L3 Loan Security Flashcards
What was the composition of the portfolio? (Fair and Reasonable SWAP Reading)
Location
- Reading
Composition
One scheme of flats
Why did you have to re-run the valuation? (Fair and reasonable swap)
I hadn’t valued the new units as such I had to conducted comparable analysis on them and establish that they were a good swap for the current units
- Made sure the whole portfolio still provided adequate cover
In the comparable analysis did you identify any patterns related to property type / location which meant the new units were suitable and provided adequate security for the loan? (Fair & reasonable swap)
Flats closer to the Reading main station were achieving much higher sales rates
Whereas
Houses based slightly further out near parks still with good access to amenities were achieving higher sales
What assumptions did you updated? (Fair & reasonable swap)
Because the composition of the portfolio had barely changed new units being a good swap with the old I felt the discount rates were still good the only change I made was to the sales rates for the MV-T cashflow
There were more flats in the updated units
I therefore updated the sales rates and the years to reach market rent
What key points did you ensure to include in the side letter to the client? (Fair & reasonable swap)
- Changes in property type
- Changes in location
- Makeup / composition / density of the portfolio
- Changes in value
- Any changes to assumption inputs
How can you ensure transparency and ensure the client fully understands the rationale behind valuation changes
1) Make sure the client is fully aware of any changes at each stage of the valuation
2) Clearly communicate, via the side letter, the changes in tenure, locality of property type
3) Make sure they are aware of the before and after value
What factors and considerations led to choose a 10% increase In management/repair?
Sensitivity analysis should show what could happen in the case of a market shock
In the current climate both labor costs and material costs are increasing rapidly
Therefore a 10% increase in both Management and repair I though was a good sensitivity standard
Shows that the portfolio would still hold adequate cover should these costs begin to spiral
Can you elaborate on the role of shock predictions and how they contribute to assessing the Loan security?
A shock prediction take one of the various assumptions I have stated in the cashflow and increases it / them to large proportions
- Shows how a portfolio can hold up given strenuous circumstances
- Ensures that the portfolio provides a good form of security for the loan
What is the significance of a 0.5% increase in the Discount rate?
I would show that the cashflow is significantly more risky
- An increase in discount rate will reduce the Net Present value
How do you analyze a potential consequence of a 10% reduction in MV/MR
I would review what the clients requirements are in terms of this portfolio?
- Does this portfolio still provide adequate security for a loan?
if No
- I would have to conduct enhanced due diligence into market conditions and the portfolios potential for decreasing in value
- I would have to report this to the client stating that the portfolio does provide adequate security for the loan at this time however if it were to drop…
What key points / conclusion did you highlight to the client to demonstrate the portfolios resilience?
The Portfolio in its current state produces a value of £68m
0.5% Discount rate - £64m
Management Cost 10% - £67m
Repairs Cost 10% - £66m
MV-VP Fall 10% - 64m
Market Rent fall 10% - 64m
What is the make up of the portfolio (Barclay Guinness Sensitivity Analysis)
464 Units
Flats & Houses
How are Market rents linked to value in your cashflow?
Can you explain your cashflow please? how does it work?
It takes the in-goings and projects them into the future with a predicted % increase per year
- Weekly rent x by 52
It will then deduct the various out- goings
- Bad debts / voids / Management / Major repairs / Cyclical / day to day
These will be taken off the income on a yearly basis giving me the yearly Net income
Net income is then x by the Discount rate to establish Cumulative Present Value per year
In the final year the model capitalize value into perp
