Presentation on theme: "LOAN WORKOUT PROJECT Background, Class Project & Preliminary Report Information January 21, 2009."— Presentation transcript:
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. 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 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: 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 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 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.) 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? 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? 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 John Sanders information: –7 years experience in his business. –Bachelors 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 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 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: 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 Look at entire audience when presenting – not just at me. Do not read too much from the slides or notes – rehearse the presentation.
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.