Modeling from a debt perspective
Hi!
Can any analyst at a bank, life co, lender, etc share some insight on how modeling is done from a lending perspective. I get that two most important metrics are debt yield and dscr. But can anyone please be kind enough to share what else do you do in excel?
I know how to create a proforma- multi year cash flow forecast. I can find the NOI and I assume that based on that NOI, I should be able to arrive at debt yield and dscr. So, is debt modeling similar to equity modeling upto the NOI calculation? Whereas equity folks will go further to calculate net cash flow after debt service, irr, npv, equity multiple, after tax clash flow. etc. Are lenders concerned at all with any of those?
If I have to interview for a entry level analyst position at a lender, besides the important metrics for a loan question (debt yield, ltv, dscr), what else would you ask me? I really appreciate any help or insight, thank you!!!
You pretty much have it to a tee. Banks typically won't underwrite escalated rents unless it's a credit tenant. You are going to focus more on spot NER.
LOT of market work/diligence. Are my rents, expenses ok? What does the market and supply pipeline look like?
Key metrics are LTC, LTV, DY, and DSCR.
Biggest difference is thinking from a debt perspective- basically how is this developer/fund going to screw this thing up and if they do how can we mitigate loss?
Construction lending is a whole different ballgame because you have to underwrite both sponsor and RE.
Thank you for the reply!, is a part of the sizing the loan also figuring out what should the max loan amount be? I figured if I can figure out the max available debt service payments and interest rate, we can calculate max loan amount by using present value function in excel. The other method is a more simple ltv method. If your an interviewer, besides what I mentioned in my post, would you ask anything else or expect me to know at the very least? Any skills (excel, argus, etc) that I would want to sharpen in order to be decent at the job?
Excel. Argus is a plus. You have loan sizing correct although 90% of the time sizing is simple as what stabilized DY would we be comfortable with? Oh ok let's size the loan based on that and our UW NOI.
Honestly pretty much yeah, there's not a lot to it IMO. An "analyst" pretty much means helper. By the time you actually start to add value and do real work you will be promoted to "senior analyst" or "associate".
You pretty much got it. I would add a couple of things that take off from there:
1) what if analysis. Like tenant roll, what is dscr if tenant XYZ vacates?
2) break-even analysis. What could rents drop to and still cover debt. What could vacancy rise to and still cover debt, interest rates rise to, etc.
3) exit analysis. Given loan amortization and NOI at maturity could it get refinanced at 1.25x dscr at some interest rate usually 200-250 bps higher than current rates. (Most banks have what they call an "Underwriting Rate" that is some internal hurdle rate they use)
Could the what if and break even sensitivity analysis be accomplished using goal seek? Any other way to do it?
Data tables
You end up reading a lot of leases too. Be sure you really understand what co-tenancy requirements are and ways to mitigate those risks. You will underwrite based on co-t's pretty frequently.
you pretty much covered it. slight differences depending on the type of lender and their flexibility when it comes to structuring.
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