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174 Part 4 Additional Cases




Boland™s earnings grew steadily from 1985 through 1989. However, they fell by more
than 30 percent in 1990, as Boland found itself selling products into those sectors of the
economy most affected by the recession.
Debt Ratings in the Chemical Industry




Boland™s long-term debt consists of $341 million of notes, revolvers, and other debt
arranged with a variety of ¬nancial institutions, plus $125 million of publicly held sub-
ordinated notes. It is the subordinated notes that Mandrell is attempting to rate. The
notes were issued in 1987, are due in 1997, are not callable, and are unsecured. The notes
were issued to reduce short-term bank debt incurred in early 1987 to ¬nance working
capital and long-term investments.
Boland™s ¬nancial statements appear in Exhibit 4.


QUOTRON CHEMICAL CORPORATION
Quotron Chemical is a long-standing company engaged in the manufacturing and retail-
ing of petrochemicals, propanes, and polyethylene products. Quotron ranks as the na-
tion™s largest propane retailer (24 percent of sales) and polyethylene producer (54
percent of sales). The polyethylene business tends to experience particularly volatile
earnings, as the prices of the inputs (e.g., ethylene) and output (polyethylene) sometimes
fail to move in tandem. The propane business is also subject to some randomness; for
example, propane sales vary depending on the severity of winter weather.
Quotron™s earnings, after having stagnated during the early and mid-1980s, grew dra-
matically in 1987 and 1988, largely as a product of strong demand and higher prices for
polyethylene, polypropylene, and other petrochemical products. However, polyethylene
margins fell in 1989 and a ¬re caused the shutdown of a major plant for the last half of
the year”leaving Quotron operating pro¬ts down almost 40 percent. The plant resumed
operations in the spring of 1990, but prices continued to swing in unfavorable directions,
leading to another decline in operating pro¬ts.
In early 1989, the company undertook a number of actions to prevent a takeover.
First, a leveraged recapitalization was arranged, involving the issue of a $50 per share
dividend and a large increase in the ¬rm™s long-term debt. Secondly, a “poison pill”
shareholders™ rights plan was adopted. Third, an ESOP plan was adopted, resulting in
the placement of 14 percent of the ¬rm™s shares in the hands of the ESOP trustee.
Quotron has more than a dozen issues of debt outstanding. Seven issues totaling
$1.25 billion are unsubordinated; the remaining issues are subordinated. Mandrell has
decided to consider one debt issue in each of these categories. The ¬rst is Quotron™s lar-
gest debt issue: $500 million of unsecured subordinated debentures, issued in conjunc-
tion with the recapitalization in 1989 and due in 2004, callable after 1994 at prices that
begin at 106.50 and decline over time to par. The other debt issue considered by Mr.
Mandrell is Quotron™s second largest: $300 million of unsecured unsubordinated sinking
fund notes, dated 1988 and due in 2018, callable after 1991 at prices that begin at 108
and decline over the life of the issue to par.
Quotron™s ¬nancial statements appear in Exhibit 5.
905
Case: Debt Ratings in the Chemical Industry




175
Part 4 Additional Cases




EXHIBIT 1
Fargo Chemical Company “ Financial Statements




Debt Ratings in the Chemical Industry
INCOME STATEMENT

Year Ended December 31
...........................................................
($ millions, except per share data) 1990 1989 1988 1987
..................................................................................................................................................

Sales 2,830 2,663 2,700 1,952
Cost of Goods Sold 1,993 1,749 1,704 1,335
Gross Pro¬t 837 914 996 617
SG & A Expense 281 238 191 152
Operating Income Before Depreciation 556 676 805 465
Depreciation, Depletion, & Amortization 117 93 83 67
Operating Pro¬t 439 583 722 398
Interest Expense 75 37 51 41
Non-Operating Income/Expense 73 56 92 64
Special Items 30 “3 0 0
Pretax Income 467 599 763 421
Total Income Taxes 159 194 269 164
Income Before Extraordinary Items 308 405 494 257
Extraordinary Items 43 0 0 0
Net Income 351 405 494 257
..................................................................................................................................................
906 Case: Debt Ratings in the Chemical Industry




176 Part 4 Additional Cases




BALANCE SHEET

as of December 31
Debt Ratings in the Chemical Industry




...........................................................

1990 1989 1988 1987
($ millions)
......................................................................................................................................

Assets:
Cash & Equivalents 486 144 410 709
Net Receivables 593 409 477 363
Inventories 289 286 271 207
Other Current Assets 38 13 12 12
Total Current Assets 1,406 852 1,170 1,291
Gross PP & E 2,467 1,851 1,565 1,427
Accumulated Depreciation 699 588 487 443
Net PP & E 1,768 1,263 1,078 984
Investments at Equity 132 118 99 76
Other Investments 270 11 8 0
Deferred Charges 163 182 193 183
Other Assets 0 229 0 0
Total Assets 3,739 2,655 2,548 2,534

Liabilities:
LT Debt Due in One Year 39 29 4 0
Notes Payable 40 102 256 650
Accounts Payable 225 151 113 122
Taxes Payable 45 48 71 31
Accrued Expenses 192 84 141 134
Other Current Liabilities 0 0 52 39
Total Current Liabilities 541 414 637 976
Long-Term Debt 1,181 390 271 166
Deferred Taxes 208 221 217 239
Other Liabilities 51 39 48 37
Total Noncurrent Liabilities 1,440 650 536 442
Total Liabilities 1,981 1,064 1,173 1,418

Equity:
Common Stock 100 100 100 100
Capital Surplus 864 864 864 869
Retained Earnings 907 740 520 147
Less: Treasury Stock 113 113 109 0
Common (Total) Equity 1,758 1,591 1,375 1,116
Total Liabilities & Equity 3,739 2,655 2,548 2,534
......................................................................................................................................
907
Case: Debt Ratings in the Chemical Industry




177
Part 4 Additional Cases




EXHIBIT 2
Texas Gulf Corporation “ Financial Statements




Debt Ratings in the Chemical Industry
INCOME STATEMENT

Year Ended December 31
...........................................................
($ millions, except per share data) 1990 1989 1988 1987
..................................................................................................................................................

Sales 932 1,104 1,061 707
Cost of Goods Sold 646 742 689 498
Gross Pro¬t 286 362 371 209
SG & A Expense 41 48 46 28
Operating Income Before Depreciation 245 315 325 181
Depreciation, Depletion, & Amortization 16 16 12 9
Operating Pro¬t 229 299 313 172
Interest Expense 63 1 3 11
Non-Operating Income/Expense 3 2 3 1
Special Items “18 0 0 0
Pretax Income 150 300 312 163
Total Income Taxes 55 108 119 71
Including Before Extraordinary Items 95 192 194 92
Extraordinary Items 0 0 0 “10
Net Income 95 192 194 82
..................................................................................................................................................
908 Case: Debt Ratings in the Chemical Industry




178 Part 4 Additional Cases




BALANCE SHEET

as of December 31
Debt Ratings in the Chemical Industry




...........................................................

1990 1989 1988 1987
($ millions)
......................................................................................................................................

Assets:
Cash & Equivalents 6 46 40 24
Net Receivables 118 117 127 95
Inventories 86 75 85 55
Prepaid Expenses 8 7 8 8
Total Current Assets 218 244 260 182
Gross PP & E 316 300 245 184
Accumulated Depreciation 101 91 76 64
Net PP & E 215 209 169 120
Deferred Charges 21 0 0 0
Other Assets 3 20 28 6
Total Assets 457 473 457 309

Liabilities:
LT Debt Due in One Year 43 0 0 0
Accounts Payable 75 63 81 56
Taxes Payable 8 9 19 24
Accrued Expenses 35 27 28 20
Other Current Liabilities 0 6 0 0
Total Current Liabilities 161 106 128 100
Long-Term Debt 683 1 42 42
Deferred Taxes 36 36 31 25
Total Noncurrent Liabilities 720 37 73 66
Total Liabilities 881 143 201 166

Equity:
Common Stock 0 1 1 1
Capital Surplus 2 36 27 23
Retained Earnings “427 427 302 125
Less: Treasury Stock 0 134 74 7
Common (Total) Equity “424 330 256 143
Total Liabilities & Equity 457 473 457 309
......................................................................................................................................
909
Case: Debt Ratings in the Chemical Industry




179
Part 4 Additional Cases




EXHIBIT 3

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