LGD Risk Factors
LGD Risk Factors denotes, in broad terms, the risk factors affecting the eventual Loss Given Default of credit portfolios, i.e. the degree to which the creditor will recover the scheduled cash flows of a loan or credit product.
To the degree that such risk factors can be quantified and modelled, they can be used in the construction in Loss Given Default Models. Many LGD risk factors are overlapping with those impacting the valuation of non-performing loans. The primary difference is that LGD Risk assessment is performed potentially years ahead of any default event, hence the possible range of economic and asset market conditions is very wide.
- Collateral, in particular the Loan to Value Ratio and the liquidity / depth of related asset markets in that collateral must be sold
- Seniority Class (e.g. Senior, Mezzanine, Junior, Subordinated Debt)
- Loan Covenants / other risk mitigation clauses in the lending agreements
- Legal framework in the applicable Jurisdiction which determines the balance of rights between borrowers and creditors
- Macroeconomic Factors (as general indicators)