Workout Agreement

Mutual agreement by borrower and lender to reschedule loan payments, modify payment terms by extending the original maturity, and so on. This normally is done in lieu of Foreclosure action, in which the lender attempts to sell at auction any loan collateral pledged by the borrower. Loans in this stage of negotiations already are covered fully by loan loss reserves and have been written off as Bad Debt. By negotiating new terms with the borrower, the lender expects to collect more from recoveries than from legal remedies, such as foreclosure, liquidation, and bankruptcy. See also Creditors' Committee; Debt for Equity Swap; Stand-Still Agreement; Troubled Debt Restructuring.

A mutual effort by a property owner and lender to avoid Foreclosure or Bankruptcy following a Default generally involves substantial reduction in the Debt Service burden during an economic depression. See Cash Flow Mortgage, Distressed Property.
Example: Because of an economic slowdown, the hotel suffered high Vacancy Rates and failed to generate enough income to meet Mortgage payments. The owner approached the lender about a workout. It was agreed to reduce the outstanding loan Principal and extend the Maturity date to reduce the debt service. In turn the lender would participate in the income when the economy recovered and hotel income exceeded a specified amount. See Participation Mortgage.

Table 57 Working Capital Statement

Assets Liabilities & equity

Current Current

Cash $1,000

Acc'ts receivable 1,000 Accounts payable $ 500

Inventory ­2,000 3-month note ­1,000

______ ______

Current assets $4,000 Current liabilities $1,500

Fixed Long-term

Land 6,000 Mortgage 10,000

Buildings ­10,000 Equity ­8,500

_______ _______

Total assets $20,000 Total liabilities $20,000

and equity