Padgett Blank Book Case
In early 1988, Padgett Blank Book Company had $3.6 million dollars financed at prime on 90-day notes through its sole lending bank, Windsor Trust Company. A coveted competitor came on the market and Padgett acted quickly to purchase before it fell to their competitors. Understanding Padgett’s needs and valuing their business Windsor responded to Padgett’s request for an additional $3.6 million to make the acquisition. Given the short notice, the additional amount was added to the existing $3.6 million bringing the total financing to $7.2 million well beyond Padgett’s advised $5 million dollar credit limit. Still Windsor approved the deal with an understanding that the arrangements would need to be restructured to reduce their exposure from such a large outlay of funds on 90-day notes with no protective covenants. Windsor originally brought Padgett’s management a suggestion of financing a large portion of outstanding notes as long-term debt from a life insurance company. This wasn’t perfectly ideal to Windsor as they would loose interest income and Padgett’s management flatly refused the idea because of the high fixed interest rates offered and accompanying covenants of the deal that could cause Padgett to violate the terms without any mismanagement. Padgett’s management was happy with the 90-day note arrangement and could not understand why the arrangement needed to be restructured. Windsor continues to desire to find covenants/collateralization that would reduce their exposure in amount of credit they have extended and still be agreeable to Padgett, and maintain a valued customer.
All dollar values within the document and in Appendix A are in thousands of dollars unless otherwise specified.
At the time of this writing an RMA Book to compare industry averages of ROE, ROA, A/E, total asset turnover, and net profit margins was unavailable. While the industry averages would be preferable, given that the values provided in the case were 26+ years old, current industry percentages would not be an accurate measurement for comparison.
Exhibits 1, 2, and 3 were taken as true and accurate at face value and used in the calculations presented within this text and the accompanying Appendix A.
Given Windsor’s desire to reduce it’s exposure and maintain its valued client, Windsor will be willing to work with Padgett’s management to come up with creative solutions.
Given Padgett’s need to maintain it’s loans they will be open to restructuring the notes to long-term debt barring the restructuring will not contain covenants like those presented in the life insurance financing that were beyond Padgett’s control.
Method of Analysis
Without industry averages, the basis for the findings presented here consist of horizontal analysis of Padgett’s financial statements and ratios using the figures provided in the case in Exhibits 1, 2, and 3. Making comparisons across years and noting significant changes or trends. Where significant change was observed vertical analysis was used to express components of Padgett’s assets and liabilities in terms of percentage of sales or percentage of assets respectively.
Discussion of Results
Starting with liquidity ratios I noticed that both the current ratio and quick ratio were declining in subsequent years with the largest decline occurring between the years of 1986 and 1987. The large discrepancy between the current and quick ratio caught my attention and is the result of the large and increasing amount of inventory Padgett carries. A large portion of Padgett’s liquidity exists in inventory. These assets would have to first be converted to accounts receivables before becoming cash. Plus inventory value will decline over time especially in the face of increased competition. Expressing inventory in terms of total assets I discovered that as of 1988, Padgett’s invent accounted for 46% of its total...
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