Credit Analysis & Risk Assessment Flashcards

What is 'expected loss' in credit risk management for a lease portfolio?

Answer: Probability of Default (PD) × Loss Given Default (LGD) × Exposure at Default (EAD)

Expected loss is calculated as the product of probability of default, loss severity (what's lost after recovery), and total exposure, forming the basis for loan loss reserves.

What does 'equipment obsolescence risk' mean for a lessor?

Answer: The risk that rapid technological change will reduce the equipment's market value faster than expected, eroding residual value

If technology advances quickly, off-lease equipment may be worth far less than projected, causing the lessor to realize losses when remarketing returned assets.

What is 'charge-off' in the context of a lease portfolio?

Answer: The removal of an uncollectible lease receivable from the books as a loss after recovery efforts are exhausted

A charge-off is the accounting write-off of a lease receivable deemed uncollectible, recognized as a realized loss net of any recovered amounts.

What is a 'guaranty' from a parent company in equipment leasing?

Answer: A legal commitment by the parent to pay the subsidiary's lease obligations if the subsidiary defaults

A parent company guaranty provides the lessor with recourse to a stronger credit (the parent) if the lessee subsidiary fails to meet its payment obligations.

What does 'delinquency rate' measure in a lease portfolio?

Answer: The percentage of the portfolio with payments that are past due by a specified number of days

Delinquency rate measures portfolio credit quality by showing what proportion of outstanding balances are past due, typically tracked at 30, 60, and 90+ day buckets.

In equipment leasing, what is 'first loss protection' provided by a vendor?

Answer: An agreement where the vendor absorbs the initial portion of credit losses on a portfolio it originates, to give the lessor confidence in the credit quality

First loss protection means the vendor/dealer agrees to absorb losses up to a defined percentage, aligning the vendor's incentives with the lessor's credit performance.