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First Security National Bank Has Been Approached by A Long Standing

United Safeco Industries has approached First Security National Bank for a $30 million term loan to purchase new machinery and partially fund the buyout of Calem Corp. However, the bank is trying to reduce its leveraged buyout loans due to rising defaults. It also wants to shift toward shorter-term loans. The bank must determine if there are off-balance sheet options to help United Safeco while avoiding a long-term commitment, and how it could still earn fees while not providing the full loan amount.

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97 views1 page

First Security National Bank Has Been Approached by A Long Standing

United Safeco Industries has approached First Security National Bank for a $30 million term loan to purchase new machinery and partially fund the buyout of Calem Corp. However, the bank is trying to reduce its leveraged buyout loans due to rising defaults. It also wants to shift toward shorter-term loans. The bank must determine if there are off-balance sheet options to help United Safeco while avoiding a long-term commitment, and how it could still earn fees while not providing the full loan amount.

Uploaded by

trilocksp Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solved: First Security National Bank has been approached

by a long standing

First Security National Bank has been approached by a long-standing customer, United Safeco
Industries, for a $30 million term loan for five years to purchase new stamping machines that
would further automate the company’s assembly line in the manufacture of metal toys and
containers. The company also plans to use at least half the loan proceeds to facilitate its buyout
of Calem Corp., which imports and partially assembles video recorders and cameras. Additional
funds for the buyout will come from a corporate bond issue that will be underwritten by an
investment banking firm not affiliated with First Security.
The problem the bank’s commercial credit division faces in assessing this customer’s loan
request is a management decision reached several weeks ago that the bank should gradually
work down its leveraged buyout loan portfolio due to a significant rise in nonperforming credits.
Moreover, the prospect of sharply higher interest rates has caused the bank to revamp its loan
policy toward more short-term loans (under one year) and fewer term (over one year) loans.
Senior management has indicated it will no longer approve loans that require a commitment of
the bank’s resources beyond a term of three years, except in special cases.
Does First Security have any service option in the form of off-balance-sheet instruments that
could help this customer while avoiding committing $30 million in reserves for a five-year loan?
What would you recommend that management do to keep United Safeco happy with its current
banking relationship? Could First Security earn any fee income if it pursued your idea?
Suppose the current interest rate on Eurodollar deposits (three-month maturities) in London is
3.40 percent, while Federal funds and six-month CDs are trading in the United States at 3.57
percent and 3.19 percent, respectively. Term loans to comparable quality corporate borrowers
are trading at one-eighth to one-quarter percentage point above the three-month Eurodollar rate
or one-quarter to one-half point over the secondary-market CD rate. Is there a way First
Security could earn at least as much fee income by providing United Safeco with support
services as it could from making the loan the company has asked for (after all loan costs are
taken into account)? Please explain how the customer could benefit even if the bank does not
make the loan requested.

ANSWER
https://solvedquest.com/first-security-national-bank-has-been-approached-by-a-long-standing/

Reach out to [email protected] for enquiry.


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