Refinancing with a new high-yield bond issue
Tight credit markets in the U.S. and worldwide in 2009 signaled continued trouble for companies that needed to pay off or refinance debt in 2009 and onward.19 The financial crisis in 2008 had seen a virtual stop to high-yield issuance.20 The following year, there were some positive signs, and returns on high-yield debt had been very strong in 2009 as debt prices surged back from crisis lows. However, issuance volumes remained low for European high-yield debt, and PCP considered a full refinancing of the notes difficult.
A cash injection from the owner
Moroncha Holdings owner Mohammed Hussein Al Amoudi was seen as a possible source of funding. Several of his other assets had low debt and strong cash flows. Borrowing against Petroswede AB, another energy company among Moroncha’s holdings, was one option; Petroswede ...view middle of the document...
We came up with this solution based on the rational reasons listed below.
First, refinancing by debt is less costly, and it will comfort all the parties involved in this event—This is the burning priority. From the Preem’s aspect, of course, they will be more likely to finance with the debt rather than the equity because it’s cheaper. Also, as my teammate mentioned previously, more or less the first three options cannot satisfy all the people because they are not effective enough. However, a new high-yield bond issuing is a good solution for everyone.
Second, as 2009 drew to a close, oil prices started to recover. What’s more, thanks to lower costs, Corral had a net profit of $386 million, which is even more than that of 2007.
From this exhibit, we can find that Corral Petro Holdings has a really good EBIT comparing to its peers with its not-so-high total assets.
Third, like I said before, the owner’s other assets had low debt and strong cash flows. Therefore, a cash injection is theoretically feasible.
Fourth, due to the owner’s personal willingness, Preem is unlikely to be sold.
And the last, if the company filed for bankruptcy, not only the owner’s standing in the local business community could be affected, but also his fame in business field. That is to say, his other assets may be affected, which is the last thing he would like to see.
For all the concerns above, it is very likely that the owner will make cash injection if the Preem fails to issue bond.
What I want to mention in the last is, there are still several uncertainties that may inflect the final decision by the company management. For example: Each bondholder had its own agenda and style. Getting all parties to accept a proposal would prove challenging. Also, whether the issuing will be successful, and whether the owner’s cash flow will remain strong enough to support a cash injection are what they should consider as well. Anyway, the first lesson we have learned in our economic lesson was: People face tradeoff.