Part 6: How to Build a Credit Model

Asset-level assumptions:

  • Interest rate or fee charged as a percentage of initial capital outlay to the borrower
  • Underwritten duration
  • Payment frequency (daily, monthly, etc.)
  • Payment type (interest-only, principal and interest, etc.)
  • Prepayments and refinancings
  • Default rate (we like to use constant default rate or “CDR” which we will describe in a moment)
  • Facility-level assumptions:
  • Interest rate
  • Advance rate (percentage of the asset value that the lender will lend against)
  • Payment type (interest-only, fully amortizing, tranched payments, etc.)
  • Duration:
  • 2-year loans (assumptions below)
  • 80% of the loans are 2 years in duration
  • 15% of the loans will prepay at month 6
  • 35% of the loans will fully amortize over the 2 year underwritten term
  • 50% of the loans will be refinanced into new 2 year loans in month 6, effectively extending duration to 2.5 years
  • 5-month loans (assumptions below)
  • 20% of the loans are 5 months in duration
  • 100% of the loans will fully amortize per the underwritten term
  • 2-year loans: 25%
  • 5-month loans: 20%
  • Monthly payments, fully amortizing
  • 2-year loans: 7.50% CDR (meaning that 7.50% of the loans default per year)
  • 5-month loans: 3.75% CDR (meaning that 3.75% of the loans default per year)
  • Amount Lent: $15,000,000
  • Facility Interest Rate: 15%
  • Advance Rate (also known as Loan-to-Value): 95%
  • Repayment: Fully amortizing with the exception of the refinanced assets

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[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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Ali Hamed

Ali Hamed

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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