LTV, Attach and Detach Points
Can someone explain the concept of Loan-to-Value and attach/detach points related to private credit investing?
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LTV is just a way to measure how much leverage you have against the collateral. Ideally you don't want a high LTV because then if the borrower defaults you are more likely to recover that loan amount via collateral.
Company has $10M EBITDA, is worth 10x, and is raising 6x leverage via 4x ($40M) 1L and 2x ($20M). You’re looking at investing in the 2L. You’re attaching at 4x (since the debt senior to you is through 4x), and detaching at 6x (4x + your 2x). LTV in this scenario is 6x total leverage / 10x TEV ($10M EBITDA * 10x valuation) = 60%
Higher LTV = higher risk because there is less cushion. In the above example, if you were invested through 9x leverage / $90M (detach) on the 10x business (90% LTV), and that $10M EBITDA drops to $8M and the business is still worth 10x ($80M TEV), you’re now levered through enterprise value. In the $60M case where your detach is 6x / 60% LTV, you’re still covered if the biz is worth $80M.
@Special Lits description is correct
but in this case the LTV is against the EV valuation. I think sometimes diff ppl uses the terms with respect to % of collateral the borrower is lending against. Correct me if I'm wrong - this is a slightly different use of LTV concept?
thats an ABL concept. direct lending is typically EV based which comment above explains.
Is LTV based on EV or capitalization?
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