Loewen_Group_supplement___Fall08

Loewen_Group_supplement___Fall08 - Corporate Financial...

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Corporate Financial Policy (NBA 558) The Loewen Group Case Supplement Johnson Graduate School of  Management Fall 2008 Prof. Mark Leary
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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
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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
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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
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