CREDIT AND LENDING DECISIONS
Part 1: Assignment Submission - Methods and Deadlines
Your submission (excluding attachments and appendices) should be approximately 2,500 words in length. This word limit will not be strictly adhered to, so you have some flexibility in deciding on your word length. Assignments submitted after the deadline will be subject to penalties as outlined in the unit plan.
Computing difficulties will not be accepted as a valid excuse for late submission of the assignment. It is the Student's responsibility to ensure that they access the company's annual report, and it is important that this is done at an early stage so there is time to overcome any computing difficulties.
Part 2: Background on Case Study No 2
The first assessable case study in this course was on BP East. The focus in this first case study was on the technical analysis of the first way out using tools such as ratio analysis and cash flow budget analysis. In Case Study No 2 you are asked, as a potential lender to 1300SMILES Ltd, to take a much broader view. Central to this view will be an assessment of the risks that the proposed lending will expose the bank to.
Your Approach To The Lending Deal
You are asked to take a positive approach to the borrower and its request for funding. This means that your decision to approve/decline this deal should be subject to the real life pressure from your employer to add quality business to your portfolio. This point can be put another way. Almost every lending deal will inevitably have some positive features and some negative features. Your challenge in this assignment is to identify whether there are ways of structuring the deal that minimise (or mitigate) the negatives and enhance the positives so that the deal in overall risk terms is acceptable to the bank. Of course, you have the option to decline the deal if you feel that it is not possible to structure the deal in a way that satisfactorily mitigates the major risks.
The Submission You Are Expected To Write
Against this background you are asked to produce a written submission for this customer. The submission will end up with a recommendation regarding whether or not you wish to take on this business. If you do decide to decline the deal then you will still need to write a full submission so that your reasons for declining the deal are clearly developed and explained. In addition, you are expected to say something about under what conditions you would be prepared to reconsider the deal.
While there are many different possible formats for a lending submission, you are asked to adopt the format outlined in the Week 9 lecture handout in your class notes booklet entitled "A Structure for a Lending Submission". You are asked to include both in-text and end-text references in your assignment. Referencing in the assignment should follow the normal APA referencing style as detailed on the ECU Library website. Note that referencing is required in order to assist in the marking of this assignment; it is not something that is required of lenders in practical situations.
Part 3: The 1300SMILES Limited Case Study
You work as a Senior Lending Manager in the Corporate Lending Division of Excel Bank. You had a meeting today with the Chairman and the Managing Director 1300SMILES Limited. During the meeting you were told that 1300SMILES wish to move all their banking to your Excel Bank. They wish to borrow $9 million from Excel Bank as follows:
- $3 million to purchase new dental equipment.
- $4 million to purchase additional offices (valued at $8 million).
- $2 million overdraft facility.
The company has recently repaid all the facilities at their existing bank. You can assume that all their existing banking will be moved to your Excel Bank and 1300SMILES will not have any facilities with their existing bank.
Due to ongoing technology advances in the dental industry, new dental equipment of $3 million is required by 1300SMILES to modernise their existing equipment, and ensure they are at the forefront of the latest practices in dentistry. The additional office space is located next door to their existing head office premises and is required to accommodate future expansion of the company. The overdraft facility of $2m is required due to ongoing cash flow needs of their dental business. 1300SMILES have asked whether Excel Bank would be willing to provide this funding. The reason they wish to move to your Bank is because Excel Bank has developed a reputation for outstanding customer service and expertise in their industry.
1300 SMILES have referred you to the website for the company where it is possible to access the 2017 annual report (in the investor's section) which contains financial information for the past two years (use the consolidated financials). The website also provides other background information on the company. Your task is to make a decision as to whether you would provide 1300SMILES Limited with this funding; and to write this decision up in the form of a lending submission.
Note:
- You are specifically asked not to contact 1300SMILES Limited directly.
- In researching information for your assignment, the main source will be the company website. There may be other information available on the web (e.g., produced by stockbrokers and others) that analyses the performance of the company and the industry. Students should research any additional information they require, for example the IBISWorld and MarketLine Databases ECU library website. MarketLine provides information on dental service companies (but not the industry) and IBISWorld provides information on the dental services industry in Australia.
- To avoid being overwhelmed by the large amount of information contained in the detailed financial statements, you could start by completing Appendices 1, 2 and 3 to the lending submission.
- In calculating your performance ratios and assessing affordability you should ignore any "one-off" or discontinued income and expenses.
- Your analysis is to be based on the 2017 full year financials, and you can ignore any information that became available after this date. Your ratio analysis need only include two years (i.e. 2016 and 2017).
- You should assume the following in respect of the lending submission:
o All existing accounts with their current bankers will be closed
o All Company assets will be available to Excel Bank as security
o All equipment has a useful life of 3-5 years
o Leasehold commercial property has the same SLM as any other commercial property
o The customer's interest rate for all facilities provided by Excel Bank will be 8%
o You should select loan terms based on the use of the funds and the useful lives of the assets
o If a particular ratio cannot be calculated due the nature of the operations of the company (i.e. a service company that does not manufacture, buy or sell stock), then show that ratio calculation as N/A (not applicable).