Redhook Ale Brewery – the Bank and the Company Superior Bank Analysis

THE GEORGE L. GRAZIADIO

SCHOOL OF BUSINESS & MANAGEMENT

PEPPERDINE UNIVERSITY

LEN RUSHFIELD

FINC 622

MANAGEMENT OF FINANCIAL NSTITUTIONS

SUMMER 2016. Session B

Tuesday 8AM-12PM

Case for Negotiation: Redhook Ale Brewery” – the Bank and the Company Superior Bank Analysis

Team 2

Weibin Zhang

Di Yu

Jian Wang

Chenyue Wang

Yirong Jin

1. Redhook business and financial conditions – review the company’s status at the time of the loan proposal and its projected growth strategy and financial expectations. What are the company’s strengths and weaknesses in supporting the proposed loans? 

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Strengths:

1. Redhook had done well in risk management, whereas their D/E ratio was remaining low, no more than 0.6 in previous 8 years.

2. And if they succeed in pursuing new equity investment, their liquidation would perform well in the projected years.

3. After they sold the first pint of Redhook Ale, this company performed a better margin capability in recent five years. Regardless of their bad inventory control, they were gradually recognized by customers.

4. The strategy they schedule was clear and far-sighted. Pacific Northwest region was one of the fastest growing regions, and beer as daily consumptive goods would definitely enjoy such fast growing benefits.

5. If their strategy was successful, they were potential to grow fast over next five years – an incredible equity return and attractive profit margin in the projected balance sheet.

Weakness:

1. Current ratio and quick ratio are two important indexes to view company’s liquidation. Especially the quick ratio, eliminating the inventory, reveals company’s short-term reaction to fund needed. Redhook has a bad performance in early years and 1988, in which year they had larger unpaid account and inventory. Compared with 30%-50% average industries’ growth rate, Redhook seemed to have problem to control their inventory, and made a bad projection.

2.  More need to be concerned is new equity entering, whose share will occupy even four times the remaining ones. The uncertainty will include the future strategy and risk management attitude, which banks may care about.

3.  Poor performance of profit margin even in recent years was another concern. Redhook was one of the pioneers in industry, ones should have occupied more market share and greater profit margin. With the bad management, they performed not so good as they supposed to be, with same result from their small ROE.

1. U.S. Bank/ Redhook business relationship – consider the existing and potential relationship between the bank and the company. What should be the bank’s principal motivations in responding to Redhook’s proposal?

The existing relationship between the bank and the company is that they maintained a good relationship. In 1988, U.S. Bank of Washington agreed the financing proposal to Redhook, and increased the loan to be $865,000 for Redhook’s additional equipment in following year.

The potential relationship between the bank and the company is that Redhook still want to keep the established relationship with U.S. Bank of Washington and to provide secure financing to the Redhook’s expansion.

Following motivations are stated in responding to Redhook’s proposal -

1.         Since U.S. Bancorp is the largest financial services holding company around Pacific NorthWest, they have similar strategy market as Redhook, and they are possible to expand business through Redhook’s sales net such as more cover in L/C.

2.         It aimed to improve asset quality and loan portfolio, reduce nonperformance assets, and maintain strong asset growth. The goal of owning real-estate fits Redhook’s building schedule, if they have agreed with the mortgage of plant or invest them directly.

3.         To offer some non-traditional banking products and services, and provide main source for growth in the Pacific Northwest.

4.         The potential of Rehook and the re-emergence of Microbreweries is considerable, the growth of sales on domestic beer market were expected to continue. From its business strategy, the construction allows Redhook to develop high-quality larger brands to compete against higher-priced imported larger beers and provide significant growth opportunities for the brewery. Its financial strategy is to focus on maintaining the flexibility to grow and seize opportunities as they arose.

5.         The high growing inventory and account receivable could be a good mortgage, especially considering the current assets in projected 1993 and 1994’s balance sheet.

6.         Newly built bank always need to invest more leading and constantly developing companies in fast growing industries such as microbrewery, in order to keep attractive for other good assets.

7.         The risk assessment and credit evaluation of the business. Such as character, capacity, collateral, and coverage. Not only the company’s business performance should be under consideration, but also the leverage degree and business strategy need attention.

8.         Company’s financial attitude, including their historical payment records and major managers’ credit, will be crucial to determine their risks as well.

9.        Return on assets, return on equity and so on methods to see whether such investment has enough power to be repaid.

10.         Banking regulations may limit the loans. As what we can see, the timing is right after savings and loan crisis.

11.         How much and when the borrower may borrow, the interest provisions, repayment terms and additional fees, the intended use of loan proceeds, and any security interest taken by the bank.

12.         The constant situation of management, especially when the huge merger or large equity entering will lead to an uncertainty strategy and operating habit in the future.

1. Comment on the principal conditions from the viewpoint of risk management for the bank and its requirements for suitable structure and profitability. Suggest any changes which you believe could improve the proposals for the bank and for Redhook as well

Structure of the loan:

Amount: $750,000.00 five-year term loan, with a ballon payment at maturity and a $100,000.00 line of credit.

Interest: the prime plus 1%, with no personal guranteens, and the intereste rate was adjusted annually in January, based on the current prime rate, and it interest was payable monthly.

Collateralized: the loan was collateralized by the all the company’s equipment; The line of credit was to be collateralized by the company’s receivables and inventories.