Finance Case Report: Massey Ferguson Group 9: LENDERS
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Massey-Ferguson, a multinational producer of farm machinery, industrial machinery and diesel engines, was founded in 1847. In 1980, Massey is the largest producer of farm tractor (17% of world market share) and the largest supplier of diesel engines, registering total assets of $ 2827.6 mln US$, annual sales of $3132.1 mln US$ and a loss of 225.2 mln US$.
Figure 1 shows Massey’s sales in the previous 10 years. It is evident that the company registered a high growth rate until 1975. During the 1960s and 70s, Massey had an ambitious program of expansion. But in the last 70s, it faced huge problems with sales. The macroeconomic situation was changing: the price of oil drastically increased and the farm price and income in North American market dropped down.
(Figure 2)
Massey’ s difficulties: Current Lenders’ situation
At the beginning of the fiscal year 1981 the company presents outstanding debts for 2.5 bln US$. The short term debt accounts for 43% of the total amount (1.075 bln US$). In 1980 the D/E ratio is 214%, which is relevantly above the average level of the competitors. It is thus evident that our position as lenders results particularly risky since the company won’t be able to repay the debt due by the 1st
November. Indeed, the growth of the company was massively financed by short term debt, whose impact in terms of the interest rate expenses deteriorated the credit-worthiness of the company. The interest expenses are, indeed, 10% of the total ones and the percentage is expected to increase reaching 300 mln
US$ in 1980 with a growth rate of 125%. (Figure 3) .As a result of this financing strategy the company would unlikely have sufficient financial resources to cover both the short and the long positions.
Our lack of trust towards the company is confirmed by the behavior of the