Credit Memorandum
Task
Request from customer
You are employed as a Senior Business Banking Manager at the Asian Infrastructure Development Bank Ltd. The directors of Lithgow Valley Coal Pty Ltd have approached you for additional funding.
The company has now requested an increase in their existing leasing facility from $2,500,000 to $3,000,000 to purchase additional equipment and machinery and overdraft facility from $350,000 to $500,000 to fund research and development.
The company has been successful in winning several new contracts from around the country and is expected to increase revenue by 20 percent next year followed by 10 percent growth in the 4 years after that, mainly due to lower cost of fossil fuel compared to alternative sources of energy. Kevin estimates the operating cost will only increase by 5 percent per annum over the next 5 years.
The company also has Term Debt with current outstanding amount of $2,856,750 as per 2016 balance sheet with remaining term of 12 years to repay this debt in full.
Existing and increased facilities will be secured by way of all three director's personal guarantees and General Security Agreement over the company's assets. Net worth of the directors is estimated around $2 million each.
You are required to to produce a credit memorandum (credit approval report) to seek approval from your credit manager for the request from the client in the following scenario.
Background/History
Established in 1989, Lithgow Valley Coal Pty Ltd is a coal mining and marketing company supplying thermal and coking coal to the domestic market.
Lithgow Valley Coal, which has over 200 employees, is a medium size underground coal producer in NSW. The company sees its future through organic growth at their existing operations and focuses on the Company's portfolio management including acquisitions, divestments and focused exploration.
Vision
To be the leading, sustainable Australian coal supplier to both domestic and export markets.
Our mission
To operate and grow a sustainable mining business, delivering value to our customers and our shareholders whilst at the same time exceeding the expectations of our stakeholders.
Values
Principles are integral to our business as we:
• Strive for financial and operational excellence
• Refuse to compromise on safety
• Listen to, understand and provide opportunities for our employees
• Communicate honestly and openly with our stakeholders at all times
• Encourage innovation
• Strive for synergy by collaboration
• Value our corporate reputation and social licence to operate and strive to be a good corporate citizen
To be sustainable we must:
• Seek zero harm to people and the environment
• Productively and efficiently mine quality coal
• Increase Company value
• Leave a community with greater capacity than when we arrived
• Attract, develop, motivate and retain a diverse workforce
• Maximise the value of the resources we use
• Secure new resources
Note: The above background, vision, mission statement etc has been sourced from the website of Centennial Coal to give you the feel of real world scenario. https://www.centennialcoal.com.au/About-Us/Who-We-Are.aspx
Management
Kevin Ure, Timothy Brown and Sara Young are major shareholders and directors of Lithgow Valley Coal Pty Ltd. Sara is the Managing Director, Timothy has an engineering background and manages the research and developments whereas Kevin looks after the operations and finance. The company also employs 4 full time admin staff members apart from around 200 miners on contracts.
Required for assessing serviceability in your Credit Memorandum
1. You are to calculate principal and interest repayments based on the affordability interest rate of 8.5% p.a. on the Overdraft and Term Debt facility and 7.5% p.a. on Leasing facility over 15 years term for Over Draft and 7 years for leasing facility.
2. You are to include the following structure as a minimum in your credit memorandum. Additional materials on credit memorandum template and identifying risk and mitigant is attached on the Subject site's Resources.
• Customer and industry background information.
• Risk identification and mitigants.
• Financial Analysis (Key ratio analysis working along with commentary required i.e. liquidity ratio, efficiency ratio, profitability ratio and leverage ratio for 2014, 2015 & 2016).
• Debt Serviceability calculation.
• Cash flow analysis.
Hint:
i. Ratios are of no value when looked in isolation. They need to be compared with and against other information such as trends and must always be connected back to the cause in the trend.
ii. When you review the financial ratios, you should be able to paint a picture of the business as to its financial strengths, weakness, opportunity and threats.
• Rationale for recommendation with commentary on primary and secondary exits.
• Overall flow and structure of the credit memorandum.
Any data you use in your proposal must be referenced from a reliable source i.e. industry reports etc. Additional materials on credit memorandum template and identifying risk and mitigant is attached on the subject's Resources.
Lithgow Valley Coal Pty Ltd
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|
Detailed Financials for year end ($)
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|
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2014
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2015
|
2016
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ASSETS
|
|
|
|
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Current Assets
|
|
|
|
|
Cash
|
231,750
|
171,250
|
23,650
|
|
Accounts Receivable - Trade
|
2,808,880
|
3,117,030
|
3,526,900
|
|
Account Receivable - Other
|
5,190
|
17,480
|
21,850
|
|
Inventory/Stock in Trade
|
1,846,770
|
2,017,020
|
2,275,470
|
|
Prepaid Expenses
|
29,750
|
72,910
|
40,860
|
|
TOTAL CURRENT ASSETS
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4,922,340
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5,395,690
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5,888,730
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Fixed Assets
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|
|
|
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Land
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1,115,000
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1,115,000
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1,115,000
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Building & Improvements
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1,248,250
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1,348,250
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1,348,250
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|
Furniture & Fixtures
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47,850
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71,480
|
57,080
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|
Machinery & Equipment
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597,980
|
626,180
|
2,007,880
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|
Computers and Office equipment
|
86,400
|
77,300
|
74,610
|
|
Transportation Equipment
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252,830
|
322,970
|
335,940
|
|
Due from Related Parties
|
14,250
|
27,250
|
139,650
|
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Patents
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45,250
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45,250
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45,250
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TOTAL NON-CURRENT ASSETS
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3,407,810
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3,633,680
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5,123,660
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TOTAL ASSETS
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8,330,150
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9,029,370
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11,012,390
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Lithgow Valley Coal Pty Ltd
|
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Detailed Financials for year end ($)
|
|
|
2014
|
2015
|
2016
|
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LIABILITIES
|
|
|
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Current Liabilities
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|
|
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Overdraft
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427,560
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526,820
|
328,450
|
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Current Mat - Finance Lease/ HP Liabilities
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128,360
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135,460
|
461,350
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Accounts Payable - Trade
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1,732,650
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1,772,600
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2,531,570
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Accounts Payable - Other
|
112,640
|
154,080
|
175,850
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Accrued Liablities
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14,600
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20,310
|
79,250
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Provisions - GST
|
212,680
|
163,520
|
145,780
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TOTAL CURRENT LIABILITIES
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2,628,490
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2,772,790
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3,722,250
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Long Term / Non Current Liabilities
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|
|
|
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Long Term Debt - Financial Institution
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2,563,240
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2,758,420
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2,856,750
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Long Term Debt - Finance Lease/ HP Liabilities
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372,150
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399,110
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1,563,580
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Due to Shareholders
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1,024,960
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769,240
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788,900
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Other non current provisions
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62,250
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110,810
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165,470
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TOTAL SENIOR LT LIABILITIES
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4,022,600
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4,037,580
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5,374,700
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TOTAL LIABILITIES
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6,651,090
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6,810,370
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9,096,950
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NET WORTH
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|
|
|
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Paid Up Capital / Ordinary Shares
|
100
|
100
|
100
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Profit & Loss A/c or Firms Capital A/c
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1,678,960
|
2,218,900
|
1,915,340
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|
NET WORTH
|
1,679,060
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2,219,000
|
1,915,440
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TOTAL LIABILITIES & NET WORTH
|
8,330,150
|
9,029,370
|
11,012,390
|
Lithgow Valley Coal Pty Ltd
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|
Detailed Financials for year end ($)
|
|
|
2014
|
2015
|
2016
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INCOME STATEMENTS
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|
|
|
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SALES
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13,525,850
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14,752,580
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16,001,240
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Cost of Goods Sold
|
8,813,450
|
9,753,850
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11,633,740
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GROSS PROFIT/ REVENUES
|
4,712,400
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4,998,730
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4,367,500
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General & Administrative Expense
|
2,598,870
|
2,929,580
|
2,999,740
|
|
Selling Expenses
|
76,420
|
123,480
|
182,140
|
|
Wages & Salaries
|
768,830
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784,400
|
928,780
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Compensation
|
70,960
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60,620
|
49,350
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Bad Debt
|
41,760
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52,480
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62,540
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Depreciation
|
70,270
|
90,030
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200,630
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TOTAL OPERATION EXPENSES
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3,627,110
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4,040,590
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4,423,180
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TOTAL OPERATING PROFIT
|
1,085,290
|
958,140
|
-55,680
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Interest Income
|
19,870
|
23,650
|
11,780
|
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Interest Expense
|
171,250
|
167,680
|
214,820
|
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Interest Expenses Lease/Hire Purchase
|
45,280
|
48,120
|
55,280
|
|
PROFIT BEFORE TAXES & EXTRA ITEM
|
888,630
|
765,990
|
-314,000
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Current Taxes
|
270,860
|
222,800
|
-880
|
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Gain/(Loss) on Sale of Assets
|
11,250
|
-3,250
|
9,560
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|
NET PROFIT
|
629,020
|
539,940
|
-303,560
|
Rationale
This assignment is designed to:
- Assess your progress towards meeting the subject learning outcomes 1, 2 and 3.
- allow you to demonstrate your understanding of Topics 1 to 6;
- assist you to develop knowledge and skills required to operate professionally in the banking and financial institutional lending environment;
- allow you to develop your understanding of sound and practical lending techniques including risk analysis;
- demonstrate your understanding of the key criteria used in such analysis;
- develop credit writing skills.
Presentation
Credit Memorandum
You are to include the following structure as a minimum in your credit memorandum. Additional materials on credit memorandum template and identifying risk and mitigant is attached on the Subject site's Resources.
- Customer and industry background information.
- Risk identification and mitigants.
- Financial Analysis (Key ratio analysis working along with commentary required i.e. liquidity ratio, efficiency ratio, profitability ratio and leverage ratio for 2014, 2015 & 2016).
- Debt Serviceability calculation.
- Cash flow analysis.
- Rationale for recommendation with commentary on primary and secondary exits.
- Overall flow and structure of the credit memorandum.
Credit memorandum will be assessed on the overall quality and conciseness of your response.
Requirements
As per the CSU Referencing Policy, each assessment item must indicate the style of referencing required for each task. Students should be directed to a single Guide that supports the required referencing style for each assessment task. For those tasks requiring the use of APA, students should be directed to the CSU Referencing website at https://student.csu.edu.au/study/referencing-at-csu
For this assessment you are required to use APA referencing to acknowledge the sources that you have used in preparing your assessment.
Please refer to the CSU referencing guide https://student.csu.edu.au/study/referencing-at-csu.
In addition a very useful tool for you to use that demonstrates how to correctly use in text referencing and the correct way to cite the reference in your reference list can be found at https://apps.csu.edu.au/reftool/apa-6