Managing Maturity Default Risk Eliminates Major Contributors to Total Investment Loss Risk
As we discussed in Part I of this series, maturity default risk is the risk the income-producing assets of the business will have insufficient market value to provide the projected economic return the sponsor forecasted when the transaction originated. Maturity default risk can only be said to exist in the absence of term default risk forecasting. After all, if you have the luxury of having your investment re-underwritten every month, then you would know well in advance if the payoff at maturity was going to be at-risk if you didn’t take measures now. This kind of information is the key to the practical elimination of maturity default risk, and when combined with the effective management of term default risk, the risk of total investment loss must be viewed as being greatly reduced.
As with term default risk, the same risk elements apply to maturity default risk. Technology risk is again the chief culprit that drives asset obsolescence risk. The resulting potential reduction in revenues creates, to one degree or another, maturity default risk. The other contributors would be third-party claims risk, regulatory risk and business operations risk that could create the conditions for a materially-significant loss of investment. Yet these last three (3) risk elements are all within the power of the market to manage for the benefit of investors and lenders in commercial real estate income-producing properties. They are also indirectly connected to technology risk.
This brings the analysis back full-circle in terms of our potential understanding of some of the key risk elements we need to be aware of that have the greatest potential for impact on managing total investment loss risk. Our best efforts in the near-term future are likely to be in deference to risk management and addressing the obvious shortcomings of the industry’s efforts to date in light of the expectations of the investing-public.