Fixed Income & Credit Research

Solution

• Business Overview: The JMI team prepared a detailed description of the company, including its history, industry, products or services, target market, competitive advantage, and overall business strategy.
• Security and Structure Analysis: The JMI team assessed the quality and liquidity of the collateral or security offered to support the financing and conducted subordination risk analysis.
• Financial Statements: Reviewed the company’s past five-year financial statements, analyzing its financial performance and evolution of the most important liquidity, efficiency, profitability and leverage ratios.
• Cash Flow Adequacy: Estimated the future cash flows modelling base case projections as well as down case scenarios to assess the company’s payment ability in adverse conditions, such as economic downturns, changes in interest rates, among others.
• Credit Analysis: Analyzed the company's credit history, checking for any defaults, delinquencies, or bankruptcies with the financial system. Evaluated credit ratings and the ability of the company to access capital.
• Management Assessment: JMI team evaluated the competence and relevant experience of the company's management team. Assess their track record, strategy and business plan, and their ability to effectively manage risks.
• Industry & Market Analysis: Conducted extensive research to evaluate the company’s position within its industry and the overall market conditions considering factors such as competition, market trends, regulatory environment, and potential risks or opportunities specific to the industry.
• Key Risks & Mitigants: JMI team identified and evaluated key risks that could impact the borrower`s ability to fulfill its financial obligations and determined the appropriate mitigants to minimize the impact of these risks.

Solution

• Data Collection: JMI team gathered data on the loan portfolio, including loan types, loan amounts, interest rates, borrower information, and repayment history. Based on historical loan tape data, we calculated a detailed month-wise breakdown of the funded principal, commissions, gross factor rates, actual collections, loss rates, and a month-wise Merchant Cash Advance (MCA) asset IRR.
• Credit Quality Assessment: Evaluated the credit quality of the loan portfolio and calculated key metrics such as non-performing loan ratio, net charge-off ratio, and provision coverage ratio. Assessed the adequacy of loan loss provisions set aside for potential credit losses.
• Financial Model: JMI team collaborated closely with Company's management team to develop a comprehensive financial model that forecasted the IRR of their MCA assets loaned out which incorporated various key inputs and assumptions.
• Portfolio Yield and Return Analysis: JMI team also analyzed the portfolio yield and return metrics to assess the profitability of the loan portfolio considering the interest income generated from loans, net of provisions for credit losses and operating costs. Evaluated the impact of changes in interest rates on the portfolio's performance.

Solution

• Data Collection: JMI team gathered information on the composition of ABC Investments' CLO portfolio. Team had identified the individual CLOs held, including their underlying leveraged loans, tranche structure, and associated cash flows. Determined the size of each CLO and its relative importance within the portfolio.
• Market Data Analysis: JMI team collected and analyzed market data, including loan market spreads, credit default swap (CDS) rates, interest rate curves, and other market indicators. Our team also keep updated on market trends and changes that may impact CLO valuations, such as shifts in credit spreads or changes in loan performance.
• Cash Flow Projection: Estimated the future cash flows from each CLO in the portfolio. Considered factors such as the interest income generated by the underlying loans, prepayment rates, defaults, recoveries, and reinvestment assumptions. JMI team also used historical data, market conditions, and credit rating agency reports to inform cash flow projections. Determined an appropriate discount rate to apply to the estimated cash flows considering the risk of each CLO tranche and the prevailing market rates.
• Monte Carlo Simulation: Team had performed a Monte Carlo simulation to incorporate uncertainty into the CLO valuation. Simulated various scenarios based on different assumptions about interest rates, default rates, and other relevant factors and calculated the range of potential CLO valuations and assess the associated probabilities of each scenario.
• Sensitivity Analysis: Conducted sensitivity analysis to identify key drivers impacting CLO valuations. JMI team also evaluated how changes in variables such as interest rates, credit spreads, default rates, or prepayment rates affected the value of the CLO portfolio. Assessed the sensitivity of the portfolio to different market factors and identify the most significant risks.

Solution

• Credit Risk: JMI team conducted due diligence on the student loan platform's underwriting practices, credit assessment methodologies, and risk management strategies. These assessment helps to mitigate credit risk by ensuring loans are extended to creditworthy borrowers based on robust underwriting criteria.
• Market Assessment: JMI team also analyzed macroeconomic indicators, employment trends, and historical loan performance data to assess market risk and establish appropriate risk mitigation measures.
• Investment Monitoring: Following the disbursement of the credit facility, our team actively monitors the performance of the student loan platform's loan portfolio. JMI team also provide regular reporting on loan delinquency and default updates. In the event of defaults, JMI team also collaborated with the student loan platform to implement strategies such as loan modifications, repayment assistance programs, or debt restructuring to help borrowers manage their debt effectively and optimize loan recoveries.
• JMI team had also provided their analysis on exit strategy based on different scenarios like Loan Portfolio sale and Renewal or refinancing for extended term depending on risk return appetite.

Solution

• Developed a comprehensive Cash Flow Schedule that includes rental income, operating expenses, interest expenses, loan origination fee, exit fee etc.
• Established a detailed structure outlining the project costs, including hard and soft costs, and how they will be allocated over the period.
• Created a financing scenario that incorporates various sources of capital, including equity, senior loans, and mezzanine loans.
• Included a provision for potential loan refinancing in the plan.
• Developed a schedule for calculating returns on equity using Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC) along with sensitivity analysis.