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    Corning needs to raise capital to repay debt and cover losses. It faces a debt overhang problem where both equity and debt holders are reluctant to provide funding due to bankruptcy risk. Raising equity would be difficult as equity holders would receive nothing in bankruptcy and raising more debt is challenging given Corning's high debt levels and recent junk credit rating downgrade. JP Morgan is proposing a convertible preferred security to attract high-risk investors who would benefit greatly if Corning survives its financial distress. However, the offering risks greatly diluting existing shareholders and gives investors unlimited upside with no cap on stock price for conversion.

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    Corning needs to raise capital to repay debt and cover losses. It faces a debt overhang problem where both equity and debt holders are reluctant to provide funding due to bankruptcy risk. Raising equity would be difficult as equity holders would receive nothing in bankruptcy and raising more debt is challenging given Corning's high debt levels and recent junk credit rating downgrade. JP Morgan is proposing a convertible preferred security to attract high-risk investors who would benefit greatly if Corning survives its financial distress. However, the offering risks greatly diluting existing shareholders and gives investors unlimited upside with no cap on stock price for conversion.

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    699 views2 pages

    Corning

    Uploaded by

    Van Komm
    Corning needs to raise capital to repay debt and cover losses. It faces a debt overhang problem where both equity and debt holders are reluctant to provide funding due to bankruptcy risk. Raising equity would be difficult as equity holders would receive nothing in bankruptcy and raising more debt is challenging given Corning's high debt levels and recent junk credit rating downgrade. JP Morgan is proposing a convertible preferred security to attract high-risk investors who would benefit greatly if Corning survives its financial distress. However, the offering risks greatly diluting existing shareholders and gives investors unlimited upside with no cap on stock price for conversion.

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    of 2

    1. Describe Cornings business. How has the firm performed?

    What accounts for the changes in valuation in Corning stock in Exhibit 2? In your assessment could Cornings troubles have been forecasted before 2001? a. Evaluating Cornings valuation in the late 1990s and 2002. b. Discuss the impact of internet traffic growth. c. How do you explain reaction in market? Discuss relevance of market efficiency concept. 2. Evaluate Cornings financing strategy. How has the firm raised capital in the past? a. Discuss financial history of Corning. b. Implications of debt covenants c. Implication of cash position

    3. Why does Corning need to raise capital? Why might it be difficult or undesirable to raise equity, given its financial leverage and credit rating? What is the debt overhang problem? Why might it be difficult or undesirable to raise equity, even if its financial leverage were lower? a. Why do you think raising capital in distress is difficult? b. Should Corning raise funds through debt or equity? c. Discuss debt overhang problem, agency issues, signalling and market efficiency concepts is explaining your choice. 4. Why is JP Morgan proposing this particular security? Who are the likely buyers? 5. Draw a payoff diagram for the convertible security in Exhibit 10. Would you buy the Corning convertible preferred shares at par? If your answer is yes, what other investments, if any, would you make concurrently? 6. What are the risks of this offering for Corning? 7. What should Flaws do?

    Corning needs to raise the capital to repay the debt which it has raised previously and cover the losses and to fund itself for working capital and capital expenditures. The company is caught in the debt overhang where in the company is facing liquidity crunch and both the equity and debt holders are reluctant to lend money to corning.

    Debt Raising Options


    Company would have trouble raising equity as the equity holders are reluctant to infuse money as in the case of bankruptcy they would not be getting anything and the left over money would be taken by the debt holders. Company cannot source debt as its current debt to equity ratio is high and the company was recently downgraded to junk status. So it would be difficult for the company to raise the debt. JP Morgan has to come with this kind of security to attract the buyers. JP Morgan is suggesting this security because it will attract buyers who want to take high risk. If company survives this financial distress then the benefits are huge for these investors.

    Risks for Corning


    1) Too much stock dilution: Risks of this offering for corning are they are issuing a lot of debt which gets converted into stock. If the stock price regains because it did well a lot of that benefit would get transferred to these investors as they would convert their debt into stock and make money where as for the previous equity holders their share would get diluted 2) The company is giving the choice to the investors on when they can convert the convertible to shares. The upside cap is not there and the rewards are unlimited. They should try to put an upper cut off Flaws has to lobby for either of these in the current scenario. As the company is in financial distress and cannot raise equity or debt convertibles is the attractive way to raise the money. He should try to lobby for the following things to make the deal better for the company. For a lower coupon on the bond and putting the cap on investors rewards in case the stocks raise limiting the upside potential of making profits for the investors

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