Unformatted text preview: e facts: – Interest payments must be suspended and maturities must be extended
– In exchange, lenders should be given an equity position in the firm (convertibles, warrants, and/or common shares)
40 Massey’s Financial Options: Refinancing Why give the lenders equity? Since the company has too much debt, lenders now own the firm. Thus we need to convert debt to equity to formalize this issue.
Lenders give up the fiction of immediate returns as debt
holders in exchange for a contingent payoff tied to future performance
But Massey needs at least $500 million in additional financing to restructure its operations. With low liquidation value, lenders have little to lose from swapping worthless debt for equity. But they will resist putting new money into Massey!!!
41 Massey’s Financial Options: Refinancing How can Massey obtain the required funds?
Turn to interested parties: those who still have something to lose if Massey is liquidated:
– Labor (e.g. pension funds)
The government seems the natural candidate!
Massey employs 17,000 workers in the U.K., but many of these jobs are at Perkins Engines and are likely to survive. Thus cannot press the British government.
42 Massey’s Financial Options: Refinancing But in Canada, if Massey shuts down, its 6,700 Canadian workers are vulnerable and likely to be fired.
This will be very costly to the Canadian government:
– will have to pay unemployment compensation to these workers until they are reabsorbed in industry (could be 35 years)
– plus jobs will be lost in related industries, such as Massey’s suppliers
– plus government will lose tax revenues
Because the Canadian government has a major financial stake in Massey’s survival, the firm can extract this value to help fund the restructuring
43 Massey’s Financial Options: Refinancing Government help most often takes the form of guarantees (politically palatable off balance sheet financing requiring no visible cash outlay) Such refinancing/restructuring is typical Operations are restructured to attain a viable business New money comes from interested parties Debt is exchanged for equity Everyone gains in refinancing and loses in liquidations
44 Massey’s Financial Options: Refinancing Such refinancings are very difficult to implement in practice
With many lenders, each with a small stake, there is an incentive for an individual lender to hold...
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