The background details of the company

Capilano Honey Limited is an Australian company that retails honey in the Australian market. The company not only sell their product in the Australian continent but also sells their product over thirty countries around the world. The company is been in the market since 1953 (Caspalino Honey Limited, 2018b). The company is determined to supply hundred percent pure to its customers. Company sales a variety of honey products to their customers, each product has different taste and nutritional value. Headquarter for the company is located in Brisbane and their production unit is located all over the country. The beneficiaries of the company are the shareholders of the company as well as the bee keepers who are actually selling their product to the company. The major shareholders of the company are the directors and other executives of the company. The majority of the company’s share is with Wroxy Pty Ltd, after that Citicorp is the second largest holder for the shares of the company. major shareholders for the company are investment banks there are only few individuals that have huge amount of share of this company. the individual who has the highest amount share is Mr. Enrico Albertani and Ms. Alison Woodbury, they have with them more than sixty thousands of the company’s share.

The borrower has demanded a sum of twenty one million dollars as a term loan from the bank. The company is demanding this sum of money to repay their debt of seven million dollars with their existing bank. The other purpose of the loan is to buy new equipment of worth three million dollars. Another three million is required by the borrower for buying new properties. If the bank allows this sum as a loan, then the company has promised to shift their corporate account to this bank. The company is willing to shift to Grand Commercial Bank as they have grown huge amount of expertise in their industry and has as outstanding customer service record. The present valuation of the assets of the company is around fifteen million dollars and the new property that is being bought by the company is valued to five million dollars, thus the total valuation comes to twenty one million dollars.

The company has total past borrowing from the existing bank is around thirteen million dollars. Out of this thirteen million the company has around seven million dollars as term loan, while another six million as overdraft loan. The company is governed by the Australian stock exchange corporate governance policies and principles. The company maintains gender unbiasedness by allowing more women to take important role in the management of the company. The company is trying to change the present composition of the board; they are targeting to increase the women participation to thirty percent. The chairman of the company is Mr. Simon Tregoning (Caspalino Honey Limited, 2018a).  The company has a strict code of conduct that not only regulates the conduct of the directors but also regulates the conduct of other employees of the company. The directors of the company are responsible for running the business and meeting the objectives of the business. The company sells honey in Australia and thirty different countries. The company is a leader in the local market while it enjoys huge customer recognition in other countries too. The company conducts marketing of honey and other food in Australia and other selected overseas countries. In early days of the business the owners used to pack honey and sell it to the grocery stores of Brisbane. With time the company has evolved and innovated many products like Beeotic is a prebiotic honey that is backed by clinical research (Caspalino Honey Limited 2017).

Overview of the deal

The competitor of Capalino is Dick Smith, Comvita, Pureharvests and etc. There are many companies that are operating in the global market supplying food article. Though the company is facing huge competition from other companies that sell substitute products, yet none of the companies sell similar products. Like Pureharvest produces sauce, non-dairy milk etc. There are very few players in the honey industry around the world and also in the local region. In the local market competitors like Tasmanian Honey Company, Beechworth Honey and etc.; thus the company has to struggle in order to obtain the raw materials in the local market as well as in the foreign market.

The company has entered into new markets and is performing well in these foreign lands. The have gained expertise in penetrating new markets and creating success in that market. Thus they have generated new cash streams as well as new revenue channels. The company is dedicated towards the creation of value for the customers, thus the company has a good relation with their customers (Leiber, Stensaker & Harvey, 2018). The relationship management department has been successful in maintaining good relation with their present customers and created a high level of brand equity among potential customers. Caspalino uses technology to maintain their products; the automation has increased their consistency of product quality. This has also enabled the company to scale their production up or down according to the demand in the market. The company is blessed with a strong dealers’ community, the dealers not only maintain the code of conduct of the company, but also helps the company through promoting the products of the company. the distribution channel of the company is also very strong, they have taken years to build this channel. The distribution channel of Caspalino is efficient enough to distribute its products to all the potential market of the company.

The company is struggling as new companies are entering the industry; the company is having trouble in preventing the entry of new companies in the market. This is not only affecting their sales but also the area of the potential market of the company is decreasing. In order to maintain their quality the company spends a fortune to train its employee’s and other suppliers. This puts a huge pressure on the financial position of the company; moreover its competitors have managed to deliver their quality without investing much money on the training of employees.

Overview of the borrower

The company enjoys leadership in honey products among the local companies. Thus, the brand value of the company is very high in the local market. On the other hand new companies are emerging with innovated products which influence the consumer behaviour. Thus the food industry is growing everyday with increasing competition. The company’s leadership is at stake and thus the company hugely invests in research and training of the employees in order to maintain their standards and stay ahead of their competitors. The industry is highly sensitive towards climatic changes as well as economic conditions. Climatic changes can alter the honey production rate and the economic conditions of the country can affect the price of honey.

The company is performing well in the market with a very huge client base and a strong brand loyalty among customers, the company has earned revenue of about thirteen billion dollars in both 2017 and 2018 (Annual report, 2018; Fatah, Amboningtyas & Fathoni, 2018). The company has profited around ninety eight million dollars profit in this year. The company is performing well in the market with a profit margin of seven percent in this year. Profit margin or net profit margin measures the ability of the company to earn profit from its revenue (Asche, Sikveland & Zhang, 2018). Thus, Capilano is earning eight dollars of profit for every hundred dollars of revenue. Thus the capability of earning profit is very strong in case for this company. The operating profit margin of the company is around one percent in 2018 and two percent in 2017. Operating profit margin measures the ability of the company to earn profit from the operating activities of the company. In this case, Caspilano is able to convert the one dollar as profit from each hundred dollar of sales. It can be seen in this case the capability of earning profit from its operating activities has decreased in this year. On the similar note the profit margin of the company has also decreased with time. In the previous year the profit margin of the company was eight percent. Another measure of profitability for companies is the return on assets; this measures the ability of the company to convert their assets into profits. The company Caspilano is very much capable of converting their present assets into profits; the present return on asset of Caspalino is around nine percent. The concerning fact is the return on assets for the company has also decreased with time; previous years’ return on assets was around eleven percent.

Industry Analysis

The short-term liquidity of the company is very strong, in case of current ratio of this year the company has two times of assets compared to their liabilities. Thus the company has enough money to pay off their short-term debts. The current ratio of the company has increased with time; there has been a five percent increase in the short-term liquidity of the company from 2017 to 2018. The company has suffered in case of very liquid assets; the company has witnessed a slight downfall of around one percent in their acid-test ratio. Current ratio measures the ability of the company to pay off their short-term debts through the assets earned by the company in this short-run (Reddy & Narayan, 2018). On the other hand acid-test ratio measures the ability of the company to pay off their short-term liabilities of the company with cash and its equivalents earned by the company in this period only (Setiawan & Amboningtyas, 2018). Thus from this measurements it can be inferred that Caspalino has lost some of their very liquid assets in this time.

Capalino uses mostly debt for financing their operations. The debt to equity ratio for 2018 is around twenty percent. The company has increased their leveraging with time; the debt to equity ratio of the company has increased with time by about six percent. The company also uses mostly debt for earning its assets. The debt to asset ratio for Capalino in 2018 is around thirteen percent. The company has borrowed more money to earn assets in this year than the other year as the debt to asset ratio for the company has increased by four percent from the last year (Barth & Seckinger, 2018). Though the company is continuously borrowing still the interest coverage ratio of the company is very high for both the period of consideration. The percent interest coverage ratio of the company is thirty six; this measurement of the company has witnessed a ten percent increase from the last year. The interest coverage ratio measures the ability of the company to meet their debt obligation with their earnings (Barth & Miller, 2018). The earning is the earning earned by the company before deducting tax and interest (Setiawan & Amboningtyas, 2018). Thus the company has a strong earning to pay off their finance costs from their every year’s earning.

 The company is performing well; it takes to much risk by highly leveraging itself. The recent decrease in liquidity of the company is a growing concern for the various stake holders of the company. Growing interest coverage ratio is relieving for the investors beside the news of decreasing liquidity and increasing leverage ratios of the company.

The key credit issues that has come out that the company needs an overdraft facility of eight million dollars in order to pay their short-term debt with their existing bank and also in order to increase their working capital. Thus accepting the request of loan will mean that the bank will have to offer an overdraft along with a term loan amounting to thirteen million dollars. Though all the assets of the company will be hypothecated by the bank but all the equipment’s owned by the company has an estimated life of five years  which is approximately the term for the loan thus during the time of selling in case of default, the instruments will fetch a lower price than what is expected.  So, the bank is running the risk of lending to the company with not equal mortgage. The only way out is to offer the loan for a period of less than four years, in this way the bank can make some money from selling these instruments.

The company produces honey which is a natural product produced by honey bees. Thus apart from operational and financial risk, environmental risk also plays an important role in this case (Moutinho & Phillips, 2018). The operational risk includes every risk that can affect the operation of the company, like suppliers’ non-compliance with the code of conduct or the quality of the company, the disruption of the machineries used by the company for the production of honey. The financial risk of the company is very high as they mostly used debt funds to finance their operation. Increase in the interest rate in Australia or in any other country will cost the company very dearly. Extreme environment can also affect the operation of the company, heavy rainfall or heat can prevent the honeybees from producing honey and thus affects the operation of the company.

Thus in order protects them from the loss of changing the economic effect the bank can enter into the derivative contracts. The best person to enter into a derivative contract is the major shareholders of the company. The Citicorp and HSBC will be interested in entering this contract as it will give them more right into the company. They are the major shareholders of the company, thus they will be looking forward to have a share of the pie. The bank can either enter into a forward contract with this investment banks about the whole term loan or can enter into a swap contract about the interest rates prevalent in the country.

Caspalino is a very old company who has been delivering products in the market for over fifty years, thus they have gained great expertise in the industry. The Grand Commercial Bank can surely lend the amount of twenty one million dollars to the company, because the collateral offered by the company has a value greater than this. Moreover, the financial position of the company is also very strong and the company has the capability to meet their debt expenses.

References

Annual report (2018). Corporate. Caspalino Honey Limited. Available at: https://www.capilanohoney.com/au-en/corporate/annual-reports

Asche, F., Sikveland, M., & Zhang, D. (2018). Profitability in Norwegian salmon farming: The impact of firm size and price variability. Aquaculture Economics & Management, 45(9), 1-12.

Barth, A., & Seckinger, C. (2018). Capital regulation with heterogeneous banks–Unintended consequences of a too strict leverage ratio. Journal of Banking & Finance, 88(7), 455-465.

Barth, J. R., & Miller, S. M. (2018). Benefits and costs of a higher bank “leverage ratio”. Journal of Financial Stability, 38(5), 37-52.

Caspalino Honey Limited (2017). Company Profile.  Available at: https://www.capilanohoney.com/uploads/Corporate/2017-PDFs/Company_Profile_August2017.pdf 

Caspalino Honey Limited (2018a). Corporate governance. Caspalino Honey Limited. Available at: https://www.capilanohoney.com/au-en/corporate/corporate-governance

Caspalino Honey Limited (2018b). About us. Available at: https://www.capilanohoney.com/au-en/hive-to-home

Fatah, D., Amboningtyas, D., & Fathoni, A. (2018). Analysis of effect of capital structure, liquidity, profitability, total assets turnover and firm size to the value of companies with net sales as a moderating variable (Empirical study on food and beverages companies listed in Indonesia stock exchange 2012-2016 period). Journal of Management, 4(4), 34-56.

Leiber, T., Stensaker, B., & Harvey, L. C. (2018). Bridging theory and practice of impact evaluation of quality management in higher education institutions: a SWOT analysis. European Journal of Higher Education, 35(3), 1-15.

Moutinho, L., & Phillips, P. (2018). Strategic analysis. In Contemporary Issues in Strategic Management (pp. 46-79). Abingdon, Oxfordshire: Routledge.

Reddy, Y. V., & Narayan, P. (2018). The Impact of Liquidity and Leverage on Profitability: Evidence from India. IUP Journal of Accounting Research & Audit Practices, 17(1), 24-36.

Setiawan, H., & Amboningtyas, D. (2018). Financial ratio analysis for predicting financial distress conditions (Study on Telecommunication Companies Listed In Indonesia Stock Exchange Period 2010-2016). Journal of Management, 4(4), 56-78.