Valuation Of Inventory Pledged Loans With Extension Clauses

An inventory pledged loan is one of the effective ways to solve the financing prob-lems of SMEs. In practice, financial institutions can remove the pressure of short-term funding by the extension of enterprise services, and ultimately recover the loan goal. For example, when on the loan maturity enterprises are facing financial difficulties, financial institutions can provide extension services to ensure full recovery of the loan principal and interest; when loan period is less than the production cycle of the case, the finan-cial institution will provide extension services to ensure the enterprise keeping a stable investment scale. Obviously, how to determine reasonable loan-to-value (LTV) ratio of inventory pledged loans with different extension terms is one of the important issues of concern to both lenders and borrowers.Combined with the loan contract template classification, the thesis, focused on amortizing and the full moratorium on repayment terms, will build valuation models of inventory pledged loans with extension clauses, determine a reasonable LTV ratio and analyze the relationship between LTV ratio and financing costs. In practice, financial in-stitutions can provide loan extension services if enterprises increase a certain amount of inventories or repay part of the loan repayment on the original maturity. This thesis will classify into two extension terms:installment repayment and fully amortizing deferred repayment terms, which the installment repayment term means when it repay the part of the loan on the original loan maturity the borrower can apply for extension a loan; the fully extended repayment term means if the borrower increase a certain amount of in-ventories pledged on the original loan maturity and paid in full at the end day exhibition loan, the borrower can apply for extension a loan. Currently, most of the work focused on loan contracts without the extension clauses, and study the issue about determining the LTV ratio from the perspective of the lender. This thesis will analyze the pledged loan from the perspective of the borrower with the lender’s non-recourse and recourse rights, and compare the relationship between financing costs and the LTV ratio with different extension clauses. Here, two types of enterprises will be considered:one is the enter-prises facing financial difficulties on the maturity date of the loan, which corresponds to the case of insufficient collateral value in the thesis. The other is the enterprises needing funds to operate, which corresponds to the case of the enough collateral value in the thesis.In a word, we build the valuation models of inventory pledged loans with extension clauses under two situations of non-recourse and having recourse, and give the deter-mining equations on the LTV ratio to match the borrower’s willingness to repay the loan. Then we analyze how the inventory liquidity impacts the LTV ratio for the loans under default possible. Finally, under the terms of a different extension, this paper gives the reasonable relationship among the LTV ratio of the loans, the loan interest rate, ex-tension terms and renewal fees and other reasonable risk control indicators and compare two renewal terms of the loan interest rates via numerical experiments.According to the theoretical results and the numerical results of this thesis, we get the following conclusions:(1) under the assumption that the collateral value is less than the value of claims on the loan maturity date, if the financing costs (interest rates and fees) are the same and the lenders have no recourses, then borrowers can get more the loan amount with the extension way of repaying part of the loan. If the collateral value is higher than the value of claims, then borrowers can get more the loan amount with the extension way of increasing inventories pledged. When the lenders have recourses, borrowers can get more the loan amount with the extension way of repaying part of the loan.(2) Regardless of whether the financial institution have recourse, if the LTV ratios are the same, then the borrowers lower financing costs incurred with the way of increasing inventories pledged extension methods.(3) As long as the collateral value is higher than the value of claims on the maturity date of the loan, the loan with the two extension clauses have the same loan spreads in the case of non-recourse and recourse.The results of our study can be used by the borrower to choose loan products match-ing their needs. For example, according to the needs of their own funds companies can determine the extent of the extension clauses and renewal deadlines approaches, and also provide a theoretical basis for determining the borrowing and lending rates on revolving loan pledge. In addition, the results of this thesis will provide technical support to help lenders to design and fix the price of loan product in inventory pledged financing prob-lems.