masseyfergusoncase

Topics: Debt, Finance, Loan Pages: 7 (1601 words) Published: December 4, 2013
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Massey‐Ferguson
Case

Lenders


Group
9


Finance Case Report: Massey Ferguson

Group 9: LENDERS

Massey-Ferguson, a multinational producer of farm machinery, industrial machinery and diesel engines, was founded in 1847. In 1980, Massey is the largest producer of farm tractor (17% of world market share) and the largest supplier of diesel engines, registering total assets of $ 2827.6 mln US$, annual sales of $3132.1 mln US$ and a loss of 225.2 mln US$.

Figure 1 shows Massey’s sales in the previous 10 years. It is evident that the company registered a high growth rate until 1975. During the 1960s and 70s, Massey had an ambitious program of expansion. But in the last 70s, it faced huge problems with sales. The macroeconomic situation was changing: the price of oil drastically increased and the farm price and income in North American market dropped down. (Figure 2)

Massey’ s difficulties: Current Lenders’ situation
At the beginning of the fiscal year 1981 the company presents outstanding debts for 2.5 bln US$. The short term debt accounts for 43% of the total amount (1.075 bln US$). In 1980 the D/E ratio is 214%, which is relevantly above the average level of the competitors. It is thus evident that our position as lenders results particularly risky since the company won’t be able to repay the debt due by the 1st November. Indeed, the growth of the company was massively financed by short term debt, whose impact in terms of the interest rate expenses deteriorated the credit-worthiness of the company. The interest expenses are, indeed, 10% of the total ones and the percentage is expected to increase reaching 300 mln US$ in 1980 with a growth rate of 125%. (Figure 3) .As a result of this financing strategy the company would unlikely have sufficient financial resources to cover both the short and the long positions. Our lack of trust towards the company is confirmed by the behavior of the shareholders who seems to have lost their confidence because of the critical situation of Massey and of the general economic environment. One evidence of it is that that the Argus Corporation, the largest shareholder, lost interest in further investing in Massey and postponed the issue of preferred stocks. Massey needs extra investment to improve the operation and financial difficulties, which is about 500-700 mln US$ in the next five years while it lost its major source of equity funding. So as lenders, our choice is critical for the future survival of the firm.

Alternatives to face Massey’s difficulties and alleviate its financial problems Given the current situation of the firm, four possible alternative scenarios can be considered: a. Claim the debt
As long as the company will be in default on several loans on November 1, lenders will be able to use the Cross-default provision, which allows them to cut off credit and secure their loans. As a consequence, the firm will be obliged to stop its activity and start the pay-off phase, implying assets sale and massive worker layoffs. Pursuing this alternative would mean minimizing the risks assumed by the lenders, ensuring them a partial return on their loans and would also represent a way out from an unhealthy company. However, they would report a loss deriving from the discount on receivables (968.2 mln US$) before maturity, on the non-current assets (721.3 mln US$) sale in order to obtain liquidity in the short term and on the inventory (988.9 mln US$) dismissal. Indeed, this amounts discounted plus the cash currently held (56.2 mln US$) does not cover the 2.5 bln US$ of outstanding debt reported at the beginning of the fiscal year 1981.

Not claiming the debt would mean betting on a recovery of the company financial situation but also 2

Finance Case Report: Massey Ferguson

Group 9: LENDERS

increasing the probability of having back the total amount due. How can Massey survive and repay its debt-holders? We use Dupont Analysis to tackle this...
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