FINS 5512

Case Analysis
Week 5
Varun Abbineni
z5093991
Jackson Automotive Systems
Founded in 1961 by the father of Larry Edwards, Jackson Automotive
Systems is an Original Equipment Manufacturer (OEM) located in
Jackson, Michigan. Jackson Automotive Systems has specialised
production lines and requires sophisticated and expensive precision
equipment. Jackson's clients are local automotive assemblers within
the state of Michigan.
Jackson is currently in a very precarious position due to its inability
to currently service its outstanding debt, as well as having to borrow
further in order to purchase new equipment needed to carry on
production at existing capacity. This is because of recent
modifications to the equipment that led to the company producing
under capacity.
In the current scenario, assuming that the bank does not approve
the loan, the company will not have enough cash to service the
loan, and will likely have to liquidate some of its holdings to service
the loan, or rely on new equity issue, something the owner will not
be keen on (given the recent stock repurchase).
Jackson appears to have the necessary volume of orders needed to
produce at its full capacity and service its obligations, if the bank
agrees to rollover the existing debt and approves of the additional
debt towards capital expenditures. However, it will still end up with
a cash shortfall in excess of $715000 in September, owing to its
plan to distribute dividends of $1.2 million, which does not seem
prudent in the current scenario.
As the banker, if I were to agree to Jackson's request, I would grant a
short-term (4 month) extension to the existing loan and place
restrictive covenants on some of Jackson's intended measures. One
covenant would be to ask Jackson to hold off on paying dividends in
September, and to instead do so when the firm has adequate cash
reserves to afford it (possibly by October or November). When
structuring the loan, I would release the loan in equated monthly
installments, subject to the company's performance in subsequent
quarters, and whether it achieves its stated recovery goals. The
additional loan towards capital expenditures would also be a short
term loan released in July, payable at the existing loan's terms, with
a one year payment period.