Sample Co Credit Writeup



Student Name(s):Krystian RaymondAmount of Loan($):$500 millionBorrower / Obligor:WalmartExporter: WalmartCountry of Risk:PeruSum of Current Financial Debt :$121,367mS&P Rating for Country:BBB+ (Stable Outlook)Financial information in USD ($) unless otherwise noted.Customer Description and Purpose of Financing (what is the customer trying to achieve?):Walmart is the largest retailer in the world, the biggest private employer and the second largest public corporation globally. Headquartered in Bentonville, Arkansas, Walmart has been in operation since 1969 and has been publicly traded since 1972. It is still over 50% owned by the Walton family. Walmart currently has 11,098 retail units in 27 countries, under 69 different banners. In 2013, Walmart’s international operations comprised almost 30 percent of the company’s net sales, with an increase of 7.4 percent from the prior year to $135.2 billion. Walmart International serves more than 105 million customers per week.Though growth has been relatively strong over the past 5 years (4.5% average), 2010 saw net sales grow by only 1.1%, compared to 7.3% in 2009. Walmart cited economic conditions and price deflation as the causes. 2010 also saw a $9.8 billion unfavorable currency exchange rate impact in the Walmart International segment, compared to a $2.3 billion unfavorable currency exchange rate impact in 2009. Walmart’s commitment to growth (global expansion, customer traffic, sales), leverage (lowering operating expenses relative to sales), and returns (increasing shareholder value, dividends) has provided solid financial direction through the recession and continuing into the recovering economy. Net sales have increased 16% over 5 years. The request is to secure a term loan of $500 million to be repaid over 10 years compounded annually at 4%. Principal and interest payments are to be made annually. This loan would be used to acquire retail units within Peru, namely the Plaza Vea chain of hyper-markets. Plaza Vea locations are found mostly within Lima, the largest city and consumer market in the country. There are 56 current locations under the Plaza Vea banner. The Plaza Vea chain outlets were acquired by Intercorp Retail in 2003.Intercorp had a net income of approximately $51m in FYE 2012, compared to approximately $21m in FYE 2011. Gross margins were 27.6% in FYE 2012, increasing from 27.4% in FYE 2011. The Plaza Vea retail outlets present Walmart with the best organizational fit within the Peruvian retail market, as the locations are well-known and provide shoppers with the ‘one-stop shop’ retail capability. Walmart does not currently have a retail presence in Peru, though it has exhibited expansion success in neighboring countries Brazil and Chile.DEAL INFORMATION (to be completed by UW, in collaboration with workcell as required)dStructure:Direct LoanIf Other please specify: FORMCHECKBOX ERDPricing: FORMCHECKBOX Market Window FORMCHECKBOX Consensus FORMCHECKBOX Consensus-plus FORMCHECKBOX ASUKey Risks / Issues > Description:1) Commercial RiskPeru’s retail markets remain under-developed in non-metropolitan areas. Chain retail outlets hold only 15% of retail market within Peru, compared to an average of 60% control in Brazil and Chile. The variation in socio-economic status across non-metropolitan areas creates difficulty for branding and pricing across chain outlets. This limits Walmart’s ability to grow following acquisition of the mainly metropolitan Plaza Vea outlets.A risk analysis rating of A has been given. As the 2nd largest supermarket chain in Peru, Walmart can gain a strong foothold in the Peruvian market quickly. The lowered ability for growth in terms of outlet expansion can be offset by Walmart’s corporate focus on increasing store sales and lowering operational expenses as a percentage of sales. Retail sales in Peru are set to grow 20% within the year, allowing Walmart to pursue their strategy of driving growth through same-store sales increases. Walmart’s untapped credit facility (over $16,000m) creates confidence in their ability to effectively manage debt loads and unfavourable financial conditions.2) FORMDROPDOWN 3) FORMDROPDOWN WORK CELL RECOMMENDATIONFocus of Analysis > Basis of Recommended Flight Path:Recommended Dark Green flight path given (1)Walmart has shown strong ability to manage and service debt loads (2) Undrawn credit facilities and high interest coverage ratio further exhibit company strength (3) Strong corporate policy focuses on 3 areas: growth, leverage, returns. This has given Walmart consistent growth in the face of price deflation and economic downturn. (4) continually strong business performance as evidenced by FYE 2013 annual report and historical performanceRecommended Flight Path: FORMCHECKBOX Dark Green FORMCHECKBOX Light Green FORMCHECKBOX Yellow FORMCHECKBOX RedDETAILED RISK ANALYSIS1) COUNTERPARTY ANALYSISFINANCIAL ANALYSISProfitabilityIn FY 2013, Walmart saw net sales increase to $466 billion, an increase of 5% over FY 2012. In addition, Walmart saw historical lows in terms of operating expenses, dropping to 19.1% (as a percentage of sales). This increases profitability and allows for financial growth in existing retail units. $13 billion was returned to shareholders through dividends and stock repurchases. Operating income increased 22.1% over 5 years to $27,801m in FYE 2013. This demonstrates Walmart’s strong efficiency and effectiveness in the retail market.Return On Assets was calculated at 9.0% in FYE 2013, exhibiting stable returns. Return On Investment was calculated at 18.2% in FYE 2013, exhibiting a slight decrease from 18.6% in FYE 2012. These ratios show Walmart to be a profitable company, exhibiting strong and stable growth opportunity. Gross profit margins have remained very stable, averaging 24.6% over the past 3 years. Walmart’s ability to stay consistent through price deflations and economic downturns show the strength of the company and prove its ability to produce strong growth in both store sales increases as well as global expansions.Liquidity / Debt ServiceThough current and quick ratios are low, at 0.88 and 0.22, respectively, Walmart has shown strong ability to service its debt load. Quick ratio remains low due to high inventory level necessary in large retail operations. Debt/Equity ratio of 1.48 is well below industry average (2.7) and has dropped steadily over the past 5 years. Walmart has over $16,000m in undrawn credit facility. The strength of Walmart’s operating income and consistent profitability have significant positive effects on lowering debt levels and reliance on credit facility. Interest Coverage ratio remains very strong in FYE 2013, at 13.45. This exhibits Walmart’s strong ability to service its debts and demonstrates a strong ability to service the requested loan amount of $500m. The interest coverage ratio remains well-above industry average and has shown steady increases over the 3 previous fiscal years. Additional debt can be serviced without any material negative impacts to Walmart’s operational ability or profitability.Debt has increased at an average of 5.3% per year, where assets are growing at an average rate of 6.0% per year. Revenues have increased at an average of 4.5% per year (3-year high of 6.0% in FYE 2012).Capital StructureWalmart’s Capital Structure includes:364-day revolving credit facility of $10,000m ($10,000m undrawn)Five-year credit facility of $6,258m ($6,258m undrawn)Stand-by letters of credit of $1,871m ($3m undrawn)Long Term Debt of $38,394m (as per FYE 2013 financial statements), down from $44,070m in FYE 2012Total Debt of $43,981m in FYE 2013 consisting of mostly unsecured debt (USD/Euro/Sterling/Yen denominated) with maturities ranging from 2014 to 2042$32,976m in Total USD denominated debt$5,000m in debt issuances from April 18, 2011 (maturities ranging from April 15, 2014 to April 15, 2041)762000123825762000123825762000123825762000123825762000123825762000123825762000123825Company CaseUSD MillionsHistoricalCompany Case?01/31/201101/31/201201/31/201301/31/201401/31/201501/31/2016Statement DateActualActualActualProjectedProjectedProjectedIncome StatementTotal Revenues421,849 446,950469,849 490,992513,087 536,175Growth 3.4%?6.0%5.0%4.5%4.5%4.5%Cost of Sales314,946335,127352,488372,580393,817416,264Gross Profit Margin24.8%24.5%24.4%24.6%24.6% 24.6%Operating Income (EBIT)25,54226,55827,801 29,010 30,27231,589 Net Income 16,99316,38717,756 18,64419,57620,555Balance SheetCash and Equivalents7,3956,5507,7818,0618,3518,651Total Assets180,663193,406203,105215,291 228,208241,900Total Liabilities109,416117,645121,367 127,799134,573141,705Current Liabilities58,48462,30071,81879,50288,00997,426Equity71,24775,76181,738 87,46093,582100,133TNW54,48455,11061,24164,91568,81072,939Cash Flow Analysis?CFO23,64324,25525,59126,61527,67928,786CAPEX12,19316,60912,611 13,36814,17015,019Free Cash Flow10,94410,74512,69313,96215,35916,894 Dividends per common share (in dollars)1.211.461.591.812.062.36Diluted net income per common share attributable to Walmart (in dollars)4,474.525.045.365.706.05New Debt Issuance5005.000--------Leverage & Debt ServiceTotal Debt / EBITDA4.284.434.364.404.444.49Debt / Equity1.531.551.481.461.441.41Debt/TNW2.002.141.981.971.951.94EBITDA / Int. Exp.12.7512.3013.4513.6213.7713.92LiquidityCurrent Ratio0.880.880.830.860.860.86Quick Ratio0.260.230.220.240.240.24PROJECTIONSFiscal 2012 projections ProfitabilityBased on the financial information, revenues are projected to rise by 14.1% over 3 years based on an average growth rate of 4.5% annually. Return On Investment (ROI) was calculated at 18.6% in FYE 2012, compared to 18.2% in FYE 2013. ROI was projected at 17.8% in FYE 2016. Return On Assets (ROA) was calculated at 9.0% in FYE 2013, and was projected at 8.5% in FYE 2016. From FY 2009 through FY 2013, Walmart has returned over $60 billion to shareholders through dividends and share repurchases. Earnings per share increased 59% over this time period.Walmart’s focus on its leverage policies has led to steady reductions in operating expenses. As a percentage of sales, expenses have dropped from 19.7% in FY 2010 to 19.1% in FY 2013. This has given Walmart the ability to grow its profitability internally, while domestic and international expansion opportunities allow for growth externally. Due to the nature of the Peruvian market, Walmart must focus its strategies on same-store sales increases and operating expense reductions to support growth within the market.Liquidity/Debt Service:Walmart remains fairly non-liquid, with projections of a current ratio of 0.86 and a quick ratio of 0.24. The low quick ratio is due to the inventory necessities in the retail outlet sector. Liquidity ratios have remained lower than average, but stable over the previous 3 years. Interest coverage ratio is expected to rise by 3.5% over 3 years, projected at 13.92 in 2016. This exhibits Walmart’s strong ability to service the loan. The requested loan will not have a material negative effect on Walmart’s ability to service debt. Debt/Equity is low, calculated at 1.48 in FYE 2013 and projected at 1.41 in FYE 2016, compared to industry average of 2.7. This exhibits Walmart’s ability to successfully manage its debt loads. Successful management of debt is further evidenced by its undrawn credit facilities.2) OTHER TRANSACTION RISKSNo other major transaction risks exist for Walmart at this time.COVENANTSMinimum current ratio of 0.75 tested on a quarterly basisMaximum Total Debt/Equity less than or equal to 1.85 tested on a quarterly basisDebt/Tangible Net Worth not to exceed 2.5 tested on a quarterly basisGross Profit Margin above 20%CAPEX not to exceed $19,000m over next 5 yearsREPAYMENTTerm loan over 10 year period (interest compounded quarterly, principal and interest payments annually) PROPOSED CHANGES TO THE CREDIT AGREEMENT The following key changes to the existing credit agreement have been proposed in the amending agreement::Facility: Term loan of $500m permittedFacility: Interest at 4% quarterly, principal and interest paid in annual installmentsFacility: Maturity date will be10 years following sign off and no later than December 15, 2023.Covenants: Maximum Total Debt/Equity less than or equal to 1.85 tested on a quarterly basisCovenants: Minimum current ratio of 0.75 tested on a quarterly basis ................
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