The Loewen Group, Inc.

(Abridged)
Why Loewen might be finding itself in difficulties?
The companys outstanding debt stood at 2.3 billion dollars. This included
debt due within a year. $875 million of this debt would mature in 1999.
Almost all debt was collateralized. It also had large contingent and other
outstanding liabilities. The various covenants contained in debts limited the
amount of debt and preferred stock the company could issue and the
dividends it could pay etc. Cross covenants in the debt ensured that if any
one debt defaulted , all other contracts would be considered as default as
well. To add to this, the company has still not reached an agreement with its
banks as to how to restructure the loans. Raising large amount of cash
through sale of assets is difficult cause of limited demand of its properties,
lower death rates and suspension of licenses of 16 of its funeral homes.
What are Loewens alternatives? What would you recommend to John Lacey?
1) Sale of assets
2) Restructure the loans
3) File for Bankruptcy
Would you want to buy pre-need funeral home services from a distressed firm
that might not be around to either deliver the services or keep the properties
in a high state of maintenance?
No. Since the pre need decision is an informed decision driven by rationality
and not be emotion the chance that the service might not be delivered will
restrict me from buying the service
How much acquisition has SCI done (and is it likely to do)?
$1990million (exhibit 3)

How was the Loewen Group able to grow explosively for the first half of the
1990s? What were advantages of debt financing enjoyed by the firm in this
phase?
It had grown explosively by acquiring small independent funeral homes and
cemeteries in densely populated urban markets. In this phase pre need sales
of funeral services and cemetary plots represented an increasing share of
death care business a large and increasing fraction of loewens revenue and
by reinvesting these funds in securities or insurance contracts that helped in
repayment of debt services. They also had a tax shield and there was no
dilution of ownership
Why did SCI want to pay a premium for Loewen?
In order to take-over the firm since they increasingly found themselves
competing for properties in the same markets

How levered was Loewen?

Long term debt stood at $2.3 billion and till 1996 it maintained a debt equity
ratio of 1.4:1
1998- debt equity ratio- 1.54:1
Why is distress costly? Is this just the capitalized value of legal bills? What
are the assets of the firm that will be damaged or destroyed if the firm
becomes distressed?
Distress is costly because it makes markets react unfavourably which might
reduce the stock price of the firms share. Also distress comes with huge
amounts of legal and consulting fees. Some assets would have to be sold at a
lower value in times of distress. The aforementioned reasons make distress
costly
Would you be willing to sll your business to Loewen and receive equity from a
distressed firm?
Yes. The company has reduced the number of acquisitions financed by debt.
Its undertaking the required steps. Also the shares are trading at a lower
value now. It is in my interest to buy them at a lower price
Would lenders want to lend to a distressed firm?
Yes. Some lenders will lend to a distressed firm in exchange of high risk
premium

How economic distress and financial distress interact?

As the economy is on a downturn, it leads to lower revenues for the firms
because of low sales. This has a direct implication on the profitability of the
firm. The firm finds it difficult to meet its debt obligations which causes
financial distress

What incremental cash flows might SCI expect that could explain this
premium?
Elimination of competition which will enhance SCIs market share explains the
premium.

Is there evidence that Loewens distress is costly?

Yes. Since almost all of its debt is secured or collateralized, an event of
liquidation would entitle creditors with cash proceeds from sale of its assets

Whether the economic problems that Loewen faced were commonly felt
throughout the industry?
All death care companies in the industry were impacted due to decline in
death rates
Why did Loewen stock trade for $40 when SCI offered $43?
The stock price was depressed because of the unfavourable jury verdict
against the company in Mississippi. This verdict required the company to pay
damages worth $500 million
Loewen as financially distressed Is this a fair description of its problem?
Yes it is since the firm is facing difficulties in meeting its debt obligations and
it is obligated to sell assets to meet such payments. This again is difficult due
to fall in death rates which reduce the demand for its properties and
suspension of 16 licenses by regulators
How did Loewen get to the position it found itself in 1999?
High death rates, suspension of licenses of 16 of its funeral homes, difficulty
in integrating newly acquired assets, 3.7 million dollars that were reported in
1996 did not consummate, acquiring new funeral homes through debt with
cross covenant, complex agreements with Blackstone are the reasons for its
state in 1999
What is Loewens immediate problem?
Immediate problems include $42 million of debt payments coming due in the
1st 2 weeks of april, and no agreement with banks on how to restructure their
loans, difficulty in raising cash, suspension of licenses of 16 of its funeral
homes and existence of cross covenants