Hi everyone,
I was wondering if someone can provide some insight on how to structure a particular loan.
I have a request by a borrower for a cash flow loan guaranteed by the government. This loan will reflect the yearly inflation adjustment in the payment. I determined the value of the loan by taking the PV of all the CFs and came up with $20MM. However, what I noticed in my model is to achieve a 1.1x coverage the payments made by the government are less than the interest component and the principal is getting added back to the original until. This all happens until the end of the 6th of the loan at which going forward the loan begins to catch up and amortize out.
Is there a way to mitigate this initial risk from a modeling perspective and a loan structure perspective? I believe this is happening because the loan takes into consideration the annual increases, which effectively gives a bump to the loan which is greater than both the P+I combined.
I used this structure in the past, but I had increases in the cash flows every five years so the effective increase in the loan based on the increase in the cash flow wasn’t enough as the loan amortized considerably at the start.
Not sure if this is making sense but hope I someone can wrap their head around it.