Systemic and non systemic risks faced by a major household appliances company and a commercial bank in unfavorable economic conditions

The XYZ Company is involved in household appliances industry and it is an old and good customer of the ABC Bank. The companys performance in the market was relatively well in the past but it is a traditional organization, mostly dependent on imports, which is not progresively growing and unable to improve its market share in recent years due to a strong competitive market conditions. The company also experienced a relatively high level of staff turnover trying to keep up with the new technological trends.

On the other hand, in the last two years, unfortunately the countrys economy showed serious signs of declining in its performance, wth a 20 % rate of inflation, together wth increasing interest rates to the range of 25% coupled with an increase of trade deficit and an unfavorable developments in the foreign exchange rates .

When a borrower is experiencing financial difficulties and is unable to make interest and principal payments on time (as they become due), it is sometimes tempting for a bank to lend more money to the borrower so that, the payments on the old loans can be kept up to date. This is referred to as debt rescheduling or debt refinancing. this approach allows interest on the loans to be accrued and avoids or defers the recognition of loan losses. ABC Bank faced a related problem concerning a loan that was provided to XYZ Company.

ABC Bank provided a five year loan of $ 50,000,000 to XYZ Company three years ago to finance its additional production capacity. however, the subject company started to show serious problems in making its loan payments to the bank and is currently unable to make its principal and interest payments for the last three months concerning the loan mainly due to its worsening working capital conditions created mainly by unfavorable economic conditions in the country.

With a reconsideration of the XYZ Companys financial condition and the companys previous historically good relationships, ABC Banks management decided and offered to the company to refinance / reschedule with a more convenient terms of payment extending the loan to 8 years (instead of 5) with an intention to avoid or at least defer or correct the loan losses and may be to avoid a potential bankruptcy situation for the XYZ Corporation.

Questions:

Based on the above mentioned information:

1. How do you evaluate the performance of XYZ Corporations performance in the past?
2. What are the main systemic and unsystematic risks faced by XYZ Corporation and ABC Bank.
3. What do you think about the decisions taken by ABC Bank providing the loans to the XYZ company? According to your opinion, do you agree with the ABC Banks decisions? If not, what course of actions should have been taken by the bank.

Required:

Please answer the above questions in a brief, concise and in point form as required and necessary, without giving too much extended information.