question - answer the questions in this mini-case study related to credit analysis. Please note the following:

Please make a recommendation regarding whether ABC's bonds should be upgraded, downgraded, or remain stable.

In your reasoning, please be sure to (a) quote the information (e.g., financial data and ratios, etc.) from the case to support your conclusion and (b) discuss what could have happened to ABC Corporation (e.g., business expansion, mergers and acquisitions, and competition, etc.).

Credit Analysis ABC Corporation is a supply channel management company that provides pharmaceuticals, medical-surgical supplies, and specialty products. The company also provides information management solutions and outsourcing services, as well as develops disease-specific treatment protocols and pharmaco-economic initiatives to assist in the reduction of health care costs. Exhibit A1 shows the financial data for the 1996-1999 fiscal years and various financial ratios. (The financial ratios are shaded in the exhibit.) The company's fiscal year ends on September 30th. Since each rating agency uses slightly different inputs for the ratios it computes, we have included the ratio definitions used by S\&P in Exhibit A2. The original corporate bond rating was BBB+. S\&P reviewed the company's credit rating in December 1999. Based on the traditional financial ratio analysis, would you recommend ABC Corporation be upgraded, downgraded, or remain stable? And why? Be sure to discuss what could have happened to ABC. EXHIBIT A1 (continue) ^ABC fiscal year ends September 30th. 1. Revenues and Cost of Goods Sold excludes bulk shipment to customers' warehouse sites. The Company only serves as an intermediary and there is no material impact on the Company's operating earnings. 2. (a) Does not include pre-tax distributions on the Company's Preferred Securities. (b) Although the S\&P formulas call for "Gross Interest Expense" net interest is used because Gross Interest Expense was unavailable in the filings and could not be inferred. 3. Free operating cash flow = Funds from operations + Capital expenditure + Change in WC. Note for the above formula for free operating cash flow: (a) Capital expenditure is shown as a negative in the exhibit. That is why it is added to obtain free operating cash flow. (This is consistent with S\&P's formula for free operating cash flow as given in formula (4) in Exhibit A2.) (b) Increase in working capital for 1998 and 1999 is shown as a negative, so is added to free operating cash flow as per the S\&P formula (4) in Exhibit A2. EXHIBIT A2 S\&P's Formulas for Key Ratios *Including amount for operating lease debt oquivalent "Including interest income and equity earnings; excluding nonrecurring items. EXHIBIT A1 Financial Data and Selected Ratios for ABC: Fiscal Years 1996-1999 Based on 10K Data \begin{tabular}{|c|c|c|c|c|c|c|} \hline \multirow{6}{*}{1} & & & 1999 & 1998 & 1997 & 1996 \\ \hline & Revenue & 1 & $17,244,905 & $13,720,017 & $11,659,127 & \\ \hline & cogs & 1 & $(16,145,378) & $(12,969,752) & $(11,004,696) & \\ \hline & SG&A & & $(837,700) & $(534,119) & $(479,399) & \\ \hline & EBIT & & $261,827 & $216,146 & $175,032 & \\ \hline & Interest Expense & 2 & $74,143 & $39,996 & $30,793 & \\ \hline \multicolumn{3}{|c|}{ EBIT interest coverage } & 3.53 & 5.40 & 5.68 & \\ \hline \multirow[t]{5}{*}{2} & EBIT & & $261,827 & $216,146 & $175,032 & \\ \hline & Depreciation \& Amortization & & $66,031 & $37,465 & $40,756 & \\ \hline & EBITDA & & $327,858 & $253,611 & $215,789 & \\ \hline & Interest Expense & & $74,143 & $39,996 & $30,793 & \\ \hline & \multicolumn{2}{|l|}{ EBITDA interest coverage } & 4.42 & 6.34 & 7.01 & \\ \hline \multirow[t]{15}{*}{3} & Net lncome & & $70,573 & $3,102 & $81,679 & \\ \hline & Depreciation \& Amortization & & $66,031 & $37,465 & $40,756 & \\ \hline & Current Deferred Income Taxes & & $10,840 & $41,955 & $10,577 & \\ \hline & Other Noncash Items & & & & & \\ \hline & Deferred Compensation & & $2,552 & $2,809 & $2,266 & \\ \hline & Doubful Receivables & & $85,881 & $11,934 & $11,899 & \\ \hline & Writedown of goodwill & & & $87,271 & & \\ \hline & Abandonent of capitalized & & & $5,307 & & \\ \hline & Funds from operations & & $235,877 & $189,843 & $147,177 & \\ \hline & Long Term Debt & & $1,041983 & $464,778 & $437936 & $419,275 \\ \hline & Lease Debt Equivalent & & $82 & $53 & $59 & $43 \\ \hline & Long Term Debt & & $1,042,065 & $464.831 & $438,015 & $419,318 \\ \hline & Current Maturity of LTD & & $45,923 & $6,029 & $1,021 & 1,125 \\ \hline & Total Debt & & $1,587988 & $470,860 & $439,036 & $420,443 \\ \hline & \multicolumn{2}{|l|}{ Funds from operations/Total debs } & 14.85% & 40.32% & 33.52% & \\ \hline \multirow[t]{7}{*}{4} & Funds from operations & & $235,877 & 5189,843 & $147,177 & \\ \hline & Capital Expenditure & & ($305,535) & ($52.361) & ($23,806) & \\ \hline & Working Capital & & $1,199,527 & $518,443 & $474,910 & $643,607 \\ \hline & Change in WC & & $(681,084) & $(43.533) & $168,697 & \\ \hline & Free operating cash flow & 3 & $(750,742) & $93949 & $292,068 & \\ \hline & Total Debt & & $1,$87,988 & $470,860 & $439,036 & \\ \hline & \multicolumn{2}{|l|}{ Free operating cash flow/Toul debe } & 47.28% & 19.95% & 66.52% & \\ \hline \multirow[t]{7}{*}{5} & EBIT & & $261,827 & $216,146 & $175,032 & \\ \hline & Total debt & & $1,$87,988 & $470,860 & $439,036 & $420,443 \\ \hline & Equity & & $1,495,490 & $629,064 & $644,861 & $666,877 \\ \hline & Non-current deferred taxes & & & & $1,791 & \\ \hline & Total Capital & & $3,083,478 & $1,099,924 & $1,085,688 & $1,087,320 \\ \hline & Average Capital & & 2,091,701.10 & 1,092,806,15 & 1,086,503.89 & \\ \hline & \multicolumn{2}{|l|}{ Pretax return on capital } & 12.52% & 19.78% & 16.11% & \\ \hline \multirow[t]{3}{*}{6} & Operating lncome & & $261,827 & $216,146 & $175,032 & \\ \hline & Sales & & $17,244,905 & $13,720,017 & $11,659,127 & \\ \hline & \multicolumn{2}{|l|}{ Operating Incomd/Sales } & 1.52% & 1.58% & 1.500% & \\ \hline \multirow[t]{5}{*}{7} & Long Term Debr & & $1,042,065 & 5464.831 & $438,015 & \\ \hline & Long-term debt & & $1,041,983 & $464,778 & $437.956 & \\ \hline & Shareholders' equity & & $1,495,490 & $629,064 & $644,861 & \\ \hline & \begin{tabular}{l} Capitalization \\ Con \end{tabular} & & $2,537,473 & $1,093,842 & $1,082,817 & \\ \hline & \multicolumn{2}{|l|}{ Long-term debu/Capitalization } & 41.07% & 42.50% & 40.45% & \\ \hline \end{tabular}