The credit glossary.

45 terms credit teams use every day, each with a plain definition, the formula where there is one, and a worked example.

3

30+ delinquency: 30+ delinquency is the share of loans or balances that are 30 or more days past due, a standard measure of portfolio credit quality.

A

Allowance for credit losses (ACL): Allowance for credit losses (ACL) is a valuation reserve that reduces the carrying value of loans to the amount a lender expects to collect.
Annual loan review: Annual loan review is the yearly reassessment of a commercial credit relationship to confirm repayment capacity, covenant compliance and the accuracy of its risk rating.

B

Borrowing base: Borrowing base is the maximum amount a borrower may draw on an asset-based credit line, calculated by applying advance rates to eligible collateral.

C

Charge-off: Charge-off is the accounting action of removing a loan balance deemed uncollectible from a lender's books by charging it against the allowance for credit losses.
Compliance certificate: Compliance certificate is a document signed by a borrower's officer that reports covenant calculations and certifies whether any default exists under the loan agreement.
Concentration risk: Concentration risk is the potential for large losses when a lender has significant exposure to one borrower, industry, geography, collateral type or common factor.
Covenant headroom: Covenant headroom is the cushion between a borrower's actual financial result and the covenant threshold it must meet under a loan agreement.
Covenant waiver: Covenant waiver is a lender's written agreement not to exercise its default remedies for a specific covenant breach by a borrower.
Credit committee: Credit committee is a group of senior lenders and executives authorized to approve loans that exceed individual lending limits or require policy exceptions.
Credit line increase (CLI): Credit line increase is a raise in the credit limit on a revolving account, granted either at the customer's request or proactively by the lender.
Credit memo: Credit memo is the written analysis and recommendation an analyst or relationship manager prepares to support approval of a loan request.
Credit utilization: Credit utilization is the ratio of a borrower's outstanding revolving balances to their total available revolving credit limits, expressed as a percentage.
Criticized and classified assets: Criticized and classified assets are loans rated special mention, substandard, doubtful or loss under the US regulatory credit classification framework.
Cure rate: Cure rate is the percentage of delinquent accounts or balances that return to current status within a specified period.
Current expected credit loss (CECL): Current expected credit loss (CECL) is the US accounting standard requiring lenders to reserve for lifetime expected credit losses on financial assets at origination.
Current ratio: Current ratio is a liquidity ratio that divides a company's current assets by its current liabilities to show its ability to meet short-term obligations.

D

Days past due (DPD): Days past due (DPD) is the number of days since a borrower missed a required payment's contractual due date without paying it.
Debt service coverage ratio (DSCR): Debt service coverage ratio (DSCR) is the ratio of cash flow available for debt service to the principal and interest payments due in a period.
Debt yield: Debt yield is a commercial real estate metric equal to net operating income divided by the loan amount, expressed as a percentage.
Debt-to-income ratio (DTI): Debt-to-income ratio (DTI) is the percentage of a borrower's gross monthly income that goes to required monthly debt payments.
Delegated lending authority: Delegated lending authority is the approval limit a board of directors grants to individual officers or committees to approve loans without further escalation.

E

Earnings before interest, taxes, depreciation and amortization (EBITDA): EBITDA is a company's earnings before interest, taxes, depreciation and amortization, used as a proxy for operating cash flow in credit analysis.
Expected loss (EL): Expected loss (EL) is the average credit loss a lender anticipates on an exposure, calculated from probability of default, loss given default and exposure.
Exposure at default (EAD): Exposure at default (EAD) is the total amount a lender is expected to be owed by a borrower at the time the borrower defaults.

F

FICO score bands: FICO score bands are ranges of FICO credit scores that lenders and consumers use to group borrowers into broad credit risk tiers.
Financial spreading: Financial spreading is the process of entering a borrower's financial statements into a standardized template so lenders can calculate ratios and compare periods.
Funded debt to EBITDA: Funded debt to EBITDA is a leverage ratio that compares a company's interest-bearing debt to its annual EBITDA, expressed as a multiple.

G

Global cash flow: Global cash flow is a combined analysis of the cash flow and debt obligations of a borrower, its related entities and its individual guarantors.

L

Loan covenant: Loan covenant is a promise in a loan agreement that requires the borrower to take, avoid or maintain certain actions or financial results.
Loan grading migration: Loan grading migration is the movement of loans between risk rating grades over time, typically tracked with a transition matrix of upgrades and downgrades.
Loan-to-value ratio (LTV): Loan-to-value (LTV) is the ratio of a loan's balance to the value of the collateral securing it, expressed as a percentage.
Loss given default (LGD): Loss given default (LGD) is the share of a defaulted exposure a lender expects to lose after recoveries, net of collection costs.

M

Months on book (MOB): Months on book (MOB) is the number of months since a loan or account was originated or opened, used to measure account age.

N

Net charge-off rate (NCO rate): Net charge-off rate is the annualized amount of loans charged off, less recoveries, divided by average loans outstanding during the period.
Net operating income (NOI): Net operating income (NOI) is a property's revenue less its operating expenses, before debt service, depreciation, capital expenditures and income taxes.

P

Probability of default (PD): Probability of default (PD) is the estimated likelihood that a borrower will default on its obligations within a specified time horizon, usually one year.

Q

Quick ratio: Quick ratio is a liquidity ratio that divides cash, marketable securities and receivables by current liabilities, excluding inventory and prepaid expenses.

R

Recovery rate: Recovery rate is the share of a defaulted or charged-off balance a lender ultimately collects through payments, collateral, guarantees or debt sales.
Risk rating: Risk rating is an internal grade a lender assigns to a loan or borrower to express its assessed credit risk on a defined scale.
Roll rate: Roll rate is the percentage of balances or accounts in one delinquency bucket that move to the next, more severe bucket the following period.

T

Tangible net worth (TNW): Tangible net worth is a company's total equity minus intangible assets such as goodwill, giving a conservative measure of the equity cushion.

V

Vintage analysis: Vintage analysis is a method of tracking the performance of loans grouped by origination period, comparing results at the same months on book.

W

Watch list: Watch list is a lender's internal list of loans showing signs of weakness that require closer monitoring and more frequent reporting to management.
Working capital: Working capital is the difference between a company's current assets and current liabilities, representing the liquid resources funding day-to-day operations.