial analysis can therefore be used as a basis for determining an appropriate course of action on default. Under all conditions, there is a need for systematic and unbiased evaluation of the risk from the underlying collateral.
The Crucial analysis can also explore the balance between the return to the investor and an acceptable value to the debt holder, based on the constraints and uncertainties attached to quarterly cash flows and evolving asset values.
The Crucial analysis can be driven by setting a minimum value for the debt and calculating a risk adjusted return. It can also set a minimum value for the return, and then determine a risk adjusted value for the debt.
Crucial analysis can be applied to whole debt, or to mezzanine debt. However, risk analysis is directed only at the underlying collateral. It does not extend to any legal considerations that may be present in the facility agreements, or to any additional inter-creditor agreements outside the basic ICR and LTV covenants.
Buying CRE Backed Debt
Debt Disposal Service
Debt should be one of the safest forms of investment. In the absence of default, the risk is born primarily by the borrower rather than the investor.
Crucial Analytics can offer a facility to prepare reports for the presentation of debt into the investor market for disposal.
Crucial Analysis can offer the services of independent brokers to introduce interested parties to the debt and discuss the investment potential with them.
Crucial's reports cover the options available to an investor, by assessment of the risk adjusted value for a debt based on the collateral risk, and on the investment potential of the asset collateral itself in the event of default.
Crucial's service is based on an objective assessment of risk, with a trading basis that is transparent to both parties.
This process can be applied to whole debt or mezzanine debt. It can offer opportunity to dispose of ‘toxic’ debt at a price that is genuinely appropriate to its situation and therefore unlikely to destabilise the market.
Debt review service
The Crucial process can also be applied to a portfolio of debt as a debt review service, so that only debt which has a reasonable market value is offered for disposal.
