To determine Whether or not it will be difficult for Marvel or other companies in the MacAndrews and Forbes holding company to issued debt in the future, we should analyze two perspectives, one is historical and the other one is the future perspective.
Historically, Marvel Holdings issued zero-coupon senior secured notes which were all secured by Marvel’s equity rather than its assets or operating cash flows. However, this was a very attractive offer since the stock price was trading above $25 per share which had a value of $1.9 billion, well above the face value of the bonds issued. The interest payments on these bonds would be made from revenues received through tax sharing agreements between Marvel and Marcel III Holdings; moreover, all issues were scheduled to mature in April 1998, which in other words, the company would have a huge cash outflow when the bonds came to maturity.
After the issurance of debt, company’s revenue decrease due to the comic book and trading card business failure, which caused share price to fall significantly. Despite the problems of revenue fallen, Marvel acquired SkyBx and financed the acquisition with $190 million of additional debt in early 1995. S&P then downgraded the holding companies debts from B to B-.
The fianancing structure and the revenue fallen problems lead to Marvel announced that it would violate specific bank loan covenants due to decreasing revenue and profits. Moody downgraded Marvel’s public debt after the announcement and caused the price of the zero-coupon bonds to fall drastically by more than 41%. Moreover, their two largest institutional holders desided to sell the bonds even at a price of $0.37 per dollar of face value. When the resturcture plan was announced, the stock price fell by more than 41% and the zero-coupon bonds fell by addition 50%, to $0.18.
As shown on the Balance Sheet, there was a $625.8 millions of current portion of long-term debt in 1996 which was increased significantly compare to previous years. Moreover, the short-term borrowing has also appeared on liability in the year of 1996. Total long-term debt and total liabilities also increased drastically in 1995 and more significantly in 1996.
From the Consolidated statement of operations, the cost of sales increased since 1995. Moreover, the amortization of goodwill increased which is due to the decrease in revenue of trading cards and comic books. Interest expense also increased due to significant increase in debt. All these caused a loss in income and earning per share becomes negative at the end of 1995.
Based on all the above historical evidences, it will be really difficult due to the fact that the company has a debt-to-total capital ratio of 88% which is $805.4 million in total debt and $107.4 million in equity. With the downgrade of the public debts, it will make the financing situation even worse since the issueing notes or bonds will not raise as much financing as when the rating is good and will be more costly since the interest rate has to increase due to the increase in risk.
In the future perspective, a restructure plan was mentioned by Perelman. However, Marvel was facing three options:
1. if marvel was going under chapter 7 liquidation, the debtholders would get around 70% of the original value and the holding company debtholders and equityholders would get nothing.
2. If Marvel did not aquire Toy Biz, the total enterprise value would between be no more than $660 which was not enough to settle the debt, and the equity would again be worthless.
3. If Marvel acquired Toy Biz, the company could transform into an integrated entertainment company which would operate theme restaurants, movie studio, entertainment software, and etc. Marvel believed with the growth of new media exposure, they would be able to have modest growth and pay secured and unsecured creditors in full. This plan had passed the feasibility test, which in other words, the company was not likely to be liquidized or reorganized.
let’s assume Marvel implement the restrurture plan and make modest growth of profit. As they slowly payoff the debts, start earning profit and rebuild their reputation, It will become easier to raise debt. Moreover, if their performance is good, it might be even possible to increase their rating which will lower the cost due to the decrease in default risk.