hard · Private Credit portfolio-management-monitoring-workouts
A borrower defaults on a $100M loan. The lender spends 18 months in a 'Workout' and eventually recovers $70M in principal. During the workout, the lender received no interest.
If the lender's cost of capital is 10%, what is the approximate 'Economic Loss' compared to a performing loan?
- $0M, because the $70M recovery is likely higher than the 'distressed' purchase price.
- $30M
- $100M, because non-accrual status requires a full write-down under conservative Level 3 smoothing rules.
- $45M - $55M
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