Case Study: Fraikin Sa

2727 Words Apr 16th, 2013 11 Pages
Case Study: Fraikin SA
Comparison of Three Financing Options

a. Background Analysis Current Situation Founded in 1994, Fraikin group, the largest French truck rental operation, took up 30% of the market share by 2004. The core operation business of Fraikin is to provide its clients with customized trucks and commercial vehicles, primarily under long-term operating lease contracts. During the period from 1999 to 2002, the number of the leased trucks was continuously increasing (from 59,600 to 74,300), which indicated a stable growth of the company and a possibly booming market in the future. However, as a capital-incentive company, only continuous investment on fleet maintenance and expansion can retain Fraikin’s leader position in the
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It also meant the insufficient operating income cannot afford the interest, debt or preferred stock dividend which were required by investors and shareholders and thus would hurt the value of the firm. If, LBO financing would improve the operating ability, thus increase EBITRDA more than interest and debt growth, this option should be applied. However, if as Fraikin expected, the company would experience worst scenario in the future, the EBITRDA and cash inflow would be even tougher and it is better to consider other financing alternatives. Studies suggested that the occurrence of LBOs is positively related to the existence of target firms that have large and stable cash flows and the possibility of future tax savings. Compared to the current situation of Fraikin, who was facing negative cash flow and a high debt-toequity of 2:1, continuous financing through LBO may give rise to overleverage. c. Assets-backed Loan Generally, an assets-based loan is the loan secured by a company's assets. In this case, longterm lease receivables was regarded as backed assets to secure the loan. 14.3% of the total fleet was involved in this option and 19,925 long-term contracts with average term of 5 years would be used as collaterals. Advantages and Disadvantages Asset-based loan make

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