Padgett Paper Products
CASE: PADGETT PAPER PRODUCTS COMPANY As result of inflation and the acquisition of its competitor, Tri-State Tablet Company in 1996, Padgett's financial needs have been risen to a permanent level rather than being merely seasonal in nature. The Company exceeded its bank credit line of USD 5 million to USD 7.2 million. So Padgett Paper requested their bank, the Calson Trust Company for a higher credit limit of USD 8 million. The request was granted under internal guidance line of USD 8 million at prime. The objective is for the Management at the company's bank must revise Padgett's debt structure in a mutually satisfactory manner that will minimize lender risk while increasing company value. The current situation is the bank is now in bad
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Another aspect which Libris have to take a look was the market situation at this time. Padgett was active in a high competitive market. In this time existed a lot of Consolidations in this market because of the high inflation rate in this time that made difficult for small firms to finance their assets. Many small Companies get in financial troubles due to of acquisitions, larger Companies start to dominate. The sharp drop in the stock market in 1987 had frightened some owners into selling out. The paper price had risen over 50% from mid-1994 and exceeded the previous high prices of 1988/1989. The margins get smaller and have declined due the competitions and the high paper price (Appendix2). The interest rates were volatile and this made the situation more difficult. The question was should the loan be priced at a floating rate or fix rate. The final rate had to be checked against the market. A fixed rate would be better, when the market is suspect like in Padgett's situation, because the Federal Reserves would raise the rates to reduce the inflation, and so the rates would picked up.
Overall Padgett's new Capital Structure should firstly increase cash flow and tax shield value. Furthermore increase revenue meanwhile decreases the bank risk. The owner has to changes his dividend politic. Also start to