Credit Analysis & Risk Assessment Flashcards

What is 'adverse selection' in the equipment finance industry?

Answer: The tendency for higher-risk borrowers to seek financing more aggressively, skewing a portfolio toward riskier credits

Adverse selection occurs because high-risk borrowers who can't get credit elsewhere pursue every financing option, potentially causing a lessor's portfolio to attract disproportionately risky customers.

What is 'accounts receivable (A/R) aging' analysis used for in credit underwriting?

Answer: To assess how quickly the lessee collects payments from its own customers, indicating cash flow quality

A/R aging shows how current a lessee's receivables are; slow collections may signal cash flow problems that could affect lease payment ability.

What is 'cash flow from operations' (CFO) and why is it the most important financial statement metric for lease underwriters?

Answer: CFO is the cash generated by core business operations, and it directly shows whether a lessee can fund lease payments without relying on asset sales or new debt

CFO excludes financing and investing activities, showing the true cash-generating power of the business that will ultimately service the lease obligation.

What is a 'blanket lien' (also called an all-asset lien) in equipment financing?

Answer: A UCC filing that gives the secured party an interest in all of the debtor's assets, present and future

A blanket lien covers all of a debtor's assets as collateral, providing broad protection for the secured party but potentially subordinating other lenders.

What does 'global cash flow analysis' mean in underwriting?

Answer: Analyzing cash flow from all entities and individuals (business + guarantors) to assess total repayment capacity

Global cash flow analysis combines the business's cash flow with the personal finances of guarantors to get a complete picture of total debt service capacity.

What is a 'covenant lite' (cov-lite) structure in equipment financing?

Answer: A financing arrangement with few or no financial maintenance covenants, giving the borrower more flexibility

Cov-lite structures omit traditional financial maintenance covenants, reducing the lessor's ability to catch early warning signs of deteriorating credit but making deals more attractive to borrowers.