Palmer Limited

Lindsay Moran Sandeep Basra Jordan Suen NiKhil Bhagwan Greg Fraser Junjie (JJ) Li

Agenda
Review of the case SWOT analysis Porters five forces 5Cs of credit Evaluation of the options and alternatives Recommendation Questions

Review of the case

Context
o Industrial mechanical building contractor in Saskatoon o Founded in 1986 by Michel and Andre Palmer o Volatile local market and decline in house construction market in current year

Main players: the owners of PL and the creditor, Confederation Bank Issue:
o The Confederation Bank is requesting an assessment of financial needs to maintain the banks continued support.

Critical Issues
Company is deviating from their core competencies Cash flow problems Highly leveraged Problems with collections

SWOT Analysis Strengths

o Extensive experience in the business & existing customer base for smaller contracts o Efficient e organizational structure o Specialized in sheet-metal work o Good reputation of the owners o Large capacity

Weakness
o o o o o Poor management skill on the investment and cash flow Low profit margin in recent years Cash flow issue from the collection procedure High leverage/ cash flow problem The company is under-capacity

SWOT Analysis cont.

Opportunities
o o o o o o Cost control of the subcontractor The residential construction Farming industry Optimistic overall Canada economy GDP, CPI Financial support from Confederation Bank Bank loan through using person asset as collateral

Threats
o o o o The quality issue from using subcontractor Cost issue from using subcontractor Tightening borrowing from chartered banks Speculative estimates on their future billings & uncertainties of the business

Porters Five Forces

Rivalry among existing firms: medium low
o o o o Number of competitors and balanced size of competitors Low industry growth rate Relatively low switching costs High exit barriers

Bargaining power of suppliers: low

o o o o Not many suppliers Importance of suppliers product to the buyers business Suppliers products are low in differentiation The bargaining power is relatively important to PL

Porters Five Forces cont.

Bargaining power of buyers: high
o Buyers have more power in negotiating o Statutory holdback of 10 percent on the monthly billings

Threat of new entrants: Medium

o Advantage from economies of scale and distribution channels o Threats from the new entrants for smaller contracts o High requirements on capital for large contract bidding o Cost disadvantages o High switching costs

Threat of substitute products or services: Low

o The technological changing for plumbing, heating and sheetmetal work can be low

5Cs of credit
Character
o Palmer bros. have substantial personal and business funds invested in the company. o Over 13 years of experience in the industry. o Hard workers that are educated in their trade. o Gaining strong business knowledge as company grows, by undertaking small jobs first and progressing to larger ones.

Capacity
Intend to return to smaller contracts with higher profit margins. Cutting back work force in order to reduce expenses. Intend to return to profitability with zero tax consequences. Most recent years show signs of financial distress.

Capital
Palmer bros. have substantial funds invested in the business ($25,000 + $113,700).

Collateral
Palmer bros. have $162,500 in personal assets Business has $973,100 in Total Assets

Conditions
Palmer Inc needs a short-term injection of cash to cover costs of operation before collecting on their receivables

Financial Ratio Analysis

Liquidity Ratios
1.4 1.2 1

0.8 Current Ratio 0.6 Quick Ratio

0.4

0.2

0 1999 1998 1997 1996 1995 1994 1993

Financial Ratio Analysis

Asset Management Ratios
160 140 120

100

80 Average Collection Period 60

40

20

0 1999 1998 1997 1996 1995 1994 1993

Financial Ratio Analysis

ROE
80% 60% 40% 20% 0% 1 -20% -40% -60% -80% -100% -120% 2 3 4 5 6 7 ROE

Projected Financials
Projected I/S and B/S Projected Cash Flows

Options
Status Quo Status Quo with change to covenants Loan Call

Status Quo
Bank continues financing with no change to covenants.

Advantages
Bank will still receive outstanding loan within the year.

Disadvantages
Risky do not know if projections are accurate. Economic situation in Sask. Is uncertain. Residential shows upward trend, commercial construction is still depressed.

Status Quo with change to covenants

Impose restrictions on :
o Debt to Equity o Maintain positive working capital

Finance the loan with additional collateral More frequent financial reporting

Advantages
Loan will be fully paid off in 3 months Banks investment will be better protected Bank will realize full interest Risk of loan will be diversified Continue long term relationship with PL

Disadvantages
PL is currently in transition and it is uncertain whether this will pay off Company is highly leveraged, with the likelihood they will need to borrow more Rising interest rates may put pressure on PL to pay off loan Financials are very sporadic and do not have predictable trends Management estimates of expenses may be incorrect.

Call Loan In
Confederation Bank calls in the loan due to the following:
o Downward trend in construction industry o Expected increase in prime rate o Poor financials in recent years cast doubt on companys future

Advantages
Less risk for Confederation Bank Money can be loaned to other profitable ventures Consistent with policies of other banks (competitors).

Disadvantages
Bank may lose interest on the loan PL may no longer come to Bank for future loans

Recommendation
Continue financing with changes to debt covenants. Allow the company to borrow in the short term Further collateralize the loan with personal and business assets Request monthly financial reports to ensure adherence to ratios

Questions?