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What ratios are used in lease underwriting?

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Lease underwriting credit analysis includes financial ratios to assess the transaction collateral credit quality.  Whereas equipment lease credit criteria are commonly limited to loan-to-value, traditional commercial real estate financing generally also considers net operating income and debt-service coverage:

  • Loan–to-value (LTV) – The maximum amount an institution is prepared to advance as a percentage of the value of the eligible collateral, it being the ratio of the loan amount divided by the collateral’s value;
  • Net operating income (NOI) – The overall performance of a firm’s operations before considering nonoperating revenue and expenses, extraordinary items and income taxes; and
  • Debt-service coverage ratio (DSCR) – A ratio of net operating income to annual debt service, which indicates how many times a firm is able to meet all of its fixed charges from net operating income.
IFC Loan-to-Value Ratios in OECD Countries and Emerging Markets
Emerging Markets
Type of Collateral OECD Friendly/Reformed Difficult/Unreformed
Immovable Property ≤ 90% ≤ 80% Cities: 60%-80%; rural: 30%-60%
Movable Property
Vehicles ≤ 100% 70%-100% 60%-85%
Equipment ≤ 80% ≤ 80% 60%-80%; secondary collateral
Accounts Receivable ≤ 80% ≤ 50% Secondary collateral
Inventory ≤ 50% Secondary collateral Secondary collateral
Source: International Finance Corporation

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