Instructor Blog - Credit Write Up

Q: How much are they paying for rent before the acquisition?

A: We don't know how much the acquiring party is paying in rent, assuming it does rent office space, prior to the acquisition of 1200 Columbia Pike. Further, it is not clear if the acquiring party – the borrower – will hold 1200 Columbia Pike as an investment property or if it will integrate the property into its operations as office space.

The key issue before us is whether 1200 Columbia Pike generates sufficient cash flow to cover the interest-bearing debt required for its acquisition. In this instance, the lender estimates the property's cash flow is insufficient to meet proposed debt service based on analysis of actual rent rolls and operating expenses. As a result, the lender has reduced the loan amount and accordingly moved the associated debt service to the point at which the cash flow from 1200 Columbia Pike is sufficient to meet the 1.2 debt service requirement.

Q: Do we know if the Seaside Marble, Inc. capital expenditures in 2018 were maintenance or expansion purchases? The nature of those expenditures adds perspective now that they are planning another 500M in CAPEX and requesting $400M in financing after spending 613M in 2018.

A: We don't have information that specifies whether the 2018 CAPEX or projected 2019 fixed asset spending of $500,000 is to replace existing assets or to expand the fixed asset base to properly support sales growth. It seems very likely that the $613,474 of 2018 fixed asset spending (see Slide 20) was necessary to produce the products that resulted in 47.33% sales growth for the year. The same holds for 2019, since the company projects an additional 20% in sales growth.

It is certainly useful to understand this issue. Our focus here is on determining how the company will finance its projected increase in working and fixed assets and the sources of cash it will use to do so.

Course overview: Analytical Focus in the Credit Write Up