Chapter 11 - Recognition, Diagnosis, and Response to Troubled Loans

Abstract

Publisher Summary Statistical distress models are usually associated with regression and discriminant analysis. Regression utilizes historical data to forecast future events, while discriminant analysis classifies observations into one of several a priori groupings. The asset management effect indicates high probabilities of distress if assets such as inventory, receivables, and equipment build up out of control. It is interesting that total assets make up the denominator of four out of five of the Z-score variables, meaning distressed companies hold excessive assets relative to operating requirements. The consequences that redundant assets bring to lenders are readily seen in sustainable growth rates, too. Loans secured by assets carry certain risk, but to criticize these loans, it must be evident that the risks are increased beyond a point where otherwise the original loan would not have been granted—that is, crossing a credit grade threshold.