In this Case Study, we are asked, as a potential lender to AVL, to take a much broader view. Central to this view will be an assessment of the risks that the proposed lending will expose the bank to.

Our Approach to the Lending Deal

we are asked to take a positive approach to the borrower and its request for funding. This means that our decision to approve/decline this deal should be subject to real-life pressure from your employer to add a quality business to your portfolio. This point can be put another way. Almost every lending deal will inevitably have some positive features and some negative features. Our challenge in this is to identify both the positives and negatives and to identify whether there are ways of structuring the deal that mitigate the negatives so that the deal in overall risk terms is acceptable to the bank. Of course, we have the option to decline the deal if you feel that it is not possible to structure the deal in a way that satisfactorily mitigates the major risks.

Against this background, we are asked to produce a written submission for this customer. The submission will end up with a recommendation regarding whether or not we wish to take on this business. If we do decide to decline the deal then we will still need to present a full submission so that our reasons for declining the deal are clearly developed and explained. In addition, we are expected to say something about under what conditions you would be prepared to reconsider the deal.

We work as a Senior Lending Manager in the Corporate Lending Division of Grand Commercial Bank. We had a meeting today with the Chairman and the CEO of Australian Vintage Limited (AVL). During the meeting, you were told that AVL wishes to move all their banking to Grand Commercial Bank. They wish to borrow $70 million from Grand Commercial Bank as follows:

$50 million term loan (5-year term) to replace their existing loan facilities from their current bank (although their debt at their existing bank is more than $50m, the customers will repay the difference through their own capital raisings).

$10 million to purchase a new commercial property for showroom purposes (the property is valued at $20m, so the firm is contributing $20m of their own money to the purchase).

$5 million to purchase new wine-making equipment (the equipment costs $10m, so the firm is contributing $5m of their own money to the purchase).

$5 million overdraft facility.

We can assume that all existing borrowings (including all loans, all equipment leases, and all other forms of bank borrowing) from their existing lenders will be repaid by AVL and will be replaced by the new $70m facilities at Grand Commercial Bank. Thus, AVL will no longer have any facilities with their existing bank.

Due to ongoing technological advances in the wine industry, the new equipment loan of $5 million is required by AVL to modernize their existing equipment and ensure they are at the forefront of the latest practices in the industry. The new commercial property is located next door to one of their existing properties. The overdraft facility of $5m is required due to the ongoing cash flow needs of their wine business. AVL has asked whether Grand Commercial Bank would be willing to provide this funding. The reason they wish to move to your Bank is that Grand Commercial Bank has developed a reputation for outstanding customer service and expertise in their industry.

AVL has referred us to their website at https://www.australianvintage.com.au/investors/ where you can access their 2021 annual financial report (called AVL 4E and Financial Statements - 30 June 2021), which contains financial information for the past two years, which is a sufficient number of years for this assignment (use the consolidated financials). Their website also provides other background information on the company. Our task is to make a decision as to whether we would provide AVL with this funding and to present the decision up in the form of a lending submission.

Grand Commercial Bank has requested that all lending submissions should consider how the borrower's industry and business have been affected by Covid-19 when undertaking the industry analysis and strengths and weaknesses analysis components of the submission.

Note:

• We are specifically asked not to contact AVL directly.
• In researching information for your assignment, the main source will be the company website. There may be other information available on the web (e.g., produced by stockbrokers and others) that analyses the performance of the company and the industry. Students should research any additional information they require. The IBISWorld Database (which is free to students on the ECU library website) is an excellent source of industry information. Whilst there are different industry categories that AVL could potentially fit into, we will assume for this case study that the industry that they operate in is the one described by IBISWorld as Industry Report C1214 "Wine Production in Australia".
• To avoid being overwhelmed by the large amount of information contained in the detailed financial statements, you could start by completing Appendices 1, 2, and 3 to the lending submission.
• We should assume the following in respect of the lending submission:
  • All existing loans and other lending facilities with their current bankers will be repaid by AVL.
  • All of AVL's assets will be available to Grand Commercial Bank as security
  • All equipment has a useful life of approximately 5 years
  • The business currently leases (rents) some commercial premises (shown in the financials as 'right of use' assets and liabilities). These existing lease (rental) agreements are unaffected by the new lending proposal, as the business will continue to lease (rent) and occupy this existing property in addition to buying and occupying the new property.
  • The customer's interest rate for all facilities provided by Grand Commercial Bank will be 5%
  • If the loan term for any facility has not been provided to you in this case study, then you should select your own loan terms based on the use of the funds and the useful lives of the assets that secure the loans
  • In note 9 to their financial statements, there is a breakdown of property, plant, and equipment. For the purposes of this assignment, we can assume property as being in the "freehold land" and "buildings" columns of note 9, and that all the other columns relate to plant and equipment.
  • We may make any reasonable assumptions that are necessary to calculate the ratios. If a particular ratio cannot be calculated due to the nature of the operations of the company, then show that ratio calculation as N/A.