Massey-Ferguson - Epilogue • 1981: out-of-court settlement with lenders • STD ---> LTD, Preferred stock • Interest, principal waived for 5 years • Lenders get 76 mm new shares (81% of total!) + options • Canadian govt. gave $450mm preferred stock guarantee - MF pledged min 6,000 Canadian payroll • Two more E for D swaps in 83, 86; Break/Even in 86 • By 1986: Payroll =17,000 (vs. 68,000 in 1976) Assets = $1.2 B (vs. $2.8B in 1980) Sales = $1.3 B (vs. $3B in 1980) • Deere pursued aggressive growth/ IH exited farm business
Massey-Ferguson: Summary Points • Target Debt Policy should be consistent with business risk and competitive risk. Don’t add high financial risk (Debt) if your business risk is already considerable. • The true cost of an excessive debt load is not just higher interest rates or bankruptcy reorganization costs. The biggest cost of excessive leverage is the loss of competitive position during financial distress. • Deere & Co. used finance as a competitive weapon. Its low debt, unused borrowing capacity allowed it to aggressively fight Massey-Ferguson when the latter was most vulnerable.
Out-of-court workout vs. Bankruptcy (Ch. 11) filing - Must (1) Freeze existing debt obligations, (2) Convert Debt into Equity, and (3) Raise new cash - Advantages of bankruptcy filing: - Legally freezes existing contracts, stops creditors from collecting (workout: must negotiate with lenders) - Provides ‘Debtor-in-Possession’ financing with super seniority - Debtor has unique right to propose workout plan (2005 law limits this) - Law sets voting rules for creditors to accept a plan (‘cram down’); useful if complex capital structure - Disadvantages of bankruptcy filing: - Court interference with business decisions - Lengthy, costly if complex capital structure - Mgmt can play for time, erode asset value. Lenders may offer deviations from ‘absolute priority’ to avoid this