The eligible pool balance is an important concept for any borrower who is borrowing through an asset-backed structure. It is directly linked to the borrowing base, which is the amount of money a lender will provide to a borrower as well as calculating the value of the collateral on an ongoing basis. In this blog post, we’ll explore the different components that make up the eligible pool balance, how they can affect your borrowing base, and why it's important for borrowers to understand the calculation before signing a loan agreement.
An eligible pool balance is ultimately the value assigned to the assets backing the loan. To calculate the value three main components are used: eligibility criteria, eligible pool discounting, and excess concentration. Eligibility criteria determine the types of assets that can be used for asset-backed lending, such as assets with a term of fewer than 12 months. Eligible pool discounting reduces the outstanding principal value of a loan based on the risk associated with the loan (ex: loans with a DPD of 90 are reduced to 0%). Finally, excess concentration measures how much of the collateral is grouped by different rules (ex: no more than 10% of the eligible pool balance can be related to one borrower).
When setting eligibility criteria for an eligible pool balance, it is important to consider the needs of both the lender and the borrower. It is critical to understand what types of assets the borrower can put in the pool, as well as will the borrower be able to generate enough assets to match the loan size. For lenders, this helps to assess the risk associated with the potential loan and determine the necessary loan terms. Some multilateral lenders like the IFC have exclusion lists that get factored into eligibility as well. The characteristics of a future portfolio should be clearly defined and agreed upon by both parties. It is important to make sure that the criteria do not create ineligible assets or eliminate opportunities for risk diversification.
When assessing an eligible pool balance, asset discounting is an important part of the process. Discounting helps lenders determine the value of the collateral based on changing conditions. This ensures that a company’s assets are being valued accurately and that lenders are protected in case of default or delinquency. When discounting an asset, the main variable used is the number of days past due (DPD). As loans increase in days past due, they become riskier and less likely to recover. To set the optimal discount rates, lenders and borrowers need to deep dive into vintage and roll rate analysis to help understand the likely recovery rate of assets at different DPDs. It's important that both lenders and borrowers run different analyses on the portfolio at different points in time to understand the impact of discounting. Discounting is the primary driver in reducing the borrowing base, both parties need to ensure they understand the impact of the discounts on the outstanding balance to prevent any unnecessary borrowing base deficiencies.
When considering eligible pool makeup borrowers and lenders need to be mindful of excess concentration limits. These restrictions refer to the amount of the total eligible pool balance that can be held by a single borrower, or in a single geography or other limits. An excessive concentration could put the lender at risk if a sudden economic downturn hits a sector. When determining excess concentration limits, lenders need to consider both their capital requirements and their risk management policies. In addition, lenders should also look at factors such as geographical trends, industry developments, borrower products, risk grades, and macroeconomic factors. This will allow them to effectively mitigate their risk and maximize their profitability.
At Cascade, we are proud to be at the forefront of fintech innovation in private debt and asset-backed lending. Our technology platform is designed to help lenders and borrowers alike in managing their eligible pool balance. We offer a range of services to help you make informed decisions when it comes to your borrowing base. At Cascade, we strive to provide our clients with the data and insights they need to stay ahead in this ever-changing world. Our powerful platform can help you easily manage and monitor your eligible pool balance, giving you greater control over your lending strategy.
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