Isaac Chan’s Reviews > The Successful Lender's Field Guide: Commercial Lending Strategies That Maximize Value For Both Bank and Borrower > Status Update
Isaac Chan
is on page 71 of 180
Value of embedded options (caps, floors, collars etc) can be separated into intrinsic & time
Let's just look at floors here
E.g., intrinsic value is when floor > forward curve (ITM floor). Time value is the POSSIBILITY that FUTURE floor will > forward rate
2 main takeaways: (Floors)
- Max value if floor < starting loan rate (cuz if rates go down then YAY)
- Min value if the borrower has a prepayment option
— Jun 05, 2025 08:40PM
Let's just look at floors here
E.g., intrinsic value is when floor > forward curve (ITM floor). Time value is the POSSIBILITY that FUTURE floor will > forward rate
2 main takeaways: (Floors)
- Max value if floor < starting loan rate (cuz if rates go down then YAY)
- Min value if the borrower has a prepayment option
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Isaac’s Previous Updates
Isaac Chan
is on page 102 of 180
Apparently for hedged loans, while the back-to-back format allows the bank to maintain the derivative on its balance sheet, the authors find that the complexity of this arrangement (including the difficulty of explaining to the client) ultimately leads to fewer loans and fees earned (compared to a standard off-balance sheet swap arrangement).
Banks partner with a hedging partner, allowing them to focus on lending
— Jun 10, 2025 09:03PM
Banks partner with a hedging partner, allowing them to focus on lending
Isaac Chan
is on page 91 of 180
Apparently when bankers change banks and want to reengage with a former client, but a hurdle exists in the form of a prepayment penalty with the existing bank, an easy solution is to roll the penalty into the new loan amount, assuming the LTV supports this.
— Jun 09, 2025 02:29AM
Isaac Chan
is on page 61 of 180
2 interesting, competing theories:
i) Only risky, desperate borrowers accept tight covenants
ii) Only confident, strong borrowers accept tight covenants
The authors' empirical research on a 6-YEAR period concludes i)
Nuance:
1) Tight covenants produce > 3x violations
2) Tight-covenant-borrowers do better financially (they reduce CAPEX, limit their debt)
Net: Tight covenants reduce loss probability & expected loss
— Jun 04, 2025 10:17PM
i) Only risky, desperate borrowers accept tight covenants
ii) Only confident, strong borrowers accept tight covenants
The authors' empirical research on a 6-YEAR period concludes i)
Nuance:
1) Tight covenants produce > 3x violations
2) Tight-covenant-borrowers do better financially (they reduce CAPEX, limit their debt)
Net: Tight covenants reduce loss probability & expected loss
Isaac Chan
is on page 49 of 180
Apparently for property loans, some bankers want their lease terms to > their loan maturity. They think that this mitigates credit risk.
The authors claim that this consensus is wrong. They then produce their own data and show that there's little correlation (< 5%) between lease terms and default.
Moreover, by shortening the maturity u just introduce refinancing risk. You also lower the loan profitability.
— Jun 04, 2025 08:17PM
The authors claim that this consensus is wrong. They then produce their own data and show that there's little correlation (< 5%) between lease terms and default.
Moreover, by shortening the maturity u just introduce refinancing risk. You also lower the loan profitability.
Isaac Chan
is on page 45 of 180
The authors claim that ceteris paribus, the default risk of non-RE loans is usually lower than RE secured loans, depending on economic cycle. Not sure if this is even the consensus. They say this is cuz RE is geographically fixed whereas commercials are flexible. Dk if this even makes sense.
They then produce a chart of default probabilities by sector, alleging that it's FDIC data (but don't cite the source).
— Jun 02, 2025 11:32PM
They then produce a chart of default probabilities by sector, alleging that it's FDIC data (but don't cite the source).
