Massey Case Solution

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Potential Options

- Issue more equity: The company could improve its debt-equity ratio by issuing new shares in the market. The capital, thus raised, could be used to cover the outstanding short-term debt and a lower debt-equity ratio would reduce the risk of being highly leveraged. However, this option seems unfeasible as the company would find it difficult to attract equity shareholders in such a financially distressed company.

- Convert debt to equity: Converting part of the debt to equity can help to adjust the company’s capital structure and bring down the leverage ratio. However, with the high default probability, the banks are not likely to prefer the equity position, because they do not have the interest and knowledge to run this decaying business, and at the same time it would make them lose their senior position during payback.

- Low-interest bridge loan from government : Massey could ask the federal and provincial government for a bridge loan at a low-interest rate. This loan amount could then be used to cover the outstanding debt and finance a recovery plan. Additionally, government involvement would also help towards building stakeholder confidence. This option is a feasible one as the government has a strong incentive to support Massey considering the heavy repercussions on the job market.

- Issuing COCO bonds: Massey could issue contingent convertible (Coco bonds). Contingent convertible bonds would be issued as debt, however when the company starts performing well at a certain trigger they would get converted into stock. However, this has very less likelihood of working as we do not believe investors can be attracted using such a hybrid debt instrument. Also, the current debt holders wouldn’t appreciate such a move by Massey.

- Liquidation: Massey could liquidate some of its assets and these funds could then go towards paying the short term debt obligations. The company closed down a few of its plants to cut down on operation costs and these can be liquidated to fulfill obligations. However, in addition to debt and common stock the company also issued two issues of preferred stock - Series A (1,526,300 shares) and Series B (2,298,500 shares) with a liquidation value of $25. The dividends have been suspended in 1978 and we think this is not a feasible option.

- Merger: A merger could infuse capital in the short term and help Massey fulfill their short term obligations along with a government assistance program. The management loses some control after the merger. However, the employees’ jobs are protected and both lenders and if the merger is struck with the right kind of company then it could giver shareholders and lenders a lot of confidence in the future of the company.

APPENDIX

Dupont Analysis for 1980

Dupont Equation

Massey Ferguson

International Harvester

Deere & Co.

Profit Margin (Net Income/Sales)

- 7.18%

-6.29%

4.17%

Operational Leverage (Sales/Assets)

1.11

1.08

1.05

Financial Leverage (Assets/Equity)

8.01

3.08

2.43

Return of Equity (Net Income/Equity)

-0.64

-0.21

0.11