7 timely repayment is impossible loewen finds itself

7

timely repayment is impossible. Loewen finds itself in a vicious circle, from which a breakout
seems highly unlikely.
c) Lack of trust from investors
Reduced investor confidence
1993 1994 1995 1996 1997 1998 1999
Credit rating BBB BBB BBB BB+ BB+ BB B-
Share price 25.38 27.00 25.31 39.13 25.75 8.44 1.93
Table 7: Credit ratings and share price of Loewen Group
The deterioration of financial ratios, of course, is reflected in Loewen's credit ratings. From
BBB (investment grade) it goes down to B- (highly speculative). As a consequence, Loewen has
incurred and will incur high interest payments. In face of the large amount of debt outstanding,
this clearly endangers the company's viability. In addition, equity investors have lost faith, too. The
share price indicates that they do not believe in Loewen's ability to generate future distributable
profits. Further evidence of general mistrust comes from the company's reluctance or inability to
issue new equity capital in 1998 (the amount of newly issues equity went down from $439.4
million in 1997 to 1.8 million in 1998).
d) Interest expense
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Interest expense 8.2 12.4 17.1 19.8 21.7 34.2 53.6 91.0 127.5 182.3
Operating profit 17.7 31.0 44.4 52.0 66.6 94.6 131.9 195.1 199.8 78.0
Interest coverage ratio 2.2 2.5 2.6 2.6 3.1 2.8 2.5 2.1 1.6 0.4
Table 8: Interest expense of Loewen Group
As the total level of debt increases, so does the amount of interest expense with the climax
of $182.3 A
mi
e
l
w
on
o
n
n
1998.
a
Ap
i
ar
g
t f
t
rom
're
he
u
a
ce
oun
usin
debt.
p
t
erfo
increas
ce
g
ca
t
n
er
be
t
rates due to
li i t m t
of
ss
he
in in es
deteriorat a
in
n e
re
.pO
t
in
ra
tp
t
reg
s
ard
n
n
be
ohfet
s
h
um
d
e
rti
to
d
b
bh
a
s
not
ew
r
e
f
l
a
e
t
xprma
c
nd.
r
'
ibute
t
ma
hat
in
number.
g
c
d
di
i
g
ng
c
nd 7
as
e a
d
cle t
e
i is
he
l
c
or
la
o
ne
ont
gross
o
t
rg s
a
t
i
Especially dd
e
interest
c
6
overage
ratio being clearly below 1 in 1998 indicates Loewen's th
inability to tisf .
d
bt obe
e
s' de nds De red
s
u
a
ced
y
In
e
oct
hold
r
r
1998,
m
e
a
arni
.
ngs
f
f
a
o
u
r
lt
3rd
e
qu
s
art
o
er
b
red
nl
ced by
at
3
e
0
r
%.
f
weeks or se m t e
o
u
y
a m t
o
months.
Also we can highlight how the acquired assets were not performing well
using the 'Acquisition Revenue Multiple' which increased drastically
e) Debt c f ovenan 9 ts 6-98 and is very high compared to other firms in the industry. rom
1 9
Table of this multiple is at the bottom of pg.11 of the case.
Debt covenants that are imposed by numerous debt holders of the company limit Loewen's
actions. Dividend payouts as well as the issuance of new debt are restricted by these covenants.

Moreover, violations of the agreements lead to immediate default and accelerated repayment
claims. The maturity structure of Loewen's debt is therefore likely to deteriorate even further.
f) Hidden commitments
Another major obligation worsening Loewen's situation is the "put option" by Blackstone that
allows them to sell their share in Prime Succession Inc. and Rose Hills cemetery to
8

Loewen at prices clearly above market prices. It is questionable whether the commitment is
already included in the balance sheet. Given the (improbable) short-term survival of the Loewen
Group over the next one or two years, the company's medium-term viability would be heavily
endangered by the arrangement as even more funds would be needed to acquire the Blackstone stake.