Running Head: CREDIT ASSESSMENT PROPOSAL

Lending Assessment

Introduction

The main objective of this is to prepare a lending submission report on behalf of Advance Bank. The study will provide a background of the chosen company, the industry analysis, financial analysis, the credit history of the chosen company, and provide recommendations for the Advance Bank.

Background Details

Name of the borrower

The name of the borrower is BHP that is also called BHP Billiton. The BHP Group Plc, founded in 1985, is an Australian trading coal and mining company. The company also deals with petroleum products. It is the largest company in Australia in terms of market capitalization.

Address

The BHP Group plc headquartered in Melbourne Victoria Australia. The complete address of the company. The complete address of the company is 171 Collin Street, Victoria, Australia. This is the address of the company’s global head office (BHP group plc, 2020).

Major shareholders

The major stockholders of the company include black rock group which holds five percent of voting right, HSB custody Australia which holds 23% of share capital, JP Morgan Australia, and city group private limited which holds 5 of share capital by each party, etc.  the twenty major shareholders of the company which holds more than 62% of the total share capital of the company are listed below (BHP Group Plc, 2019).

Figure 1: top Twenty shareholders of BHP (BHP Group Plc, 2019)

Overview of the borrower

Current Borrowings

The BHP Group Plc is the largest company in Australia in terms of share capital.  It is a multinational company, which operates within various countries.  To manage its operations, the company gets a loan from various banks that deal with corporate banking. It has been assumed that the BHP group is the current borrower of different Financial Institutions/banks. As per financial statements, they are availing funded credit Lines to the tune of 1,661M and 23,167M being Current and Non-Current Liabilities. For companies like our customers, Non-current Liabilities tend to be on the higher side. The company reduces long term borrowings by a whopping amount of 902M, which shows a reduction of 3.75% against that of last year, this reduction is against growth in non-current liabilities by 625M showing increased interest of sponsors for the longer term. As far as current liabilities are concerned, they have increased by USD 1,650M showing as the rise of 11.79%, which is against stagnant growth in current liabilities (BHP Group Plc, 2019).

History of Borrower

They are having a very rich credit history since the company was established in 1885; therefore, they are more than 135 years old having experience of many generations and with a rich understanding of their area of operations/business model. Company has been in well-performing since inception; they have survived many highs and lows through the 19^th, 20^th, and 21^st floors. They have grown and thrived through all crises, including two world wars and many other highs and lows. As stated by the company, currently, they are undertaking six major projects, and all are well as per timelines and within budgeted amounts/allocations (BHP Group Plc, 2019).

Individual behind the Borrower

Since the company is a Public Limited company, listed on Stock exchanges of Australian Security Exchange and London Stock Exchange. Company is having total issued shares of 211,207,180/- having per share price of 1,550/- depicting total market capitalization of more than 327 Billion (MarketScreener, 2020). Since the company is a PLC entity, therefore its shareholders of the general public at large. Company is governed by the Board of Directors, which include Diverse Skills and Attributes for the long-term value addition for the Company as well as shareholders (BHP Group Plc, 2019). Both Executive and Non-executive Directors of the company are required to have sufficient time to execute the responsibility of their roles, having proven honesty and integrity, must-have skill, and be prepared for challenging environment, Questions, and Critiques. Non-executive directors are involved in Strategic decision making. While Executive directors are involved in Decision Making being Strategic and Day to Day operations and routine Decision Making. Constitution of Board Members is ensured to have the right level of Skill Set, having Diverse areas of expertise pertaining to different areas of demography and locations. Board members of the Group constitute as under (MarketScreener, 2020):

Independent Non-Executive Directors:

1. Susan Saltzbart Kilsby, Aged 60 Years

board member of GHP Group Ltd. Unilever NV, Unilever Plc, Frotune Brands Home, and Security Inc. Diageo Plc.

2. Ian David Cockerill, Aged 64 Years

Board members of BHP Group Ltd. Polymetal International Plc, Conservation 360, Leadership for Conservation in Africa.

3. Gary J. Glodberg, Aged 59 Years

Board Member of BHP Group Ltd.

4. Malcolm William Broomhead, Aged 67 Years

Board Member of BHP Group Ltd. The Walter and Eliza Hall Institute of Medical Research, Orica Ltd.

5. Lindsay Philip Maxsted, Aged 65 Years

Board Member of BHP Group Ltd., Baker Heart and Diabetes Institute, Jacobite Investments Pty Ltd., Continuum Investments Pty Ltdj., Westpac Banking Corp., (New Zealand Branch), Transurban Group Ltd., Align Capital Pty Ltd., Transurban Holdings Ltd., Transurban Infrastructure Management Ltd., BHP Group Ltd., Transurban International Ltd., Align Investments Pty Ltd., Belmont Pty Ltd., Centip Pty Ltd.,

6. Anita Margaret Frew, Aged 62 Years

Lloyds Banking Group Plc, Bank of Scotland Plc, Lloyds Bank Plc, HBOS Plc, GHP Group Ltd. Croda International Plc.

7. Terence J. Bowen, Aged 52 Years.

Board Member of Transurban Group Ltd. Officeworks Ltd., Indian Pacific Ltd. BHP Group Ltd., BHP Group Plc.

8. John Mogford, Aged 66 Years.

Board Member of The ERM Group Inc. Amromco Energy SRL, ERM Worldwide Group Ltd., BHP Group Plc., BHP Group Ltd.

9. Shriti Vadera, Aged 57 Years.

Board Member of Prudential Plc, Santander UK Plc, Santander UP Plc (Private Equity), Santander UK Group Holdings Plc, BHP Group Ltd.

List of Executive Directors.

1. Mike Henry, CEO
2. Peter Beaven, Chief Financial Officer.
3. Rag Udd, Cto, and VP Technology Global Transformation
4. Geraldine Ann Slattery, President – Operations Petroleum.
5. Daniel Malchuk, President – Americas Minerals Operations.
6. Jonathan Price, Chief Transformation Officer.
7. Geoff Healy, Chief External Affairs Officer.
8. Laura Tyler, Chief Geoscientist.
9. Brandon Craig, Vice President Maintenance.
10. Robb Eadie, Chief Risk Officer.
11. Bandita Pant, Group Treasurer and Chief Commercial Officer.
12. Graham Tiver, Group Financial Controller
13. Adrain P. Wood, Head – Investor Relations.
14. Athalie Williams, Chief People Officer
15. Rachel Agnew, Co-Secretary.
16. Caroline Cox, Co-Secretary.
17. Geofray Peter Stapledon, Co-Secretary.
18. John Kenneth Norman KacKenzie, Chairman.
19. Susan Saltzbart Kilsby, Independent Non-Executive Director.
20. Ian David Cockerill, Independent Non-Executive Director.
21. Gary J. Goldberg, Independent Non-Executive Director.
22. Malcolm William Broomhead, Independent Non-Executive Director.
23. Lindsay Philip Maxsted, Independent Non-Executive Director.
24. Anita Margaret Frew, Independent Non-Executive Director.
25. Terence J. Bowen, Independent Non-Executive Director.
26. John Mogford, Independent Non-Executive Director.
27. Shriti Vadera, Independent Non-Executive Director (MarketScreener, 2020).

Sources of Income

Principally, they are involved in Mines and Minerals extractions and their Trading. They are also involved in Constructions of large-scale Civil Projects, mostly involving G2C contracts. They are having different areas of operations in terms of products as well as geography. Company is a Global Natural Resources Company operating at Global Level.

Nature of Business

The company is considered as Global Natural Resources Extraction Company having operations in different Geographies and supplies of different sorts of minerals. This Company is included in the Globe’s top 40 companies, which control and manage most of the Global Natural Resources ON and IN Earth Crusts. In addition to Natural resources extraction, they are also involved in Large Scale Projects Constructs like Dams, etc. (BHP Group Plc, 2019).

Changes in Business Over Time

Since the company is more than 100 years old, therefore they have gone through different technology trends. Due to advancements in research and Development, few of the complex operations have become quite easy to handle and execute. Recent concepts like Smart Mining and getting increasingly popular within the industry. Implication of most advanced and cost-effective technologies is the basis of the strategic survival of companies like BHP Group (BHP Group Plc, 2019).

Industry analysis

Earth has abundant natural resources under and over it in the form of Layers for the good of humanity and the usage and wellbeing of mankind. But the extraction of these resources requires a lot of effort, expertise, Capital Involvement, and resource mobilization. Companies involved in such activity are called Mining and Mineral Extraction companies. (Market Research.com, 2020). Global Mining and Extraction involve Mining, Quarrying, Oil, and Gas Extraction Companies, and these companies are classified and Mine Operation and Mining Support Activities. Mining is done for extraction of Solids like Coal and Ores, Liquids Like Crude Petroleum and Gases such as Natural Gas. Global Market is dominated by the top 40 mining and extraction companies, which produce and supply most of the world’s mining products. And BHP Group is one of the Most Valuable companies having major share for the wellbeing of mankind because the company is involved in all sorts of mining activities, having a stake in Mine Operations and Support Activities and also having operations for extraction of Solid, Liquid and Gases Extraction at Global Level. More recent concepts like Smart Mining are getting increasingly popular due to cost-effectiveness, efficiency, and economies of scale due to managed production and resource mobilization (WoodMac.com, 2017).

A commentary on the industry, ending with a statement about the key success

The employment of smart mining through the implication of advanced/latest is key to success for any company operating in the mining and construction sector; this enables companies to reduced production cost and attains economies of scale level.

Strength and Weaknesses Of The Industry

Day by Day advancement in Exploration and production, as well as construction sectors, are adding value to the Strengths of the companies like our customer. While these also pose a great risk to our Globe / Earth, it leads to degradation of the environment and the overuse of natural resources, which are the main causes of global warming and rapid environmental changes. Fast depleting of Ozone Layer and other damages are creating havoc to human lives and future generations.

The Nature and Extent of Competitiveness In The Industry.

Since the company is a Global level Company, they need to maintain and manage their costing structure and reduce per-unit production cost to survive and compete with other companies operating in these sectors. As stated, Global market is dominated by 40 top mining companies of the world who control most of the world’s supply of natural resources, therefore, BHP Group also needs to have better industry linkages, better coverage and control of available natural resources through the engagement of different governments and organization / governing bodies (BHP Group Plc, 2019).

Financial analysis

The financial statement analysis is used to identify the strength and weaknesses of the business and asses the profitability, liquidity, solvency, and market analysis. It helps investors such as lending financial institutions and shareholders in investing decisions and prospects investors to analyze the profitable institutions to earn maximum return on their investment (Williams. and Dobelman, 2017.p.109).

The financial analysis of BHP group plc can be identified by evaluating its key ratios, such as profitability ratios, liquidity ratios, and solvency ratios. The analysis of financial statements helps investors and lenders know the company’s strengths and weaknesses (Robinson, 2020).  For the example the liquidity ratios help an organization to know the ability of the organization to meet its short term obligations, it helps an organization to know how much current assets company has to pay its current liabilities, as well as, manage the operations of the business (Penman, 2013). On the other hand, the profitability ratios help organizations know the return on the shareholders. It helps an organization to identify the return on investment of shareholders that can be analyzed by the return on equity ratio of the company, m while the return on assets can also be analyzed by dividing the net profit with the total assets of the company (Easton. and Sommers. 2018). It helps businesses to know the actual return the business earning on total resources, i.e., assets of the company. While the long term solvency ratios help investors as well as lenders to know the risk of default of the company.  The solvency risk can be identified by analyzing the debt-to-equity ratios and analyzing the company’s gearing level.  This section aims to analyze the financial analysis of the BHP group plc that is the largest coal, mining, and mineral company.  The main objective of these analyses is to help Advance banks in making a lending decision and know the current financial position of the company. It will also help Advance Bank analyze the business’s current and future operations and cash flow management. The BHP Group plc has the largest market capitalization within Australia. First of all, the liquidity of the position of the company would be analyzed. The liquidity position of the company would be analyzed by the following ratios

Liquidity ratios

Current Ratio

The current ratio of the BHP group plc is showing a mixed trend because its ratios had increased from 1.852543 in 2017 to 2.511259 in 2018. While current ratios during 2019 have decreased to 1.894238. It means for every one dollar of liability, and the company has 1.894238 of assets to pay its liabilities. However, by comparing the current ration over the three years, it can be stated that the liquidity position of the BHP group plc has weakened during 2019 (BHP Group Plc, 2019). Therefore, the company should focus on improving its liquidity position to maintain its competitive advantage (BHP Group Plc, 2019).

Profitability Ratios

Return on Assets

The return on assets of the BHP group plc is showing increasing trend because it’s ROA has increased from 5.35% in 2017 to 9.44% in 2019, which means the BHP group plc has improved its efficiency of operations by improving return on assets during three years period. On the other hand, the ROE of the BHP group plc is also showing improving trend because its ROE had increased from 9.92% in 2017 to 18.37% in 2019. This means the BHP group plc has doubled return on capital invested by shareholders during the three years. To conclude, the profitability of the BHP group Plc has increased during the three years period (BHP Group Plc, 2019).

 Solvency ratios

Debt to equity

The debt to equity ratio shows the percentage of capital financed through liabilities and the owner’s capital. The debt to equity ratio of the BHP group plc is showing a mixed trend because its ratios had decreased from 86% in 2017 to 84% in 2018. While it increased by 94% in 2019, this means the company has increased its solvency risk during 2019 (BHP Group Plc, 2019). Overall the company has a lower solvency risk because its debt to equity ratio is less than, which means every one dollar of equity is equal to 0.94 of debts to finance its assets. On the other hand, the gearing ratio shows the percentage of assets that financed through borrowings from banks. The debt to equity ratio of BHP group plc is showing decreasing trend because its ratios have decreased from 30% in 2017 to 15.1% in 2019, which means more than 15% of company assets are financed through borrowings from banks while remaining 85% of the assets are financed through owner equity and other debts. Moreover, the gearing ratio of BHP group plc shows that the company has reduced its bank borrowing from 2017 to 2019 and focused on other sources of financing to finance its assets for maintaining daily operations of the business (BHP Group Plc, 2019).

Cash Flow Analysis

The cash flow analysis shows the cash inflows and outflows from an operation, investing, and financing activities of the business during a particular period of time. It shows the total flow of cash that changed hand during a specific period of time (Wu et al. 2016.p.105). The net cash flow from operating activities of BHP group plc is 17,871, which means the company has earned 17,871 net cash after all necessary adjustment form the operations of the business during 2019 (BHP Group Plc, 2019). However, the company’s cash flow decreased from 18461 in 2018 to 17871, which means the company has reduced its net cash from operation in 2019. On the other hand, cash from investing activities shows the total investment and disinvestment in long term assets during a particular period of time (BHP Group Plc, 2019).  The positive amount of cash flow from investing activities indicates the company has reduced its investment and return its money.

In contrast, the negative amount of cash flow from investing activities indicates that the company has increased its investment in long term assets such as purchasing of equipment and other assets during a particular period of time. The investing activities cash flow of the BHP group is showing positive balance during $2067 million during 2019, which the company has reduced its investment in long term assets during 2019, which was the result of divestment in the onshore US (BHP Group Plc, 2019). The cash flow from financing activities shows the source of funds utilized by the company during a particular period of time. The net Financing cash flow of the company is showing a negative position, which means the company has reduced its capital during 2019; the major porting is related to the company’s maturity of interest-bearing liabilities. While its ending balance of net cash flow is positive, which means the company has received a higher inflow of cash than outflow during 2019 (BHP Group Plc, 2019).

To conclude, the overall results of the financial analysis of the BHP group are showing a strong financial position of the BHP group plc because it has strong liquidity, profitability, ratios, and a lower risk of solvency.  Moreover, the company’s cash flow analysis is also showing favorable results because it has higher cash inflows than outflows to finance its operations in the future

Security

Identification of the key credit issues that come out of the existing security structure.

We assume that currently, BHP Group is not having any lending/credit relationship with Advance Bank. Therefore, proper security structure to be maintained before disbursement of any fresh Credit Lines.

Details About Different Term of Security and Lending Margin

Fresh Lending for the company must be secured appropriately, with adequate margin requirements. Like Financing of Company Receivables must be jointly financed by Company as well as Bank. Some portion of the Receivables must be shared by the company as well, like margin requirement of 10 to 15 percent for the short-term lending must be included in order to have continued interest of the company for proper follow-up of adequate recovery policy. Further, for longer lending like acquisition of Machinery, Long Term usage Equipment, Testing Facilities / Laboratories equipment, etc. and other such assets must be jointly financed by the company. This will make Advance Bank’s lending risk mitigated.

Concluding Comment On The Second Way Out Security

As stated above, a bank must allow subjective lending based on Cash Flow Based Lending for the company.

Every lending / Advance must be backed by structured business Transactions with a clear timeline for adjusting facilities.

Maximum Margin requirement to be negotiated with the customer/borrower.

Recommendation

Covenants are already mentioned in the Security Structure.

However, credit lines may be allowed in line with the Global profile of the Organization. Credit Lines to be permitted on Structure-based transactions and Tri-Party Agreement must be obtained from parties involved to have a secondary fall back / recourse in case of any risk arising out of payment issues.

The banking facilities to be considered must include a short term as well as long term credit lines for maximum time period association of BHP group with Advanced Bank. This will create a good name for the advanced bank to have other companies like BHP relationships since the company is more than one and quarter-century-old bearing experience of several generations and survived through even world wars. Therefore, the risk of default is minimum—moreover, the industrial analysis. The financial analysis of the BHP group plc has also shown favorable conditions of the company because it’s all ratios were showing a strong financial position of the company. Therefore, the BHP group Plc must provide for the lending facility to BHP group plc to create long term as well as short term credit facilities because the company has a lower risk of default and higher possibility of growth that will increase the profitability of the company and higher spread for it lower risk of default.

References

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

Penman, S.H., 2013. Financial statement analysis and security valuation. McGraw-Hill.

Easton, M., and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.

Williams, E.E., and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109-169.

Wu, J., Al-Khateeb, F.B., Teng, J.T., and Cárdenas-Barrón, L.E., 2016. Inventory models for deteriorating items with maximum lifetime under downstream partial trade credits to credit-risk customers by discounted cash-flow analysis. International Journal of Production Economics, 171, pp.105-115.

BHP Group Plc (2019). BHP Annual Report 2019. [online] BHP. Available at: https://www.bhp.com/investor-centre/annual-report-2019/.

BHP group plc (2020). About us. [online] BHP. Available at: https://www.bhp.com/our-approach/our-company/about-us/.

Market Research.com (2020). Mining Market Research Reports & Mining Industry Analysis | MarketResearch.com. [online] www.marketresearch.com. Available at: https://www.marketresearch.com/Heavy-Industry-c1595/Energy-Resources-c82/Mining-c151.

MarketScreener (2020). BHP GROUP : Shareholders Board Members Managers and Company Profile | AU000000BHP4 | MarketScreener. [online] www.marketscreener.com. Available at: https://www.marketscreener.com/BHP-GROUP-6492795/company.

WoodMac.com (2017). Metals and Mining from Wood Mackenzie. [online] www.woodmac.com. Available at: https://www.woodmac.com/our-expertise/capabilities/mining-and-metals.

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