15
Dic

Refinancing debts

Escrito el 15 diciembre 2008 por Francisco López Lubián en Uncategorized

At the end of this annus horribilis of 2008, most companies are focused on restructuring and refinancing debts, as a way to survive and to avoid bankruptcy. Unfortunately, this is not new at all. When value of equity becomes very close to zero, there are three main ways to increase its value (if possible):

a) Recapitalize the Equity with new funds, in most of the cases coming from cancellation of debt in exchange of new equity.

b) Decrease the amount of debt by selling non-core assets.

c) Increase the amount of future cash flows by implementing a restructuring plan.

As an example of how to set up this kind of operations, you might be interested in a case I just published in the last issue of The Journal of Financial Education (Vol 34, Fall 2008, pages 137-157, http://www.fea.sju.edu/toc08f.html)), on the financial restructuring of Jazztel in 2002.

Summarizing the basic facts, on June 13 2002, Jazztel announced that it had reached an agreement in principle with an ad hoc committee of bond holders regarding the proposed restructuring of the company’s balance sheet. The proposals involved the cancellation of the Senior Notes and the release of all claims relating to the Senior Notes by their holders, in exchange for: (i) 457,334,951 new shares, representing approximately 88 per cent of the issued share capital on the effective date, (ii) up to 18,627,092 additional shares, (iii) convertible bonds with an aggregate face value of €75 million and (iv) escrow cash, to be paid to holders of the December notes only.

As a result of the financial restructuring the company managed to reduce the annual interest payments by €93 mm. Following the completion of the agreement, Jazztel re-balanced its financial situation allowing the company to continue to be an active player in the Spanish and Portuguese fixed-line telephone markets.

As always in this kind of agreements, the remaining question was whether the agreement was enough to ensure the future of Jazztel. In this case, we know what happened: the recap was a previous step to a further sale of the company. The new ownership was in charge to implement the needed restructuring plan.

More details in the case.

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