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Revolving Credit Facilities | Key Differences | How it Works? | Examples - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel of WallStreetmojo friends today we are
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going to learn our tutorial on revolving
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credit facilities and we'll be taking an example over here of Nestle and Walmart
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ohk so very forced note revolving credit facilities are pretty helpful for
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companies if they want to pursue and upcoming opportunities and they don't
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want to have immediate cash handy so revolving credit facilities are
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basically pre-approve corporate loans facility just like you know credit cards
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we're in the corporates can avail loan without any further documentation and
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there are no fixed repayment schedules for the same
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so in this tutorial we'll look into the details of revolving credit facility and
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how it is reported in the annual report and what all areas are important for the
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financial analyst now first the foremost thing what do we really mean by
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revolving credit I mean revolving credit facilities I'm
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talking about see before we get into what revolving credit facilities are as
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per the 10k okay we need to know what exactly what it is at the very first
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place see revolving credit facilities are a great flexible options for the small
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business owner so here's why small business owners often face difficulties
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in regards to policy of the opportunities due to lack of cash okay
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lack of cash is the first reason second the small business owner often don't
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have hefty collateral that is the second reason
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hefty collateral is the second reason
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why to take a basically huge loan so they often find that they don't need
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much cash to pursue a new opportunity but lack of cash or the inability to
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take loan makes it really impossible even if these small business owners take
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loan they feel really threatened by equal instalments that is EMI in every
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certain period so to solve all the above the concept of revolving credit
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facilities is being introduced now these small business owners will talk
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to the bank about the credit facilities and the bank will ask for mortgage okay
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now in this scenario usually for the business owners inventories or account
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receivables the acts as a mortgages second bank hands the business owners a
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revolving account where there is a pre-approved limit pre-approved limit in
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this scenario if the if the business owners wants to use little she can do or
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they can do so so on the rest of the amount and interest is being charged by
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the bank for example if let's say if there is a pre-approved loan of 30000
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okay and these small business owners only need 3000 they
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don't want 30000 they need just 3000 the bank will charge
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interest on the outstanding amount and if the business owner does not take more
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credit facility they can pay back the amount in whichever ways they want so
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there is no fixed monthly payment over here and you know the business owners
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can pay back the amount in basically six monthly or six installment the principal
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plus the interest or in basically it's called bullet shot or known as on the one
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go now you may wonder that what banks does if the small business owner fails
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to pay off the amount see Bank values the inventory's or the accounts receivable
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at close enough to 80% and then they sell off the inventories are
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account receivable if the business owner fails to pay off the loan amount they
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have taken now let's understand what is the difference between revolving credit
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facility that is RCF vs CC that is the credit cards so let's understand the
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difference between the two what are the key differences all right over here RCF
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over here CC and let's begin the first and foremost thing it may seem
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like the credit card for small business owner but it's not there are many
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differences and let's have a look at them one by one
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see in the case of credit card if you talk about a this shift over here as
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this is CC and this is RCF now in case of a credit card the person needs
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to carry it but in case of the revolving credit the
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person does not need to carry any card so carrying card is really important in
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both the scenario sorry in case of RCC and not in case of RC
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now the next point of difference is that while using the credit card the
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individual needs to make a purchase but in case of the revolving credit
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facilities the person does not need to make any transaction and they can get
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the money directly into their business account for whatever reasons they they
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they basically needed so over here you need to make a purchase that is the
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point of difference the fees that are charged by the credit card
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facilities is much more than the fees charged by the revolving credit facility
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fourth the flexibility in case of credit is much more than in revolving
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credit facilities then a credit card basically now how to interpret the
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revolving credit facility see many companies in the u.s. use flexibility of
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the revolving credit facilities and usually you will find that they report
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back on the balance sheet let's say a company has taken a revolving credit
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facility from a bank and now where the company would report its revolving
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credit in the financial statements that makes it that's my question so they
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would first set up and balance sheet and then they will go to the section of the
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debt and then usually they will mention a note below the balance sheet where
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they will report about what exactly happens in regards to the revolving line of credit
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now what if they don't mention okay what if they don't mention so then it would
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be very difficult for an investor to find out where the debt and the the
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figure basically has come from if the company has done the calculation but
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does not show the calculation and the exact narration of how it has happened
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under the balance sheet it wouldn't be investor to understand
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it the filing system basically of SEC filing is done to ensure that the
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investor interest is secured okay and not showing or mentioning a revolving
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line of credit will be treated as non-disclosure
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now and will basically is not going to help the investor at all now let's
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see the example and we will show you that you know how you'd be able to do
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that let's make an example and we'll show you that you know how to interpret
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the revolving credit facility in the SEC filing now we can see there is a balance
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sheet of ABC company there are current assets investments plant and machinery
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intangible assets which gives us our total assets there are some liabilities
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like short-term liabilities accounts payable deferred revenue accrued expense
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and there are some long-term liabilities which includes long-term debt
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deferred revenue which gives you your total gives you a total liability then
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we if we just go down a little bit there is detail of stockholders equity which
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has preferred stock preference shares common stock and retained earnings which
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gives you your total stockholders equity stockholders equity and total
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liabilities and stockholders equity so this is basically the balance sheet we
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have and now we will see how to represent the revolving credit facility
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so you can see an Strick basically in the long-term debt now let's look at
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that and at the note basically how things have been worked over there so
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let's see their street mark now there are some details over here for the same
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there is a notes dude that is in 2020 there is a revolving credit facility
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which is important for us 25000 and 20000 and you
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deduct the short-term debt including the revolving credit facility which gives
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you your long-term debt so in 2015 the ABC company has taken a revolving
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facility of 50,000 okay from let's say our it was rvs commercial bank and
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they wanted to expand upon the operations by buying a new machinery for
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the production house so in 2015 they took a 20000 which was payable
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in 3 months basically of borrowings and that and that's the reason it was
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treated under these short-term debt okay and you can say in 2016 as well they
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took a revolving credit of 25000 from the same bank and the
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payment was due within 90 days of the borrowing so in this case as well the
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revolving credit was also included in these short-term debt in reality it is
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much more complex and by for the same let's see in the practical example now
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over here you can see that Nestle revolving credit facility the
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consolidated balance sheet as on the 31st December 2016 and 15 we have the
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data for the financial debt over here and financial debt in non current
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liabilities so current liabilities means all those liability which will get
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accrued within one year of timespan and non-current are the vice versa are the same
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so there are two financial debt to one occurring within one year and there
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another debt which is occurring post factor of one year so the above balance
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sheet as the depiction of the long-term debt and the short-term debt of the
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nestle in the year of 2015 and 16 let's have a look at how things they how they
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have reported how they report the revolving credit facility under the
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notes in the annual report and they have mentioned in in it under the liquidity
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risk management so they have mentioned that they didn't expect any refinancing
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issues and they have two revolving credit facilities so in the year of 2016
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they would have extended both of the revolving credit facility by one year
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along with that there are key factors that were noteworthy are let's see that
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firstly they had mentioned about the two new revolving credit facility that was a
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4.1 billion and euro of 2.3 billion with an initial maturity date of October 2017
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they also mentioned that the group had an ability to convert in in a
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one-year term loan secondly they had also mentioned about the existing
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revolving credit facility and their extended maturity the new maturity date
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of the revolving credit facility was close enough to 3.3 billion and another
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of with 1.8 billion now they had also remarked that this revolving credit
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facility should be treated as a backstop to their short-term debt let's see some
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of the details regarding the Walmarts revolving credit facility now as you can
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see over here there are details of consolidated
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balance sheet of Walmart of 2017 and 2016 these short-term borrowing are given
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and long-term boring is given so now we will see that you know how they
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represented the Revo revolving credit facility the above balance sheet
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basically of Walmart has portrayed the short-term borrowing and long term borrowing
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so in their in their annual report they had a note in regards with to the
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short-term borrowing and long term borrowing under that note they have talked about
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their revolving credit facilities first of all they had mentioned about their
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short-term borrowing which was depicted over here as you can see over here there
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is a maximum on outstanding at any month average daily short-term borrowing in
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5691 over here it was we mention about the short-term borrowing
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which was depicted and the annual average weighted average interest rate
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okay it's certain in addition to our short-term borrowing we also have various
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undrawn committed lines of credit that provide 12.5 billion dollar of
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additional liquidity if needed so Wal-Mart had been committed with almost
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close enough to in the neighborhood 23 institution combining them
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to the US dollar 15 billion as on 31st January 2017 and 2016 let's have a
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glimpse of that in the table as you can see over here there are five year great
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facility which is given 5360 Ford revolving credit facility 7500
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and in case of 2016 6000 and 9000
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so it's written over here they had also mentioned in the note that they had
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extended both the 5 year credit facility and 364 day revolving credit facility in
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June 2016 so in the final analysis we can say that revolving credit facility
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is basically a boon to for any small business owners even the giant companies
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are also taking the advantage of these things but as an investor if you would
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like to know that where the company has reported its revolving credit facility
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you can look at their annual report then look at there and you'll report basically and
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and find the notes regarding the risk management and credit agreement on
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short-term or long-term borrowings thank you everyone
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