Rothschild: The Conergy Financial Restructuring Conundrum, LBS Harvard Case Solution & Analysis

Rothschild: The Conergy Financial Restructuring Conundrum, LBS Case Study Analysis

Government and regulatory bodies are interested in stability of the economy and in order to do that they make laws to prevent firms to create monopoly or make pools with other firms to exploit the consumers such that in case of Conergy under the German solvency law for structuring consent from all the creditors is required and also firm cannot place new share at a price below the par value of equity. Moreover in order to achieve the goals of the company healthy relationship with all the stakeholders are very important and in order to achieve that coordination with them is very important to prevent conflicts of interest.

In Oct 2010, when Conergy was thinking for restructuring the finances it had two options which were a debt haircut which means to decrease the market value of company assets or debt to equity swap or a combination of haircut which means to decrease the market value of company assets as well as swap debt to equity, which means converting company’s debt into equity ratio in order to increase the cash flow of the company. For lendersdebt haircut option wasn’t supposed to be profitable in lenders perspective so it was declined by them because they didn’t want company’s assets to be reduced as assets are the main resource of the company on which operations are dependent and lenders didn’t want to face the equity risks as well. However lenders were ready for a combination of hair cut such that change of 66% of debt into equity. In this situation banks were also ready to exchange debt into hybrid form of capitalwhich were kept in mezzanine capital with 15% discount. However hedge funds wanted 30% discounts from banks.(Turconi, 2014)

As a financial advisor I would recommend management of Conergy that it should go towards a combination which are written down the value of assets and swap debt to equity so that burden is borne by both and risks can be eliminated to some extent. As of 2010 Conergy has a debt to equity ratio of 4.95 (477.2/96.5) which means company’s debt is approximately 5% higher than the equity which means company can increase its equity. By increasing its equity Conergy’s liquidity will get better but for a short time, in this case company should focus on its business to increase sales so that they can achieve their ideal liquidity to ensure paying off their remaining debts before the maturity. Another option which is also desirable is write down the value of assets which is only possible if lenders give their consent..................................

 

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