Stress Testing Scenarios
While the above portfolio metrics analyze historical performance, lenders also leverage stress testing which models hypothetical economic scenarios to gauge future portfolio risks.
Typical sensitivity scenarios include:
Recession Stress Tests
Applying elevated default and loss assumptions in line with historical recessionary periods to estimate potential downside risk.
Interest Rate Shock Tests
Modeling the impact of sudden interest rate increases on portfolio yields relative to funding costs. Useful for financing facilities relying on variable rate funding markets.
Recovery Rate Haircuts
Evaluating portfolio outcomes given 10-25% reductions in collateral recovery assumptions.
Prepayment Speed Shocks
Considering above average payout rates which compress earned interest income but lower future default risk.
These simulations help lenders size potential loss buffers, financing capacity, and benchmark portfolio yields required to withstand downside scenarios. While relying on assumptions, scenarios lend perspective for strategic planning.
Monitoring Requirements & Reporting
While lenders track metrics on an ongoing basis, most facilities also outline portfolio reporting requirements within programme agreements which dictate certain statistics the lenders must regularly provide, often monthly.
Typical metrics mandated in agreements include:
- Default and Loss Rates
- Delinquency Rates
- Portfolio Yields/Spreads
- Vintage Loss Curves
- Portfolio Stratifications – FICO bands, LTV ranges, etc.
- Facility Utilization Rate
Conforming with stipulated reporting allows the manager and financing partners to independently monitor portfolio health while confirming adherence to established guidelines. Metrics often tie to covenant packages governing facility terms and advancement rates based on collateral performance.
Once received, lenders scrub reporting for anomalies, authenticate figures against models, assess covenant compliance, and finalize financing draws or paydowns.
Benchmarking Metrics
The final crucial element entails consistent benchmarking of portfolio metrics against both peers and company history to qualify results:
Internal Benchmarking
Comparing portfolio metrics period-over-period and year-over-year provides essential historical performance context for metrics and trends.
Peer Benchmarking
Position metrics and returns against anonymized industry benchmarks for perspective on competitive positioning.
Benchmarking to Forecasts
Review budget and modeling projections relative to actuals to validate forecast assumptions.
Proper benchmarking contextualizes trends to support interpreting results and guidance decisions.
Building a Comprehensive Risk Monitoring Toolkit
By compiling metrics across the key categories of defaults, losses, delinquencies, concentrations, and portfolio analytics while also utilizing scenarios and benchmarking, lenders assemble a robust toolkit for tracking collateral performance regardless of asset specifics.
Certain facilities necessitate specialized metrics matching the intricacies of their product dynamics, from automobile pool distribution to small business credit exposures. But the principles of aligning metrics with risk drivers remain consistent regardless.
With a carefully constructed reporting regimen, lenders can catch adverse portfolio shifts early, advise on interventions to preserve collateral quality when required, ensure adequate financial safeguards, confirm compliance with facility covenants, and ultimately sustain the warehouse funding arrangement through various market cycles via prudent datadriven risk management.