I have selected Astec Industries, a public listed company dealing in construction, and retrieved its financial statements including the Income Statements, Balance Sheets and Cash flow Statements both annually for the last three years and quarterly reports for the last financial year ended 31st December 2009. These are included in the report as part of appendices.
Financial Requirement
I have determined that there is low activity in the construction industry in the US due to the economic depression but in Southern Sudan there is a lot of construction funding due to the discovery of oil, minerals and agriculture expansion and peace and stability progress in the country. I have determined that the company will need to raise estimate of US$ 70 million through a bank loan facility for the extension of its activities to the country. The bank loan request is directed to HSBC Bank.
Credit Application Memorandum
For internal Bank approval process I have prepared the Credit Application Memorandum below.
CREDIT APPLICATION MEMORANDUM (FORM)
Borrower: ASTEC INDUSTRIES INCORPORATION
Borrower description:
Astec Industries, Inc. (Astec Industries) is a construction equipment manufacturer. The equipments are primarily used in road building and related construction activities. The company has 14 manufacturing subsidiaries which are aggregated into four reportable business segments which include Aggregate and Mining Group, Asphalt Group, Mobile Asphalt Paving Group and Underground Group.
The company requires raising an estimate of US$ 100 million if it is to extend its construction activities to Southern Sudan an oil rich country in Africa with poor road infrastructure. The company proposes to raise this amount of money as follows:
$70,000,000 from bank loan
$20,000,000 from retained earnings
$10,000,000 from equity
Proposed new credit exposure:
$70,000,000 a 7 year construction activity
Recommended risk rating: BBB (Adequate capacity to meets its financial obligation)
Primary Source of Repayment: Revenue cash flow from construction operations
Secondary Source of Repayment: Sale of equipment and assets (Moderate/weak, strongly related to primary source).
A number of other companies also placed their bids for the construction of the road, suggesting possible reduction of the tender price for the road construction work to win the bid. The major assets are plant, machinery and equipment related to the construction work. However, the construction equipment and assets are likely to realize significantly lower value in a default situation.
Major Credit Risks:
Threat to peace stability from political conflicts (Probability: medium/high. Impact: moderate/high). The credit period is long and goes to 7 years. The great period presents a lot of uncertainties as to the stability of the country as little information can be used currently to predict the stability. The great period and the uncertainties hence present the major credit risk in this country. In the eventuality of the risk then the impact from the loss would be high to moderate.
Recession in building industry activity (Probability: low/medium. Impact: moderate/high) the effects of recession are minimal to absent in the country. There is a lot of construction of physical facilities including road construction going on. The probability of the credit risk is therefore low to medium but the impact would be high to moderate.
Significant interest rate increase (Probability: low. Impact: moderate). No economic factor points to influencing greatly the fluctuation of interest rate upward. There is therefore low probability of credit risk and hence less impact of credit risk from increase in interest rate.
Competitive pressure on operating margins (Probability: low/medium. Impact: low) There are a few companies that have been set up in the country but mostly from China. There are the therefore a few companies that place bids for construction tender hence the operating margins are high. The probability of credit risk due to competitive pressure on operating margins is therefore low and the impact would be low.
Competitive Position Moderate
Astec Industry extension of operations to Southern Sudan as the country attains more political and social stability gives it an edge in the exploration of new market for its services. The country needs construction of roads for exploration of minerals and the consequent mining of the raw materials and an improvement in its agricultural sector. All these resources had never been tapped until recently. The discovery of oil, the exploration of other minerals and the improvement of agricultural sector all promise improvement in the social and economic progress of the country. The rush to grab the opportunity in the construction industry includes Chinese companies. However, the market has significant barriers to entry due to the significant investment in capital equipment and access to the raw material. Astec Industries with its subsidiaries and the specializations by the different segments clearly present strong competition to the Chinese companies.
Balance Sheet Position Strong
The company does not have any long term debt currently. The extension of its activities and increase in its credit exposure, Astec industries will have its capital structure as well as credit coverage affected. There will be an introduction of long term liabilities as the shareholders equities remain constant.
However, it faces uncertainties due to conflicts and wars that pose adverse business, financial, or economic conditions which could lead to the obligor's reduced capacity to meet its financial commitments.
Management Strength Moderate
The management of Astec Industry is very experienced in the construction related industry. Out of its 14 subsidiaries segmented to four main business and operational activities it has all the technical expertise it may need for the extension of its service to Sudan. The management may experience challenges in the new country but they may not relate directly to operations.
Financial Forecasts
As show below I have prepared a pro-forma financial statement to be presented to the bank;
Income statement, Balance Sheet, and the Cash flow statement. They show the financial budgets. The following forecasts ratios have also been computed:
Interest Cover
DSCR
Leverage
Senior Leverage
Net Senior Debt/EBITDA
Gross Margin and
Net Margin
ASTEC INDUSTRIES INCORPORATION
Annual Financial Statements forecasts for Seven years ending on 31st December 2016
Amounts in $'million
0
1
2
3
4
5
6
7
31st Dec.
2009
2010
2011
2012
2013
2014
2015
2016
INCOME STATEMENT
Total Revenue
738.094
775
835
890
930
985
1040
1082
Cost of Revenue
585.667
635
700
725
755
790
830
860
Gross Profit
152.427
140
135
165
175
195
210
222
Operating Expenses
Research & Development
18.029
19
18.5
18
18
18
18
18
Selling General and Administrative
107.455
112
110
107
107
107
107
107
Non Recurring
17.036
20
Others
Operating Income or Loss
9.907
-11
6.5
40
50
70
85
97
Total other income/Expenses
1.871
1.9
1.8
1.8
1.7
1.5
1.8
1.4
Earning Before Interest and Tax
11.778
-9.1
8.3
41.8
51.7
71.5
86.8
98.4
Interest Expense
0.537
5.6
5
4.2
3.3
2.8
1.8
0.95
Income Before Tax
11.241
-14.7
3.3
37.6
48.4
68.7
85
97.45
Income Tax Expense
8.135
3.3
4.5
6
7.2
8.2
9
9.3
Minority Expense
-0.038
-0.06
-0.052
-0.06
-0.07
-0.04
Net Income
3.068
-18.06
-1.252
31.6
41.14
60.5
75.93
88.11
Net Income Applicable to Common Shareholders
3.068
-18.06
-1.252
31.6
41.14
60.5
75.93
88.11
BALANCE SHEET
0
1
2
3
4
5
6
7
31st Dec.
2009
2010
2011
2012
2013
2014
2015
2016
Assets
Current Assets
Cash and Cash Equivalents
40.429
53.88
65.3
71.5
41.48
39.3
48.36
54.02
Short Term Investments
Net Receivables
80.172
82
85
96
104
115
126
138
Inventory
248.548
253
287
295
301
340
345
356
Other Current Assets
15.216
13
15
17
19
22
23
24
Total Current Assets
384.365
401.88
452.3
479.5
465.48
516.3
542.36
572.02
Long Term Investments
11.965
10
13
24
47
32
37
41
Property, Plant and Equipment
172.057
203
238
240
241
243
240
245
Good Will
13.907
14
14
15
15.5
16.1
16.7
17
Other Assets
8.607
8
8
13
17
21
23
24
TOTAL ASSETS
590.901
636.88
725.3
771.5
785.98
828.4
859.06
899.02
Liabilities
Current Liabilities
Accounts Payable
79.701
86.68
138.352
177.952
176.792
182.212
160.442
129.792
Short Term Debt
3
7
5
3.5
2
1.5
Other Current Liabilities
26.606
30
32
27
22
17
14
12
Total Current Liabilities
106.307
119.68
177.352
209.952
202.292
201.212
175.942
141.792
Long Term Debt
40
70
55
40
25
10
0
Other Liabilities
17.359
17
18
18
16
15
12
9
Deferred Long Term Liability Charges
14.975
16
17
14
12
11
9
8
Minority Interest
0.357
0.357
0.357
0.357
0.357
0.357
0.357
0.357
TOTAL LIABILITIES
138.998
193.037
282.709
297.309
270.649
252.569
207.299
159.149
Stockholders' Equity
Common Stock
4.51
14.51
14.51
14.51
14.51
14.51
14.51
14.51
Retained Earnings
320.589
302.529
301.277
332.877
374.017
434.517
510.447
598.557
Capital Surplus
124.381
124.381
124.381
124.381
124.381
124.381
124.381
124.381
Other Stockholders' Equity
2.423
2.423
2.423
2.423
2.423
2.423
2.423
2.423
TOTAL STOCKHOLDERS' EQUITY
451.903
443.843
442.591
474.191
515.331
575.831
651.761
739.871
TOTAL LIABILITIES AND EQUITY
590.901
636.88
725.3
771.5
785.98
828.4
859.06
899.02
CASH FLOW STATEMENT
0
1
2
3
4
5
6
7
31st Dec.
2009
2010
2011
2012
2013
2014
2015
2016
Net Income
3.068
-18.06
-1.252
31.6
41.14
60.5
75.93
88.11
Cash Flows Provided by Operating activities
Depreciation
18.676
23
25
26.5
24
23
25
27
Adjustment to Net Income
32.165
33
34
31
28
26
30
35
Changes in Accounts Receivable
3.5
-7
-13
-15
-17
-19
-25
Changes in Liabilities
-47.373
-45
-47
-53
-57
-65
-63
-59
Changes in Inventories
36.57
45
51
47
53
42
55
43
Changes in other Operating Activities
6.057
5
7
3.4
6.7
-2
-3.6
-4.2
Total Cash Flows from Operating Activities
49.163
46.44
61.748
73.5
80.84
67.5
100.33
104.91
Cash Flows Provided by Investing activities
Capital Expenditure
-17.463
-57
-53
-27
-34
-46
-57
-85
Investments
12
24
17
-34
-43
-61
-51
Other Cash flows from Investing Activities
-0.192
12
14.5
33
26
29
25
27
Total Cash Flows from Investing Activities
-17.655
-33
-14.5
23
-42
-60
-93
-109
Cash Flows Provided by Financing activities
Issue of new Shares worth $10 Million
10
Dividends Paid
-13
-17
-21
-24
-27
Sale Purchase of Stock
0.88
Net Borrowings
-3.427
40
30
-15
-15
-15
-15
-10
Other Cash flows from Financing Activities
-0.713
0.6
3
5
-11
3
2.3
Total Cash Flows from Financing Activities
-3.26
50.6
33
-23
-43
-33
-39
-34.7
Effect of Exchange Rate Changes
2.419
7.9
6.4
6.4
4.5
4.3
4.1
4.7
Change in Cash and Cash Equivalents
33.735
53.88
85.396
111.5
41.48
39.3
48.36
54.02
Ratio Analysis
Interest Cover
25.36
-1.63
1.66
9.95
15.67
25.54
48.22
103.58
DSCR
2.97
-0.20
0.24
2.18
2.83
4.02
5.17
8.99
Leverage
0.07
0.16
0.24
0.18
0.13
0.09
0.05
0.02
Senior Leverage
0.21
0.52
0.78
0.53
0.39
0.26
0.15
0.08
Net Senior Debt/EBITDA
0.91
1.38
2.09
1.80
1.54
1.29
0.99
0.72
Gross Margin
0.21
0.18
0.16
0.19
0.19
0.20
0.20
0.21
Net Margin
0.00
-0.02
0.00
0.04
0.04
0.06
0.07
0.08
Risk Adjusted Return On Capital Calculation
Together with the financial forecasts RAROC has been computed as follows:
RAROC% =Amounts Advanced $ x [ Margin % Credit Loss Provision % (Funding Premium % x (1 - Capital on Advances %)) + (Base rate * Capital on Advances %) ] + Undrawn Commitments $ x (Commitment fee %) + Facility Amount$ * UpFront Fee% ] Allocated
administrative costs $
All divided by
Advance Amount $ * Capital on Advances % + Undrawn Commitment $ * Capital on Undrawn Commitments%
Facility Amount $100
Loan Advances $70
UpFront Fee 3.5%
Margin (Average) 19%
Credit Loss Provision 30%p.a.
Funding Premium 5%p.a.
Base Rate 3.85%p.a.
Commitment Fee 1.75%p.a.
Risk adjusted Capital on Advances 8%
Risk adjusted Capital on Undrawn Commitments 0%
First period RAROC =[$70*(19%30%5%(18%)+5%(8%)]+[$70*1.75%]+[$100*1%]
/ $70*8%
2.83591+1.225+1/5.6
=5.06091 %
Offer Letter
Below is an offer letter I have written on behalf of HSBC Bank requesting Astec Industries to accept our loan facility?
HSBC Bank USA, N.A.
P.O. Box 2013
Buffalo, NY 14240
14th May 2010
The Chief Executive Officer,
Astec Industries Incorporation
4101 Jerome Ave.
P.O. Box 72787
Chattanooga, Tennessee 37407 USA
Dear Sir/Madam,
Ref: LOAN OFFER
We received your inquiry letter dated 3rd May 2010 seeking to find out our offer for a long term loan product as you seek to extend your operations. We have examined the financial statements you attached and the financial forecasts you provided.
We are pleased to inform you that your application meets our thresh-hold and we would be pleased to be enjoined in this undertaking through our provision of loan facility. Our interest rate for the facility is the Libor + 3.85%. We have attached our terms and conditions for the facility for your examination as we look forward to meet you for the conclusion of the agreements.
We at HSBC Bank wish you all the best in your endeavors.
Yours Sincerely,
Indicate your name here
Branch Manager,
HSBC Bank.
Terms and Conditions Sheet
I have drafted below the sheet that sets out the terms and conditions of the loan facility agreement.
ASTEC INDUSTRIES INCORPORATION
$70 million Long Term Loan Facility Summary of Proposed Terms and Conditions
Borrower: Astec Industries Incorporation.
Facility: Long Term Loan Facility.
Lender: HSBC Bank
Purpose: To finance the extension of road construction activity in Southern Sudan in Africa
Final Maturity: 7 years from the drawdown date.
Availability: Subject to the satisfaction of conditions precedent, the loan may be drawn in two installments during the availability Period. Any amount not drawn will be automatically cancelled.
Availability Period: 2 years from the date of signing of the facility agreement,
Amortization: Subject to any Mandatory Prepayment, the loan will be repaid in 5 annual installments commencing two years from drawdown date as follows:
Installment 1- $15 million
Installment 2- $15 million
Installment 3- $15 million
Installment 4- $15 million
Installment 5- $10 million
Mandatory Prepayment: On the date of each scheduled repayment, the Borrower will also prepay 20% of the Excess Cash flow for the year preceding that date, as defined below. Prepayments will be applied to reduce scheduled repayments in inverse order of maturity (i.e. last ones are reduced first). Excess Cash flow for any period is equal to the beginning cash plus cash flow from operations for that period, less the sum of senior debt service for that period and scheduled senior debt service for the following period.
Optional Prepayment: At its option and subject to 3 day's written notice, the Borrower may prepay additional amounts on any interest payment date, in minimum amount of $5 million and integral multiples of $1 million. Amounts prepaid will be applied to reduce installments in inverse order of maturity.
Pricing
Up Front Fee: 3.50% flat on the Facility Amount, payable on loan signing
date.
Interest Rate: Libor + 3.85%, payable in arrears at the end of each interest period. Interest periods shall be three months duration.
Commitment Fee: 1.75% on the daily unutilized and unconcealed commitment amount, payable quarterly in arrears.
Commitment Precedent: Conditions precedent to first drawdown will include, but not be limited to, the following:
Executed agreement of loan for extension of construction activity to Southern Sudan to the Borrower, in form satisfactory to the Lender, under which completion is conditional only upon the receipt of funds drawn under this facility.
Executed indemnity from the extension of construction activity in favor of the Borrower against loss in the extension of construction work.
Executed subordinated debt facility in form satisfactory to the Lender, and under which all funds have been drawn by the Borrower.
Interest rate hedging for the full amount and life of the senior debt in form and rate satisfactory to the Lender.
Insurances over assets in form satisfactory to the Lender.
Usual conditions precedent for a facility of this type including copies of relevant company documents and authorities, legal opinions, valid security documents, consents and licenses, and certification of representations and warranties.
Representations: Representations will include, but not be limited to the following:
No material adverse change in the financial condition or business of the Borrower which could affect the ability of the Borrower to repay the facility.
All agreements required as conditions precedent are in force and in form originally approved by the Lender.
Usual representation for a facility of this type including accuracy of information, pari passu ranking, no default, no resulting breach, status and capacity of the borrower, validity, no litigation, etc.
All representations and warranties will be repeated upon facility signing, loan drawdown, and each interest payment date.
General Undertakings: General undertakings will include, but not be limited to, the following:
Negative pledge: the Borrower will not enter into any additional borrowings or provide any financial accommodation (e.g. guarantees). The Borrower will not pledge or secure any of its assets or interests to any other party in excess of $25,000,000 in total.
No disposal of assets valued in excess of $20,000,000 without Lender's consent, except for sales of inventory in the ordinary course of business.
Borrower to provide management updated management (unaudited) financial statements and three year forecasts within 14 days of the completion of each quarter, except that it shall provide audited financial statements at the end of each half year.
Payment of dividend and debt service on subordinated debt only to be made from Excess Cash flow and after Mandatory Prepayment.
Usual undertakings for this type of business, including provision of information, financial statements, and no change of business.
Financial Undertakings: Financial undertakings will include, but not be limited to the following:
Minimum Interest Cover Ratio for each half year period as follows: year 1, 1.75; Year 2, 2.00; Year 3, 2.50; Year 4, 3.00; year 5, 3.50; Year 6, 4.50.
Minimum Debt Service Cover for each half year period of 1.25:1.
Minimum Net Worth as follows: Year 1, $15; Year 2, $20; Year 3 onward, $30.
Maximum Debt:EBITDA of 2.50 in year 1 and 1.75 thereafter.
Security: First ranking fixed and floating charge over all the assets and interests of the Borrower.
Documentation: Documentation in form usual for this type of facility and in form acceptable to all parties. It will include additional terms and conditions usual for this type of term loan facility including, but not limited to, standard conditions precedent, representations & warranties, undertakings, material adverse change, illegality, increased costs, and events of default.
Transferability: Documentation shall include provision allowing the transfer or assignment of the Lender's rights and obligations under the facility, subject to the consent of the Borrower, which may not be unreasonably withheld.
Governing Law: The Laws of United States of America.
