Lesson 15 of 25 · 6 min

Apply a haircut widening with no price move

Cutting Calder from 35 to 20 costs $276,000.75 of lending value and does not move market LTV by a single basis point.

A haircut widening is a change to an advance rate with the prices left where they are. Calder's March advance rate is 35 percent, so its haircut is 65 percent. Widening that haircut to 80 percent is the same fact as cutting the advance rate to 20 percent. Every price on the statement is still the March price.

Calder's market value is still $1,840,005. Lending value on the row was $1,840,005 × 0.35 = $644,001.75 and becomes $1,840,005 × 0.20 = $368,001.00. The drop is $1,840,005 × 0.15 = $276,000.75. The book's lending value falls from $3,277,251.25 to $3,001,250.50. Market value is still $6,032,795.

Market LTV is therefore still 30.81 percent, and dollar headroom on the market-value test is still $3,377,704.33. The operative test on this facility does not see the cut. Lending-value LTV does: $1,858,563.47 ÷ $3,001,250.50 = 61.93 percent, up from 56.71 percent. The blend falls from 54.32 percent to $3,001,250.50 ÷ $6,032,795 = 49.75 percent.

A price stress and a haircut stress can print the same kind of lending-value damage from opposite sides of the row. Nineteen percent off Calder's price would have removed $122,360.33 of lending value and also removed $349,600.95 of market value. This cut removes $276,000.75 of lending value and not one dollar of market value. The operative test, written on market value, reports the second event as nothing.

Key terms

Haircut widening: An increase in the percentage of market value the lender refuses to count. Equivalent to a cut in the advance rate.
Price-still stress: A restatement that edits advance rates and leaves every last price where the statement printed it.
Invisible on market LTV: A change that moves lending value and does not move market value, so a market-value test cannot see it.

Worked example

Fifteen points off Calder, prices still

Calder advance rate cut from 35 percent to 20 percent. Every March price held. Balance $1,858,563.47.

Calder lending value before: $644,001.75
Calder lending value after: $368,001.00
Drop: $276,000.75
Book lending value after: $3,001,250.50
Market LTV: 30.81%
Lending-value LTV: 61.93%

The market-value test is silent. The lending-value test has moved 5.22 points on a day when every last price was unchanged.

Check yourself

Calder's advance rate is cut from 35 percent to 20 percent and no price moves. What happens to market LTV, and by how much does lending value fall?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.