Representatives of Acme Enterprises, LTD have approached Sterling Bank in Houston, Texas, to borrow $1.7 million needed to purchase two Gulfstream II aircraft. To evaluate Acme Enterprises' request, a loan officer must research every aspect of the loan request and write the credit request memo to be submitted to the bank's Senior Loan Committee charged with the final decision of whether to loan Acme Enterprises the $1.7 million. (Note: In the task below, the Roman numeral M indicates 1,000 and MM indicates 1,000-thousands or 1 million.) The loan officer must report information to the committee regarding the aircraft (including their condition), how the aircraft will be used by Acme Enterprises (i.e., how they plan to make the money needed to repay the loan), how likely it is that Acme Enterprises' plan will work given the realities of the marketplace and the operation costs involved, and the financial health and credit worthiness of Acme Enterprises. Based on the research, the loan officer must weigh the pros and cons of the loan and make a final recommendation to the committee.

Following are excerpts from a credit request memo written by a loan officer for approval by the Senior Loan Committee.

Credit Request
This is a request from Acme Enterprises, LTD to borrow $1.7MM to purchase two Gulfstream II aircraft. Both planes and a $200M Sterling Bank CD will initially secure this loan. Proceeds from the sale of parts from the older Gulfstream will be used to reduce the outstanding balance of the loan and the debt will then be placed on a 7-year amortization. The CD will be released under the terms outlined in the collateral section listed on page 2. The 1972 G-II will be used as an international air ambulance. The 1968 G-II will be used as a parts plane.

The 1972 G-II currently has two engines that will need replacing because they are nearing the maximum number of allowable operating hours since last overhaul allowable under Part 91 of FAA regulations. This plane is in exceptional condition, with several valuable modifications outlined below. It does however need "new"/overhauled engines and the cost to overhaul these Rolls Royce jet engines is $750,000 each. Most Gulfstream operators cannot fulfill their operating contracts if their aircraft is down for the several weeks needed to complete the overhaul, so in this case — as in many cases the owner/operator placed this plane for sale after buying another aircraft with acceptable hours on the engines. Our borrower wants to make an offer of $1,000,000 for this plane.

Because the 1968 G II has not received any of the key update modifications (see below — Especially RVSM) our borrower feels that the plane may be acquired for a bid of $700M — even though the engines on the plane still have 6,000 useful hours on them. The engines will be removed from the 1968 G-II and installed on the 1972 G-II. These replacement engines have roughly 10 years of flight time remaining on them. The borrowers also have a committed buyer of specific parts on the 1968 G-II that will sell for $200M. This money will be applied to the principal portion of loan. The labor cost of the engine replacement will be covered by the sale of additional parts. Ultimately, when the 1972 G II has been completed and the appraisal is certified at the "as completed value" the CD will be released.

Full Collateral Description and Valuation/Analysis
1972 Gulfstream II/SP Model G-1159 G II, S/N 109; Engines make/model: Rolls Royce/MK511-8. Aircraft blue book value is $4.275MM. This plane will have both engines replaced with engines from the other aircraft securing this loan. The two replacement engines will allow the aircraft approximately 6,000 more hours or 10 more years in flying time. This aircraft also comes with three major modifications that cost approximately $1MM.

1968 Gulfstream G-II Model N244DM S/N 21; Engines Make/Model: Rolls Royce/MK 511-8 Spey. Aircraft blue book value is $3.888MM. This plane will be used as a parts plane. They will initially remove the two engines from this plane and install them on the 1972 G-II. They will also sell $200M worth of parts which will be used to reduce the principal balance of this loan.

$200M SB CD will be released upon a $200M principal reduction, completion of the engine installation, and appraisal confirmation of the "as completed" value.

Strengths & Weaknesses
Strengths:

• Experience of the Borrower
• Financial Strength of Blank Emergency Medical Service; sales growth during the past three years and improving gross and profit margins.
• Loan to value
• Meets all 3-2-1-2 guidelines
• Rapid payback

Weaknesses:

• Loan to cost