How to Evaluate Collateral, LTV and Covenants
Understanding the Credit Return Engine
A low stated LTV can be misleading if the asset value is optimistic, volatile or hard to realise. Covenants matter because they create early intervention rights before collateral value is exhausted.
Reading Protection, Cash Flow and Structure
LTV equals debt relative to an agreed collateral value, but the valuation basis must be tested.
Financial covenants monitor leverage, coverage, liquidity or net worth.
Affirmative and negative covenants control actions such as new borrowing, asset sales and dividends.
Where Credit Risk Becomes Capital Loss
Independent valuation can still lag market conditions.
Covenant waivers can weaken protection.
Collateral concentration creates one-point failure risk.
Making the Allocation Decision
Before acting, answer five questions in writing: recalculate ltv using stressed values; check valuation independence and recency; review covenant testing frequency; ask about waivers and breaches; and map collateral liquidation time and costs.
Good credit underwriting relies on repayment capacity first and collateral second.
Key takeaways
- LTV equals debt relative to an agreed collateral value, but the valuation basis must be tested.
- Independent valuation can still lag market conditions.
- Good credit underwriting relies on repayment capacity first and collateral second.
Related questions
What should an investor verify first?
LTV equals debt relative to an agreed collateral value, but the valuation basis must be tested.
How does the structure affect the investor’s outcome?
Financial covenants monitor leverage, coverage, liquidity or net worth.
What is the main downside to test?
Independent valuation can still lag market conditions.
How should the final decision be made?
Good credit underwriting relies on repayment capacity first and collateral second.
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