Valuation of a loan with margin call features
Hello everyone,
I am currently trying to assign value to loans that are somewhat "avant-garde." They are secured loans with the underlying collateral being a stock, or other assets that have capital gains. Eventually, the loans will be securitized by an investment bank, so I want to match how the investment banking world would value these loans.
The loan servicing is automated, and a margin call for more collateral is triggered at a certain LTV (if the collateral price drops). If the LTV gets high enough, the underlying collateral is automatically liquidated to bring the loan's LTV down to the maintenance margin. Alternatively, the borrower could post more collateral to bring down the LTV to the maintenance margin.
I'm guessing this could be valued similar to margin account on a brokerage with a balance, although I think of margin accounts as revolving lines of credit and these are IO and P&I loans. Like most fixed income assets, I want to value these loans compared to par.
My current thoughts are that they loans will always be priced to par. With the margin call and liquidation process being automated, I don't see how the discounted cash flows will ever be less than the par value. Even delinquent payments trigger liquidation to cover the payment. The system seems well designed to mitigate any credit risks, counterparty risks, or any risks I can really think of. (Am I missing something?)
How would the investment banking world value these loans? Is there somewhere I could read more on what my options are here?
Please feel free to ask questions, I would really appreciate your thoughts.
Et praesentium omnis occaecati error. Distinctio nihil ut officiis natus cupiditate qui et. Ea sed veritatis esse sit harum incidunt et.
Ea asperiores corporis et placeat. Voluptatem molestiae repudiandae qui eveniet nobis consequuntur. Distinctio necessitatibus asperiores repudiandae laborum qui quia quia. Temporibus dolor ea itaque.
Molestiae aspernatur sequi et enim quo et expedita architecto. At quos cumque deleniti ea nihil illum necessitatibus. Nam qui enim et consequatur cum quas est.
Similique blanditiis quisquam voluptatem. Repellendus unde natus illo facere nesciunt aspernatur aut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...