Padgett Paper Products Case Study Solut
Lending exceeds reasonable levels and is not collateralized or subject to consonants. A $8 million loan is abnormal for the bank. The companies management does not appear to understand the unrealistic debt situation, the impact on firm value and impact on the upcoming audit report. Management: Has unrealistic expectations and a lack of understanding of Impact of current structure of firm value. Company: The company has considerable levels of equity and Is not maximizing Its financial structure.
It is capable of taking on considerably more debt, however, the seas to owe more appropriately structured Ownership: Closely-held company with owner having little interest in management. Owned for dividend distribution. The Company Background 1. Closely held public company (ETC) 2. MFC stationery including notebooks, loose leaf binders, filler paper 3.
100 years old 4. Management is professional but not finance as’. N. Y 5. Customers: 5,000 wholesalers and retailers in US & Canada (not subject to concentrations) 6.
Product -Stationery including notebooks, loose leaf binders, filler paper -Low margins business -Seasonal business (Back to School dominates) Current Capital Structure -Too much short-term debt -90 day terms -Significant level of equity – DIE is not maximized and value from tax shield is lost Options -Portion of debt through insurance company -Continue at 90 day terms -Factor receivables -Collateralized assets Mortgage general purpose building -Independent canal Hanging -Flat dividends -Payment Terms – accelerate receipt -LIFO / FIFO Pros and Cons of Options Debt through insurance company Pros: longer maturity schedule, reduce risk to bank and company Cons: Management is against this option due to restrictive consonants and interest rate uncertainty Recommendation: This could be used as a second tier of leverage, to increase debt levels as needed. But not necessarily needed now.
Continue at 90 day terms Pros: Management likes Cons: Subject to short term rate increases, going concern issues with upcoming audit, Callable in 90 days, no collateral or covenants, bank management is negative on situation, significant distress costs reduce stock value. Recommendation: Not an acceptable option Factor Receivables Pros: Increase cash flow, payroll savings in collections and credit departments, reduces risk to bank and bank’s required due-diligence in regards to collateralized receivables. Cons: Additional costs associated with factoring Recommendations: Not advised as a first tier method, but we recommend the company pursue a relationship with a factoring firm to allow for as needed. Collateralized Assets
Pros: Longer maturity schedule, reduce risk to bank and company Cons: Restricts management’s flexibility Recommendation: Will be a required option Mortgage General Purpose Building Pros: Longer maturity schedule, reduces risk to bank and company, use of previously untapped funds Cons: Management is against this option due to restrictive covenants and interest rate uncertainty Recommendation: Company should use this option as a first tier of debt Independent Canadian Financing Pros: Risk reduction; foreign exchange risk reduction, untapped source of leverage.
Cons: Uncertainty related to Canadian compliance and different laws and practice. Recommendation: This option should be used in first tier. Payment Terms – Accelerate Receipt Pros: Increase cash flow cons: Not something to penal on Recommendation: Absolutely strive for, but we do not recommend structuring current debt based on this Flat Dividends Pro: Flat dividend provides additional cash to shore up debt situation Cons: Ownership may be unhappy, negative signaling in market place Recommendation: This should not be necessary given the strong equity situation of the company.