Its late Tuesday evening, and youve 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 tomorrows loan committee meeting. Heres what he tells you: Weve provided seasonal loans to Argenti for the past 20 years, and theyve always been a firstrate customer, but Im

Chapter 6, Cases #3

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 firstrate customer, but I’m troubled by several recent events. For instance, the company just reported a $141 million loss for the first quarter of 20X6. This loss comes on top of a $237 million loss in 20X5 and a $9 million loss in 20X4. What’s worse, Argenti changed inventory accounting methods last year, and this change reduced the 20X5 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 20X5 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, 20X5—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. Unless 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.

Argenti Corporation Balance Sheets and Selected Other Data ($ in millions) 20X5 20X4 20X3 20X2 20X1 Assets Cash and securities $ 35 $ 38 $ 36 $ 117 $ 92 Receivables 213 166 112 62 47 Inventories 1,545 1,770 1,625 1,242 1,038 Other current assets 13 22 312 1,996 1,806

Argenti management has asked GE Capital for a $1.5 billion refinancing package that would be used to pay off all or a substantial portion of its outstanding debt. Excerpts from the company’s financial statement notes follow. Management Discussion and Analysis (20X5 Annual Report)

The company has obtained waivers under the Long-Term Credit Agreement and the Short- Term Credit Agreement with respect to compliance for the fiscal quarter ending March 29, 20X5—with covenants requiring maintenance of minimum consolidated shareholders’ equity, a maximum ratio of debt to capitalization, and minimum earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR). These waivers and amendments reduce the maximum amount of debt permitted to be incurred, and the maturity of the Long-Term Agreement was changed from February 28, 20X7, to August 29, 20X5.

The company is currently in discussions with financing sources with a view toward both a longer term solution to its liquidity problems and obtaining refinancing for all or a substantial portion of its outstanding indebtedness, including a total of $1,008 million, which will mature on or about August 29, 20X5. This would include repayment of the current bank borrowings and amounts outstanding under the Note Purchase Agreements. The company’s management is highly confident that the indebtedness can be refinanced. Its largest shareholder, GE Capital, also expects the company to be able to refinance such indebtedness. However, there can be no assurance that such refinancing can be obtained or that amendments or waivers required to maintain compliance with the previous agreements can be obtained. Note to Financial Statements (20X5 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 20X5?

2. What recommendation would you make regarding the company’s request for a $1.5 billion refinancing package?

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