3. Some might describe Loewen as “financially distressed”. Is this a fair description of its problem? What are the manifestations and apparent costs of this so-called financial distress
It’s not completely unfair to say that Loewen is financially distressed. It has to pay over $183 million in interest, as well as almost a billion dollars in principal payments in 1999. (Exhibit 1). The firm’s market value of equity fell by 92% and its bonds dropped by 30%. Furthermore, declining revenues and death rates are other factors of its distress.
Moreover, numerous covenants prevent Loewen from many actions-
* Amount of debt it can issue is limited
* In case of change in ownership of company’s stock, Loewen has to repurchase bonds for 101% face value which are already selling under par
* Dividend payments are limited thus holding shares become less interesting.Costs of these financial distress are-
* Bankruptcy cost: To just initiate the procedure, Loewen’s over 850 US and 100 Canadian subsidiaries would probably each have to pay filing fees of $800 to the courts.
* Customers: Part of its business is the pre-need business. A customer wont be willing to buy these services from a firm who might not be around to deliver those services or keep properties in a high maintenance.
* Acquisition targets: Loewen’s acquisition strategy is tom pay for properties using its own equity as currency. A firm wont sell its business to Loewen and receive equity in return.
* Lenders: Loewen acquire other firms mostly by debt. Now, a lender would not lend to a distressed firm. Also the case states that most of the assets of the firm were already used to secure existing debt, so opportunities for new debt financing could be limited.
* Lost Growth: Loewen was run and presented as a growth machine. With the factors already stated, the growth would disappear, substantially decreasing value of the firm.Here are a few points which I feel should be added…