Loewen_Group_supplement___Fall08

Loewen_Group_supplement___Fall08 - Corporate Financial...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Corporate Financial Policy (NBA 558) The Loewen Group Case Supplement Johnson Graduate School of  Management Fall 2008 Prof. Mark Leary
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 The Loewen Group: Options Debt overhang Loewen owes $875 million to lenders by the end of the year. Suppose that with no change in strategy the firm will be worth only $800 million. Now suppose they discover a great investment opportunity: invest $100 million, generate $150 million in CF by year-end. Can they sell equity to fund it? Status Quo With New Project Existing assets 800 800 New project 150 V 800 950 D 800 875 E 0 75
Background image of page 2
3 Chapter 11 and “Risk Shifting” Suppose there are two lenders: Senior debt: BankA is owed $50 million Junior debt: BankB is owed $50 million Market value of the bankrupt firm: As a going concern, $20 million with 50% probability, $70 million with 50% probability. If liquidated, $50 million What’s best for firm value? Going concern: E[V] = 0.5*70+0.5*20=45 Liquidation: V=50 What’s best for BankA? BankB? Management? Bank A prefers liquidation Bank B prefers continuation
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 The Loewen Group: What happened March 1999: Sold off 124 cemeteries and 3 funeral homes, proceeds to pay off debt Renegotiated bank debt Stricter covenants, including limit on 1999 capex to $60 million June 1999: Filed for bankruptcy in both Canada and US Reorganization plan filed in November 2000 Secured creditors: recovered 100% Unsecured creditors: stock worth 1 percent of the value of their prior claims
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 12

Loewen_Group_supplement___Fall08 - Corporate Financial...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online