CASE: PADGETT PAPER PRODUCTS COMPANY
As result of inflation and the acquisition of its competitor, Tri-State Tablet Company in 1996, Padgett's financial needs have been risen to a permanent level rather than being merely seasonal in nature. The Company exceeded its bank credit line of USD 5 million to USD 7.2 million. So Padgett Paper requested their bank, the Calson Trust Company for a higher credit limit of USD 8 million. The request was granted under internal guidance line of USD 8 million at prime. The objective is for the Management at the company's bank must revise Padgett's debt structure in a mutually satisfactory manner that will minimize lender risk while increasing company value. The current situation is the bank is now in bad situation because of over extended. Lending exceeds reasonable levels and is not collateralized. A credit line of USD 8 million is not normal for the bank.
Furthermore the Companies management does not appear to understand the unrealistic debt situation and has unrealistic expectations and a lack of understanding of impact of current structure of firm values and impacts on the upcoming audit reports. Another issue is that the Owner of the Company is interested in dividend distribution, which is another reason for the bad debt structure of the Company. Padgett could repay the loan after 8 years which was considerably longer than the typical bank five-year term loan that a company like Padgett Paper's size might expect under the assumption that the company would generate every subsequent year at a Cash Flow of USD 1 million.
The company has significant levels of Equity and is not minimizing its financial structure. It is able of taking more debt, but the debt needs to be more properly structured. ...