The paper "Evaluation of Financial Lending to a Public Listed Company by a Bank" is a good example of a finance and accounting coursework. I have selected Astec Industries, a public listed company dealing in construction, and retrieved its financial statements including the Income Statements, Balance Sheets and Cashflow Statements both annually for the last three years and quarterly financial statements for the last trading period which ended on 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 an 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 (Thomas, 1999). 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 equipment is primarily used in road building and related construction activities. The company has more than 13 subsidiaries which deal with different projects in the economic sector which is the construction sector to be precise. 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 a 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 the significantly lower value in a default situation. Major Credit Risks: The 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 the 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, the low probability of credit risk and hence less impact of credit risk from an 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. For this reason, there are 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 consequently below.