On July 11, 2018, in connection with the acquisition of a complementary company, ABC Automotive Inc entered into a credit agreement for a five-year $1.2 billion asset-based revolving credit facility arranged by Bank of America (BAC). This credit is comprised of a five-year $1.2 billion revolving credit facility which matures on July 10, 2023. As of March 31, 2020, ABC Automotive Inc had outstanding borrowings of $593.2 million. As part of the credit, ABC Automotive Inc has pledged substantially all of its assets as collateral and is subject to an ongoing consolidated leverage ratio covenant, with which ABC Automotive Inc has complied. For balance sheet data, see Exhibit 1-2. Exhibit 1-2 ABC Automotive Inc Consolidated Balance Sheet (In $ 000) as March 31st 2020

ASSETS

Current Assets:

Cash and cash equivalents 29,872

Accounts receivables, net 123,539

Amounts receivables from vendors 63,652

Inventory 1,903,108

Deferred income taxes 74,056

Other current assets 37,331

Total Current Assets 2,231,558

Property and equipment, at cost 2,448,289

Less: Accumulated depreciation and amortization 663,988

Net property and equipment 1,784,301

Notes receivables, less current portion 11,208

Goodwill 743,824

Other assets, net 66,974

Total assets 4,837,865

Liabilities and Shareholders Equity

Current Liabilities:

Accounts payables 794,676

Self-insurance reserves 68,488

Accrued payroll 62,652

Accrued benefits and withholdings 39,661

Income tax payable 35,060

Other current liabilities 148,477

Current portion of long term debt 105,790

Total Current Liabilities 1,254,804

Long term debt, less current portion 596,710

Deferred income taxes 23,726

Other liabilities 162,307

Owners Equity

Common Stock 1,379

Additional paid up capital 1,058,407

Retained earnings 1,747,599

Accumulated other comprehensive loss -7,067

Total Shareholders Equity 2,800,318

Total Liabilities and Shareholders equity 4,837,865

ABC Automotive Inc is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories selling its products to both do-it-yourself customers and professional installers. The company ships different products to its customers. It carries carry an extensive product line, including, but not limited to, the following products: New and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, chassis parts and engine parts Maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products Accessories, such as floor mats, seat covers and truck accessories A complete line of auto body paint and related materials, automotive tools ABC Automotive Inc leases certain office space, retail stores, property and equipment under long-term, non-cancellable operating leases. Most of these leases include renewal options. On December 31, 2019, future minimum rental payments under all of the operating leases for the next five years average about $175.000 million, declining to $126,223 million by 2014. Rental expense amounted to $226.049 million, $142.363 million and $55.358 million for the years ended December 31, 2019, 2018, and 2017, respectively.

A Meeting with the CFO In your meeting with ABC Automotive Inc, the desire to replace BAC was stated as due primarily to what the chief financial officer (CFO) asserts are onerous terms. She literally ranted about the requirement for bank debt to be secured, noting that annual profits for the past three years were roughly $193 million in 2017, $186 million in 2018 and $307 million in 2019. She went on to say that in the last two years, interest expense was a paltry $26 million in 2018 and $45 million in the last fiscal year. Pre-tax income for those two years was $496 million and $303 million producing EBIT coverage, per the CFO, that was off the charts. ABC Automotive Inc is looking for an unsecured loan facility to replace BAC. For income statement data, see Exhibit 1-3. Exhibit 1-3 Exhibit 1-3: ABC Automotive Inc Consolidated Statement of Income as March 31st 2020

Sales 1,280,067

Cost of goods sold, including warehouse and distribution 661,720

Gross Profit 618,347

Selling, general and administrative expenses 449,902

Operating income 168,445

Other income(expenses), net

Interest expense -10,879

Interest income 396

Other, net 514

Total other expense, net -9,969

Income before income taxes 158,476

Provision for income taxes 61,000

Net Income 97,476

As a senior loan officer for your bank, you are expected to produce a counteroffer but not necessarily what ABC Automotive Inc has requested. Critical to your proposal are the terms and conditions you will require of the borrower. In your analysis, consider the following issues: Examine the following critical issues about the company when contemplating their loan request What is the current level of debt for the company? It is sustainable? To what extent does the company equity cover its debts? Does the company have adequate liquidity? What about its cash flows? Is there any item on the balance sheet that concerns you? How profitable is the company? Are primary internal sources greater than primary internal uses? What do we mean by primary sources and uses? What is the companys interest expense coverage? Is the company capital intensive? From a lenders point of view which is more preferable; low capital intensity or high capital intensity? What is the companys level of fixed charge coverage? Would you like to see budgets and plans for the company? What are these going to tell you? Would you be willing to lend unsecured to ABC Automotive Inc? What do you think would be the most important terms and conditions and explain your reasoning. For instance, should a minimum debt service ratio be part of the agreement? In your analysis, detail what you think are the key risks to lending to ABC Automotive Inc and explain how your terms and conditions will mitigate those risks.

Provide the answers with calculations