Strategic Financial Management

Case Discussion on
Stone Container Corporation

By,
Malika Bajpai , A001
Nishigandha Shah , A013
Krutika Mahajan , A015
1. What is the impact of each financing alternative on Stone's cash surplus or shortfall? What is the
impact of each on Stone's capital structure?
Answer: Evaluation of the different options and Its impact on cashflows and capital
structure.

 Option number one was to renegotiate the terms of its loans. The effects of this would be $70-
80 million in fees. This option is the only solution that doesn't involve the Stone's family's
interest in the company to lessen but doesn't have an upside of taking in money. Cash flow
will decrease by $70mn-$80mn for payment of fees.

 Option number two was to sell off some assets in the company that could raise $250-500
million. Assets will come down by $250mn-$500mn and cash balance and cash flows will
increase by $250mn-$500mn. Hence there will be no change in balance sheet as such.

 Option number three was to sell senior intermediate-term notes worth $300 mn with a 5-year
term and a coupon of 12 to 12 ½%. This is a bond that takes priority over the other debt
securities sold by the company. If Stone were to go bankrupt, this debt must be repaid before
other creditors receive payment. Cash flow and debt will increase by $ 300mn.

 Option number four was to $300 million in convertible subordinated notes with a life of 7
years and a 8 ¾% coupon. These options would allow the company to receive funds up front
with coupon payments paid in the future. At present liability will increase by $300mn and
subsequently it will convert to equity by $300mn. And Cash flows will go up to that extent .

 Option number five was to issue up to $500 million in common stock with net proceeds
equaling 95% of the offering price. This option could potentially allow the company to put
$475 million towards its debt. Equity Share capital and the cash flows will increase by
$500mn .
2. Which financing alternatives should Stone pursue? Explain the provisions of the convertible
subordinated note. What option is embedded in the convertible? If the linerboard business
recovers, will the convertible behave more like debt or equity? If it continues its slump?

Answer : So option 1 and option 4 are the best options. If Stone Corporation wants to stay out of
bankruptcy it needs to restructure its debt first. The company had a long time standing of not
needing debt or paid it off quickly but that changed and it quickly got in over its head because
large acquisitions. The company should restructure its loan terms first and then issue $300 million
in convertible notes, in order to relieve the immense debt and also help restore the company to its
former glory of financial stability.

3. Why did the market greet the announcement of a new financial plan so negatively?

Answer. The reason for greeting the announcement negatively is that Stone Container have to pay
interest of $400mn to $425mn, it has to repay debt of $416mn and revolving credit facility of
$400mn. In addition to it Stone Container need to pay $100mn for secondary waste treatment.
From the point of investor if any company is having such line of liabilities, event of default
increases and therefore on announcement of new financial plan market acted negatively.

4. What are other challenges are there to resetting Stone's capital structure to its optimal level? What
are the broader implications for raising capital and setting capital structure? For the global
financial crisis and for the global economy during a period of deleveraging?

5. What should Stone do now?

If Stone were to renegotiate the terms of its loans as in option one, they could take a smaller hit
than if they were to pay out the interest payments outlined in option three . Renegotiating these
terms will also allow the company more time to restructure its debt portfolio and give them a
chance to depend less on an alternative that decreases the family's share in the company. This
option outweighs the alternative to sell equity in the company or its subsidiaries because there is
no loss of family stake in the company.

If the company were to also go with option number four they could see a good return on their
equity. This alternative outweighs the option to issue senior notes because the ROE is higher and
the total interest paid is less . The longer life of this option would allow Stone to spread out its
default risk farther than any of the other options. This option would also keep the Stone family's
interest in the company the greater than compared to option number five.

In conclusion , if Stone Corporation wants to stay out of bankruptcy it needs to restructure its
debt.
Five debt reducing alternatives were presented to the company with two options deeming the
biggest rewards. The company should restructure its loan terms and issue $300 million in
convertible notes, in order to relieve the immense debt that is plaguing them, help it get through
the paper pricing trough, and also help restore the company to its former glory of financial
stability.