CENTRAL MINDANAO UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT

University Town, Musuan, Maramag, Bukidnon

In Partial Fulfillment of the Requirements for

Governance, Business Ethics, Risk Management & Internal Control
Case Study Analysis
1st Semester S.Y. 2022 – 2023

Submitted by:
Aguilar, Jaylou
Alsola, Vince
Barquin, Cyrile Jean
Bomediano, Domenique Jose
Cuyos, Christian Rey
Cainglet, Lionel Geoffrey
De Leon, Cleahdel
Florita, Natasha Faye
Heramiz, Althea Kaye
Jondonero, Sze Siu Kuen
Luspe, Edmark
Minguez, Erika
Oppus, Cristine Jane
Superticioso, Lyle Gwyneth

Submitted to:
Mrs. Rose Mae Langot-Mapeso, CPA, MSA
Instructor

November 24, 2022

 INTRODUCTION
Case Overview

In 1847, Wellfleet Bank was established in London and offered services to colonies in Asia and
Africa. From 1960 to 1990, the bank became a worldwide institution and expanded its operations in
North America and Europe. However, it lost most of its profits and money during the European property
crisis between 1989 and 1992. During the 2000s, it became a leading international bank, had a presence
in 55 countries in 2007, and expanded its operations to 78 countries in 2008. Its two main lines of
business are Consumer and corporate banking. Wherein 72% of the assets used and 58% of pre-tax
profits were attributed to corporate banking. And 28% of assets used and 42% of after-tax profits to
consumer banking.

The management of Wellfleet viewed leveraged and syndicated loans to large corporate
clients as potential growth markets for the company. By combining the efforts of numerous banks,
syndicated loans were made available to borrowers, lowering the overall transaction exposure and
enabling smaller banks to engage in significant deals. Companies with a lot of debt were granted
leveraged loans, with the higher risk of default translating to a typically higher interest rate. Instead of
relying on its investment banking operations, Wellfleet decided to expand its core corporate-banking
capabilities to these market sectors.

In light of its efforts to pursue large-scale transformational acquisitions, various risks

are prevalent to Wellfleet Bank in its daily operations. One of their mega-deals involves considering
lending $1 billion to South African gold producer Gatwick Gold Corporation (GGC). According to the
credit application prepared by Wellfleet's relationship managers, the GGC classifies as 5B under their
Internal Credit Grades, which means a probability of default at 39 basis points. The expected Economic
Revenue and Economic Profit (year 1) are $44.6m and $32.16m, respectively. It offered the possibility
of numerous revenue streams. However, the fact that the transaction would propel Wellfleet to the top
of the client's banking needs, making it a top-tier bank to GGC, prompted the managers to recommend
it strongly.

The very appealing deal exposes the bank to risks that could outpace its risk-
management capacity, citing Catherine Richards' concerns that the excitement of the high-profile deal
might have clouded the relationship managers' judgment. The risk associated with the transaction goes
beyond exchange rate risk and gold price volatility to include political threats like government
interference. The Gatwick Gold proposal divided the Group Credit Committee and sparked heated
discussions between risk managers and client-relationship managers. The dilemmas lie in whether to
approve the proposed $1 billion deal with the third-largest gold producer, whether Wellfleet's risk
management measures are sufficient in the event of a global financial crisis, and what would happen if
the deal fails.

Statement of the Problem

The capacity of Wellfleet Bank's risk management division is being exceeded by rising
demands brought on by the bank's expansion. The company's effective risk management was known to
have helped it survive the 2008 financial crisis. Still, as it continued to grow and more demand was
generated, this jeopardized the entity's historically crucial competitive edge in risk governance. Thus,
concerns were raised about the entity's responsiveness to risks, particularly with megadeals, including
the following:
 1. Risk management and client-relationship managers at Wellfleet Bank engaged in heated
discussions on whether or not to approve Gatwick Gold Corporation's (GGC) proposal for a $1
billion loan.
2. Issues on how Wellfleet Bank's management process's feasibility in managing megadeals,
mainly when its risks are overly structured. Since the current strategy is based more on the
judgment of its committees—particularly the Group Credit Committee (GCC), which has
considerable authority than on risk management methods, thus Wellfleet Bank is exposed to
various risks.

CASE ANALYSIS

Wellfleet's capacity for risk management has been outpaced by demand and growth as they
aggressively pursue large-scale transformational deals, which eventually affected the company's risk
culture and credit assessment process. The bank's top-notch internal controls, risk management
procedures, and compliance standards, which have historically been a key competitive advantage, are
no longer as efficient as they once were. Their lengthy process for approving mega-deals now makes
their ineffective risk management clear.

Wellfleet has outgrown its risk management system, yet it still pushes through with its strategic
intent despite the absence of Risk Appetite to set the tolerance for corporate banking loans. Additionally,
there is a lack of participation from the CEO and the Board in the loan approval process because they
have no other direct involvement with it besides the quarterly review of the loan portfolio. Executive
management oversight was removed, which did guarantee the independence of risk analysis and
management. But because it gives the members of the risk committee too much power, it creates a lot
of operational risks.

In addition, there are several important Threats & Obstacles for Gatwick GC. A protracted
decline in the price of gold represents the single biggest risk for GGC over the long run. And low pricing
would affect investment, capex, and exploration as well as render some of its mines unprofitable. Also,
global mining expenses are rising quickly due to three key factors: Electricity, because its cost will rise
in accordance with energy prices; The cost of labor in South Africa, rising by about 12% annually; and
industry demand for new equipment is extremely high.

In terms of credit analysis, GGC has challenges and strengths. The need to refinance a $1 billion
convertible bond that will expire on February 27, 2009 is their challenge. In 2007, their total debt to
EBITDA was 800% (up from 200% in 2006 and 130% in 2003). In terms of debt protection, GCC's
EBIT to interest expenditure ratio was -3.1% in 2007 (-1.9% in 2006; -12.9% in 2003), which is not
particularly impressive.

Fortunately, it offers benefits, some of which include being the world's third-largest gold
producer with 7% of global gold production, having a diverse production base, and being a low-cost
producer (i.e., being in the lower 50% of worldwide cost curves on average across all its mines).
 AREAS OF CONSIDERATION

Efficacy of the Structure of the Risk Committee

The coordination between relationship managers and senior credit managers makes up the risk
management structure. In order to approve business loan applications based on individual experience,
Wellfleet's risk management function was designed as a three-level hierarchy. Credit proposals are
initially accepted by the lowest level, comprised of senior credit officers. These officers sign off on
these requests as long as they are within their purview. Requests that exceed their jurisdiction are then
forwarded to the middle level, which is made up of regional credit officers, who then do the same for
the Body Credit Committee (GCC), the group in charge of handling the largest credit proposals.

The CEO, Dawes, manages risk for the company and its risk portfolios. The management works
to maintain a balance on either side, taking the helm of the executive forum on any modifications to the
bank's risk profile and developments that could have significant risk exposures and the choice of taking
on risky loans. The CCO, Richards, manages the intended growth from a risk viewpoint. The board
assigns executive directors to serve on the Board of Directors' Audit and Risk Committee to mitigate
risk. The Committee of non-executive reviews particular risk areas and keeps an eye on activity.
Applications for business credit in corporate banking business decisions were made by credit officials,
known as the "Alpine Pass." and senior credit officers oversaw commercial spaces. Wellfleet Bank's
risk management structure can be seen in the diagram below.

According to Cromwell, the board wants the risk function to be separate from the business since
they need someone that can question the Company's plan. The Group Credit Committee and seven other
risk committees examined the additional sources of risk. Based on the report of the eight committees,
the top executives were consistently updated about risk patterns quarterly. The board-level Audit and
Risk Committee received a separate report from the chief risk officer. However, caution was issued
about taking on too much risk because the risk exists. Aside from the fact that each risk may be evaluated
more quickly and efficiently independently, it interacts with one another and is connected.

Consolidating all eight committees into one in managing the risk would undermine the benefit
of independence and balance between committees. However, depending on the financial risk, the Group
Risk could be subdivided into Macro and Micro Risk Committees. Since it is feasible, it is more
practical and effective to divide the responsibilities of risk committees to provide unquestionably good
decisions.
 Integrating these specific risks takes care of clear, overarching concerns, including monitoring
the Corporation's global risk management policies and procedures, spotting warning signals of future
troubles, and making plans to deal with them. These committees' interactions will be more centered on
subjects that are important to them. In addition, the Micro Risk Committee manages credit risk,
reputation risk, operational risk, and compliance risk. This committee's risk assessment will concentrate
on making wise decisions regarding risks like the potential for a debt default due to a borrower's failure
to pay, the risk associated with a covert threat to a company's reputation that can appear in a variety of
ways, the risk of loss due to inefficient people, systems, processes, or external events that can disturb
the flow of business operations, and finally the risk of legal penalties and financial forfeitures.

Reduction of Group Credit Committee Dependence

Wellfleet's three-level hierarchical risk management strategy necessitates the consent of every
hierarchy level. The decision-making body is the Group Credit Committee, yet it still needs approval
from the senior credit officer and the regional credit manager, making the process sluggish. Risk
management is not a concern for business units, and risk analysts do not consider it. The group risk
committee examines and approves loan proposals, norms, and restrictions for retail and commercial
banks. Although no risk appetite statement specifies a matching acceptability criterion, the corporate
client group has pursued disruptive efforts. The Chief Executive Officer and Chief Revenue Officer of
the group board of directors are not directly involved in the loan approval process other than regularly
evaluating the company's loan portfolio once a decision has been made. The Group Credit Committee's
decision is not subject to the Board of Directors control or influence during the loan approval procedure.
Since the Corporation Credit Committee's authority is unrestricted at Wellfleet Bank, the GCC may
approve a loan as it complies with its regulatory requirements.

According to Professor Anette Mikes, the following actions are advised:

A. Wellfleet Bank should organize groups of risk analysts for different transactions rather than
maintaining the current structure of its risk committee. It would be possible to combine the
eight committees into two functional categories: Macro and Micro risk committees, as this
restructuring would enable a more thorough and thorough risk assessment for each mega-deal.
The two committees' ability to communicate with one another can increase systemic
effectiveness.
B. The ability to make choices based on models should be given to credit officers and regional
credit officers. The company should make greater investments in strengthening its risk
management models to reduce the time it takes to approve large-scale transactions. Thus, the
Group Credit Committee's control over the corporation may be lessened while important
decisions are made more openly and transparently.

Large Corporate Deals Considerations

Wellfleet's management identified leveraged and syndicated loans to large corporate clients as
potential growth markets for the company's corporate banking division. Wellfleet Bank concentrates on
growing transformative partnerships with customers because it is advantageous for the bank but also
presents many challenges and risks. It might put the entire Wellfleet management in danger and pose a
credit, operational, market, compliance, country, and reputational risk.
 ● Market Risk - Since Wellfleet concentrates on growth potential in developing nations, it may
be more vulnerable to market risks due to lax insider trading rules, less liquidity, difficulties
raising capital, an inadequate corporate governance structure, and a higher chance of
liquidation.

● Operational risk - Wellfleet's convoluted decision-making process, especially when dealing

with megadeals, exposed company to significant operational risks.

● Credit Risk - In order to incur significant deficiencies after one has ducked, Wellfleet has been
pursuing significant transformational deals.

● Foreign Exchange Risk and Country or Sovereign Risk - because Wellfleet is an

international organization with activities in 78 countrie, Wellfleet had to deal with political risk,
switch rate risk, economic risk, sovereign risk, and transfer risk because it had such
numerous worldwide businesses.

Concentration Risk - as the bank has a very high concentration on its Corporate Banking
Group.

● Reputational Risk- Relationship managers may feel pressured and embroiled in disputes with
credit managers, which may lead them to breach their promises to clients.

● Risk of overreliance upon the model - as it has its own Credit Risk Assessment Model

Wellfleet bank's strategy was to accommodate Mega transformational deals through its
corporate banking segment. Each of these large-scale credit applications counted as Mega Risk. As
Wellfleet says, "If a billion-dollar deal went wrong, it could sink the ship."

Risk Management at Wellfleet Bank

Risk management is a major factor in the success of Wellfleet Bank. Since rewards gained are
often proportional to the risks taken thus, such risks must be appropriately managed. With the changing,
more competitive business environment, more risks are emerging for Wellfleet. The company has
divided various risks into categories and assigned different committees to deal with these risks. This
compartmentalized risk management framework is what Wellfleet has. An example would be the
Group Credit Committee, which handles risks related to credit deals, arguably one of the most critical
ventures of the company.

For Alastair Dawes, with the business growing at a tremendous rate, the risk management
capacity of Wellfleet is being overtaken by the number of risks they face. He believes it would be better
if he had more control over the risks taken, specifically those relating to large credit deals.
As for risk officer Patricia Cromwell, scientific risk measurement should be emphasized to have the
ability to measure the risks in numbers. This would allow them to calculate the amount the bank could
lose on a particular loan.
 On the other hand, Catherine Richards saw risk management more as an art than a science. For
her, most of the models relied on data from the past, which could quickly get outdated, especially with
the rapidly changing environment of the business.

The role of risk management functions at Wellfleet should ensure the organization's financial
status, profitability, and success of its operations. All risks related to the bank's operations must be
identified, measured, limited, controlled, mitigated, and reported promptly and thoroughly. Acting
proactively rather than reactively in handling future outcomes can lessen a risk's impact and its chance
of happening.

Expected Loss, Economic Revenue, and Economic Profit of GGC’s Proposal

Gatwick Gold Corporation (GGC) was the third-largest gold producer in the world, contributing
about 7% to global gold production. It has done significant exploration and has 21 mining operations
spread over ten nations. In South Africa, deep-level hard rock activities accounted for 41% of total
production.

In connection to the case, we compute the proposal's expected loss, economic revenue, and
profit, explaining any assumptions made and commenting briefly on how management can evaluate and
apply the findings. So, the counterparty is believed to be rated 5B by Wellfleet's internal rating model
and credit committee. This amounts to a default probability of 0.39 percent. Wellfleet anticipates a first-
half margin of 425 basis points and a second-half margin of 525 basis points. The initial cost is 30 basis
points, which equates to $3,000,000. The amount drawn would be equal to the proposed limitation of
$1,000,000,000. According to Wellfleet's model, the Loss Given Default for this transaction is 52.25
percent. The capital charge is estimated to be $3,800,000 by the Treasury. Group Finance allocates the
following transaction overheads: cost ($500,000) and tax ($12,000,000).

Expected Loss
= Probability of Default × Exposure at Default ($) × Loss Given Default (%)
= 0.39% × $1,000,000,000 × 52.25%
= $2,037,750

Total Revenue
= Interest Income + Fee Income
= ($500,000,000 × 4.25%) + ($500,000,000 × 5.25%) + ($1,000,000,000 × 0.3%)
= $21,250,000 + $26,250,000 + $3,000,000
= $50,500,000

Risk-Adjusted Revenue (RAR)

= Total Revenue - Total Expected Loss
= $50,500,000 - $2,037,750
= $48,462,250
Economic Revenue
= RAR - Net Capital Charge
= $48,462,250 - $3,800,000
= $44,662,250

Economic Profit
= Economic Revenue - Cost - Tax
= $44,662,250 - $500,000 - $12,000,000
= $32,162,250

The following ratios will also be used as an additional basis in making the decision:

The Gold Price trend will also be considered as follows:

Based on its Net Profit Margin, there has been a continuous Net Loss since 2005. In addition,
its total Debt to Equity Ratio indicates that the percentage of the debt-financed that was invested
compared to equity finance was high in those years, which generated terrible results. Lastly, according
to its Interest Coverage Ratio, GCC's debt protection is not impressive either, with their EBIT to interest
expense at -3.1% in 2007.

From the result of our discussion, it is suggested Wellfleet must reject it based on various analyses:
1. From 2003 to 2001, GGC's performance has been deteriorating. According to the evidence
presented throughout the case, while GGC's income growth stopped between 2004 and 2007,
 D&A and interest expenses sharply surged in 2004. As a result, the chance of this company
decreased from 2003 to 2007. Its net income was even negative from 2005 to 2007;
2. GGC's capital structure was inadequate. The graph shows that the total debt to EBITDA ratio
increased dramatically, but the percentage of EBIT to interest costs decreased in 2007.
According to reports, GGC's debt levels were rising, and its handling of that debt had gotten
worse over time;
3. 41% of South Africa's output came from deep-level hard-rock operations. Additionally, the
company would have been almost entirely susceptible to sudden dips in the erratic price of gold.
Consequently, the market risk posed by developing nations would significantly affect GGC;
and
4. The initial business model for the company was questioned and scrapped by the new
management team that GGC hired. This strategy could expose GGC to higher operational and
commercial risk.

Although Wellfleet cannot rely solely on risk quantification, it is undeniably a robust risk
management and decision-making tool. What strikes us the most is that it converts an intangible and
complicated component of risk, credit risk, into a single number and the calculation taking potential
losses into account. Credit officers can easily judge if the revenue is commensurate with the risks
involved in a deal by quantifying credit risks. It may also aid the executive management when choosing
deals by comparing their economic profits, especially when the bank is dealing with overflowing credit
applications.

SWOT ANALYSIS FOR RISK MANAGEMENT AT WELLFLEET BANK

SWOT analysis aids Alastair Dawes’ concern. When we put ourselves in the position of the
bank's CEO, we can see that he would be both at ease and concerned about the company's risk
management. The CEO may feel secure in the company's risk management's many strengths, which
include:
1. A sound financial situation and state of health would let the company make additional
investments.
2. A strong presence online across various social networking platforms supports the growth of
long-lasting relationships with clients.
3. Locational advantages can boost the company's competitive positioning in several ways,
including lower costs, better accessibility, or increased brand perception.

On the other hand, it is also essential to take into account the threats and weaknesses associated
with risk management. The two that stand out the most are an excessive compartmentalization of risk
and an overreliance on risk models. To be specific, the succeeding paragraphs will elaborate.

Strengths
There are several perks and strengths to Wellfleet. Starting off, Successful execution and
effective operations management deserve credit for the performance. Next, one of the organization's
main strengths can be attributed to its geographic presence in many areas. It establishes the company's
market penetration and guarantees simple accessibility. Third, the business may be able to increase its
customer base and balance out losses from one product category with gains from others thanks to its
diverse product selection. Fourth, a strong source of competitive advantage can be found incompetent
and dedicated people resources, especially in service-oriented industries. High product quality increases
brand loyalty and improves Risk Management at Wellfleet Bank performance in a competitive market.
Wellfleet has been so vigilant about whether to accept risks or not that they carefully consider all
potential dangers before making a choice. The risk profile of Wellfleet Bank is distinctive. The excellent
internal controls and risk management system of Wellfleet Bank have received praise. 2008 was the
only year they experienced no losses. Wellfleet Bank saw its first-world compliance standard as a major
advantage over a number of competitors.

Weaknesses

Concerning weaknesses, Wellfleet has too much compartmentalized risk. According to Thomas
Mayfield, deputy group chief risk officer, separate risk talks are fruitless and thus urge looking across
risk kinds. He argues that risk interacts with reality and that risk management is chemistry, not particle
physics. As a result, risks cannot be separated. CEO Dawes agreed with him and noted that maintaining
a comprehensive perspective of the bank's risk profile was critical but challenging. The bank has market
risk, operational risk, reputational risk, and credit risk to consider, which are all separately managed by
different committees with different chief officers. It is much better that all these risks must be managed
in one committee, and decisions must be headed by one person based on the totality of these risks, not
on their individuality.

Opportunities

In terms of opportunities, Wellfleet chose to divide its core corporate business into the
following market segments: syndicated and leveraged loans, which have the potential to drive
significant growth in its corporate banking business. Smaller banks can participate in large transactions
that would otherwise exceed their balance sheet constraints thanks to syndicated loans. Leveraged loans
were made to companies that were already heavily in debt. Wellfleet's long-term relationship with new
clients is one of their opportunities. It gives the bank security because it ensures the profitability of their
services while also gaining the trust and interest of new clients. Many new clients will be encouraged
to use their bank because of their good relationship with them. Many of Wellfleet's clients are in multi-
million or multi-billion-dollar industries. Receiving payments on their loans will be much more secure
with clients like that because they can generate a large sum of profit. Other industries will also try
Wellfleet's services, as it appears that large corporations have taken loans from them. The bank has a
variety of revenue streams. This benefits the bank by reducing the likelihood of bankruptcy. Having
multiple revenue streams can also help keep the corporation stable and spark potential development for
the bank. The revenue can sustain the funds required to cover the costs incurred, making it stable.

Threats

Patricia Cromwell, chief risk officer at Wellfleet Bank, emphasizes the critical need for the risk
management function's independence. She stated that the risk function must be independent of the
business because someone must be able to oppose what the business seeks to do. According to Alastair
Dawes, CEO of Wellfleet Bank, the difficulty is striking an effective balance between the business and
risk functions. However, as he went on to say, the risk function cannot be so powerful that people will
never accomplish anything because they don't like the risk.
The threats that Wellfleet Bank faces in risk management are as follows:

1. Excessive dependence on risk models

o The bank's chief risk officer, Patricia Cromwell, underlined the need of rigorous risk
measurement. Risk measurement enables them to talk about risk scientifically and
assess whether the revenue can compensate them for the risk taken. As a result,
such measurement can only be accomplished through the use of a risk model.
However, Catherine Richards, the group chief credit officer, stated that while risk
models are valuable tools, there will be occasions when they will no longer work
because the assumptions on which they are based are no longer accurate, either
temporarily or permanently. That is why she cautioned against relying too heavily
on risk models.

2. Government Regulations and Bureaucracy

o The rapidly changing government rules as a result of increased pressure from protest
groups and non-governmental organizations, particularly in the areas of
environmental and labor safety, pose a significant danger to Wellfleet's risk
management. This threat hampers and complicates the company organization's
compliance with legal criteria. Failure to comply with new regulations increases
the possibility of costly legal action.

3. Economic conditions

o When they have a direct impact on customers' spending habits and purchasing
power, the deteriorating economic conditions have a negative impact on business
performance. Inflation increases operating expenses, which has a detrimental effect
on corporate profitability.

4. Trends in sustainability

o When supplied goods or services are not environmentally friendly, the expanding
sustainability trends pose a serious danger. It damages the brand's reputation in a
cutthroat market by drawing negative attention and criticism from
environmentalists.

5. Globalization

o The organization must transcend international borders and cope with cultural variety
as a result of globalization, which could be negative if the organization lacks
cultural intelligence.
 RECOMMENDATIONS / SOLUTION

Corporate growth is a sign of success for any company. However, they must be able to make
decisions that align with this growth. For Wellfleet, their original risk management structure has enabled
them to achieve such growth, but it won't be enough to sustain the company anymore as it has grown
much larger and is now facing more risks. In line with these facts, the group recommends the following:

● The Group Credit Committee should consider integrating the CEO's decisions to ensure that
approved credit deals align with the organization's goals.
● They should simplify risk management functions, such as a hierarchical structure, for more
efficient decision-making. Relationship managers should have more responsibilities within
small credit or less risky sectors.
● For credit officers to focus more on larger, much riskier deals, small tasks should be delegated
appropriately.
● To set clear risk criteria, Wellfleet should limit the size of the credits they approve.
● The Chief Credit Officer should consider the 5C's of credit (Capacity, Capital, Collateral,
Conditions, and Character) in his decision-making.
● They must develop a risk appetite statement to guide them in decision-making.
● They should also assess their performance through metrics to track their activities and make
better decisions moving forward.

In general, Wellfleet should look for a better risk management structure that fits its current
activities, precisely one that deals with large credit deals. This will be key for the continuous growth
and sustainability of the company. Research is one way to achieve this. They may also look into their
peers in the industry and beyond. Look at how other companies manage major risks and try to emulate
their best practices. A solid framework that effectively manages the risks they currently face will be
essential for the company as they continue to do business with its clients.

The risk management structure they employ must be adequately staffed with credible and
skilled people. Having a framework is not enough. It must be appropriately managed and applied in all
business decisions. One way to ensure this is to have the best people working in the areas in which they
are most suitable. Risk management officers must be adequately picked, and regular training and
seminars on current risks present should be given to them. With their current framework, only those
within the Group Credit Committees are involved in risk assessments and decision-making on credit
deals. This is no longer a viable option because they are facing huge risks that could potentially destroy
the business if not handled properly. Key board members should approve risk management to ensure
the company's interest is put first.

In relation to the potential GGC partnership, they should only consider this once they have
properly established their risk management structure. If anything, even with their current structure, the
risks carried by the possible partnership are far greater than the expected benefits they can derive from
it. This alone should tell them not to accept the proposal.

With respect to the threats that the company faces brought about by the growth that the company
is experiencing. The company must take time to restructure itself properly first before trying to pursue
much riskier business deals. Restructuring does not mean going back to the start. What the group
suggests is that they look at the big picture first. Take time to assess the size and ability of their company
and make reforms in their practices to fit their current business environment better. Proper assessment
of risks should always be their first consideration when it comes to decision-making. They are now
facing more and more risks as their company grows. With this, their risk management structure should
reflect this new risk volume, and decisions should be assessed on how it affects the company as a whole.

CONCLUSION

There is no doubt about the significant business potential a partnership with Gatwick Gold
Corporation (GGC) can offer. Given this deal's great benefits, it also comes with many risks.
Nonetheless, the group suggests that these risks outweigh the benefits presented. Because of the
following reasons, the group recommends that the proposal be rejected:

1. Gold prices appeared strong in late 2008 because the economy was still in recession, which is
very typical with gold prices during an economic decline. However, the GDP had been slowly
rising in mid-2009. Therefore, there is no guarantee of a substantial increase in gold prices in
the long run.
2. According to the case, GGC has not been showing a good capital structure seeing the losses
they suffered in 2007 totaling $800 million.
3. In May 2008, GGC appointed a new management team challenging the existing business
model. This event can very potentially expose the company to more risks. This behavior just
adds more uncertainty to the company's internal structure for the duration of this deal.

Although there will be a sizable economic gain from this deal, management should also
consider that GGC is the third-largest producer of gold and is quite susceptible to changes in the price
of gold on a worldwide scale. While sales have increased over the past three years at a compound annual
growth rate of 12.48%, profitability has significantly suffered as EBIT has experienced negative growth.
In the last three fiscal years, there has been a negative income. With a negative ROI in the prior year,
the company's EBITDA margin dropped from 27.6% to 7.20% in the most recent year. GGC
experienced issues with its capital structure. It appears that GGC's debt load was getting heavier and
heavier with time and that its ability to protect its debt had declined. And deep-level hard-rock
operations in South Africa accounted for 41% of total production.

In addition, the business would be nearly entirely susceptible to sharp drops in the unstable
price of gold. Therefore, the market risk of emerging nations would have a significant impact on GGC.
Furthermore, GGC hired a new management group that challenged and dismantled its initial business
strategy. Such actions could put GGC at greater operational and commercial risk. Thus, the group rejects
the GGC Business Credit Proposal

As stated in the case study, Wellfleet is growing fast, and its operating environment is becoming
riskier. Besides the GGC proposal, the bank is also reviewing other submissions totaling one billion
dollars. The Gatwick company itself is presenting several uncertainties, and there is also no prominent
certainty in the gold industry at the time. Given the circumstances, this deal is too risky for the bank,
and as believed to be the bank's internal mantra, "If a billion-dollar deal went wrong, it could sink the
ship."