Case Study: The Restructuring of Bulong’s Project Debt
Bulong Operations Pty. Ltd. (BOP) is one of the principal subsidiaries of the Preston resources company in Australia. The case is the debt crisis in the enterprise due to the US $ 185 million of senior secured notes as well as loans and hedging contract owed to the Barclays bank. The company requires approval from the Supreme Court, the note holders and lastly, the shareholders to come out of this crisis and resume operations, or else it could face liquidation if the process is not approved. The company is under the management of the Preston resources which is involved in the mining industry.
The formation and construction of the Bulong Company into existence is for extraction of the nickel mineral. Since it was a startup firm, most of the finances at the star point are primarily due to the hedging facilities and contractual agreements of equipment on lease and sponsorship of construction. The branch of Barclays bank BPTL is responsible for all its marketing of all the production output to the outside countries involving all the marketing matters of the company. The nature of the management by Preston was through an acquisition of the company as a further strategy into the mine industry expansion in the year 1998. The contribution in the contract of the purchase such as the agreement to cover the loan and buy some shares in the US $1.50 per share made the company to become the biggest shareholder in the ownership amounting to 19.95 control of the BOP.
The nature of the crisis is rooted in the requirement by Preston through its contractual obligation to service the loans by the bank. After weighing on an option of getting extra financial help, the company decided to sell it senior notes as a project bond in the U.S market. The strategy can enable the business to receive good ratings on their plans leading to probability to secure finances for operations and also servicing of the loan of BOP by the Preston resources.
The security to the finances of the Bulong note indenture is through setting up a cash trap holding more than 75% of the cash flow for the sinking fund. Also, the funds were responsible for the repayment of the final maturity and an account for the servicing of the debt DSRA. The proceeds for the company which was amounting to around the US $177 which was used to repay the loan by Barclays and its accrued interests as well as funding to the DSRA which amounts to the US $ 165 and the US $11.6 million respectively. The situation left the company in a debt eating to the cash reserves of about A$66 million.
At the startup of its business and also its initial financings of the projects and operational costs of the Bulong activities, the company through Preston’s influences contributed not only to the defaulting in the repayment of the loans but also dig deeper into the financing crisis. In particular, the company started with a difficulty in the operating funds which were costly due to the unexpected fall in the price of the commodities as well as the expensive repairs to their machinery. To alleviate this problem, Preston gave collateral of the Marlborough mines to gain more capital making the back become one of the note holders. In total, all the creditors of the company amounted to slightly over the US $ 700million as debt in which the falling rates of the foreign exchange rates for the American dollar contributed to the problem.
The first recommendation for the company is to include all the stakeholders in the restructuring process to reassess the market needs and the operationalization of the activities. The strategy will help Bulong to reevaluate its business goals and to strengthen its capital investment through the collaboration of the parties approving a collectively restructuring plan. Secondly, the enterprise should restructure and renegotiate the payment plan to allow sufficient and efficient operations though adequacy of funds for the full realization of the initial profitability goals. Regarding the payment, the company should rework a practical repayment plan for a longer period while using private means to raise their working capital. Lastly, the company should employ economies of scale while expanding its services more in the market sales of its product to increase its turnover and be able to repay the loans progressively through the reworked plan.
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