Haircut

A haircut is a downward adjustment applied to a stated collateral value, reducing the amount a lender will recognize for borrowing base purposes, and in legal-asset lending it typically applies on top of, and for different reasons than, the percentile-based advance rate applied to a settlement or award distribution. Where an advance rate addresses the general uncertainty in a distribution's shape, a haircut typically addresses a specific, identifiable risk factor: a matter past a defined procedural age without material movement, a matter concentrated in a defendant, judge, or legal theory the portfolio is already exposed to past a defined threshold, or a matter whose underlying claim is independently disputed on grounds unrelated to its value. A well-structured haircut schedule states each specific risk factor and its corresponding discount explicitly, rather than applying an undifferentiated, blanket haircut across an entire collateral pool, because a disclosed, factor-specific haircut schedule lets both the lender and the borrower understand exactly which characteristics of a given matter are driving its treatment within the borrowing base, rather than accepting an opaque, unexplained reduction neither side can independently verify or dispute in good faith once the borrowing base certificate has already been issued and relied upon by both parties.