Lesson 11 of 25 · 6 min

An advance-rate move you cannot see until the next letter

A haircut revision leaves the market-value trigger untouched and rewrites only the lending-value column.

Suppose the next letter reprints Calder at an advance rate of 0.31 instead of 0.35. Nothing about that revision is on the tape. The last sale can sit at $593.55 for the whole interval and the lending-value column still drops by $1,840,005 × 0.04 = $73,600.20. The new Calder lending value is $570,401.55. The book's lending value is $3,277,251.25 − $73,600.20 = $3,203,651.05.

The market-value trigger does not move. It is $1,858,563.47 ÷ 0.70 = $2,655,090.67 before the revision and after it, because this facility's test is written against market value. What does move is the blended advance, from $3,277,251.25 ÷ $6,032,795 = 54.32 percent to $3,203,651.05 ÷ $6,032,795 = 53.10 percent, and the lending-value LTV, from 56.71 percent to $1,858,563.47 ÷ $3,203,651.05 = 58.01 percent.

A running reconstruction that holds March's 0.35 therefore stays right on the market-value test and goes wrong on every lending-value figure, and there is no public print that discloses the error. The error arrives when the letter does. That is the third mover, and it is the one the weekly method in the next lesson has to carry as an assumption rather than as an observation.

On a market-value test a silent haircut is invisible to the trigger and fully visible to the lending-value column. The reconstruction has to keep those two facts in different pockets.

Key terms

Silent haircut: An advance-rate revision that has taken effect and has not yet been printed on a letter you hold. The tape does not show it.
Test basis: The denominator the maintenance clause names. On this sample it is market value, so a haircut revision does not move the trigger.

Worked example

Calder haircut from 0.35 to 0.31, prices unchanged

Calder market value still $1,840,005, other rows unchanged, balance still $1,858,563.47, threshold still 70 percent of market value.

Lending-value drop on Calder: $73,600.20
New book lending value: $3,203,651.05
New blended advance: 53.10%
New lending-value LTV: 58.01%
Market-value trigger: $2,655,090.67

The trigger the sample actually uses does not hear the haircut. The lending-value column does, and nothing public discloses the rewrite.

Check yourself

Calder's advance rate is revised from 0.35 to 0.31. Prices and the balance are unchanged. What happens to the market-value trigger of $2,655,090.67?

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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.