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PRESENT
VALUE ANALYSIS
William Thomas
U.S. Department of Treasury
Office of Technical Assistance
OVERVIEW
This presentation covers loan classification
and present value calculations used in the
valuation of loans.
Suggested Policy
Proper credit decisions require the
evaluation of collection alternatives on a
comparable basis. Therefore, it should be
the policy of LPS to employ present value
techniques to assist in determining
courses of action most advantageous to
LPS in the liquidation of closed bank
loans.
Loan Classification
Determining loan status
Performing Loan
Sub-Performing Loan
Loan Classification
Non-Performing
Valuation Usage
Market Value
Market Rate
Base Rate
Valuation of Performing
Loans
Adjusting the Base Rate
lending practices.
Valuation of Performing
Loans
200bp
Valuation of Performing
Loans
Adjusting the Base Rate
Valuation of Sub-Performing
and Non-Performing Loans
Present Value Methodology
Cash recoveries
Direct expenses
Payment of any prior liens
Liquidation Scenario
borrowers or guarantors.
For sub-performing loans, NPV-ECR may also include
projected principal and interest payments until default
occurs.
Valuation of Sub-Performing
Valuation of Sub-Performing
Sources of Recovery
guarantors
Documentation
Discount Rates
Measuring Risk
For example:
Less risk should be associated with estimating recovery on
Discount Rates
Prime + 7
Prime + 10