Takeover
1) Why is Flagstar in financial distress? When possible, back your claims with data.
Signs of financial distress
• The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.
• The company evolved through an elaborate series of mergers and divestitures, and financed its acquisitions through debt. Coniston partners took on 1.4B of new debt after the acquisition in 1989. It incurred huge expenses of $1.47B and $192M in 1993 for write-off of goodwill and restructuring charges. From Exhibit 19, we can see increasing yields on several of the Flagstar’s debt vehicles especially sharp increases in the yields of junior debts.
• The company’s outstanding debt kept climbing year over year even after KKR recapitalization with a total debt of 2.5B in 1993. From Exhibit 19, we can say that Flagstar’s debt was rated poorly by S&P and there was a further downgrade from CCC+ ratings in ’94 to CCC- ratings in ’97.
2) What kind of restructuring makes sense in Flagstar’s specific case?
Flagstar’s position was to have a consensual plan for reorganization because the management believed that was the best way to preserve value and minimize the damage to the corporation, and would work to the benefit all of its constituencies. A Chapter 11 prepackaged bankruptcy makes more sense for Flagstar. Such a restructuring should result in an expedited bankruptcy process and a quick emergence from Chapter 11. It will allow the firm to emerge from bankruptcy in about 45 to 60 days, as opposed to several years in a regular Chapter 11, and would be less
Signs of financial distress
• The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.
• The company evolved through an elaborate series of mergers and divestitures, and financed its acquisitions through debt. Coniston partners took on 1.4B of new debt after the acquisition in 1989. It incurred huge expenses of $1.47B and $192M in 1993 for write-off of goodwill and restructuring charges. From Exhibit 19, we can see increasing yields on several of the Flagstar’s debt vehicles especially sharp increases in the yields of junior debts.
• The company’s outstanding debt kept climbing year over year even after KKR recapitalization with a total debt of 2.5B in 1993. From Exhibit 19, we can say that Flagstar’s debt was rated poorly by S&P and there was a further downgrade from CCC+ ratings in ’94 to CCC- ratings in ’97.
2) What kind of restructuring makes sense in Flagstar’s specific case?
Flagstar’s position was to have a consensual plan for reorganization because the management believed that was the best way to preserve value and minimize the damage to the corporation, and would work to the benefit all of its constituencies. A Chapter 11 prepackaged bankruptcy makes more sense for Flagstar. Such a restructuring should result in an expedited bankruptcy process and a quick emergence from Chapter 11. It will allow the firm to emerge from bankruptcy in about 45 to 60 days, as opposed to several years in a regular Chapter 11, and would be less