How to Keep Loans Performing: Business Snapshot 2.3 Hull/RMFI

[Dr. Jayanthi Sankaran]

Hi David,

I don't know where to post this - so thought I would post it here. I am not very clear on the 'Debt Rescheduling' of Mexican/Brazilian/Argentinian debt in the early 80's.

According to Hull "In the early 1980's, many LDC's were unable to service their loans. One option for them was 'Debt Repudiation', but a more attractive alternative was 'Debt Rescheduling. In effect, this leads to the interest on the loans being capitalized and bank funding requirements for the loans to increase"

I am not sure I understand it (the bold) perfectly. Would appreciate your input on this!

Thanks
Jayanthi

 

[Mkaim]

Hi David,

I don't know where to post this - so thought I would post it here. I am not very clear on the 'Debt Rescheduling' of Mexican/Brazilian/Argentinian debt in the early 80's.

According to Hull "In the early 1980's, many LDC's were unable to service their loans. One option for them was 'Debt Repudiation', but a more attractive alternative was 'Debt Rescheduling. In effect, this leads to the interest on the loans being capitalized and bank funding requirements for the loans to increase"

I am not sure I understand it (the bold) perfectly. Would appreciate your input on this!

Thanks
Jayanthi

Hi @Dr. Jayanthi Sankaran ,

So, as you may be aware, in a 'debt repudiation' someone is basically not acknowledging the debt against them (denying any payment) and walking away. Debt rescheduling would then mean it's a loan workout; basically, you're working with the borrower to change the terms of the loan so that the borrower keeps paying, as opposed not paying anything. So you either work with the borrower (debt rescheduling) if they're facing difficulty or you get nothing (repudiation). It seems like there is a workout where the interest is capitalized (added to the principal amount) so the borrower makes lower periodic payments of principal only and the interest part gets "capitalized", i.e. added to the principal. Given that the loan amount increases due to this, I can see how funding requirements increase (you're effectively increasing the duration of the loan). Also acknowledging it's a higher risk loan so therefore funding cost would be higher.

Also wanted to add that the borrower is making the same dollar amount of payments (interest + principal) over the course of the loan but the timing is changing. Doesn't look like any "forgiveness" is occurring in this case.

EDIT -> Loan Workout = Loan Modification

 

[brian.field]

@Mkaim is the man!

 

[Mkaim]

@Mkaim is the man!

The one area I know a little about dealing with GSEs

 

[Dr. Jayanthi Sankaran]

Thanks @Mkaim - appreciate it BTW what is a GSE?

 

[Deepak Chitnis]

Hi @Dr. Jayanthi Sankaran, GSE is government sponsored enterprise.
Thank you!

 

[Dr. Jayanthi Sankaran]

Oh - okay Deepak. Not good with acronyms! Thanks a lot

 

[brian.field]

Hi @Dr. Jayanthi Sankaran, GSE is government sponsored enterprise.
Thank you!

Examples of which would be Fannie Mae or Freddie Mac, among others.

 

[Dr. Jayanthi Sankaran]

That's what I thought Brian - but was not sure! Did not know that Freddie Mac or Fannie Mae extended loans to LDC's. Thought only international banks did that...Ah....got it! @Mkaim just used the US GSE's example of 'Debt Restructuring' domestically, and applied the same concept to 'Debt Restructuring' of LDC loans by international banks.

 

[Mkaim]

That's what I thought Brian - but was not sure! Did not know that Freddie Mac or Fannie Mae extended loans to LDC's. Thought only international banks did that...Ah....got it! @Mkaim just used the US GSE's example of 'Debt Restructuring' domestically, and applied the same concept to 'Debt Restructuring' of LDC loans by international banks.

Sorry @Dr. Jayanthi Sankaran - but I have been traveling so I just saw this. Yes, I did precisely what you thought. Seemed like a very similar concept as you're basically working with a borrower.

 

[brian.field]

Hi @Dr. Jayanthi Sankaran, GSE is government sponsored enterprise.
Thank you!

Holy cow!!!!! @Deepak Chitnis - I never intended to dislike your post! Sorry about that!

 

[Dr. Jayanthi Sankaran]

Thanks @Mkaim - appreciate it

 

[Deepak Chitnis]

No problem @brian.field it happens many time with me, then I have to change it back!