CASE 1.

1 MIDI CAPITAL CANADA, COMMERCIAL TRANSPORTATION FINANCING

DIVISION

It was early morning on April 15 2016, 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$3.6 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 rates could be greater than 4:1 when

including the new town, Fourth, CTF would not finance more than 90 percent of the value of the

value of any asset, thereby requiring the company to have enough cash to pay for at least 10 per

cent of the assets it wanted to purchase. Finally, consider the character of the business owners,

general economic conditions, and any company assets that could be pledged in collateral as

additional factors in the loan request

THE TRANSPORTATION SOUTHERN ONTARIO INDUSTRY IN

The trucking industry had been very profitable from 1985 to 1568 until a major recession in

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

by tracking 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-1990s and the amount of freight shipped between Windsor and Torontos was
at its highest level ever, however the transportation industry in Southern Ontaro 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 renamed ow with

trucking companies typically generating after tas met incomes of less than 8 percent of

With prices law ,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 trader, a mucking 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 new assets Because so many trucking companies

borrowed money to mend, it was important to maximize the amount of time a truck was on the

the road generating 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 Mistry of Transportation of Ontario (MTO). These standards were

enforced on major highways at weight scale stations where all trucks were required to stop for

inspections. Effective February 02, 1998 new legislation gave the MTO the right to impound any

vehicle (truck or trailer) deemed to have a major defect. If a critical defect was found during an

inspection, the MTO impounded the vehicle for 15 days and the vehicle could not be operated

until the equipment had been repaired to meet safety standards. If the same or additional critical

defects were found during any subsequent inspection, the MTO impounded the vehicle for 30

days. In addition to impounding the vehicles the MTO also charged fines ranging from $2,000 to

$20,000 for equipment that did not pass inspection. Despite the risk of impoundment, thousands
of trucks have failed safety inspections annually and the MTO has impounded thousands of

trucks from the inception of the program until October, 2015

SIMON CARRIERS LTD.

Background

William Simon and his wife Mary founded Simon Carriers Ltd. (SCL) in Waterloo Ontario, in

the late 1980's. The company began as a one-truck operation hauling freight for a larger trucking

company that contracted work to independent truck drivers. William was the driver and

mechanic while Mary managed the accounting records. The Simons survived the economic

recession of the early 1990s and continued to operate their business as a one-truck operation until

late 2013 when they began searching for exclusive hauling contracts of 2014 SCL signed an

exclusive two year contract with a small auto parts In March manufacturer that supplied the Ford

Motor Co. assembly plant in Oakville, Ontario. Ford schedules, required its suppliers to make

deliveries according to just-in-time inventory which meant that SCL, would haul multiple trailer

loads several days a week.To accommodate the new contract SCL borrowed S336,000 from

Nippissing Credit on April 01, 2014 tO finance the purchase of three ew transport trucks and

three new trailers. The company also hired three new drivers to drive the new trucks. As of

December 31, 2014, SCL Still owed $189,000 on the loan from Nippissing Credit. SCL paid

$7,000 on this loan each month.The trucking volume generated by the contract continued to

increase. In October 2014. SCL Sought financing to purchase two new trailers. A loan for

S38400 was arranged through Midi Capital on October 01, 2014, the current balance still owing

on the Midi Capital loan was $36,000. CSL paid S800 on this pan each nonth. The

truckingcompany's financial statements, ratios and sources and uses of cash are shown in
Exhibits 1 through 4.

THE NEW CONTRACT

In March 2016, the auto parts manufacturer signed a new supplier contract effective May 01,

2016, with Ford. The new contract reflected a 60 per cent increase in trucking volume. SCL's

two-year contract with the auto parts manufacturer expired on March 31, 2016, and had not been

renewed. In an effort to reduce its own costs, and because the trucking volume would increase by

60 per cent, the auto parts manufacturer was allowing several trucking companies (including

SCL) to bid for the new trucking contract. If SCL hoped to win the new trucking contract, it

would need to expand its fleet to accommodate the higher trucking volume and to "outbid"

competing trucking

companies.

PROJECTED REQUIREMENTS CONTRACT FOR THE NEW CONTRACT

To expand its fleet, SCL required approximately $300,000. Since SCL was required to pay at

least 10 per cent of the cost in cash ($30,000), it requested a S270,000 loan to purchase two new

2016 freightliner transport trucks, four new 53 foot trailers and four new mobile satelite systems.

In projecting its income statements for 2016, SCL estimated revenues to be 30 per cent to 60 per

cent higher than 2015. Salaries and wages were expected to increase by $60,000 to hire two new

drivers and general and administration expenses were expected to increase by $13,000 due to the

larger fleet.

Additionally, bank charges and interest on the new loan would be $17,300. Depreciation on the

new assets would be S30.000. Legal and accounting fees and rent and utilities were expected to

remain unchanged from 2015 amounts. The operating expenses for 2016 were expected to
remain at the same proportion of sales as they had been in 2015. No other purchases of new

assets were expected for 2015. The company's income tax rate was approximately 45 per cent.

In projecting its balance sheets, SCL estimated the value of the new loans to be $270,000 less the

monthly payments made between May 2016 and December, 2016. SCL anticipated no changes

to the age of receivables orthe age of the payables. The company also had a line of credit of up to

$5o,000 that it had never used. It planned to use $30,000 from this line of credit to make the cash

payment required by Midi Capital (10 per cent of the new assets). The Simons had used $50,000

in personal assets to secüre the bank line of credit. None of the assets on SCL'S Current balance

sheet were pledged as collateral. The main question for Brant was whether SCL would show a

cash

Surplus on its projected balance sheet. A cash surplus would indicate that sCL WOuld be apable

of making the required loan payments, whereas a deficit would indicate that SCL wOuld be

incapable of paying back the loan. Since profits remained ow across the indUstry, the Simons

believed that continued growth would ensure their profitability. If SCL lost this contract, the

Simons knew it would be difficult to find enough work to keep their fleet working at 100 per

cent

capacity William and Mary had worked hard to grow their business and had never been ate with

a loan payment, despite having trailers impounded on two occasions. Mary Commented: We

have been through go times and bad and we ve expanded before. Ifeel that this is the right thing

to do. We cah't afford to stay small."

BRANTS DECISION
The new loan wvould bring the total of SCL's with Midi Capital to $306,000. Brant's report

would have to be reviewed by his senior manager since the total loan amount exceededS200,000.

Brant had been with the company for his account managers credit limit of eight months and it

was important he made a well thought-out that followed CTF's minimum lending requirements.

His report was due in a few hours.