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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


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.
  • 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
  • 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.
  • 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
  • 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.