Negotiations with borrowers can be tricky and fast-paced. The workout professional needs to be able to respond to borrower inquiries quickly, authoritatively and without losing a step. While final numbers, covenants, terms and conditions must be developed carefully before being finalized, workout professionals know that Cash is King and that they must be able to deal with cash flow issues on the fly.
The workout professional who can make quick rough calculations without using his or her HP 12C has an advantage. A desperate borrower may promise you the moon just to buy time. An unsophisticated borrower may not know how much cash is available to pay the Bank and still keep the business operating. A complicated relationship with multiple deals may prove challenging for Bank and borrower, particularly where the borrower lacks an experienced CFO or controller and financial reporting is incomplete. The officer who can quickly comprehend whether borrower promises are realistic can keep the conversation moving without having to stop to run detailed calculations.
Let’s assume you have a $1,000,000 loan that bears annual interest at 6 percent. You need to know how much interest accrues each month. Here’s the simple rule of thumb to follow:
Always start your calculations by assuming that the simple annual interest rate on the loan is 12 percent, or 1 percent per month.
So the first easy calculation is that interest on a $1,000,000 loan at 1 percent per month results in monthly interest of $10,000 per month.
But your loan bears interest at only 6 percent, which is half of 12 percent. The second easy calculation is to cut the monthly payment in half to $5,000 per month.
Similarly, if the interest rate is 8 percent, multiply the monthly payment by two-thirds, because 8 percent is two-thirds of 12 percent. Thus, the monthly interest payment on $1,000,000 at 8 percent is $6,667 per month.
Precision is not the goal here. Approximation allows you to keep the conversation moving. There will time later to do the exact calculations, which of course must be done before the deal is finalized.
You can apply this process to rough approximations of fully amortized loan payments, but it does get tricky. As any homeowner knows, payments on a loan amortized over 30 years includes precious little principal paydown in the early years, but this is not so for loans that fully amortize over shorter time periods. It is worthwhile committing to memory a few formulas for calculating fully amortized loan payments that you can use in your head.
At today’s low interest rates, to fully amortize a loan over 3 years requires payments of around $30 per $1,000 of principal. So to fully amortize the payment on our $1,000,000 loan over 3 years at 6 percent will require monthly payments of about $30,000. The exact payment is $30,421.94, so to be safe, after making your calculation, refer to the monthly payment as a little more than $30,000. If your interest rate is slightly higher or lower, adjust your calculations accordingly.
There are magic numbers for 4 and 5 year fully amortized loans, also. To amortize a 6 percent loan over 4 years requires payments of about $25 per $1,000. To amortize a 6 percent loan over 5 years requires payments of about $20 per $1,000.
Finding loan amortization payments in not something that many people can do without a calculator, but there is a simple table that you can keep for handy reference for those times when you do not want to stop the negotiations to calculate specific payment amounts. Before the age of pocket calculators and online loan calculators, amortization tables were published in books and on wallet-sized cards. Even in our electronic age, these tables can be valuable tools for workout professionals to use in borrower negotiations. We have reproduced the table below:
To use the amortization table, just multiply the payment factor by the number of $1,000 of loan principal.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
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