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25752 Financial Institution Lending
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Faculty of Business (Economics Discipline Group) Page 1 of 8
25752 Financial Institution Lending Faculty of Business (Finance Discipline Group)

Corporate Loan Structuring Case Study

-A total of 10 marks
Answer the question below with regard to the company .

Australias largest electronic entertainment retailer

leading brands of home entertainment products offers low cost of business model
Hi-Fi, Televisions, Speakers, Cameras, Computers, DVDs and Home Theatre
multi-channel strategy stores & online
150 stores Australia 30 New Zealand
Online shopping service
Established 1974 single store
Business sold 1983 + open 9 new stores in 1999
2000 purchased by senior management and private equity bankers
2003 JB Hi-Fi launch on Australian Stock Exchange
*Long term Debt = Secured Bank Loans

$ million 2009 % 2010 % 2011 % 2012 %

Cash 5.75% 7.24% 4.95% 4.90%
Receivables 9.75% 9.52% 9.65% 9.15%
Inventories 49.00% 47.35% 53.04% 52.80%
PPE 22.50% 24.15% 22.11% 23.00%
Intangibles 13.00% 11.74% 10.25% 10.15%
Total Assets 100.00% 100.00% 100.00% 100.00%
2009 % 2010 % 2011 % 2012 %
Account Payables 309 43% 324 45% 350 46% 436 54%
S/T Debt 5 1% 35 5% 2.5 0% 2.3 0%
L/D Debt 98 15% 37 5% 232.6 30% 151 19%
Provisions 20 3% 25 3% 29 4% 37 5%
Total NCL 118 18% 62 9% 261.6 34% 188 23%
Total Liabilities 432 65% 421 59% 614.8 80% 626.6 77%
Total Equity 232 35% 293.3 41% 152.3 20% 184.5 23%
664 100% 714.3 100% 767.1 100% 811.1 100%
2009 2010 2011 2012
Sales 2.33B 2.73b 2.96b 3.13b
EBIT 142.0m 175.1m 162.6m 161.5m
NPAT 94.4m 118.7m 109.7m 104.6m
109.7 101.8 105.9
EPS 88.3 cps cps cps cps
Dividend 44.0 cps 66.0 cps 77.0 cps 65.0 cps
Share Price 15.4 19.07 17.07 8.86
P/E 17.44 17.38 16.77 8.37

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Faculty of Business 25752 Financial Institution Lending

Profitability Ratios 2010 2011 2012

Profit Margin 4.34% 4.54% 3.35%
ROE 40.45% 88.25% 56.72%
ROA 17.29% 18.09% 14.08%
Asset Management Ratio
Inventory Turnover 8.16 7.27 7.3
Asset Turnover 3.82 3.86 3.86
LT Asset Turnover 10.51 11.12 11.29
Debt Ratios
Financial Leverage 2.44 5.04 4.4
Net interest cover 31.79 48.6 12.34
Current Ratio 1.25 1.45 1.22
Quick Ratio 0.33 0.27 0.24

Days Inventory 44.7 50.2 50

Days Receivable 1.35 1.44 1.85
Days Payable 38.7 37.2 46.8
Market Ratio
EPS 109.7 101.8 105.9
P/E 17.38 16.77 8.34

Quiz 3 Autumn 2015 Page 3 of 8

25752 Financial Institution Lending Faculty of Business (Finance Discipline Group)

Task

JB Hi Fi Limited-Loan Structuring

Terry Smart JB Hi Fi CEO commented in the CEO address to the annual General meeting that JB Hi Fi is operating in
difficult conditions with a fall in EBIT Margin 5.2% in 2012 to the lowest level since 2008 and a 1% fall in gross margin.
The industry and more specifically JB Hi FI was being impacted upon by increased competition within the industry as
well as structural challenges in the industry overall. Terry Smart identifies the key challenges ahead as excess store
fronts and price deflation. The trading outlook is for a small increase in sales of about 5.5%.

Given the tricky and volatile trading conditions forecast for at least the next 3-4years the CEO together with senior
management and the Board have decided a restructure the liabilities or borrowing of the company. The Treasurer
Richard Murray is concerned about the growing level of accounts payable and would like to reduce the exposure to
suppliers from its current level of $4000m to a more manageable level of no greater than 27.5% of total assets. Mr.
Murray would like to consider the possibility of utilising domestic bank products to provide short term and medium
term facilities to provide the shortfall in funding.

Mr. Murray has recently attended a number of banking seminars and is aware of the local and overseas debt capital
markets; he would like to consider using offshore facilities to fund the long term portion of the balance sheet and
possibly increase the long term portion to 25-35% of the total assets. Mr. Murray is aware that the credit risk rating of
JB Hi Fi is about B but feels there is availability even at this level in the high yield markets.

TASK: As a consultant of a leading investment bank you are required to structure the debt facilities to meet
the requirements of the CJC CFO as outlined above. Your proposal should follow the questions below:

1. List JB Hi Fi s existing borrowings 2 mark

2. Determine the future debt requirements as proposed by the CFO

3. Design suitable funding facilities for JB Hi Fi 5 marks

Present the each facility in the form of a summary term sheet as below:
Fully detail all aspects of the products chosen including
Type of facility
Amount/Currency
Term
Fees
Covenants.
Collateral requirements.
Proposed Repayment type.

4. Explain in detail the factors which make these loan structures suitable 3 marks
for the needs of JB Hi Fi Pty. Ltd.

Page 4 of 8 Quiz 3 Autumn 2015

Faculty of Business 25752 Financial Institution Lending

Possible Draft Solution

1. Existing Debt JB Hi Fi 2012 Total $589M Made up of:
a. Secured LT Bank Loans $151M -Secured by Fixed & Floating charge over the Groups Assets-
the current market value of which exceeds the value of the loan.
b. ST loan $2.3m
c. Accounts payable $436M

2. Restructure the liabilities

Short term Debt
Accounts payable too high ( $436m reduce to < 27.5% of Total assets) $811.1X 27.5% approx.$223M
A reduction of approx. half that is $436m - $225m = $211m
Long term funding requirement
$811.1 x 25% approx. $200m
$811.1 x 35% approx. $285M

Additional short term & medium term domestic funding facilities

Offshore facilities long term 25-35% of Total Assets

Refinance $225m from accounts payable to other types of debt

JB Hi FI already has bank secured debt of $151M

Assume new borrowings would be fully secured by tangible assets

Consider complete restructure that is :

Accounts Payable $ 211m
Fully Draw Advance including overdraft of $25m = $75m
Bank Accepted Bills(BAB) - $100m
Medium domestic facility - $50m
Long term facility - $200m US$ Corporate Bond or Private Placement Facility

Quiz 3 Autumn 2015 Page 5 of 8

25752 Financial Institution Lending Faculty of Business (Finance Discipline Group)

3. Possible facilities- this is a sample for teaching an exam question may only require two of these
Business overdraft
Borrower: JB Hi Fi Limited
Facility Limit: $25 million
Facility Term: 18months
Security: Secured against JB Hi Fi Limiteds Assets
Repayments: annual review evergreen consideration
Interest Rate: Bank Prime rate+ margin of 1.2% .
Fees
Acceptance Fee 2.5% of the maximum overdraft amount
Facility fee of 2.5% p.a. on $25m limit
Account renewal fee 1.5% of the maximum overdraft amount
Late payment fee 2% on the unpaid amount
Dishonour fee 1% on the maximum overdraft limit
Repayment: Flexible upon 24hours notice
Covenants:
Minimum profitability covenant: NPAT should be a minimum of the average of the
Minimum Current ratio: The Working capital of the company should at all times be positive and a
minimum level of
Minimum Interest & Leasing Cover Ratio
Maximum Leverage Ratio
Additional Secured Borrowings must be advised to the Lender at least 30 days prior to draw down
Asset Sales of greater than 20% of Total Assets must be advised to the lender a minimum of 15 working
days prior to finalisation.
A maximum dividend payout ratio of 60% of NPAT.

Bank Accepted Bills

Borrower: JB Hi-Fi Limited (JB Hi-Fi)
Financier: A&P Bank Limited
Facility Limit: AUD $100m
Facility Term: 2 years with covenants rollover
Security: AUD $400 million inventory. During the facility term, JB Hi-Fi has the obligation to maintain the
inventory level upper a book value of AUD $400m.
Repayment: as bills expire at the end of 2 years a bullet
Interest Rate: BBSW +1.0%p.a.
Fees: 0.55% establishment Fee payable once acceptance.
Acceptance fee 4%.
Any legal fees or out of pocket expenses incurred by the financier as a direct result of drafting the loan
for the borrower.

Fully Drawn Advance

Borrower: JB Hi-Fi Limited (JB Hi-Fi)
Financier: A&P Bank Limited
Facility Limit: AUD $50m
Facility Term: 3 year
Security: The security mortgage over the PPE. total LVR should be less than 80% that is the value of
the assets must exceed the loan value.

Covenants:

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Faculty of Business 25752 Financial Institution Lending
Minimum profitability covenant: NPAT should be a minimum of the average of the
Minimum Current ratio: The Working capital of the company should at all times be positive and a
minimum level of
Minimum Interest & Leasing Cover Ratio
Maximum Leverage Ratio
Additional Secured Borrowings must be advised to the Lender at least 30 days prior to draw down
Asset Sales of greater than 20% of Total Assets must be advised to the lender a minimum of 15 working
days prior to finalisation.
Repayment: AUD $30m in three tranches of 2 monthly $10m commencing 30months from drawdown
Interest Rate: commercial mortgage rate currently 8% p.a. paid quarterly
Fees: 0.35% establishment Fee payable once acceptance.
If the loan is not fully drawn within a 14 days after approval, a commitment fee may be applied.
Commitment Fee of 0.5% per annum of the unused portion quarterly.
Any legal fees or out of pocket expenses incurred by the financier as a direct result of drafting the loan
for the borrower.

Corporate Bond
Borrower: JB Hi-Fi Limited (JB Hi-Fi)
Underwriting Syndicate: A&P Invest Bank; Morgan Stanley; Merrill Lynch
Arranger: A&P Investment Bank Group
Additional Underwriters: Morgan Stanley; Merrill Lynch
Facility Limit: AUD $200m
Facility Term: 5 year
Security: The security of Yankee bond is PPE valued AU$170 million.
Covenants:
Minimum profitability covenant: NPAT should be a minimum of the average of the
Minimum Current ratio: The Working capital of the company should at all times be positive and a
minimum level of
Minimum Interest & Leasing Cover Ratio
Maximum Leverage Ratio
Additional Secured Borrowings must be advised to the Lender at least 30 days prior to draw down
Asset Sales of greater than 20% of Total Assets must be advised to the lender a minimum of 15 working
days prior to finalisation.
Repayment: AUD $200m face value at maturity
Interest Rate: 5% per annual with semi-annual interest payment.
Fees: 0.35% establishment Fee payable upon acceptance.
Underwrite fee 1.5%on $100M
Ongoing fee of 0.25% per annum. Paying to each of the trustee, the listing stock exchange and the
paying agent.
Any legal fees or out of pocket expenses incurred by the financier as a direct result of drafting the loan
for the borrower.

US$ Private Placement of 144a market

Euro Bond Facility

Quiz 3 Autumn 2015 Page 7 of 8

25752 Financial Institution Lending Faculty of Business (Finance Discipline Group)

4. Explain in detail the factors which make these loan structures suitable for the needs of JB Hi Fi Pty. Ltd.
Bank Overdraft
A flexible facility which will provide for daily cashflow needs of JB Hi FI. A bank overdraft is an expensive facility
in terms of interest rate and fees but the flexibility allows the company to avoid any temporary insolvency issues
and provides a working capital source.

The facility would be part of a relationship lending facility with a local bank and as such would be secured against
the tangible assets of the JB Hi FI. Covenants will provide a trigger point for the lender if the company financial
position is below an acceptable level.

Bank Accepted Bills

A flexible floating rate facility based on commercial bills and short term pricing with a bank acceptance.
This kind of facility does attract a number of fees but allows the company to take advantage of local short term
pricing in A$ markets. Most local bank are happy to design a loan facility in terms of bills which also provides the
banks a mechanism the ability to manage the bank liquidity and produces a better overall pricing for the
borrower than less flexible facilities.

Bank Accepted Bills or Commercial Bills permit the borrower to increase or decrease the debt outstanding at
each rollover date and also create a credit profile for the borrower in the market.
This facility will be fully secured by the tangible assets of the company plus at least 5 financial covenants and
default clause which act as a trigger system in the case of unsatisfactory financial performance.

Fully Drawn Advance

A bilateral facility provided by a banking institution. This facility would be secured and usually part of an overall
banking relationship. An FDA is a more permanent part of capital structure and intended to be fully drawn during the
majority of the term. This would give JB Hi FI certain funding and allow the company to plan other more flexible
arrangement and a possible equity injection over time. The company would be unlikely to repay this facility at the end
of the term and would be expected to either rollover the facility or refinance according the financial markets at the
time.

This facility could be part of a multi-currency facility allowing of matching to revenues and also in currencies of
imports of goods. Possible currencies would include $A $US $ Won.

The facility would be fully secured with a number of covenants and default clauses and representation and warranties
to protect the lender institution.

Corporate Bonds
This is a long term secured facility likely to be raised outside of Australia with a fixed coupon, fixed term and
at market yield. As the facility will be raised outside of Australia this will provided a stable long term
component of the capital structure of the company will free local banks to fund the short term requirements
of the company.
The Bonds will be managed by a trustee company and are secured over the tangible assets of the company
with 10 covenants, standard default clauses and representations and warranties

Bonds are regards as a permanent part of the capital of the company and will create certainty and stability in
the overall funding of the business model.

Other possible facilities

US $ Private Placement Market

Page 8 of 8 Quiz 3 Autumn 2015