To:Senior Credit Officer

From:A Credit Analyst

Date:July 26, 2018

Re:Credit Report for Carlton Polish Company

This report is an analysis of Carlton Polish Company and includes qualitative as well as financial analysis of the company so that the company may decide whether to award a loan of $5730000 to the company for share repurchase. The loan will be provided at 2% + the prime rate which is 4.75% currently.

Carlton Polish Company is an over 100-year-old company and is always a profitable operation. The strength of the company lies in its premier products that are liked by the consumers due to its quality and so the company is able to charge higher prices for its products. Carlton Polish sold a complete line of branded floor waxes, finishes, sealers, aerosols, spray buff solutions, disinfectants, detergents, cleaners, deodorizers, carpet care materials and soaps. The company is not only strong in consumer segments but is very strong in industrial segments where 90% of its sales are made. It operates in cleaning services and supplies for industrial and institutional facilities where it holds a 3% market share. An important strength of the company is that it does not rely on a single or few major customers and 85% of its sales are made to 130 major customers. The market is highly competitive and mature; however, the company can grow in other geographic markets. However, it would need to set up its manufacturing facilities in those areas as otherwise, transportation costs would make the sales inefficient.

Historically, the company has grown rapidly and has grown around 20% until recently but in the future, it is expected to grow at 10% annually. Its net profit is also expected to increase by 10% or more throughout the next five-year period (Exhibit 1). Its expected profit ratio would be higher than all its competitors. (Exhibit 2) and would be higher in the last financial year of 2002 as well if we account for the extraordinary items.

Another important strength of the company is the experience of the capabilities of its major shareholder who run the company in the past and after buying the company exclusively, want to run the company again.Then the company has very satisfied employees and there is never a strike in the company’s history in spite of the fact that its labor is unionized.

The company enjoys significant competitive advantage due to the sale support and services provides to its distributors.Then, another strength of the company is that it does not need any capital investments to support its current level of sales growth for the next 6 years and its facilities are upgraded recently.

Another plus point for the company is that it is not affected by the recession and in fact, during the recession, its sales got improves because companies tend to use existing furnishing and equipment for a longer time and that people cannot postpone cleaning whatever the situation of the economy is.

The company can even expand and increase its sales rather rapidly than 10% through direct selling and purchase some distributor. However, to purchase some distributor it would need an additional loan.

The company needs 5730,000 to finance the repurchase of its 50% shares from its other share shareholder. This loan will be senior to all existing debt and to all debt used to finance the purchase of the partner’s shares. No additional senior debt can be issued at any time. Moreover, Mr. Charles Carlton will be required to co-sign the note. He will be personally responsible for paying the loan and associated interest in the event of a default by the Carlton Polish Company.

The probable important covenants of the loan are listed below:

  1. 1. The company will maintain the networking capital of at least $1,500,000.
  2. 2. The company will not make capital expenditures in any one year which exceed $500,000.
  3. 3. The company will not enter into any new operating lease agreement, the present value of which exceeds $500,000.
  4. 4. The company will not pay a dividend until this loan has been completely paid off. Under special circumstances, the bank will consider a request to waive this covenant.
  5. 5. The total compensation paid to the top two officers of the company will not exceed $900,000 in 2003. The allowable level of compensation will increase each year by the same percentage amount as the percentage increase in net sales in the year.
  6. 6. The company will maintain life insurance on the two top officers of the company in an amount at least equal to the remaining principal balance of this loan.

The company can easily afford to pay the interest payments as its interest coverage ratio would remain 5 or more times throughout the period and it would have enough finances at the end of 5 years (Exhibit 1) to start repaying the loan. Therefore, it is suggested that the Bank provide the loan to the Carlton Polish Company.

The company’s financial statements are attached as exhibit 2.

Following assumptions are made in preparing the financial statements of the company

  1. 1. Sales and all other relevant expenses will increase at 10% per year
  2. 2. The extraordinary legal expense is onetime payment and is deducted from 2003 SGA expenses
  3. 3. Other income or expenses will remain the same over the next 10 years
  4. 4. Salary of Carlton is taken at 600,000 from 2003 and would increase at 10% per year in line with the sale
  5. 5. The salary of Jim Miller is not included in 2003 and onward salary figures.
  6. 6. It is assumed that the lease rental is already included in the SGA expenses and the capital amount of real estate is not accounted for which is added to assets and liability sides of the balance sheet
  7. 7. The interest amount of 2,000,000* 10% = 200,000 payable to Mr. Jim is added to the interest cost for the year 2003 to 2005, then the interest cost of remaining loan after paying 166667 per year is added
  8. 8. the interest cost of 5730,000 loans of the bank at 6.75% (2%+4.75%) prime rate
  9. 9. It is assumed that the interest income will remain at the same level throughout the five-year period at $8,000.
  10. 10. it is assumed that the interest expense related to other current debts of 330 will remain constant and then interest expense for the new loans is added into it
  11. 11. Income tax rate would be the same in the future year as in the year 2002 of 402/956=42%
  12. 12. Depreciation will be at the rate of 10% per year
  13. 13. Other Current liabilities will remain the same
  14. 14. Accounts payable, inventory and current maturities will increase at 10% per year in line with the sales Kindly Let me know If I can be of any other help.

Exhibit 1.

net profit ratio interest coverage

Exhibit 2

net profit ratio

Get free written samples available from

Related Samples

Capturing China’s High Potential Markets: Intel’s Quest to Maximize Growth

Urban Brands and TSG Capital Group LLC

Revenue Management at SkyJet