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There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not complete

by css 6y ago

There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. > The whole idea of Adjusted EBITDA is insane to me. The straitjacket bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules (mainly FDIC insurance requirements) make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. This is also why there is an emerging trend of non-traditional lenders (e.g. some VCs and PE firms). I’m sure the government will find a way to regulate them eventually. > This year we are doing "COVID-19" addbacks. What’s wrong with that? Ability to repay is based on expected future cash flows. If COVID losses are believed to be non-recurring (a big if), then that makes sense.

PEJOE 6y ago
> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. I agree with you, with the caveat that many of these receivables are taken off balance sheet through a securitization process, and the resulting structure is almost unable to technically default as long as the AAA tranche interest is paid. Responsibility for originating good loans, meaning they are creditworthy in a downturn, goes down if you can securitize them into a credit enhanced structure or sell them to another investor. > Generally, I agree. The straitjacket then bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. In my opinion (not worth much) the industry is simultaneously under and over regulated. Enough bad actors that reducing the regulation is a bad idea, but the existing regulation makes lending more challenging and constrains growth on most businesses, who are operated in good faith.
jiveturkey 6y ago
> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. And if investors (of the banks, or of the securities backed by such loans) are accurately apprised of the risk factors.
cm2187 6y ago
If the bank wants to exclude an exceptional item, it can always waive the breach of a covenant for a few reporting periods. I am perplex as of why the covenant would allow the borrower to make any adjustment.

by css 6y ago

PEJOE 6y ago

> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. I agree with you, with the caveat that many of these receivables are taken off balance sheet through a securitization process, and the resulting structure is almost unable to technically default as long as the AAA tranche interest is paid. Responsibility for originating good loans, meaning they are creditworthy in a downturn, goes down if you can securitize them into a credit enhanced structure or sell them to another investor. > Generally, I agree. The straitjacket then bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. In my opinion (not worth much) the industry is simultaneously under and over regulated. Enough bad actors that reducing the regulation is a bad idea, but the existing regulation makes lending more challenging and constrains growth on most businesses, who are operated in good faith.

jiveturkey 6y ago

> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. And if investors (of the banks, or of the securities backed by such loans) are accurately apprised of the risk factors.

cm2187 6y ago

If the bank wants to exclude an exceptional item, it can always waive the breach of a covenant for a few reporting periods. I am perplex as of why the covenant would allow the borrower to make any adjustment.