Loan Modification 101.
You operate are a bank holding a $10 million loan with an 8 percent interest rate that is currently paying interest only for one year (just to keep it simple). The borrower is having problems servicing the debt. You have two choices: (1) reduce the interest rate to 4 percent or (2) reduce the principal amount to $5 million.
Interest income in both examples generates $400 thouand per year.
Which method do you chose?
My answer is number 1.
If you write down the value of the loan by 50 percent, you will take a $5 million hit to the income statement.
Now, if you are a distressed investor who picked the loan up from the bank at 40 percent of par, which one would you do?
It depends.
MMPIQ may have difficulty convincing all of the banks and other financial institutions to take large haircuts.
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