Restructuring versus Liquidation for a Defaulted Term Loan
A term loan of 850m is 210 days past due. Security is a factory land and building with a market value of 1.2bn but a forced-sale value of 780m after 18 months and 60m legal costs. The personal guarantor has assets of about 300m, but enforcement may take two years and costs 40m. The borrower proposes restructuring: 40% principal haircut, five-year bullet at 10%, no principal for three years. Its EBITDA is 150m and total debt is 1.1bn including other lenders. The bank's policy prefers restructuring when the NPV of recovery exceeds liquidation and the business is viable. Liquidation would yield uncertain recovery and damage the local supply chain. The relationship manager wants to accept quickly to avoid provisioning. A director of the borrower is a former bank employee.
1. Compare the recovery outcomes of liquidation, guarantor enforcement, and the restructuring proposal.
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Liquidation. Forced-sale value 780m less legal costs 60m = 720m net, about 85% of the 850m loan, but with 18-month timing and uncertain value. Guarantor enforcement could add 300m less 40m costs = 260m, but over two years and with legal challenge risk. Restructuring proposal. A 40% haircut leaves 510m principal; 10% interest = 51m per year; no principal for three years, then bullet at year 5. At a 12% discount rate, PV of interest = 51 x 3.6048 = 183.8m; PV of principal = 510 / 1.7623 = 289.4m; total PV = 473.2m, a 55.7% recovery. That is below the 720m liquidation recovery before guarantor. The proposal is therefore worse on NPV unless liquidation values are unreliable. It also leaves the bank exposed to the same management.
2. Recommend the best course and identify legal, ethical, and governance issues.
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Recommendation: reject the 40% haircut; negotiate a lower haircut, shorter moratorium, and security enhancement. Counter with: 15-20% haircut, 12-month grace, 4-year amortization, 12% interest, additional collateral or guarantor equity, and a cash sweep. If the borrower is viable (EBITDA 150m), a restructure can preserve value, but the bank should not accept a 55.7% recovery when liquidation indicates about 85%. Legal/ethical/governance. The former bank employee director creates a conflict of interest; the relationship manager must be recused and the credit committee must approve independently. Do not fast-track to avoid provisioning; that is accounting-driven, not credit-driven. Check other lenders' pari passu rights, perfection of security, and guarantor enforceability. Document the recovery comparison, stress case, and board approval. If liquidation is chosen, manage supply-chain and reputational impact, but do not let it override recovery.