a fixed krona yield of 4.5%, how much will the company save in taxes for a SEK4
billion recapitalization? What is the value of this interest tax shield?
Also there is a tax advantages of issuing debt, this is because the order the
payment are done by law. When some debt is outstanding and you have to pay
the interest on these debts, you pay them before you pay the taxes, so by issuing
debt you decrease the tax payments. For Swedish match in this case, which are
subject to a corporate tax rate of 28% and want to issue 4 billion SEK in debt
against an interest rate of 4.5% annually, their tax saving is:
annually
The rate for a 10 year BBB bond is closed to 4,5%. So we assume the debt is
issued for 10 years. Thus the present value of the tax-shield is equivalent to a 10year annuity with a 4.5% discount rate.
50.400 .000
1
1
=SEK 398.800 .996
10
0,045
1,045
2. What will Swedish Matchs book value balance sheet look like after it
completes the debt issuance and share repurchase?
A tax shield is not something which represents a book value, so there will be no
change on assets side of the balance. However, on the liabilities side the post
Total Interest-Bearing Debt will increase by SEK 4 billion because we issued SEK 4
billion in bonds. And the post Equity will decrease with SEK 4 billion because we
bought back SEK 4 billion in shareholders equity.
See appendix for book balance sheet
3. What will Swedish Matchs market value balance sheet look like: a. Right after
it announces the leveraged recap? b. When it completes the issuance of SEK 4
billion in debt? c. When it completes the share repurchase?
The initial market value of the equity is equal to:
Because the market value of equity has increased the share price has increased
as well to the new level of:
Nog te doen:
4. Can Swedish Match afford to borrow this much money? What are the risks? Is
it realistic to expect a BBB+ rating?
The net income of Swedish match is SEK 2083 million a year in the initial
situation, so issuing 4000 million debt isnt risky because the profit over the 10
year at which the debt is in the firm they earn enough to pay-back these loan. So
in the initial situation the leverage is 41% at book value and 11% at market
value. At these rates theyre provided with an A- rate. If we compare this to a
company which is rated at the BBB+ (the rate that is expected to be given after
the debt issuance). One company is BAT. If we analyze their leverage ratios, we
can conclude that they have a book-value leverage of 54% and a market-value
leverage of 28% (which are higher than the initial ratios of Swedish Match).
After the issue of the debt the ratios of Swedish Match will change. So the new
book-value leverage is
7529
=35,5
21201
7529
=50,54 , and a market value leverage
14898
BBB+ rated firm, if we compare these numbers with an even lower rated firm,
like Gallaher which is BBB rated. Gallaher has book leverage of 102% and market
leverage of 36%. These say that the market value leverage also comparable for
market value leverage then for Swedish match.
But these leverage ratios dont tell the total story if we look the ratio of
debt/EBITDA. We can compute that Swedish matchs ratio is
7529
=3,2 ,
2344
which is somewhat higher then BATs (2,5 times). If we look at the number of
times the earnings can cover the interest payments. We can see that Swedish
Match can pay these interest expenses
1865
=4,18
266 +( 40000.045)
with the
current EBIT, if we once again compare this to BAT (6,8 times). So overall we can
conclude that BAT is somewhat better then Swedish Match. But Swedish Match is
very comparable to Gallaher which is BBB rated, so an BBB rating is more likely
also with comparing these figures with the estimates of the credit-ratingagencies.
But the issuance of the debt will provide some risks to the company. Increasing
debt will always increase the likelihood of financial distress, because the interest
payments will decrease the net income. These net income is used to repay debts
or even the EBIT is not enough to pay interest at all and the company will go into
default.
5. What else speaks in your opinion in favor or against the leveraged recap?
Should the company go ahead with this new financial policy? If so, would you
even approve a larger recapitalization?
Book Value
Balance Sheet
Assets
Cash and Shortterm
Investments
Current Assets
PP&E
Other assets
Total Assets
Liabilities
Current Liabilitiesd
Total InterestBearing Debt
Other Liabilitiese
Equity
Total Liabilities+
equity
Market Value
Balance Sheet
Assets
Share
Repurchase
Initial
Initial
3.002
3.002
4.884
2.712
4.300
14.898
4.884
2.712
4.300
14.898
3.776
3.776
3.529
7.529
2.533
5.060
2.533
1.060
14.898
14.898
Recap
Announced
Debt
Issuance
Share
Repurchase
3.002
3.002
7.002
3.002
31.638
31.638
31.638
31.638
0
34.640
399
35.039
399
39.039
399
35.039
3.776
3.776
3.776
3.776
3.529
3.529
7.529
7.529
2.533
9.838
2.533
9.838
2.533
13.838
2.533
13.838
24.802
25.201
25.201
21.201
322,1
322,1
322,1
270,974436
77
78,24
78,24
78,24