What should an investor verify first?

The valuation basis behind any stated LTV figure — a low LTV against an inflated valuation offers less protection than it appears to.

How does the structure affect the investor's outcome?

Financial covenants monitor leverage, coverage, liquidity or net worth, giving the lender early intervention rights before a full loss occurs.

What is the main downside to test?

Independent valuations can still lag real-time market conditions, particularly in a sector under active stress.

How should the final decision be made?

Good credit underwriting relies on repayment capacity first and collateral second, not the reverse.

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How to Evaluate Collateral, LTV and Covenants in a Private Credit Deal

Anurag Y2 min read

Understanding the Credit Return Engine

A low stated Loan-to-Value (LTV) ratio can be genuinely misleading if the underlying asset valuation behind it is optimistic, volatile, or simply hard to realise in a real sale. Covenants matter alongside LTV because they create early-warning intervention rights for the lender well before collateral value is actually exhausted — they are the mechanism that lets a manager act before a problem becomes a loss.

Reading Protection, Cash Flow and Structure

LTV is simply debt outstanding relative to an agreed collateral value, but the valuation basis behind that collateral figure must always be tested — a 60% LTV against an inflated or stale valuation offers far less real protection than the number implies.

Financial covenants monitor metrics such as leverage ratios, interest-coverage ratios, minimum liquidity or net worth on an ongoing basis, while affirmative and negative covenants directly control specific borrower actions — restricting new borrowing, asset sales, or dividend payments — that could otherwise weaken the lender's position.

Collateral type	Typical LTV range	Key valuation risk
Commercial real estate	50-65%	Valuation can lag in a downturn; liquidity thin for large assets
Receivables / cash flows	60-75%	Collection risk if end-customers themselves face stress
Listed shares (as collateral)	40-55%	Price can fall sharply and quickly, triggering margin calls
Inventory / plant & machinery	30-50%	Distress-sale value often well below book value

Illustrative LTV bands for secured private-credit lending in India — actual terms vary by asset type, sector and lender.

Where Credit Risk Becomes Capital Loss

Independent valuations, even when genuinely independent of the borrower and the manager, can still lag real-time market conditions — a valuation report from six months ago may no longer reflect a sector under current stress.

Covenant waivers, granted when a borrower breaches a threshold, can quietly weaken the lender's protection over time if granted too readily, and collateral concentration — several loans secured against similar or correlated assets — creates a one-point-failure risk where a single sector downturn hits the whole portfolio at once.

Making the Allocation Decision

Before acting, answer five questions in writing: recalculate LTV using deliberately stressed, not base-case, collateral values; check who performed the valuation and how recently; review how frequently covenants are actually tested against real financials; ask specifically about any historical waivers or breaches across the manager's portfolio; and map out realistic collateral-liquidation time and costs in a genuine distress scenario.

Good credit underwriting relies on the borrower's repayment capacity first, and collateral as a second line of defence — a fund that leans primarily on collateral strength while glossing over cash-flow quality is underwriting backwards.

Key takeaways

LTV is debt relative to collateral value — but the valuation basis behind that figure must always be tested.
Covenants create early-warning intervention rights before collateral value is actually exhausted.
Independent valuations can still lag real-time market conditions, especially in a downturn.
Collateral concentration across similar assets creates one-point-failure risk for the whole portfolio.
Good credit underwriting relies on repayment capacity first, collateral second.

More in Private-Credit Evaluation

Continue with the other chapters in this module.

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