Question For the Credit Guys: When Is A Borrower Over levered?
Hi,
I've been thinking about this question recently, especially from a lender's perspective. You have a borrower that has say a 10M net worth . They have 10M in debt across various projects and lenders. The net worth is a combination of project equity and other unrelated assets (say 5M project equity and 5M other assets). When do you determine that the borrower is over levered?
The multiple lenders who have given loans used the borrowers high net worth to justify giving out the loans. But in a worst case scenario, the project equity evaporates, the loans default, and multiple lenders are making claim on the remaining assets. On the other hand, if lenders evaluate a borrower too strictly, they would never lend any money.
Multiple ways to skin a cat and I’m curious to see how others respond.
It’s usually not just a question of how much leverage but also what’s leveraged. When I was a credit analyst (re specific group) we would ask for a full real estate schedule. The schedule would be split up into multiple buckets: stabilized, non-stabilized, under construction, and land/non-income producing RE. We would require property location, T12 and/or proforma NOI, total loan commitments, current loan balances, loan structures monthly payment amounts, and maturities. Using all of that, we would calculate global DSCR, debt yield, and debt/total capital. We would look at those figures within each of the buckets and as a whole portfolio. If debt/total capital exceeded 60%, that was usually when we would start digging in deeper as to which properties were highly levered, were they performing, etc. We never did but if a lender was extremely thorough, they could also start layering WALT and tenant credit.
Guarantor Analysis was always the most time consuming part of the loan memos.