The current market Is being dominated by large companies, and recent events such as Inflation, tax rule changes and drop In the stock market caused smaller firms to ell, opening the business for more consolidation. As a response to the market situation and part of our company’s financing activity, we had borrowed small amounts off and on from Salon Trust Company of Richmond on a short term 90-day notes for minor acquisitions. We took significantly more debt when the company decided to acquire Trip-State Tablet.
Salon Trust Company has considered us a valued client and a major contributor to its profitability, as our only lending bank in 1997. The bank also serves as depository of the company’s tax payments. Thus, Salon has been generous in lending us to the mint that It allowed exceeding its credit limit with the rate still continued at a prime and with no protective covenants. Potential threat from Phoenix Bank where we had small deposits also led to the loan doubling up to almost $8 million with Salon without a carefully structured financial program.
To properly restructure our company’s debt, Salon Trust proposed options that will be beneficial to both and acceptable to Passage’s management. Initial meetings proved unsuccessful with us refusing to agree to a long term loan through an insurance company financing because of high rates and fancy covenants. We don’t eve much knowledge of finance so we prefer straightforward options. The bank prepared a forecast detailing the effects of a 5, 10 and 15% growth of the company, In the hopes to align our goals to theirs.
We have also decided to shift to LIFO method of valuation for their Inventory for tax purposes, resulting In a $kick tax benefit. In Dalton, a redundant warehouse will be disposed of giving them an additional $kick from the cash sale and tax refunds. Several alternatives were available to ten company In terms AT restructuring Its loan out we would want something that is simple, straightforward and beneficial for us. Also, the interest tastes were pretty volatile – from a low of 6% in the years of 1992-1994 up to 8 1/4% prime for year 1996.
Fixed rate would usually entail 2 h to 1 % above the floating rate. Our company’s current market standing though allows us to get a competitive rate. As part of Peps management, we need to determine the best option that the company can choose among the alternatives presented by the bank regarding the restructuring of the company’s short term debt. All the options available to APP will be reviewed, which would include the alternatives cited by Salon, as well as the other options available in the market that Salon did not include in his commendations to us.
The effects of each of these alternatives on the Income Statement and liquidity ratios would be quantified and qualified to come up with the optimal capitalization position. Analysis The current capital structure of Budget makes it difficult for Salon to continue issuing debt to our company. But the sales of APP has been growing and is projected to keep growing in the next few years, and the company would be needing more capital to finance their expansion. The main question would be how we would finance this increase in sales – debt or equity?
It is apparent that we lean more awards debt as a source of fund since the market considers APP as illiquid and has a thin market’. We were using short term, 90 day notes payable to finance our growing business. Although this might save us a certain amount of interest, this places our liquidity in a compromising position. Given this, there’s a need to restructure the current debt structure of our company. Salon named some alternatives available to us, and there are also options in the market that we can consider.
We need to analyze all of these alternatives to come up with a recommended debt structure that would enhance the liquidity position of our company. Hence, each option was analyzed. With Salon urging us to shift our short term notes payable into long term debt, there remains the option to maintain the current structure of short term 90-day loans. If we choose this option, this would merely entail for the company to do nothing, or use other banks to sustain this current position if Salon is steadfast to their opinion that they will not maintain the current agreement with APP.
This however poses a liquidity problem for the company, posting a negative cash flow even at 15% growth rate for the next 3 years. A second option, and what Salon is also trying to recommend is for us to accept the Eng term restructuring via a long-term debt from the insurance company at 9. 5% mull rate Tort 1 years. I nee terms Tort tens are quilt Nell, Ana normally, insurance companies would require covenants that the company should strictly follow within the duration of the agreement.
Listed below are other options as discussed by Salon to split the loan through the following alternatives: – $3 million appraisal value of Peps general purpose warehouse as collateral for a mortgage loan. APP has a warehouse appraised at $3 million, which is higher than the reported book value of the asset. This will be part of the long-term liability of APP, giving us more flexibility with the use of their working capital. – $1 million possible loan from Canadian Banks through its Canadian Subsidiary net current assets.
This was proposed by Salon in light of Peps Canadian operation through its subsidiary. If they have a good banking relationship in Canada, they might be able to arrive with a competitive interest rate, with flexible terms. For this study, for conservatively purposes, we will assume that Canadian banks would impose the same interest rate as its US counterparts’ floating interest rate. Factoring option of accounts receivable at 2%. Due to the large amount of receivable that APP has in its balance sheet, we can consider factoring the company’s receivables to factor banks.
The advice of Salon is to factor the Ear’s in a no-recourse, 2% term. The value of which is that they would be able to realize and convert the receivables into cash which APP would be able to use as their working capital, and it would then be the responsibility of the factor bank to monitor and collect on the receivables as they become due. – Wait until part of the loan is retired and rotate it with other banks to allow clean p. This option is very much like keeping the obligations of the company current, except that they would be dealing with various banks.
This is an alternative to Salon, so that we would be able to have a certain amount of time where their account is cleaned up with Salon, while the loan sits on another bank, where it waits to be due, and transferred back to Salon, or another bank to be rotated. As the goal is to come up with the best suitable loan mix for the company, all the variables are factored in. All of these options are available to the company, and all have their pros and cons as discussed above. It must be noted though that we are very conservative, and is not well versed financially.