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LOAN WORKOUT PROJECT. Background, Class Project & Preliminary Report Information January 21, 2009. Business Background. Banks make both personal & commercial loans Personal: A type of loan you would take out to mortgage a house; pay money back in monthly installments.

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Loan workout project

LOAN WORKOUT PROJECT

Background, Class Project & Preliminary Report Information

January 21, 2009


Business background
Business Background

  • Banks make both personal & commercial loans

  • Personal: A type of loan you would take out to mortgage a house; pay money back in monthly installments.

  • Commercial (business): A loan issued where the borrower keeps the entire amount for a fixed time; makes regular interest payments.

  • We will only consider commercial loans.


Borrowers
Borrowers

  • Q: Who should the banks lend to?

    • Need information about the borrower – business background, education level, etc.

    • What is the loan being used for?

  • Loans are risky – banks must monitor the loans carefully.

  • If the borrower fails to make interest payments, the bank has to make a decision on Foreclosure vs. Workout.


Foreclosure vs workout
Foreclosure vs. Workout

  • Foreclosure: In most cases, this means the bank takes over the collateral for the loan and sells it in the market.

  • Workout: If the bank decides that financially it is worth it to them to keep the loan open, the bank can set up a new schedule of loan payments with the borrower.


Decision making
Decision-making

  • The bank needs to make a workout decision using a lot of information.

    • Historical data on past borrowers with similar conditions as your borrower.

    • Current state of the Economy.

  • If a workout plan is decided upon, everyone must agree to it.


Term definitions
Term / Definitions

  • Full Value: Amount of original loan.

  • Foreclosure Value: Amount of money the bank receives if it decides to foreclose on the loan.

  • Default Value: Amount of money the bank receives if it decides to enter into a workout and the workout fails.


Class project
Class Project

  • In class, we will be referring to a situation that is similar to the project you will be working on.

  • All loans (for both class and team projects) are taken out with Acadia Bank.

  • Acadia Bank is composed of 3 former banks: DuPont, Cajun & BR.


Class project cont
Class Project (cont.)

  • John Sanders has a commercial loan with Acadia Bank with the following information:

    • Full Value: $4,000,000

    • 10% interest rate

    • 1 year old

    • Loan terminates in 4 years.

  • Missed last interest payment and will not be able to make the next 3 payments.


Foreclose
Foreclose?

  • If the bank forecloses on the loan:

    • John Sanders will be out if business.

    • Bank recovers only $2.1 million of the original $4 million.

  • If the bank enters into workout:

    • If the workout succeeds, bank recovers the original $4 million.

    • If the workout fails, the bank only recovers $250,000 of the original $4 million.


How to make the decision
How to make the decision?

  • Bank needs to know the expected value of a workout.

  • The bank will need to use historical data on borrowers with similar information.

    • BR: Number of years experience.

    • Cajun: Education level.

    • DuPont: State of the economy.

  • All three banks have data on thousands of borrowers.

  • Information can be found in Loan Records.xls


Conditions
Conditions

  • John Sanders information:

    • 7 years experience in his business.

    • Bachelor’s degree in Business Administration.

    • State of the economy is “normal”.

  • All three conditions are independent of each other.

  • Q: Should Acadia Bank enter into a workout agreement or foreclose on the loan?


Team projects
Team Projects

  • Each team needs to go to the class web page to find information about a borrower who has fallen behind on interest payments.

  • Each team should have the following information:

    • Education level,

    • State of the economy,

    • Years of experience,

    • Full value, Foreclosure value and Default value of the loan.


Preliminary reports
Preliminary Reports

  • Each team must have a preliminary report ready to present on:

    • Monday, February 2

  • This report must be done as a PowerPoint presentation. Everyone on the team must speak during the presentation.

  • The report should be about 5 minutes in length with me asking a question or two at the end of the presentation.


In the report
In the report:

  • Each member of the group must be introduced.

  • Background about the borrower given – be creative!

  • Background about loan information given.

  • Some preliminary analysis done on historical data.

  • Preliminary decision given with justification.


Requirements suggestions
Requirements / Suggestions

  • Look at entire audience when presenting – not just at me.

  • Do not read too much from the slides or notes – rehearse the presentation.


Requirements suggestions1
Requirements / Suggestions

  • Be confident when speaking.

  • Do not cut in when others are speaking – know your role.

  • Do not go over the time limit, but do not speed through the presentation either.

  • Look at the grading sheet on the web page.

  • Print out a hard copy of the slides to give to me.


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