Credit and Lending Decision - CSR Limited - Case Study Example

CREDIT AND LENDING DECISION Name: Course: Professor: University: City: Date: Credit and Lending Decision Background Details CSR Limited is one of the major brands that concentrate on providing building material that is used in residential and commercial construction (CSR Limited 2016). The company is located in Australia and New Zealand. CSR Corporate Headquarters can be fund at Triniti 339 Delhi Road North Ryde, NSW 2113 Australia (CSR Limited 2016). CSR has been involved in the supply of construction materials such as plasterboard, insulation materials, bricks and glass. The success of CSR owes to the unique procedures it incorporates in business such as subsidized manufacturing, diverse distribution procedures and strategic marketing skills. Furthermore, CSR focuses on adhering to the policies and codes that have been enacted related to compliance in terms of quality. Through this, CSR is able to assure consumers that the products are of high quality and usable across different platforms. The company intends to change the construction business through investing in research and development to increase the scope of business and offer the consumers the opportunity to choose from a variety. Shareholders and beneficiaries play an important role in the management and handling of CSR Limited considering the wide range of products and consumers that they deal with. CSR Limited is held responsible and liable for informing the stakeholders of any developments and challenges highlighting how the company intends to deal with the emerging construction issues (Crowther & Islam 2015, p. 115). The community is one of the major beneficiaries of CSR Limited in terms of availing quality products and services. With the increasing Australian population, it is possible that the demand for residential and commercial buildings will rise. The Australian Securities Exchange is a major shareholder since it is involved with certifying all the prices related to CSR Limited products and services. Overview of the Borrower CSR Limited has been involved in a number of construction projects since inception (Crowther & Islam 2015, p. 115). However, the company requires foreign funding from institutions such as banks and private companies to be able to complete a project according to the desired standards. Before any borrowing procedures, CSR Limited goes through the potential lenders to determine the most appropriate repayable rates. The company has been involved with financial institutions such as the Central bank to fund its projects. Their project funding may be off-book or on-book represented in the balance sheet. In the past, CSR Limited has taken part in five major projects that have helped the business acquire massive popularity in the construction market (CSR Limited 2016). Mt. Newman and Gove was among the first financing projects in Australia that CSR Limited was involved. American Metals Climax approached CSR Limited for business in bidding deposits in the North East of Arnhem Land. The business was initially formed as separate entity that later improved into a joint venture that would enable the company manage the tax affairs as well as arrange the financial aspects as desired. Pilbara Iron Limited was created with equity being derived from the 30% share of the project. Project financing was preferred to corporate funding considering the scope of investment that was desired. Similarly, project financing assisted the project to use the funding in an economic way that will serve before the project can support itself. Another major project that CSR Limited was engaged in was the Delhi Petroleum Pty. Ltd. The company was interested in this project owing to the massive demand for petroleum products and the impact it would create in the import sector. The deal took an upturn when there were no bids received owing to the submitted tender. As a result, CSR Limited was able to negotiate for a bridging financial deal with six banks to lend $US 100 million. It is from then that CSR Limited decided to look at different financing structures and potential sources to borrow finances. In most cases, CSR Limited uses its power as an influential brand to convince lenders that any return is worth a certain investment. The people behind the borrower are business executives that represent the interests of CSR Limited (CSR Limited 2016). The executives ensure that they determine the cost of investment through evaluating the different aspects such as economic imbalance and the past performance of the company. The forecasts enable the business determine what aspects to invest in heavily and those that require less investment. To generate income, CSR Limited focuses on the short-term strategies as well as stressing on the importance of improving marketing, reducing the costs of production, minimizing capital expenditure, continued investments and reduces the interest rates charges. CSR Limited is characterized by the ability to meet the desires of a consumer through availing the necessary goods and services in its supply chain. However, among the factors that are used to classify the company include its versed and qualified personnel of about 3, 000 people (CSR Limited 2016). These employees value the mission objectives of CSR Limited and strive to attain continual achievement. It associates with a number of products such as aluminum, building material and property development. The business is widely recognized in New Zealand and Australia with headquarters at different locations. In terms of competition, CSR Limited faces competition from Fletcher Building Limited, Boral Limited and HeidelbergCement AG. The company management is under the Chairman, Jeremy Sutcliffe who oversees the senior management in building products, property, aluminum and workplace health safety and environment (CSR Limited 2016). CSR Limited has improved over time with constant improvement and introduction of products into the diverse market. It has developed more innovative products with extensive property division. CSR Limited is committed to excellence and team spirit building that will steer success. Industry analysis CSR Limited supplies a wide range of products and systems that ensure sustainability is enhanced. They aim at ensuring that the welfare of the clients is considered while the environment is kept safe. This is a steep towards ensuring a profitable and growing enterprise. The construction industry provides consumers with the opportunity of using different products and sourcing various services from a diverse market (Lee 2012, p. 82). Therefore, CSR Limited identifies the construction industry as a successful investment. Working together and innovation is among the key success factors that remain a concern in CSR Limited. The company concentrates on the importance of valuing the suppliers considering the important role they play in the business cycle. Failure to consider the impact that suppliers and other stakeholders have to the business is likely to cause business failure. Building relationships with potential consumers and suppliers expands the scope of business therefore enabling CSR select the appropriate business model to apply as well as how to approach business issues. Workplace health and a safety environment help in ascertaining the employees that the company is concerned with their welfare therefore steering them towards attainment of success (CSR Limited 2016). Maintaining a safe environment is s positive step towards social responsibility that builds consumer value Employees are exposed to a number of benefits that ensure the environment and business conditions are friendly. Motivated employees may focus more on other factors when they are satisfied with the business conditions. CSR Limited makes sure it includes an employee program that ensures competitive remuneration for its employees. Through this, they are able to steer success and suffice in the vast competitive market. Similarly, CSR Limited ensures that it includes a positive salary packaging that provides potential employees to take part in different remuneration packages that fit the tasks highlighted. Incentive plans are part of the employee value propositions that enable potential employees to take part in short-term plans geared towards business success. Although CSR Limited runs approximately 35 construction products manufacturing plants in Australia, it is prone to market competition from three major companies. They include Fletcher Building Limited that manufactures and supplies steel products, glass, insulation, cranes and roofing material to fit the consumer needs. It covers the residential and commercial sectors covering about 45 businesses. The company has qualified to be competitive owing to its diversity in penetrating various markets such as Europe and Asia (Payne & Frow 2013, p. 75). Boral Limited is one of the major companies that are engaged in the production and distribution of construction products in Australia. Its market scope extends as far as United States and Indonesia. Boral Limited concentrates on production of cement, concrete and timber (Sloman 2007, p. 58). HeidelbergCement AG is among the leading producers of cement and concrete in Australia. The company is popular in about 40 countries with increasing sales over the years. These companies affect the performance of CSR Limited by employing foreign procedures in business activities. Financiers often evaluate various factors before granting a company financial aid or loans to take up a project. The case of MSL Bank and CSR Limited can be approached through understanding the economic factors that may accelerate lending submissions. Australia has experienced constant change in the economic aspects as more countries try to match up with the dominating economies. The effects that have come with modernization and globalization have affected how goods and services are delivered. For instance, issues such as local policies regarding the construction business may cause An increase in the economic aspects in the construction business may imply a revision of the price in goods and services offered by CSR Limited. Similarly, it implies that the business once granted the funding would have to handle increased interest rates for MSL Bank. Consumers are attracted by fair prices that do not exploit their loyalty and renders the business at a disadvantage. However, an increase in the price would cause CSR Limited to lose potential clients and investors. A risk of loosing shareholders and investors can be avoided through different ways. CSR Limited needs to draft a lending agreement with MSL Bank to ensure they are not at a disadvantage in case of economic recession. Similarly, CSR Limited will need to find alternative sources of supply, sale and distribution of its products that represents a positive record in the financial aspects despite the economy. Financial analysis Statements of Financial Position The financial analysis of CSR Limited intends to shed extensive light on the business relationships that have existed over the years. This analysis will take a different approach through evaluating the financial rations that reflect the condition of CSR Limited in the construction industry. Financiers and lenders such as MSL Bank often use financial analysis to determine the credit worth of any potential borrower to identify their potential in terms of success and repayment. Similarly, the financial analysis breaks down the costs and procedures applied during different projects and offers relevant information on the different methods of approach. Companies use ratio analysis to identify the strengths and weaknesses of the business focusing on how they can improve to create success. They are also used as mitigation strategies in case of undesired risks in business. Financial ratios pertaining to CSR Limited are classified into liquidity ratios, solvency ratios, profitability and efficiency ratios. Short-Term Liquidity Liquidity ratios ascertain the lender that the business is able to pay a loan at the desired rate and time. Business activities carried out by CSR Limited often expose the business to a number of financial risks among them being short-term liquidity risks. The aim of CSR Limited is to ensure that it has enough short-term liquidity to meet the liabilities that may emerge during business operations. Liquidity is important since it prevents a company from experiencing loses or damaging a candid reputation. Insolvency is a major issue that has seen most companies fail to meet the qualifications that are set for lending by financial institutions. Longer-Term Solvency Solvency is the state of determining the finance risk of a company. In the case of CSR Limited, the finance risk is determined through evaluating the assets, liabilities and expected cash flows. However, long-term solvency is affected by increasing debts considering the duty to pay more in terms of interests especially after the maturity phase. MSL Bank needs to confirm that CSR Limited runs under the principal of going concern that will ascertain continued business. Therefore, once the bank identifies that CSR Limited is not steered towards bankruptcy, they are able to decide on the credit issues. Reduced business performance, decreased profitability and liquidity ratios are clear indications of business failure. Business Performance Business performance is covered in the financial aspects of CSR Limited in their quarterly and annual reports. As of the end of 2015 business period, the revenue of sales in CSR was $1, 144.5 million that represented a 14% increase from the previous year. This trend implies that CSR Limited is capable of handling the credit interests that may be agreed. MSL Bank. Figure 1: CSR Limited business performance between 2011 and 2016 (Performance Morningstar 2016). Statement of Financial Performance Short-Term Liquidity In terms of short-term liquidity, CSR Limited maintains a moderate risk-level and qualifies as a borrower to MSL Bank. In the year 2014 however, CSR Limited recorded $236.3 in short term liquidity risks that consisted of current payables, non-current other payables, borrowings that included the interests, commodity financial instruments and foreign currency financial instruments. However, in the year 2015, CSR Limited recorded $292.6 in short term liquidity risks that consisted of current payables, non-current other payables, borrowings that included the interests, commodity financial instruments and foreign currency financial instruments. Longer-Term Solvency The long-term solvency ratio for CSR was 1.82, 1.85 and 1.87 in 2014, 2015 and 2016 respectively. The return on different investments by CSR Limited will enable the company to pay the different creditors. Arguably, the increase in business debts for CSR Limited implies that the business is positively engaged in new ventures. Business Performance In terms of profit, the company recoded an increase of about $77.6 million with an interim dividend of 11.5 cents. This performance highlights increased volumes and margins in the financial ratio of the company. In this case, CSR Limited may represent minimal to modest risk classes if MSL Bank is to finance it. Cash Flow Statement Cash flow statements from CSR Limited over the three years have shown a consistent drop in the activities and procedures carried out. In 2014, CSR Limited recorded 158.73% drop in net income before the extra ordinaries, 42.45% in 2015 and 13.39% in 2016 (Marketwatch, 2016). In terms of financing, CSR Limited has encountered -2.73%, -5.77% and -7.11% changes in the financing aspect. CSR Limited in 2015 was involved n increased investment as compared to 2014 and 2016. This implies that CSR Limited is able to handle the credit rates and repayment options for loans granted by MSL Bank. Figure 2: Cash flow statement for CSR Limited in the years 2012-2016 (Marketwatch 2016). Security The Australian lending market has experienced drastic changes with the introduction of the new regulations regarding asset management (Fabozzi & Mann 2005, p. 93). Such changes were associated with the economic overhaul in China and the slow recovery of the United States, which are major contributors to the conditions for fiscal lending. Although most projects in Australia may be termed as complete and adequate, the conditions of lending have changed how companies approach and finance their projects. Recently, the adoption of export credit agencies as alternatives for project financing have created much controversy in Australia. The shift in Australian lending trends from sophisticated debts to bonds and loans have seen most companies such as CSR Limited at a greater advantage owing to the affordable repayment rates with low interest. As a result, the Personal Property Security Act of 2009 was implemented in Australia that covers loans for security on property of all types except land. Nonetheless, the Australian law offers exceptions where land may be used as a security. As CSR Limited aims at acquiring funding from MSL Bank, they need to realize that its traditional conservative approach to accepting risk will not be compromised. In the MSL Bank lending policy, any facility must contain a clear rationale for acceptance of the business. The credit issues that come out of the existing security structure may come through the inappropriate valuation of the corresponding assets. Financial lending comes with corresponding tasks such as identifying whether the security will cover the loan and not render the financier or the business at a disadvantage. The various forms of security over assets include fixed charges, legal mortgages and equitable mortgages. It is done on real estate, tangible movable property, financial instruments, claims and receivables, intellectual property and problem assets. Lending submissions may be rejected if the financier is not satisfied that the company may fail to meet the requirements in terms of offering a remedy once there is a default in repayment (Fabozzi & Mann 2005, p.129). Credit issues that may be present during receiving the lending submission between MSL Bank and CSR Limited may arise due to improper calculation of the assets such as land, dwelling houses, land held under building licenses and any lease with 21 years and above. The differences in fixed assets, liabilities and long-term assets may become a major credit issue. Tangible movable property determines stock-in-trade that ensures security interest on fluctuating assets. The Personal Property Security Act allows certain assets to qualify as security for loans (Thampapillai et al. 2015, p. 207). The various forms of security over tangible movable property include fixed charges, floating charges and chattel mortgages. Credit issues may arise for a security interest against the collateral securing the duty of the lender in the interest income and fees for service as covered in the submissions. For security interests over tangible movable property to suffice, CSR Limited is required to comply with the electronic financing statement. This should be made before the closure of the financing period although early registration is preferred. Considering that MSL Bank is a corporate security provider, a financing statement is delivered within 20 business days. Once a single financing statement is delivered, it offers a remedy for any collateral. If the financing covers numerous collaterals, numerous financing statements should be drafted. Most lenders are usually satisfied with a strategic approach to determining the operations of a business. However, with technical advice on most aspects of design, contractual development, liability, liquidity damages and warranties alter the perception of any lending submission. Although lenders may determine that any venture will bring positive returns in profits, corporate institutions such as MSL Bank may have doubts in the repayment and security assurance procedures. Once a performance bond that ascertains MSL Bank of the competence level of CSR Limited in terms of payment is drafted, it is possible that lenders will extend the repayment period. Considering that CSR Limited is actively involved in the construction industry, offering tangible movable property will be more efficient as a security. Valuing tangible movable property would be easier than other forms of allocating security during lending of finances. Recommendations Companies that concentrate on value flexibility opt not to use their debt capacity as security for their financing. The covenants that are associated with lending submissions tend to limit a company to the future operations that they may have. Considering that CSR Limited intends to proceed with numerous projects in the near future, they may use value flexibility to extend the future financing requirements. For CSR Limited to be able to negotiate the loan documents, they need to determine the interest rates comparing them to those offered in the market, determine the collateral, which needs to be equal or greater than the proceeds from the loan and have a restrictive comprehensive covenant with consequences against violation. Affirmative covenants tend to surpass the obligations that are highlighted in the lending submission and ensure that a company achieves such requirements (Mortgage Bankers Association of America 2002, p. 8). At the time when the financing is operational, CSR Limited may need to adhere to various affirmative acts. CSR Limited needs to ensure that it provides credible and audited information regarding the financial aspects in its activities. This covenant limits CSR Limited from providing irrelevant and mere forecasts to MSL Bank during the operational period of the outstanding loan. Financial statements need to be provided quarterly and annually and is to be evaluated and certified by an independent public accountant. CSR Limited intends on maintaining proper records and books of accounts during the business period. Such accounts are used to record daily activities in CSR Limited that are applicable in valuing the assets of the company. These accounts need to be made accessible to the lenders and potential guarantors (Mortgage Bankers Association of America 2002, p. 8). Similarly, CSR Limited will need to comply with all the regulations and rules that apply in lending submissions. Lending regulations regarding the interest rates as well as the conditions that make CSR Limited legible for financing will assist the in maintaining a corporate existence with shareholders and MSL Bank as a financial institution. Property that acts as a security needs to be maintained and repaired if damaged. This will prevent undervaluing or overvaluing of assets. The agreed ratio of current assets to the current liabilities needs to be maintained with the commencement of the lending submission. Regardless of the economic impact that may affect the banking sector, CSR Limited and MSL Bank will agree on a dollar amount of net worth to manage the repayment (Mortgage Bankers Association of America 2002, p. 8). Assets that are prone to damage need to be insured to ensure value is maximised. The proposed facility structure will be a lease building that will have offices and stores. The walling will include framing systems that will use Logicwall and Rediwall brands considering their popularity in the building and construction sector. The proposed building will have thermal and acoustic insulation with air handling products as well as ventilations. Internal linings, ceiling systems and texture coating will be included in the facility. Concrete and clay roofing will be used in the building as well as roll and float glass. Pricing will be set based on the economic forecasts in the mortgage and housing sector. References Performance Morningstar, 2016, CSR CSR Ltd Stock Performance of Total and Trailing Returns, Available from: http://performance.morningstar.com/stock/performance-return.action?t=CSR®ion=aus&culture=en-US. [5 Oct. 2016]. Marketwatch, 2016, CSR Ltd. Available from: http://www.marketwatch.com/investing/stock/csr/financials/cash-flow. [5 Oct. 2016]. CSR Limited, 2016, CSR Building Products - a leading building products brand in Australia & New Zealand, Available from: . [5 Oct. 2016]. Top of Form Crowther, D, & Islam, M, A 2015, Sustainability after Rio, Bingley, U.K: Emerald. Top of Form Lee, W, B 2012, Creating entrepreneurial supply chains: A guide for innovation and growth, Ft. Lauderdale, FL: J. Ross Pub. Top of Form Payne, A, & Frow, P 2013, Strategic customer management: Integrating relationship marketing and CRM, Cambridge : Cambridge University Press. Top of Form Sloman, M 2007, The changing world of the trainer: Emerging good practice, Amsterdam: Elsevier / Butterworth-Heinemann.Bottom of Form Top of Form Fabozzi, F, J, & Mann, S, V 2005, Securities finance: Securities lending and repurchase agreements, Hoboken, N.J: John Wiley & Sons. 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