DEBT ISSUE Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

INTRODUCTION

James Hardie Industries Ltd is an Australian based building materials company which was started in Scotland and then the company migrated to Australia. The company is an expert in the manufacturing of fiber cement products. James Hardie has a strong research and development base supporting the development of fiber cement products. During most of the twentieth century the company has been playing an important role in the manufacturing of fiber cement products and also in mining of asbestos.

The company has recently identified certain acquisition opportunities and fund investments. The company is lacking capital requirements. With only $1.1m cash reported on its balance sheet at the date of 31st March, 2014, the company is wishing to raise $500m debt to fund its investment opportunities. The company is looking for a suitable debt security to be issued to raise capital based on the analysis of the industry and the past and present performance by the company.

COMPANY PROFILE

James Hardie was a successful company in the business of mining asbestos. It is now the largest manufacturer and the distributor of fiber cement products and building products. The company gained listing on the Australian Stock Exchange in the year 1951. Since then the company has produced a diverse and strong portfolio of building products. The company also became strong in the development of the fiber cement products due to their strength, versatility and durability. Today, James Hardie is purely a fiber products business and has its presence in Australia, United States, Philippines and New Zealand. The revenue of the business is around $1.5b a year and its employees are around 2,500. The company sells its fiber cement products through various brands such as Hardie Backer, Artisan Accent Trim and other brands such as Artisan Lap. The company has a wide distribution network, but it also sends its products directly. It uses distributors such as dealers, dumb yards, real estate developers, consumers and specialist distributors.

Looking at the financial statement figures of the company recently it could be said that the business is profitable and the business is growing day by day. Today with James Hardie has become a purely fiber cement products business and manufactures these products. The recent sales of the quarter ended in June 2014 were $416.8m. The company has recently issued a special dividend and final dividend of USD 0.32 per share on 8^th August 2014. The company is further planning for growing its business by making further investments in the US market.

ISSUANCE OF DEBT

There are two modes of financing a business. The company can either issue shares or stock on a stock exchange. A company can issue stock to the general public if it is registered on a stock exchange. It could raise the needed capital and fund its business. The public will then hold the shares in the company and receive dividend if the investments made by the management of the company are profitable. The value of the shareholders will then increase. Meanwhile, the company could issue debt securities to raise the needed capital. Under this method, one party loan amount to the other party. The party that gains the access to the funds gets the immediate access to funds. The borrowing party needs to pay a cost of the funds borrowed, which is the interest on debt. It could make the necessary investments that it wants to make to either expand its own business or acquire other companies.

When a debt is issued it is in the form of a contract. It is the contractual obligation of the party that has borrowed the funds to pay timely interest on debt and also make the principal payments at the time of maturity. Interest is generally calculated by multiplying the interest rate with the principle amount. This interest is then paid at equal periodic intervals such as annually, semi-annually or quarterly based on the terms of the agreement and the nature and type of the security that has been issued. Along with this the company must pay back the principle payment back to the debt issuer. There are three main methods of repayment of the principle. The debt borrower could amortize the loan over the life of the loan. The second method is that it could slowly amortize the loan over the life of the loan and pay a balloon payment of the remaining principal amount at maturity. The third option is that the company can repay the entire principle back at the time of maturity. The company needs to maintain its liquidity, working capital, cash conversion cycle, leverage and coverage ratios, so that it could meet its loan obligations each time and there is no default................

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