massey ferguson case

8/10/2019 Massey Ferguson Case

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Finance Case Report: Massey Ferguson Group 9: LENDERS

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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 1shows Masseys 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 wont 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 Masseys 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


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default risk of the company and guarantee our position. Since public equity participation is not in line

with the Government intentions, the only viable solution would be a long-term loan provided by the

Government at a preferred interest rate. This loan should cover the short term debt, alleviate the pressure

of interest expenses on the total cost structure and finance the recovery plan, guaranteeing the companys

solvency in the long term.

Chosen Option: Government intervention or Claim of the debt

Among these scenarios the last one seems preferable in the lenders interest since having the

Government, as a counterpart, would make our loans safer. If this would not occur, our position is that of

claiming the debt in two weeks. With such a premise we approached the financial advisors of the

company and the government to reach a negotiated solution.

Negotiation Results

All the three parties involved in the negotiation agreed on the intention of rescuing the company. Indeed,

on our side a pay-off procedure would not allow to cover even 50% of the total debt position. We agreed

on renegotiating the terms of the loan contract while the government accepted to guarantee the solvency

of the company and the financial advisors, on the behalf of Masseys managers, fixed a reduction of the

company s risk profile.

A detailed description of the agreement follows.

! 600,000,000 US$ of the short-term debt are paid in two weeks thanks to a bridge loanby the

Government.

! The remaining portion of the short-term debt (475,000,000 US$) has been subject to

restructuring. The deadline for the payment has been postponed in 5 years. This time should be

sufficient for the company to implement a recovery plan to restore the profitability level and

reduce the default risk. The market interest rate adjusted to the inflation will be applied. This

adjustment seems reasonable given that the current economic crisis lowers the opportunity cost

of money. This agreement is particularly satisfying to us because the government accepted to

guarantee the total amount in case of the company insolvency. This means that our short term

position would be covered independently from the future results of Massey, eliminating our risk.

! Our priority position in case of default is still preserved in spite of the entrance of the

Government as new lender.

!

The financial advisors of the company committed to a fixed target of D/ (D+E) of 45%, which is

aligned with the competitors level in exchange of our availability to postpone the payment date.

! At the moment we were not available to accept the advisors proposal of converting debt into

equity. However, we are open to renegotiate this point in three years if the recovery plan results

would be satisfying. A point in which the management seemed open was the possibility of

adding a put option to the converted shares in order to make our way out from the investment

easier.


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Figure #1

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Figure #4

massey ferguson case

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