Mutually beneficial loan workouts

Loan losses are a natural part of the lending function of a bank. When default occurs, a bank must decide to foreclose or forebear on the loan. The forbearance decision involves a negotiation of a workout arrangement permitting the borrower to continue to invest in the project. This paper models the bank’s workout decision and differs from other papers by jointly modelling the borrower’s decision to accept a workout arrangement. The result is the set of conditions that yield a mutually agreeable workout. Alternative cases are examined to determine the impact of size and borrower alternatives on the acceptance/rejection of a workout decision.