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Is there a relationship between the top-line and size of a term loan?

I have been confronted by this question in a recent proposal. To my knowledge there is no popular, well established norm or ratio or rule in this respect, Yet I faced lack of comfort from banks in this cases, which prompted me to contemplate and share my views in this article.

Example:
The borrower is a well established private educational institute, operating in the entire spectrum of education, in a small town in West Bengal.  The key figures for the year ending 31st March 2012 are as follows:

	31/03/2012 (Actual)	31/03/2013 (Estimate)	31/03/2014 (Projection)
	Rs. Million	Rs. Million	Rs. Million
Gross Income	150.64	189.07	241.05
EBDITA	56.60	69.80	95.49
EBDITA Margin (%)	37.57%	36.92%	39.61%
Depreciation	13.34	20.79	26.4
Interest	15.78	23.46	35.94
Profit	27.48	25.55	33.15
Cash Profit	40.82	46.34	59.55
PAT Margin (%)	18.24%	13.51%	13.75%
Existing Term Loan	129.10	129.70	140.00
Proposed Additional Borrowings	0.00	160	160
Total Borrowings	129.10	282.00	266.00

Bankers are not comfortable with this proposal primarily for the reason the gross income to loan ratio is hovering around just one, even though the average debt service coverage over the entire loan period is 2.79 and average interest service coverage is seven.

The organization being involved in basic educational services, has a relatively small top-line, even though the average EBDITA and PAT margins are healthy compared to any Indian Small and Medium Enterprise (SME).

With the same bottom-line but with bigger top-line of say five times seems to add greater comfort to bankers, even though the key margins may have been poorer, as follows:

	31/03/2012 (Actual)	31/03/2013 (Estimate)	31/03/2014 (Projection)
	Rs. Million	Rs. Million	Rs. Million
Gross Income	753.20	945.35	1205.25
EBDITA	56.60	69.80	95.49
EBDITA Margin (%)	7.51%	7.38%	7.92%
Depreciation	13.34	20.79	26.4
Interest	15.78	23.46	35.94
Profit	27.48	25.55	33.15
Cash Profit	40.82	46.34	59.55
PAT Margin (%)	3.65%	2.70%	2.75%
Existing Term Loan	129.10	129.70	140.00
Proposed Additional Borrowings	0.00	160	160
Total Borrowings	129.10	282.00	266.00
Gross Income/ Borrowings	5.83	3.35	4.53

So what could possible reason for the additional comfort when the bottom-line is the same but the top-line is five times more?

I think, the logic is that when a substantial cash flow, relative to the total size of the loan is present, in case of a financial stress, the organization could be in a better position to service the loan in time, by delaying or withholding the payments due to other unsecured creditors like suppliers of goods and services, thereby ensuring that their loan is serviced without delay or default.

I welcome your comments.

P.Anand

Author

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