Question 1) Using regression analysis on historical loan losses, a bank has estimated the following:

Xc = 0.002 + 0.8X1 and Xr = 0.002 + 1.8X1

where Xc equals the loss rate in the commercial sector, and Xr equals the loss rate in the retail sector, and X1 equals the loss rate for its total loan portfolio. 

Based on the regression analysis alone what sector should the bank limit its loans?

Reconcile the existence of both retail and commercial loans.

Question 2:

Discuss the kinds of coordination problems that can arise in loan workouts and how they can be resolved.

 

Answer1

Based on the regression analysis alone , in the retail sector the bank should  limit its loan. Since a unit change in the loss rate in the retail sector results to 1.8 units change in the loss rate for its total loan portfolio.

Answer 2

A workout in the sense of a financially troubled corporation usually means an effort to negotiate a consensual solution to a company's financial problems with the company's lenders (and/or other creditors).

WHEN CONSIDERING A WORKOUT, THE COMPANY WILL usually assess the types and nature of the sector's various obligations, as well as the degree and nature of the sector's defaults in respect thereof (i.e., if the sector is actually in default on certain of its obligations or merely anticipates a default in the immediate future). A loan workout is where a lender and a borrower work out a solution to a defaulted loan in order to prevent bankruptcy. A business and its lender(s) can restructure the loan by, among other things, amending its existing agreements or entering into a forbearance or waiver agreement. The company must consider the potential consequences of any agreement before proceeding.

Any subordination arrangements, as well as the possibility of preference disclosure For the purposes of a workout, companies that have issued public debt securities can initiate an exchange offer. In an exchange bid, bondholders are given an opportunity to exchange their current bonds for new securities, equity, or a combination of both, in order to minimize the amount or adjust the timing of the issuer's principal and interest payments.

The organization must ensure that it fixes the appropriate issues, which it cannot do until it determines whether and to what degree it is in default under its existing loan or other obligations. Once the company has a thorough understanding of its debt-related defaults (or possible near-term defaults), it may begin to explore options for dealing with them. In other terms, the company cannot ask its creditors to help it solve its problems until it understands what is wrong and why.

A standard loan agreement will include a number of covenants and other conditions that a borrower must adhere to over the duration of the loan, as well as circumstances that will result in a default or occurrence of default. Following the occurrence and continuation of an event of default, the lender would generally be able to exercise various rights and remedies against the company, including an acceleration of the indebtedness, the accrual of default interest, the right to commence litigation seeking payment on the indebtedness, and the right to foreclose on a property.

A loan agreement would often state that failure to meet such commitments would result in a default (rather than an event of default). The loan agreement's event of default section will detail the situations in which a default will result in an event of default. Typically, the organization will be given a window of opportunity to cure the default before it becomes a case of default. If the default is not corrected in a timely manner and the situation progresses to an occurrence of default, the lender will usually be able to pursue its remedy against the company.

If a lender has leverage over the company's working capital or other bank accounts, the company's access to its own funds may be severely restricted after a default case. As a result, a company must be fully aware of its covenants and obligations under the arrangement, as well as the lender's rights if the company fails to meet these covenants and obligations on a timely basis. If the company fails to meet any obligations under the loan agreement, it can speak with the lender about the reasons for the failure, whether it can remedy any current defaults, and/or whether a waiver, forbearance, or extension is necessary. If the lender agrees that declaring an event of default is not in its best interests in the circumstances, the parties will start discussing the terms of a waiver, forbearance, or extension.

Step-by-step explanation

Faraj, S., Pachidi, S., & Sayegh, K. (2018). Working and organizing in the age of the learning algorithm. Information and Organization, 28(1), 62-70.