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Maskwa Resources Financing with a Euro Bond Case Solution

Solution Id Length Case Author Case Publisher
2305 776 Words (5 Pages) Stephen Sapp, Ken Mark Ivey Publishing : 9B05N023
This solution includes: A Word File A Word File and An Excel File An Excel File

Maskwa was planning to acquire a tin refinery which was previously constructed by another firm. The financial health of the refinery was not good on account of mismanagement of operations thereby resulting in the bankruptcy of the refinery. Maskwa thought that it would be a good opportunity to earn a return from the restart of the refinery since the refinery was equipped with modern state-of-the-art, latest, commercially proven, and eco-friendly technologies such as solvent extraction for manufacturing of tin and nickel products and hydrometallurgical pressure-leach. For the acquisition of refinery, Maskwa requires capital and the same will cost $6 Million. Moreover, Maskwa intends to use the remaining funds for building a war chest for future acquisitions. 

Following questions are answered in this case study solution

  1. Why does Maskwa need to raise capital? How much money does it need? 

  2. Why is Maskwa turning towards the high yield bond market for financing rather than one of the other financial markets? 

  3. How would the payments and conditions associated with bank debt compare with those for the proposed Eurobond? Why does the Eurobond have so many different features? 

  4. If you were to use the Eurobond, would you manage the resulting foreign exchange risk? 

  5. Using a best-case scenario, what do you expect as the firm’s cash flows as a result of purchasing the proposed refinery? And the worst-case? What factors would influence the outcome being the best, base or worst-case scenarios? What factors would you consider in a sensitivity analysis? 

  6. Why are the bond investors placing certain requirements on Maskwa’s Euro-denominated bond? What is the function of the convertible feature? The sinking fund feature? What implications does this have for Heyer and Maskwa if the project succeeds? Fails? 

  7. What alternative(s) would you propose, and why? 

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Case Analysis for Maskwa Resources Financing with a Euro Bond Case Solution

2. Why is Maskwa turning towards the high yield bond market for financing rather than one of the other financial markets? 

Maskwa had to turn towards a high yield bond market because it had already attempted to raise funds in the domestic non-convertible bond market of Canada in 2002 however the company had to offer more than 15% interest rate which was substantially higher than 5% on average investment-grade bond. The requirement for a high interest rate was on account of Maskwa’s status as a junior mining company in its journey to become a well know minor combined by the low interest of investors in bonds issued in mining. As a result, the Maskwa had to use the high yield Euro-denominated bonds which were not rated by any rating agency. 

3. How would the payments and conditions associated with bank debt compare with those for the proposed Eurobond? Why does the Eurobond have so many different features? 

Maskwa does not need to hedge the risk of exchange rate if it gets the financing from the bank. The bank repayment could differ from Eurobond which requires quarterly interest payment and principal repayment would occur in April 2008. Moreover, bank debt would not have any convertible feature whereby the debt can be converted to equity. Lastly, there will be no sinking fund requirement in the bank debt. The Eurobond has comparatively lower interest rates as compared to local Canadian investment-grade bonds and commercial bank debt therefore in order to compensate investors in exchange for relatively lower interest rates, the Eurobond offers so many features. 

4. If you were to use the Eurobond, would you manage the resulting foreign exchange risk? 

It would cost less to accumulate a sinking fund in Euro thereby reducing the foreign exchange risk. 

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