Additional Default Risk Underwriting Analysis Matters

The management of default risk is critical to the protection of the future value of the assets of the business, thus it directly impacts the future value of the securities being issued.  The discounting of the future value of the securities provides a present value that can be compared by the underwriter to the stated value of the securities being issued to confirm their value to the investor.  In many cases, the investor purchases the securities under the assumption that the securities will be resold into the secondary capital market within a near-term window so that the investment profit may be realized in a shorter period of time.  This boosts the internal rate of return of the investment and is a common strategy that is applied by many commercial lenders.  Accordingly, anything that happens that may impair that future value is of critical management importance.

The most common management issues that need to be proactively managed include:

  • Financial Reporting.  Timely reporting of the financial results of all operating and non-operating events is critical to the analysis process that would reasonably expected to result by the securities holder who would be expected to compare the financial performance of the subject property to other properties that are essentially similar in the market.  A lack of timely reporting creates doubt in the mind of the future buyer and may prevent a recovery in the cases of government insured loans such as the SBA program loans and loan guarantees.  Comprehensive reporting is a baseline component of the RTS program concept to eliminate potential problems stemming from financial reporting problems, so this issue becomes a manageable issue that default risk underwriting under the INVIZEN RTU program model.
  • Regulatory Compliance.  Regulatory compliance requires management to make timely reports to various regulatory agencies, obtain the necessary licensing and permitting required for operations and compliance with all known regulations.  These matters can also be mapped out and scheduled within the INVIZEN RTS program reporting model, so this issue can also become a manageable issue that default risk underwriting under the INVIZEN RTU program model can eliminate from analysis consideration.
  • Operating Cost Payment Compliance.  All operating costs have to be paid in a timely fashion.  The key issues here are the timely payment of all property and ad valorem taxes when the are due.  The schedules for property tax payments, employee/employer benefit contributions, payroll taxes and other costs such as prepaids for business insurance, property insurance and other escrow requirements are incorporated into the INVIZEN RTS program reporting model and then confirmed on an ongoing basis to ensure compliance.  Accordingly, the operating cost payment compliance issue can also become a manageable issue that default risk underwriting pursuant to the INVIZEN RTU program model need not give consideration to for the purposes of the overall investment analysis.