Question

You are a loan officer at a bank. Two years ago your bank loaned Westwood Solar $100,000 to start a company selling solar panels to commercial and residential customers. The loan has an acceleration clause that permits the bank to immediately demand all payments plus the interest owed to date if Westwood Solar fails to pay an installment in any given month. Westwood Solar has made its loan payments for the past two years. However, you know that the company has slipped into financial distress as sales of solar panels have proved more difficult than expected. The CEO of Westwood Solar, anticipating your concern, has informed you that a new state bill proceeding through the legislature proposes to give residents substantial tax breaks for buying solar panels. The CEO has also asked for a two month extension for the next payment in order to prepare for the new tax law. Evaluate whether you should exercise the acceleration clause against Westwood Solar.

Answer 1

The Facts of the case state that Westwood solar co. has a loan of $100,000 with acceleration clause and has paid its installments for the past 2 years. As the company has slipped into financial distress, the sales of solar panels has slipped and CEO has asked for a 2 month extension against new state bill proceeding through the legislature proposes to give residents substantial tax breaks for buying solar panels that will increase its sale.

Now its at the discretion of Loan officer whether to exercise the acceleration clause or not. To make a decision, first we need to analyse Westwoods financials for the past two years, focussing majorly on Cash Flow Statement, Profit & Loss Account and Balance Sheet.

Case 1: If the company has strong financials, and have enough assets that can be used as colleteral to repay the Loan amount with principle, the Loan officer can provide Westwood with a 2month Extension.

Case 2: If the company doesn't have strong financials, but it is highly likely that legislation is passed, then a comparitive analysis of the company with its competitors should be carried out and the Loan officer should provide Westwood with a 2month Extension only if the company holds advantage against its competitors in terms of sales, profit margins and operation

Case 3:  If the company doesn't have strong financials, and it is highly unlikely that legislation is passed, The loan officer should exercise its acceleration clause against Westwood Solar demand payment with interest immediately.

The answer is completely subjective. I personally would objectively evaluate the company's financial and make a decision accordingly.

It would be highly appreciated if you rate a thumbs up.