Padgett Paper Products Company

Carlson Trust Company of Richmond, Virginia has a long-term banking relationship with Padgett Paper Product's Inc. Historically Padgett has performed more or less seasonal transactions with Carlson Trust, smaller short-term loans and tax payments. But, as a result of inflation and a recent acquisition of a competitor (Tri-State Tablet Company), Padgett Paper Products, Inc's financial needs have risen to a permanent level rather than being merely seasonal in nature. Management (Libris) at the company's bank must revise Padgett's debt structure in a mutually satisfactory manner.

Because Libris was on a deadline to reflect the new debt structure on 'the books? I feel that he rushed his preliminary 'fancy agreements?to Padgett, nearly compromising the entire relationship just to save embarrassment with his superiors. Once settled though, he took a closer look at Padgett's business and its entities and prepared a new set of forecasts for Padgett's books, thus regaining the trust Padgett once had with the bank. In addition, Padgett noted a savings of $1.2 million could be had in the coming fiscal year. Now, Libris needs to come up with a loan structure in this competitive and volatile market.

Taking the current economic environment into account, along with the double exposure of debt that Padgett had taken on, I don't see how the bank can justify the additional line of credit or the restructuring of the loan on a more orderly basis. It seems as though the management team of Padgett doesn't really want to grow as a firm. Typically, growth firms will lack a dividend payment in favor of growing the firm operationally by acquisitions. With the past acquisitions (minor), it seems as though they want to keep pace with the growing market share in the paper products industry, but yet, they still paid a hefty dividend to its shareholders which represented roughly 50% of its total earnings per share. There is mention within the case that management seems competent, but their skills lay in the area of operations, not necessarily within the financial aspects of the firm.

Padgett has had an increasing return on equity, but that is mainly due to the increased leverage the firm has taken on, not by an increased