Case $1\mathrm{.}1$ Midi Capital Canada

CASE $1\mathrm{.}1$ MIDI CAPITAL CANADA, COMMERCIAL

TRANSPORTATION FINANCING DIVISION

It was early morning on April $152016,$ when Steve Brant, assistant account manager for

the Commercial Transportation Financing Division of Midi Capital Canada in Toronto,

Ontario, Canada, finished reading the morning copy of The Financial Post and began

reviewing a loan request for $$270,000$ submitted by an existing client $$ Simon Carriers

Ltd$.$ Simon Carriers, a trucking company, requested the $$270,000$ loan to purchase two

new $2016$ Freightliner transport trucks, four new $53-$foot trailers and four new mobile

satellite systems that would be used to track the location of the transport trucks. Brant had

to make a decision on the loan request and forward a report to the senior account manager

for approval that afternoon.

MIDI CAPITAL

Midi Capital comprised of $27$ diversified businesses, including operations in North

America, Latin America, Europe and the Asia$-$Pacific region, its head office was located

in Stanford Connecticut. Midi Diversified, Midi Capital$$s parent company, was a publicly

traded corporation with net earnings of over US$$15$ billion. Midi Capital was a major

competitor in every industry it competed in$,$ achieving record net earnings of US$$3\mathrm{.}6$

billion in $2015.$ It expected each of its divisions to generate a $20\%$ after tax$-$profit, and if a

division fell below the goal of $20$ per cent, they would have to justify why profit targets

had not been met.

COMMERCIAL TRANSPORTATION FINANCING

Commercial Transportation Financing $($CTF$)$ was one of Midi Capital$$s $27$ divisions. The

majority of CTF$$s business was loaning money to medium and large$-$sized transportation

and construction companies. Loans from $$30,000$ to $$1$ million were provided to purchase

assets such as transport trucks, trailers, paving equipment and heavy machinery.

CTF was under tremendous pressure to generate profits. The selling strategy at CTF was

$$Find$,$ Win, Keep$$ Find new business, Win new business and Keep new and existing

clients. As of April $1,2016,$ less than one percent of CTF$$s portfolio of over $2,000$ accounts

had been lost to bad debt. Account managers for the Southern Ontario Region were

expected to generate $$14$ million in new loans each year, without exposing Midi Capital to

unreasonable levels of risk.

Several requirements had to be met before CTF would approve a loan. First, CTF did not

deal with any company that had been in business for less than three years. Second, the

company applying for the loan had to generate enough cash flow to cover the monthly

interest payments on the new loan. Third, the company$$s debt to equity ratio could be

greater than $4$:$1$ when including the new loan. Fourth, CTF would not finance more than

$90$ percent of the value of any asset, thereby requiring the company to have enough cash to

pay for at least $10$ percent of the assets it wanted to purchase. Lastly, CTF considered the

character of the business owners, general economic conditions, and any company assets

that could be pledged as collateral as additional factors in the loan request.

THE TRANSPORTATION INDUSTRY IN SOUTHERN

ONTARIO

The trucking industry had been very profitable from $1985$ to $1988$ until a major recession

in $1989.$ During the recession, there was less manufacturing, resulting in fewer goods being

shipped by trucking companies. Many trucking companies went bankrupt and those that

survived the recession had to lower prices to stay competitive. The industry recovered

during a manufacturing boom in the mid $1990$s and the amount of freight shipped between

Windsor and Toronto was at its highest level ever; however, the transportation industry in

Southern Ontario was very competitive with thousands of trucking companies competing

for business. By the mid $2000$s the transportation industry had experienced strong growth,

but prices and profits remained low with trucking companies typically generating after tax

net incomes of less than $8$ percent of revenues.

With prices low, trucking companies relied on higher volumes of business to generate

profits. One way to increase sales volume was to purchase more trucks and trailers and hire

additional drivers. For every truck and trailer, a trucking company would typically generate

$$150,000$ to $$200,000$ in annual sales. However, the high cost of purchasing new trucks

and equipment required large loans to finance the purchase of new assets. Because so many

trucking companies borrowed money to expand, it was important to maximize the amount

of time a truck was on the road to generate sales, to cover not only operating expenses but

also to cover the loan payments.

NEW LEGISLATION

It was mandatory that all vehicles $($trucks and trailers$)$ used by the trucking companies meet

the safety standards set by the Ministry of Transportation of Ontario $($MTO$).$ These

standards were enforced on major highways at weight scale stations where all trucks were

required