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:
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
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