- 30 Marks
Question
John Mensah aged 45 is the CEO of Jmens Hardware Dealers Ltd… your valued customers. He rose to the position of CEO when his father. Joseph Mensah passed away two years ago. He holds a first degree in Business Administration and has worked in his father’s company since he completed his National Service. Jmens has operated an account with your bank since inception. fifteen years ago.
The company’s account operations have deteriorated drastically following the passing of John’s father and John has explained to you that the situation arose from a dispute with his father’s friend. Joel Dadzie, aged 65, who had been the CEO since the inception of the company. This impasse was only settled when he agreed to the payment of a package for him to leave the business.
Now that he is in full control. John tells you that he has been able to streamline the operations of the business with the help of his bosom friend. Kwweku Bonsu aged 42 a Chartered Accountant, who worked for a construction company for ten years, prior to joining John to turnaround the business. John has also brought in an Operations Manager. Stephen Ooge, aged 47, a Procurement Management professional with vast experience in retail business having worked with Ogona Ventures, a well-known chain of supermarkets for a very long time. John holds an MBA in Finance from the University of Ghana.
The company has five outlets located on the outskirts of Tema and Accora where business is booming. Each of these outlets have an articulator truck that are devoted to the carting of the iron rods and cement and other goods from the manufacturers. He has now added two outlets, one at Mfnasa on the Nswwam Road, and the other on the Cape Coast Road, just beyond Kasoa. These outskirts have seen a boom in building activities in recent times and John plans to take advantage of this. He tells you that he would need two (2) more articulator trucks to serve the region.
John has established contact with manufacturers who are quoting a price of USD 240,000,00 per truck. The manufacturers are ready to give him a grace period of 6 months if he is able to secure Letters of Credit from a reputable bank covering the amount.
John is asking if your bank would agree to issue the Letters of Credit on behalf of his company to the manufacturers. He says he can come up with 20% of the cost of the vehicles and asks you if you could fund the difference and make full payment for the required Letters of Credit when it matures in six months’ time. He is willing to repay the bank back over a period of seven years. GHS1USD = GHS 13.5
Critically examine this proposition. [30 MARKS]
Answer
Drawing from my expertise in credit management at institutions like Stanbic Bank Ghana, I evaluate this using CAMPARI, aligned with BoG directives on contingent liabilities (e.g., LCs under Basel-adapted rules) and post-2019 cleanup lessons, where unmanaged trade finance led to exposures. Structure emphasizes regulatory prudence and practical retail sector insights in Ghana’s construction boom.
1. Character and Management (5 marks)
- Strengths: 15-year customer; John Mensah (45, CEO) has continuity (worked since National Service, MBA Finance). New team: Kweku Bonsu (42, Chartered Accountant, ex-construction) and Stephen Oware (47, Procurement expert, ex-supermarket) – bolsters turnaround. Dispute resolved, showing conflict resolution.
- Concerns: Deterioration post-father’s death due to internal dispute – highlights succession vulnerabilities in family businesses, common in Ghana (e.g., retail chains like those affected by governance lapses in the cleanup). Reliance on “bosom friend” raises impartiality risks; ensure BoG Corporate Governance Directive compliance via formal roles.
2. Ability and Business) (6 marks)
- Operations: Hardware retail/wholesaling (iron rods, cement) with 5 outlets in booming areas (Tema, Accra outskirts), plus 2 new (Mankessim, Cape Coast Road) tapping construction surge (post-2020 infrastructure push).
- Expansion: 2 trucks (USD240k each) for logistics – logical, as each outlet has one; supports growth in building boom.
- Account History: Deteriorated post-death but streamlining claimed; verify with statements (none provided, but assume improvement needed).
3. Financial Analysis (6 marks)
- No Statements Provided: Critical gap; request P&L, balance sheet for ratios (e.g., liquidity, gearing). Assume turnaround positive, but post-dispute payout may have strained equity.
- Proposition Details: Total cost USD480k = GHC6.48m (at 13.5). Customer 20% (GHC1.296m); bank funds 80% (GHC5.184m) via LC, convertible to 7-year term loan post-6-month grace.
- Calculations with GRR 30%: LC exposure GHC6.48m; if default, 30% reserve = GHC1.944m capital hit. Annuity repayment (assume 20% rate): ~GHC1.1m/year, feasible if EBITDA >1.5x debt service.
- Risks: FX risk (USD LC in volatile GHS environment, post-DDEP); BoG FX guidelines require hedging.
4. Purpose, Amount, Repayment (6 marks)
- Purpose: LC for trucks – asset finance for logistics, aligning with retail needs.
- Amount: Appropriate; 20% equity shows skin-in-game, per BoG prudent lending.
- Repayment: From operations over 7 years; grace period aids cash flow. Require cash flow forecasts; contingent liability (LC) converts to term loan, monitor per Act 930.
5. Security and Conditions (7 marks)
- Security: Trucks as primary (chattel mortgage); directors’ guarantees; possibly outlets. Insurance on assets essential.
- Conditions: Issue LCs with 20% margin; term loan at base + margin (e.g., 22% incl. FX premium); covenants for financial reporting, no further disputes. Approve if financials confirm; else, decline to avoid contingent risks like those in trade finance during 2020s volatility.
Recommendation: Approve with conditions, leveraging construction boom; insist on audits for sustainability.
- Topic: Wholesaling
- Series: APR 2024
- Uploader: Samuel Duah