financefixit.com 
"fix the equity - fix the debt - fix the control"
financefixit.com
  • fix the equity
  • fix the debt
  • fix the control
    • Topic 1
    Fix the Financing:
    Recapitalizing Enterprises

    Topic 2
    Fix the Debt:
    Reconfiguring and Designing Corporate Debt

    Topic 3
    Fix the Debt:
    Financial Engineering and Securitization

    Topic 4
    Fix the Control:
    Restructuring Corporate Ownership


    Applied Corporate Finance:


    Links:
    giddy.org
    giddyonline.com
    globalsecuritization.com
    asiansecuritization.com
     

    		    
    financefixit.com
    Workshop on Corporate Financial Restructuring

    Ian Giddy
    New York University

    Corporate restructuring: any substantial change in a company’s financial structure, or ownership or control, or business portfolio, designed to increase the value of the firm

    Schedule and Case Study Assignments


    Topic 1
    Fix the Financing: Recapitalizing Enterprises
    Time Topic  Remarks
    8:30-10:15 The changing environment for Asian business What went wrong with corporate Asia? How can we fix it?
    10:30-12:00 Concepts of corporate and financial restructuring Discussion of Sammi Steel case
    12:00-13:00 Working lunch Group discussion of Intralinks case
    13:00-14:00 Office time  
    14:00-14:30 Financing the "new economy" Discussion of Intralinks case
    14:30-16:00 Recapitalizing Asian corporations: what form of equity? Discussion of TPI restructuring, Siam Cement and Astra
    16:00-17:00 The Role of a Bank in Corporate Financial Restructiuring

    Case Study: Sammi Steel
    Assignment: Is there anything worrisome about this company's financial statements? 

    Case Study: Intralinks
    Assignment: In 1999 Intralinks, a fast-growing "dot com" company based in New York's Silicon Alley, was seeking advice on the next stage of financing its growth. What do you recommend? 

    Case Study: Photronics
    Assignment: This global manufacturer of photomasks, with significant operations in Singapore, is seeking funds for expansion of its production facilities in Asia and Europe. One recommendation is that the funding be obtained through a debt issue. Does this make sense, given the company's stage in its corporate life cycle and its capacity for further leverage? 

    Case Study: Thai Petrochemical Industry
    Assignment: TPI, the heavily indebted Thai company, is under pressure to recapitalize. Having completed a restructuring of its debt, the company plans to reduce its debt/equity ratio to below 0.5 by the end of 2000. How can this be done? What method should it use to ensure the company's long run survival? What can be learned from the way Siam Cement and Siam Commercial Bank have approached their refinancing? 

    Case Study: Astra International
    Assignment: What kind of financial restructuring is needed to make the company attractive to foreign equity investors, domestic and foreign? What kind of rate of return would such investors expect? 
     


    Topic 2
    Fix the Debt: Reconfiguring and Designing Corporate Debt
    Time Topic  Remarks
    8:30-10 The cost of equity and the cost of capital Discussion of Nokia 2000 case
    10:00-12:00 Financial restructuring in a constrained environment Group work on Nokia -- the Early Years case
    12:00-13:00 Working lunch Nokia
    13:00-14:00 Office time  
    14:00-15:00 What kind of debt? What derivatives? Discussion of Nokia's debt, DBS Pens and Ciba
    15:00-16:00 Understanding economic exposure Group work on Ban Pu case
    16:00-17:00 Reconfiguring debt in a constrained environment Discussion of Ban Pu's financing alternatives

    Case Study: Nokia 2000
    Assignment: Read the questions posed by Nokia's CFO, and consider the way in which they were answered.

    Case Study: Nokia -- The Early Years and Exhibits (Acrobat file) 
    Assignment: What form of financing should Nokia use to finance its $400 million US acquisition? 

    Case Study: DBS Pens
    Assignment: How do these securities deal with foreign ownership restrictions? 

    Case Study: Exportadores Pesces de Concepcion (Acrobat file) 
    Assignment: In what currency should Chile's salmon exporters finance their exports to Japan? Pesos? Yen? Dollars? Krone? 

    Case Study: Financing Ciba and Exhibits (Acrobat file) 
    Assignment: What is the recommended maturity, interest contract, and currency to finance Ciba's future investments? 

    Case Study: Ban Pu Coal Company and Exhibits (Acrobat file) 
    Assignment: What is the recommended maturity, interest contract, and currency to finance Ban Pu’s Mai Moh project and future expansion?
     


    Topic 3
    Fix the Debt: Financial Engineering and Securitization
    Time Topic  Remarks
    8:30-10:00 When should a company issue quasi-equity or hybrid securities? Discussion of Deutsche Bank MTN
    10:00-12:00 Design of convertibles and warrant bonds Group work and discussion of Ban Pu convertible bond
    12:00-13:00 Lunch  
    14:00-15:00 What drives asset-backed financing? Illustration: Belenus Securities
    15:00-16:00 Valuing the costs and benefits Discussion of Sears securitization; Group work on Hong Kong Card case
    16:00-17:00 Securitization of project financing Ras Laffan LNG project

    Case Study: Ban Pu Convertible Bond
    Assignment: How did this baht-denominated convertible bond work, and where did it fit in with Ban Pu’s recapitalization?  When should a company issue bonds (or arrange a term loan) with stock warrants? 

    Case Study: 6 Battery Road
    Assignment: What kind of securitization is this? What is the nature of the options given to the investor in this deal, and what are they worth? 


    Topic 4
    Fix the Control: Restructuring Corporate Ownership
    Time Topic  Remarks
    8:30-9:30 Extracting added value via ownership restructuring Application to a company in an emerging market
    9:30-12:00 Valuation of a corporate acquisition target Group work on SinoPac-Taishin Merger
    12:00-13:00 Working lunch Amazon.com
    14:00-15:00 Valuation of high-growth companies Review and discussion of Amazon.com case
    15:00-17:00 Hostile and competitive acquisitions Discussion of YHS case and PCCW/SingTel/HKTel

    Case Study: The Acquisition of Feng-Shui Compass Company
    Assignment: What was the maximum price that PT Fakawi should offer for Feng-Shui? 

    Case Study: Ipoh-Kelantan
    Assignment: Quantify the synergies and other effects of a merger between two Malaysian banks, and assess whether the shareholders of each bank will be better off, or worse off, after the merger. 

    Case Study: The SinoPac-Taishin Merger
    Assignment: You are advising Bank SinoPac on its proposed acquisition of Taishin International Bank. Value the two banks and advise on the acquisition price, the form of payment, and the financing. 

    Case Study: Valuing Amazon.com (Acrobat file) 
    Assignment: Do you agree with the valuation method used by the analysts? What are the alternatives? 
    See also Atoms, Bits and Cash

    Case Study: The Bid for Yeo Hiap Seng (Acrobat file) 
    Assignment: A hostile acquisition in Singapore illustrates the key valuation issues in M&A in a competitive bidding context



    Background Materials
    Background Materials on Corporate Finance may be found at the following website:
    http://giddy.org/ibmfinance/finmat.htm
    Excel spreadsheets for Corporate Finance and Valuation may be found at:
    http://giddy.org/ibmfinance/spreadsheets.htm
    A sample Excel spreadsheet for the valuation of a merged company may be found at:
    http://giddy.org/dbs/ipoh.xls

     
    Background Reading

    Financial Restructuring in Asia: Issues and Opportunities

    Tom Pepper and Ian Giddy
    1. Current Situation
    -The Asian financial crisis beginning in 1997 has left most Asian companies in need of financial restructuring.
    2. Origins of the crisis
    -The crisis stemmed primarily from excessive or otherwise inappropriate borrowing to finance continued high growth.
    -By 1997, high growth had come to seem "only natural," as one after another Asian company developed systems for profitably exporting lower cost manufactured products to Western, and in recent years, Japanese markets.Concurrently, the emergence of new consumer groups in every Asian country seemed to confirm the "natural" condition of high growth and continuing prosperity.
    -Heavy use of debt to finance business expansion also seemed "only natural," as newly-established companies lacked an equity base and business-friendly governments were supplying low-cost debt that, on the one hand, appeared easy to service in an overall environment of high growth and, on the other hand, could also be rolled over relatively easily.Problems would obviously arise if the above conditions no longer applied, but till then company owners felt no pressure to change to a less expansionist approach.
    -Such equity as appeared to be required was typically generated "internally," from reinvested earnings, related companies, or individual relatives.This "minimal" level of equity enabled the dominant owners of a company or group of related companies to retain management control over their businesses, but imposed no cost-of-capital constraints on the amount or type of business expansion.As long as sales growth exceeded growth in expenses, business expansion appeared cost "free" and became, in turn, the main measure of business success.
    -In this environment, family-dominated business owners -- or, as in Japan, surrogate family business executives -- saw no need to share information or control with outsiders, foreign or domestic.Moreover, with no apparent cost-of-capital constraints, company owners and executives also saw no need to monitor how efficiently they were using their capital. Assets that elsewhere might have been sold off or at least securitized, thereby freeing up capital to be deployable in higher return businesses, remained less-than-optimally utilized in existing businesses and on existing companies' balance sheets regardless of their underlying worth if they had been subjected to independent valuation.
    3. Foreign exchange complications
    -Unlike export-oriented manufacturing firms, whose foreign currency earnings gave supportive policy makers a rationale for minimizing concerns about over-borrowing, various non-exporting borrowers also took on high debt levels.If, as often happened, these borrowings were in foreign currencies, the borrowing firms -- and, as events later showed, even national treasuries -- were left disproportionately exposed to adverse exchange rate movements.
    -In particular, property developers in Thailand, Indonesia, and Korea, whose currencies were pegged to the U.S. dollar, found it advantageous to undertake arbitrage plays, borrowing in dollars at lower interest rates than in their home markets, converting these dollars into local currencies, and simply assuming they could rely on their countries' pegged exchange rates to be able to service dollar-denominated debt in later years.Such interest arbitrage plays generated attractive short-term profits (in some cases stimulating further borrowing to finance still more speculative property development).
    -As foreign-based currency traders outside Asia noticed this borrowing pattern emerging, some reasoned that they, too, could undertake arbitrage plays, and short sell what they considered vulnerable Asian currencies in an expectation the exchange values of these currencies would fall.Beginning with the collapse of Thai baht in July 1997, and spreading during the course of the year to the Indonesian rupiah, Korean won, and Malaysian ringgit, this in varying degrees is what happened.
    -As local currency values depreciated, local companies that had borrowed in foreign currencies could no longer service debt payments.As confidence fell, so did domestic demand, then employment, then overall growth.Strapped companies could no longer service even domestic currency debt.
    4. Government-stimulated recoveries
    -Deficit spending by governments, supported in Thailand, Indonesia, and Korea by IMF loans, sought to stimulate recovery.
    -In line with now standard macroeconomic theory, these stimulative efforts have worked fairly well, though economists remain typically more cautious than business leaders, officials, or politicians on grounds the affected economies still need extensive microeconomic reform to insure against repeated instances of excessive borrowing.
    5. Pending Corporate Finance Issues:Increased Need for Equity
    -Even as overall growth among Asian economies recovered during the ensuing two years -- a result of both government stimulus and fortuitous export growth based on extraordinary growth in the U.S. economy -- most individual companies in Asia are still left with over-leveraged balance sheets.
    -For such companies to achieve self-sustaining financial strength, they need increased equity to reduce debt levels.This need for increased equity raises important issues not previously faced in Asia:
    -Where is such equity to be found?
    -Will existing owners accept new equity providers?
    -What will be the effects on corporate control of raising new equity?
    -The issue of growth vs. control arises not only in Asia, but anywhere:Increased equity is needed to enable a business to grow beyond the limits set by its debt servicing capabilities and/or retained earnings; yet increased equity is often anathema in family-owned businesses that are a prevalent pattern for new ventures and especially prevalent in Asia.Thus, while well-known traditions of arms-length business relationships in the U.S., U.K., and associated Commonwealth countries make publicly available equity (and/or financing from private equity funds) easier to raise and accept in these countries than in most Asian countries, the underlying business issues are identical.
    -Unexpectedly, in light of the "base case" reliance on debt rather than equity in the financing of business expansion in Asia, equity may now be in increasing demand in markets in which traditional financial institutions are reluctant to continue lending at the same pace and/or using the same "friendly" criteria as before.Faced with a stark choice between accepting outside equity or being unable to obtain debt financing to support expansion, Asian business owners are likely to show "flexibility" andaccept new equity.Correspondingly, financial institutions that can identify and sponsor equity investors willing to accept minority positions in Asia-based companies will themselves be in great demand.Hence, the sudden and recent appearance in Asian markets of Western-based private equity funds.
     
    6. Global Pressures for Increased Use of Equity
    -Various by-products of globalization are also increasing the importance of equity in Asian corporate finance.
    -Government- directed or subsidized debt financing -- effectively a system of credit allocation -- requires protectionism, both from foreign-based lenders, lest the previously stronger capital structures of these "outsiders" enable them to offer local borrowers even better terms than the government permits, and from bankruptcy, lest borrowers take on more debt than they prudently should and run into trouble servicing this debt.But such protectionism is now tolerated by other countries less than before.As Asian countries have grown richer, they can no longer claim to be so poor as to deserve special treatment.On an opportunity cost basis, such protectionism is also increasingly expensive, i.e., relative to alternative uses of public funds or lower taxes as a percent of GDP; too much subsidization produces a crowding-out effect and/or higher interest rates.
    -A government-directed credit allocation system also effectively pre-empts development of a risk-based credit culture:Lacking systems of credit analysis and price differentiation, banks over-lend; in the absence of market-determined interest rates, neither borrowers nor lenders catch signals to slow down existing expansion; a Japanese-type situation arises, in which the borrowing companies keep seeking sales growth to the point of over-capacity (and resulting low or negative profitability), while the lending banks are stuck with under-performing loans they typically roll-over to maintain nominal asset values.Escaping from or avoiding altogether such over-lending implies a need to employ more equity-based financing than traditionally used in Asia.
    -As previous systems of government-subsidized and/or government-allocated credit come under increasing pressure, the weight of excessive debt levels is felt by both borrowing companies and governments.As in Japan for the past decade, a downward spiral ensues:Companies can no longer service their debt (or find new debt to pay off the old); as loan repayments decline, banks' liabilities exceed their assets; temporarily, some banks "survive" through direct government support, as in recent nationalizations in Japan, Korea, Thailand, Indonesia, and Malaysia; but government finances themselves also come under strain and the nationalized banks are put up for sale in a privatization process (in which, in many recent cases, foreign-based buyers have taken control, as only they have the available equity to purchase assets at prices the selling governments and their publics consider fair or at least defensible). 
    -A global market in equity returns has limited the segmentation that Asian financial markets had previously considered "natural."The relentless search by equity providers for ever-higher returns, coupled with Asian companies' need for increased equity, leads to an increased emphasis on profitability (i.e., return on equity), vs. the previous emphasis among Asia-based companies on sales growth, market share, or net profit after taxes.
    -As long as subsidized debt financing made the cost-of-capital unimportant, Asian companies could afford to ignore it.Once increased equity is needed, however, savvy equity investors will insist that proposed uses of their money earn a net-positive return – and a return higher than known alternative uses.In these circumstances, equity is no longer "free."In effect, such arms length-supplied equity has a cost that Asia's traditional "equity" financing didn't have.This change in the criteria through which equity is supplied in turn changes the basis of corporate governance, as well as requiring Asian companies to build considerations of cost-of- capital into business planning.
    7. Nascent Market for Corporate Control
    -As demand for arms-length/third-party equity financing gradually takes shape in Asia -- at least complementing and in due course replacing the traditional family- or surrogate family-based providers of equity -- an arms-length market for corporate control will also take shape.
    -This is not yet an immediate issue, in the sense of such a market's becoming "hot."For cultural reasons, mergers and acquisitions in Asia will remain predominantly "within the family."Divestitures, particularly in the form of management buy-outs, will occur more frequently, however, as companies seeking to raise their returns on equity will look for ways to divest slow growing sub-divisions and subsidiaries.
    -From a proliferation of divestiture proposals will come a necessary response in terms of merger and acquisition possibilities.Previously "un-heard of" proposals to buy or sell companies will in due course appear "normal."

    May, 2000
    Ian Giddy
    ian.giddy@nyu.edu
    giddy.org
    giddyonline.com
    globalsecuritization.com