GuySuCo’s $30 billion syndicated bond financing is devoid of financial prudence

Continuing from the discussion and analysis of last week, there is no precise theory in finance that stipulates an optimum level of debt a firm should use as part of its financing structure; but, as a ‘rule of thumb’, a firm should not take on more than 70 per cent in debt financing within its financing structure, because the higher the leverage ratio [debt financing relative to equity], the greater the risk of default; which, in turn, can ultimately lead to bankruptcy.
Why? Because having more debt to service means the firm needs to divert a higher level of its cash flow – generated from revenue — to service principal and interest payments on its debt obligations, which can then lead to liquidity constraints for the company. Therefore, the firm’s inability to service its debt obligations would mean that its creditors can then force the firm to go into liquidation to recover their investments, and this is what could lead to bankruptcy.
However, nothing is wrong if companies increase their leverage ratios beyond 70 per cent, because it largely depends on the return on capital employed, the risks factors and the strategic goals, and the drivers of the firm’s corporate strategy; that is, how sound and viable these other elements may be.
That said, in presenting a prudent analysis of these ratios, the computations were adjusted to include the $30 billion syndicated bond, which then gave rise to an adjusted long-term debt-to-equity ratio of 3.65:1. This means that, with the $30 billion bond, the entity now has 365 per cent debt financing within its capital structure relative to equity.
A comparison of debt financing options: $30 billion syndicated bond vs a $30 billion syndicated loan for the same maturity period of 5 years and interest rate at 4.75 per cent per annum:
*NB: the underwriting cost for the loan, particularly the legal fees, are a rough estimate
As such, the $30 billion syndicated bond is devoid of financial prudence, and will ultimately exacerbate disastrous consequences for that entity. Now, when a company is virtually bankrupt, there are essentially two options to undertake: (1) File for bankruptcy, or (2) undertake a series of restructuring and strategic changes to ensure the entity’s survivability. This may involve several actions, such as downsizing, cutting cost, changing the Executive Management and the Board of Directors; and the financially logical action to take is to restructure the company’s stock of debt as well.
In the case of GuySuCo, the only form of restructuring that was done was to close down some of the estates and effectively send home thousands of employees. The authorities unfortunately did not see it fit to restructure the entity’s [old] stock of debt. Instead, they have doubled the level of debt by adding more to it (increasing the level of debt by almost 100 per cent). Such a decision is extremely — and egregiously — ill-conceived, imprudent, and nonsensical.

Recommendations/Conclusion
In circumstances within which it is necessary to save a bankrupt company, it becomes necessary to restructure its stock of debt (which it cannot service in the first place) by renegotiating the terms and conditions of the debts, and/or often times seeking to negotiate for debt forgiveness. History would show that even when the Guyanese economy was virtually bankrupt, to further help the recovery programme apart from implementing the IMF’s economic reform programme, Guyana was the beneficiary of a number of debt forgiveness from its external creditors.
In the case of GuySuCo, the Government can consider writing off some of the debt of the entity, such as the amount owing to GRA; renegotiate some of the terms and conditions of the old stock of debt; and include converting a portion of the debt into equity. By doing so, this will effectively expand the equity component of the entity’s capital structure, which would allow for better financial leverage to recover from its financial difficulties.
Lastly, as can be deduced in the above table, one would recognize that it would have been better to have obtained a syndicated loan instead of a syndicate bond; because, in the long run, the bond would cost more in interest payments than a loan. Because normally interest is applied on a reducing balance method, compared to a bond, wherein interest is paid based on the face value of the bond for the maturity period annually, and then the face value is redeemable on the maturity date. To this end, the $30 billion bond would cost GuySuCo $7.2 billion in interest and other costs, while a $30 billion loan for the same period and same interest would cost $3.8 billion in interest payments, inclusive of underwriting costs.
Henceforth, as a recommendation, a $20 billion syndicated loan with an 18 months’ moratorium, and restructuring of a large portion of the old stock of debt, including converting some of it into equity, would have been better.