Managing Operating Costs and Credit Risk

Session 4 July 12, 10:45-12:15pm

Managing Operating Costs and Credit Risk

1

Credit costs from a budgetary view

? Subsidy Rate Calculation

? Subsidy Rate = (NPV outflows - NPV inflows) / gross loan amount

? In addition to economic assumptions needed for NPV analysis, must develop technical assumptions:

? Cash flows specified in loan contract ? Deviations from contract terms such as defaults, recoveries, prepayments,

forgiveness ? Management assumptions about future business or legislative authority

2

Estimating direct loan subsidy costs

3

Estimating loan guaranty subsidy costs

4

Data elements used to populate subsidy calculator

Illustrative example

Name Program type Obligations Disbursements Principal payments, scheduled Interest payments, scheduled Prepayments, net Default effect on cash flows Losses other than defaults Recoveries Other outflows Other inflows End

Year 1

Section 502 loans

Direct loan

$ 1,238,295,563

$ 1,057,311,433 $

$

4,798,244 $

$

31,839,380 $

$

1,410,597 $

-$

304,675 -$

-$

9,948,988 -$

$

-$

$

615,991 $

$

2,608 $

Year 2

152,384,782 $ 10,843,855 $ 69,318,033 $ 5,397,157 $ 1,500,893 -$ 24,777,547 -$ -$ 1,568,316 $ 6,928 $

Year 3

15,062,406 $ 12,919,103 $ 77,360,794 $ 10,484,994 $

3,014,195 -$ 30,853,466 -$

3,090,306 $ 2,416,707 $

66,126 $

Year 4

7,170,335 $ 13,964,966 $ 77,696,847 $ 14,910,515 $

3,768,513 -$ 30,905,966 -$ 10,310,645 $

3,423,361 $ 172,663 $

Year 5

3,903,427 14,955,592 77,159,022 19,645,788

3,916,205 29,625,912 11,195,526

3,970,961 371,358

* 1st five years; cash flows continue for life of loan cohort

5

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