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  • Writer's pictureRyan Lynch

Lending Risk Margins

This week MOIC looks at building a simulated model for senior lending in the current dynamic macro-economic and monetary policy environment. We simulate what prudential lenders may undertake to secure their expected portfolio returns from increased residual risk, whether driven by micro-industry trends or externalities such as regulatory scope, commodity markets or general geo-political instability.

We find the current environment is indicative of inflationary risk spread, in addition to inflation expectations, which when taken together may constitute a system concern for day-rate servicing, especially in the more bearish-cycle market segments. While risk spreads are only one mechanism for prudential lending, unless operators can "pass-through" the inflationary capital and operating costs to an end user, there may be market sustainability concerns specific to counterparty-credit risk.

While this does not seek to address a specific industry, the purpose is to understand the path dependency of lending markets at present and how they may take form after the Federal Reserve more clearly defines monetary policy in 2022.

MOIC 09 Mar
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