To price a loan that you're purchasing from another bank, start just as you would any other loan. Enter the outstanding balance of the loan in the "Amount" field and enter the rate type, maturity, payment type, amortization, collateral, and guarantees. Next, consider the additional value you stand to gain once the entire principle balance is repaid. For example, if we have paid $2.5M to acquire a $3M loan, there's an additional $500,000 of principle value upon repayment. Enter this additional value as one-time fee income in the Fees section.
This deal would exceed our Target ROE if we are able to acquire the opportunity at the discounted price.
Some additional items to consider:
- Collateral - Often times in distressed situations, default is a stronger possibility. Liquidating collateral may prove more difficult than normal as bankruptcy hearings &/or distressed properties can slow down the liquidation process. Consider creating a Distressed collateral type with a reduced recovery rate to account for the additional time and effort required to liquidate such a property.
- Guarantees - In some cases, the originating bank is willing to guarantee a portion of any losses. Consider creating a new Guarantee type for the Source Bank's pledge with a higher recovery factor indicative of the backing of a stable financial institution.
- Risk Grades - This may be a good time to review the probability of default (PD) assumptions you have for your troubled asset grades. If this is a new venture for the bank, your previous experience with criticized assets may not be indicative of your potential losses.