It’s late Tuesday evening, and you’ve just received a phone call from Dennis Whiting, your boss at GE Capital. Dennis wants to know your reaction to the Argenti loan request before tomorrow’s loan committee meeting. Here’s what he tells you:
We’ve provided seasonal loans to Argenti for the past 20 years, and they’ve always been a first- rate customer, but I’m troubled by several recent events. For instance, the company just reported a $141 million loss for the first quarter of 2014. This loss comes on top of a $237 million loss in 2013 and a $9 million loss in 2012. What’s worse, Argenti changed inventory accounting methods last year, and this change reduced the 2013 loss by $22 million. I can’t tell if the company’s using other accounting tricks to prop up earnings, but I doubt it.
I believe Argenti’s problem lies in its core business—customers just aren’t buying its merchandise these days. Management’s aggressive price discount program in the fourth quarter of 2013 helped move inventory, but Argenti doesn’t have the cost structure needed to be competitive as a discounter. Take a look at the financials I’m sending over, and let me know what you think.
Argenti Corporation operates a national chain of retail stores (Argenti’s) selling appliances and electronics, home furnishings, automotive parts, apparel, and jewelry. The company’s first store opened in New York City in 1904. Today, the company owns or leases more than 900 stores located in downtown areas of large cities and in suburban shopping malls. Customer purchases are financed in house using ArgentiCredit cards. The company employs more than 58,000 people.

The Seasonal Credit Agreement with GE Capital—dated October 4, 2013—provides a revolving loan facility in the principal amount of $165 million. The purpose of this facility is to provide backup liquidity as Argenti reduces its inventory levels. Under the credit agreement, Argenti may select among several interest rate options, which are based on market rates. Un- less GE Capital agrees, loans may be made under the seasonal credit facility only after the commitments under the company’s other debt agreements are fully used.

Note to Financial Statements (2013 Annual Report)
The company intends to improve its financial condition and reduce its dependence on borrowing by slowing expansion, controlling expenses, closing certain unprofitable stores, and continuing to implement its inventory reduction program. Management is in the process of reevaluating the company’s merchandising, marketing, store operations, and real estate strategies. The company is also considering the sale of certain operating units as a means of generating cash. Future cash is also expected to continue to be provided by ongoing operations, sale of receivables under the Accounts Receivable Purchase Agreement with GE capital, borrowings under revolving loan facilities, and vendor financing programs.

1. Why did Argenti need to increase its notes payable borrowing to more than $1 billion in 2013?
2. What recommendation would you make regarding the company’s request for a $1.5 billion refinancingpackage?

  • CreatedSeptember 10, 2014
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