The amount of losses (loss given default, LGD) that is based on the cash flows observed between the time of default and the time a resolution may take place (i.e., it is worked out). Typically, the value of such losses, workout loss given default (W-LGD), ranges between zero (zero losses) and 100% if the total exposure is not worked out (not recovered). In calculation, the realized W-LGD represents the aggregation of positive and negative cash flows.
Negative cash flows (outflows) reflect the restructuring costs that may be incurred by the lender, which may have a certain spillover effect, that is, in case these costs spiral to high levels, in which case the W-LGD may exceeds the upper limit (100%). On the other hand, the proceeds from the sale of collateral may generate positive cash flows (inflows), which help reduce the amount of the W-LGD.
