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

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Principle Conditions:

From this loan of Redhook

Character: As analysis in part two, Redhook had good relationship with U.S Bank of Washington.

Capacity: As five years development, Redhook had been the largest brewery company in Washington area. Without a large product in the market, the Redhook’s track record in order to access its ability to produce and distribute a successful new product. Rehook had thus far been good credit risk for the bank.

Capital Structure:

Since this loan occurred from 1987, 1988, we can notice that this loan would lower current ratio, quick ratio, profit margin ROE and inventory turnover ratio, which showed that increasing interest burden, poorer sales performance decreasing operating ability;

D/E ratio increased to 0.6, which showed decreasing the cost of capital and more stable capital structure.

Collateral: 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.

Coverage: The main management team members of Redhook are strong, patient, young, and committed to investors. They were well educated. They had the ability to control the business and develop the company.

From the Bank:

The US. Bank Corp may reject the loan since the cash flow of Redhook Ale Brewery performs not well. Taking a look at the cash flows from investing, it is determined that the company still needs significant investments to expand. This will pose as a risk that is outside of the loan portfolio profile of the bank. And from the capital structure angle, big interest burden would give Redhook financial pressure which would influence the operating ability and increase the bankruptcy risk. From the balance sheet of U.S. Bank, It has been seen that consumer loans have been on steady growth for the five years prior to 1989 and is expected to continue to grow for the overall banking industry. U.S. Bank of Washington will need to maintain their market share in order to compete with its peers and continue to grow their loan portfolio on pace or ahead of the industry. In addition, it is expressed that the U.S. Bankcorp is focused on improving the quality of their loan portfolio by mitigating risky loans; thus leading the bank to reduce their Credit Line loans.

Suggestions:

Since U.S. Bank would like to improve the quality of the loan portfolio, the Bank of Washington will decrease loans and focus on expanding on residential loans to maintain overall growth and maintaining market share from competitors. U.S Bank planned to maintain potential, steady and great relationship with Redhook and sought for potential future financials needs. The U.S. Bank of Washington should continue to look for opportunities in other non-commercial to increase revenue and cash flow stream.

- Recommendations – assuming you have loan approval responsibility for this proposal, what would your conclusion be on the approving the loans and under what principal conditions?

Based on the information we have, we suggest that U.S Bank should reject the proposal that extending the $6.5M loan to Redhook. We think the brewing industry is still competitive. The volatility of the projected future cash flow is high which raise the concern of Redhook’s ability to service the loan and liquidity profile. The financial statement provided by Redhook might overstate Redhook’s performance that may not be the most likely outcome given industry competition and economic conditions over the life of the planed loan. Moreover, extending this loan to Redhook will greatly increase the overall risk of U.S Bank’s loan portfolio.

If the bank approves the loans, the reason could be that the U.S. Bank think Redhook is doing well as it projected. The bank believes that Redhook will continue increasing in gross profit and positive cash flow in the future. Since Redhook have established a good relationship with U.S. Bank, U.S may think this long-term business relationship with expanding industry leading company is valuable to the competition against other lending institutions. Other principal conditions may include that U.S. Bank asks a higher premium over the normal loan rate to expect high return cash flows from interest payments by Redhook. Moreover, U.S. Bank may require more collaterals that are value-preserving and more detailed and timely information about Redho ok’s operating performance and financial position. As supported by those reason, U.S. Bank could approve the loans.