THE FINOVA GROUP, INC. (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

THE FINOVA GROUP, INC. (A) Case Solution

1. Berkadia's Benefit

Berkadia’s final offer involved providing a $6 billion loan to Finova, in order to buy the unsecured bank creditors as well as the unsecured bond creditors. The loan amount equals to the 70% of the principal repayment amount, which would be distributed among the bond and bank holders of the company. The loan was offered at a rate of LIBOR plus 2.25% spread with a maturity of 5 years, which was the higher interest rate as compared to the market rate. In addition to this, the company had to issue senior secured debts of $3.25 billion over its existing debt. These notes were kept junior to the loan provided by Berkadia. The Finova was restricted from making principal repayments on the loan and the common shares until the full repayment of Berkadia’s loan as per the agreement. Not only this, Berkadia would get a 51% ownership in the shares of the company and it would be having full control over the management, appointment of CEO’s, and directors or the president. Berkadia is owned by Warren Buffet, who is considered as a contrarian investor. He is notorious for doing what the market does not. He usually buys the assets at low price and sells at a higher by finding out viable lows in the market. Prior to the offer given by Berkadia, Warren Buffet already purchased the debt at Finova, but at discounted prices, i.e. the Berkshire Company had a $1.4 billion of Finova’s assets even before the offer. From the aforementioned scenario; it can be seen clearly that the offer made by Berkadia wasn’t focused on the restructuring of the company, rather the main benefit involved the acquisition of the company at fairly low rates and then selling it a higher rate, creating a handsome profit. Berkadia believed in the ongoing concern value of the company, which is why it kept its 51% share in the ownership, and maintained its rights in the Board of Directors, CEO, president appointment-sand its payments structure over the bonds. In this way, Berkadia kept itself at a safe by keeping its control over the management and by securing its debt over other notes issued by the company. No plan was offered for the restructuring of the company, which clearly showed that the company was not interested in Finova’s revival, it was instead looking for a profitable black hole for acquisition.

2.Participation of Vulture Investors in Finova’s Debt and Capital

Vulture is a kind of an aggressive investor, who purchases the distressed companies or assets at low rates in order to make huge profits on selling them at higher prices (Market Business News, 2018). The vultureinvestors aim to seek profit for their investors by selling out the assets of the company, in pieces and at higherrates. Such process is termed as asset stripping, whereby the undervalued companies are bought at lower rates and the assets are sold separately at comparatively higher rates.. In Finova’s case, the company’s debt and share capital were trading at low prices since the announcement of its pretax charge earnings and write-off of approximately $70 million loss and filing for bankruptcy. As the company was unable to cover its debt obligations; the banks were not extending the credit lines and false targeted the customer policy, which then led to economic problems for Finova. The situation was taken benefit of by different vulture investors, including: Leucadia, Berkadia and the GE Capital. The offers made by all of these vulture investors, included: the requirement of majority ownership in the company’s shares, rights as board of directors, involvement in the management's-selection and priority debt holdings over existing debt holders of the company. The participation of these vulture investors would leave nothing for the existing debt holders of the company, as they would not be allowed to take part in handling or restructuring the company’s management or its operations. These vulture investors had their aims stone seeking out personal profits, which is clear from the requirements mentioned in the offers. The bankruptcy without these mediators, would fulfill the requirements of the creditors, but these investors would not leave even a minor chunk, for the existing debt holders of the company..................

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THE FINOVA GROUP, INC. (A) Harvard Case Solution & Analysis