For the lenders in the forum:
when you are reviewing a borrower PFS, what ratios do you use when assessing their financial strength?
example:
$10MM cash liquidity verifiable bank deposits
$250MM real estate portfolio (assume this value is vetted and justifiable, borrower is 50% owner of the real estate)
$125MM of debt associated with real estate (of which, $50MM is recourse)
no other assets
so I read the above to mean borrower has $10MM liquidity, net worth of $135MM (cash plus equity value in real estate).
the net worth to debt ratio is almost 1:1, is that a red flag or is it considered ok? Is the amount of recourse/contingent liability debt in the example too high or ok? Just looking for general gut check on what would be looked at as higher risk vs safer when it comes to these basic ratios
thanks
Based on the most helpful WSO content, here are some key points to consider when assessing a borrower's financial strength using their Personal Financial Statement (PFS):
Key Ratios and Considerations:
Liquidity:
Net Worth:
Debt Ratios:
Risk Assessment:
Net Worth to Debt Ratio:
Recourse Debt:
General Gut Check:
Higher Risk Indicators:
Safer Indicators:
In summary, while the borrower's liquidity and net worth are positive, the close to 1:1 net worth to debt ratio and significant recourse debt could be considered higher risk. Lenders typically prefer a higher net worth to debt ratio and lower recourse debt to ensure the borrower's financial stability and ability to manage obligations.
Sources: January 2016 Data Update 6: Debt, the double edged sword, Non Recourse Loan - Guarantor Net Worth and Liquidity Requirements?, 20 balance sheet ratios every investor should be aware of, Distressed publicly traded credit - case study help needed!, Net debt: The definite list
Depends on how your real estate is performing, what loan amount you’re looking for, when your debt matures, etc…
Lenders take a holistic approach. But regarding covenants in loan docs, the main ones are net worth, leverage, and liquidity. Obviously the thresholds depend on the loan size.
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