2.11.09 Stone_Container.ppt1 What Stone did On April 8th, Stone announced that the equity offering...

2.11.09 Stone_Container.ppt 1

What Stone did• On April 8th, Stone announced that the equity

offering was being canceled

• Stock price recovered 1 1/2 points (16.7%) on the announcement, but continued to trade in the $8-$9 range for the rest of April. The junk bonds lost about 6% of their value.

• Subsequent financial moves:

– Renegotiated bank loans

– Sold $150 million of 12 5/8% Senior Notes due 1998

– Sold $250 million of 8 7/8% Convertible Senior Subordinated Notes due 2000; convertible at $11.55


More …• Other actions

– Sold Mexican subsidiary

– Sold minority interests in Canadian and British newsprint subsidiaries

– Shut down 220,000 tons of U.S. capacity

• Linerboard prices began to rise in last half of 1993, eventually rising $180 per ton above 1993 lows by 1995

• Stone lost $205 million in 1994, but reports 1995 PAT of $255 million

• Stone’s stock hit $18 1/2 in 1994

• Stone issued 16.5 million new shares at 15 1/4 ($250 million), but leverage was still high at (72%)


Human and market imperfections

• “I’ve told the junk bond people they won’t be seeing me anymore.”

Roger Stone

• “Given his past, why should we believe him?”

- Sharyl Van Winkle

Merrill Lynch analyst

Two-day wrapup


Optimal/Target capital structure—Checklist

• Can company pay interest—coverage ratios?– EBIT/Int, EBITDA/Int– In good times and bad

• Industry volatility or cyclicality?– Operating leverage makes cash flow more volatile/cyclical

• Industry standards—what are competitors doing?

• Is company able to make use of its ITS?

• Costs of financial distress?– What will customers and suppliers do in shadow of bankruptcy?

• Agency costs?– High leverage=>Mgrs take negative NPV projects with high risk– Low leverage=>Mgrs have few incentives to be efficient, may

consume excess perks (private jets, plush offices…)

• Leverage needed to control renk-seeking?– Unions and/or regulators

• Does company need strategic flexibility?– Will covenants interfere with strategy?


Getting to your optimal capital structure

• From low leverage, it’s easy: do a leveraged recap

• From high leverage, it’s hard

• Assume D+E is approx constant (Ignore value of ITS)

• Each 1% decline in D/V => $55MM in new equity

• To go from 78% to 50% requires ~ $1.5 Bn in new equity!

• At least 100 MM new shares (1.5 B/$15)

• Dilution = 100/(100+71) = 58%

• Family share = 42% of what previous holdings


Stone’s V = D+E = 4323 +1189 = 5512

And that’s before announcement effects!• Two explanations for the drop in Pstk on announcement of

equity issue

• Debt overhang– Transfer of value from new equity to impaired debt– Arises under symmetric information when D/V is high

• Signaling– Action (debt or equity) communicates true state of company to

market– Arises under asymmetric information when D/V is anything

• Net result => Companies are reluctant to issue equity– … even when company is over-levered and experiencing costs of

financial distress (out of bankruptcy)– … when a company bucks the trend, it is punished

• Converts can be “backdoor equity”



Epilogue

• Merged with Jefferson Smurfit Corp. on May 8, 1998 in an exchange of shares implying a value of $20.30 per share ($2.12 billion market cap).

• Jan. 27, 2009: Smurfit-Stone Container filed for Chapter 11 bankruptcy protection with debt of $5.6 billion.

Today, they are learning firsthand about the bankruptcy process


“Indeed, indeed, repentance oft beforeI swore – but was I sober when I swore?”

-Rubaiyat of Omar Khayyam

2.11.09 Stone_Container.ppt1 What Stone did On April 8th, Stone announced that the equity offering...

Documents

Transcript of 2.11.09 Stone_Container.ppt1 What Stone did On April 8th, Stone announced that the equity offering...