Melbourne Wools Ltd manufacture hand-knitting wool yarns mainly sold direct to retailers. They have banked with you for over 30 years and until recently have always been profitable, despite periods when hand-knitting has gone out of fashion.

Two years ago there was a sudden drop in the market for hand-knitting wools. The directors of Melbourne Wools expected this drop to be temporary, but market conditions have continued to worsen. A recent article in The Financial Review has speculated that the market for hand-knitted wools might reduce by a further 20% before any recovery takes place.

The company currently has an overdraft limit of $500,000. Last year, as a condition of continuing the facility, you recently required Melbourne Wools to sign a contract agreeing to a loan-to-value ratio of 80% of the overdraft by debtors. Recently there has been pressure on the limit, excesses have occurred and the 80% LVR threshold has been breached.

The directors have sent you a copy of draft accounts for 2013. They now call and tell you:

• ?They require an increased overdraft limit of $600,000 to see the company over the traditionally poor summer sales period:
• ?Their auditors are of the opinion that they should write down the value of stocks by $300,000;

? They will be unable to restore the 80%LVR limit.

Melbourne Wools Ltd Balance Sheet at 31 December Balance Sheets Projected Figures As at end of Year 2010 2011 2012 2013 $'000 $'000 $'000 Current Assets Cash 2122 2139 1933 1290 Debtors 648374 669281 591695 588071 Stock 852919 766446 846077 818312 1503415 1437866 1439705 1407673 Current Liabilities Creditors 498993 492958 457516 572078 Bank Overdraft 329541 277820 440027 498847 Current Tax 90915 29895 54737 o 0 Future Tax 68083 89080 56821 987532 889753 1009101 1070925Net Current Assets 515883 5481 13 430604 336748 Fixed Assets Fixed Assets and Leasehold 54334 80944 102561 98732 Plant & Machinery 301800 381674 390713 342710 356134 462618 493274 441442 Net Assets 872017 1010731 923878 778190 Financed by: Issued Share Capital 150000 150000 150000 150000 Capital Reserve 0 0 0 Profit and Loss Account 722017 860731 773878 628190 Total Capital 872017 1010731 923878 778190 Profit & Loss Account Summary Sales 2607632 2812816 2249371 2122881 Gross Profit 288546 413030 142748 97633 Net Profit before Tax 143028 250993 -79464 -145698 Ratios and other information Current Ratio 1 to 1.52 1.62 1.43 1.31 Acid Test 1 to 0.66 0.75 0.59 0.55 Credit Given (days) 90.76 86.85 96.01 101.11 Credit Taken (days) 170.00 169.00 192.00 222.00 Stock Turnover (days) 119.39 99.46 137.29 140.70 Gross margin 1 1% 15% 6% 5% Net margin 5% 9% 4% -7% Interest Cover (times) 3.80 4.30 0.00 Net Gearing % per $1 of equity 38% 27% 48% 64%