Case Study: Federal-Mogul
Instructions:
Read the case which are inspired by the Chapter 11 reorganization of Federal-Mogul Corporation and its affiliates.
For the paper, please respond to the questions below. The paper must address the questions for all stakeholder roles, not just the one you were assigned for the in-class exercise. The paper should not focus on repeating the case materials or discussing the history of the company, except to the extent that it is directly relevant to the questions- assume the reader is familiar with the details. The paper should be 3-a pages, excluding any exhibits to show your calculations. As with class participation, quality is much more important than quantity.
Questions:
1. Using facts from the case materials, forecast the financial performance of Federal- Mogul for 2002-2004, in the form of the income statement shown in Exhibit A. For the purpose of this question, you may make the following assumptions:
a. Sales and EBITDA equal Management's forecasts from Exhibit B
b. Gross margin will be 20% in 2002, 22% in 2003, and 23% in 2004
c. Depreciation and amortization will be $250 million annually
d. The post-reorganization capital structure will consist of $1.2 billion of debt at a 7% rate of interest and the rest will be equity
e. Maintenance capital expenditures will start at $350 million for 2002 and will increase each year at the same rate as Management's forecast for sales growth
f. No income taxes
g. No future obligation to make payments for asbestos liabilities
2. Assume the parties agree on a plan of reorganization that values the company at $3.2 billion, based on the facts in Question 1. The company raises the $1.2 billion of debt from new investors and uses all $1.2 billion of that cash to partially repay its original Bank Debt Holders.
a. After the Bank Debt Holders receive $1.2 billion of cash, how much of their original claim still remains to be repaid?
b. If the equity of the company is split between the Bank Debt Holders and Bondholders to satisfy the remainder of their claims, what percentage of the company will each group own after the company emerges from bankruptcy?
c. What will be the estimated 2003 free cash flow yield on the equity, based on your answer to Question 1?
For the following questions, you are not required to make the same assumptions that are listed in Questions 1 and 2. Depending on which stakeholder's point of view you use, for example, you may want to argue for a valuation based on a higher or lower EBITDA than the Management forecast from Exhibit B.
3. Take the perspective of Management for the following questions:
a. How would you think about valuation for the company? Do you expect to be biased towards a higher or lower valuation than other stakeholders?
b. Come up with a post-reorganization valuation for the company and defend your rationale.
c. What do you think should be the appropriate capitalization of the company after it emerges from bankruptcy (e.g., how much debt should it have)?
d. Besides the Bank Debt Holders and Bondholders, what other stakeholders are important to you? How does this influence your thinking?
4. Take the perspective of a Bank Debt Holder for the following questions:
a. How would you think about valuation for the company? Do you expect to be biased towards a higher or lower valuation than other stakeholders?
b. Come up with a post-reorganization valuation for the company and defend your rationale.
c. What do you think should be the appropriate capitalization of the company after it emerges from bankruptcy (e.g., how much debt should it have)?
d. Suppose you are not a bank but actually an investor who bought a piece of the bank debt at 60 cents on the dollar on the day the company filed for bankruptcy.
How much value would you need to receive in the post- reorganization company to get a 20% return on your investment if the bankruptcy lasts 1 year? 2 years?
e. In the example above, how might your motivations differ from those of a bank who originally lent to the company at loo cents on the dollar?
5. Take the perspective of a Bondholder for the following questions:
a. How would you think about valuation for the company? Do you expect to be biased towards a higher or lower valuation than other stakeholders?
b. Come up with a post-reorganization valuation for the company and defend your rationale.
c. What do you think should be the appropriate capitalization of the company after it emerges from bankruptcy (e.g., how much debt should it have)?
d. Suppose you are not a bank but actually an investor who bought bonds at 25 cents on the dollar on the day the company filed for bankruptcy. How much value would you need to receive in the post-reorganization company to get a 20% return on your investment if the bankruptcy lasts 1 year? 2 years?
e. Consider that the company filed for bankruptcy in part to reach a resolution of its liability for asbestos in the company's products. How might this fact strengthen your negotiating position? How might this weaken it?
Attachment:- Case Study Federal-Mogul.pdf