It's late Tuesday evening, and you've just received a phone call from Dennis Whiting, your boss at GE Capital. Dennis wants to know your reaction to the Argenti loan request before tomor- row's loan committee meeting. Here's what he tells you:

We've provided seasonal loans to Argenti for the past 20 years, and they’ve always been a firstrate customer, but I’m troubled by several recent events. For instance, the company just reported a \($141\) million loss for the first quarter of 2008. This comes on top of a \($237\) million loss in 2007 and a \($9\) million loss in 2006. What's worse, Argenti changed inventory accounting methods last year, and this change reduced the 2007 loss by \($22\) million. I can't tell if the company’s using other accounting tricks to prop up earnings, but I doubt it.
I believe Argenti’s problem lies in its core business—customers just aren't buying its merchandise these days. Management's aggressive price discount program in the fourth quarter of 2007 helped move inventory, but Argenti doesn’t have the cost structure needed to be competitive as a discounter. Take a look at the financials I’m sending over, and let me know what you think.
Argenti Corporation operates a national chain of retail stores (Argenti’s) selling appliances and electronics, home furnishings, automotive parts, apparel, and jewelry. The company’s first store opened in New York City in 1904. Today, the company owns or leases more than 900 stores located in downtown areas of large cities and in suburban shopping malls. Customer purchases are financed in house using ArgentiCredit cards. The company employs more than 58,000 people.
The Seasonal Credit Agreement with GE Capital—dated October 4, 2007—provides a revolving loan facility in the principal amount of \($165\) million. The purpose of this facility is to provide backup liquidity as Argenti reduces its inventory levels. Under the credit agreement, Argenti may select among several interest rate options, which are based on market rates. Unless GE Capital agrees, loans may be made under the seasonal credit facility only after the commitments under the company’s other debt agreements are fully used.

Argenti management has asked GE Capital for a \($1.5\) billion refinancing package that would be used to pay off all or a substantial portion of its outstanding debt. Excerpts from the company’s financial statements footnotes follow.
Management Discussion and Analysis (2007 Annual Report)
The company has obtained waivers under the Long-Term Credit Agreement and the Short-Term Credit Agreement with respect to compliance for the fiscal quarter ending March 29, 2008—with covenants requiring maintenance of minimum consolidated shareholders’ equity, a minimum ratio of debt to capitalization, and minimum earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR). These waivers and amendments reduce the maximum amount of debt permitted to be incurred, and the maturity of the Long-Term Agreement was changed from February 28, 2009 to August 29, 2008.
The company is currently in discussions with financing sources with a view toward both a longer term solution to its liquidity problems and obtaining refinancing for all or a substantial portion of its outstanding indebtedness, including a total of \($1,008\) million, which will mature on or about August 29, 2008. This would include repayment oft he current bank borrowings and amounts outstanding under the Note Purchase Agreements. The company’s management is highly confident that the indebtedness can be refinanced. Its largest shareholder, GE Capital, also expects the company to be able to refinance such indebtedness. However, there can be no assurance that such refinancing can be obtained or that amendments or waivers required to maintain compliance with the previous agreements can be obtained.
Footnote to Financial Statements (2007 Annual Report)
The company intends to improve its financial condition and reduce its dependence on borrowing by slowing expansion, controlling expenses, closing certain unprofitable stores, and continuing to implement its inventory reduction program. Management is in the process of reevaluating the company’s merchandising, marketing, store operations, and real estate strategies. The company is also considering the sale of certain operating units as a means of generating cash. Future cash is also expected to continue to be provided by ongoing operations, sale of receivables under the Accounts Receivable Purchase Agreement with GE capital, borrowings under revolving loan facilities, and vendor financing programs.

Required:
1. Why did Argenti need to increase its notes payable borrowing to more than \($1\) billion in 2007?
2. What recommendation would you make regarding the company’s request for a \($1.5\) billion refinancing package?

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Argenti Corporation Balance Sheets and Selected Other Data ($ in millions) 2007 2006 2005 2004 2003 Assets Cash and securities $ 35 $ 38 $ 36 $ 117 $ 92 Receivables 213 1661 112 62 47 Inventories 1,545 1,770 1,625 1,242 1,038 Other current assets 13 22 6 4 312 1,806 1,996. 1,779 1,425 1.489 Property, plant and equipment-net 1,308 1,366 1,396 1.263 1,222 Investments 317 345 314 296 277 Other assets 1,448 1,177 1,048 851 445 $4,879 $4,884 $4,537 $3,835 $3,433 Liabilities and shareholders' equity Notes payable Accounts payable Accrued expenses $1,028 $ 160 $ 144 $ 0 $ 0 1,812 2,040 1,955 1,595 1,399 1,232 1,201 1,248 1,204 1,148 4,072 3,401 3,347 2,799 2,547 Long-term debt Other liabilities Preferred stock Common stock 87 423 228 213 125 112 185 203 216 208 175 175 75 0 0 54 46 23 19 16 Retained earnings 518 768 750 661 583) Less: Treasury stock (139) (114) (89) (73) (46) $4,879 $4,884 $4,537 $3.835 $3,433 Selected earnings and cash flow data Sales $6,620 $7,085 $7,029 $6,023 $5,806 Cost of goods sold 4,869 5,211 5,107 4.258 4,047 Gross margin 1,751 1,874 1,922 1,765 1,759 Net income (237) (9) 137 101 60 Operating cash flow (356) (182) 153 132 157 Dividends 4 24 23 19