Commercial Banking Management

LOWEN GROUP
Submitted to: Dr. Chandan Dasgupta

Submitted By: Group 2 Jasleen Kaur C032 Keyur Kandhar C034 Mythri Macherla C040 Venkata Sagar C045 Arun Raghavendran C046 Apoorva Sharma C051 Niranjana SundaramC055

Lowen Group

Case Introduction: On June 1, 1999, the Lowen group announced that the Board of Directors had authorized the company to file a petition under Chapter 11 of the US Bankruptcy Code as well as an application for credit protection under the Companies Creditors Arrangement Act (CCAA) in Canada in order to implement a strategic plan to reduce debt and compete more effectively in the market place. In conjunction with the filings, the Company's U.S. subsidiaries received a commitment for up to US $ 200 million in debtor-in-possession (DIP) financing from First Union National Bank.

About Lowen Group: The Lowen Group, Inc. is a funeral service corporation located in British Columbia, Canada. The largest funeral service corporation in Canada and the second largest such firm in North America, The Lowen Group owns and operates 847 funeral homes, 23 cemeteries, 12 crematoria, and 3 ambulance companies in Canada, the United States, and Puerto Rico. With more than 10,000 employees, the company provides a full range of funeral services, including prearrangement, family consultation, the sale of caskets and related funeral items, the preparation of the body and removal of the remains, the use of a funeral home for both visitation and worship, various transportation services, and, in addition to the traditional burial items, a cremation service. Death Care Business: The death care industry refers to companies and organizations that provide services related to death: funerals, cremation or burial, and memorials. This includes for example funeral homes, coffins, crematoria, cemeteries, and headstones. A number of factors make this business unique from the customer's point of view, according to the Federal Trade Commission. Funerals are among the most expensive purchases many consumers will ever make; most often, a consumer goes through the decision making for this process once, so that there is little experience, and often few sources of information are used; and those making funeral decisions may be under time pressure and significant emotional duress.[3] Funeral homes are regulated under the Funeral Industry Practices Rule. In the United States alone, there are more than 22,000 funeral homes, approximately 115,000 cemeteries, 1,155 crematories, and an estimated 300 coffin sellers.[4] The total U.S. deathcare industry is $11 billion.[5] Enough embalming fluid is buried every year to fill eight Olympic-size pools; more steel (in coffins alone) than was used to build the Golden Gate Bridge; and enough reinforced concrete to construct a two-lane highway from New York to Detroit

Case Summary: Incorporated as The Lowen Group, Inc., in October of 1985 and encompassing funeral services, real estate, and insurance, in two brief years the company was operating 45 funeral homes throughout the western provinces of Canada. Lowen had also learned the meaning of economies of scale, and he had centralized the firm's purchase of such items as embalming fluid, coffins, advertising, and other essential ingredients to the funeral service industry. During the late 1980s, Lowen's wide range of funeral service offerings, his ability to create economies of scale, and his successful advertising resulted in a phenomenal 65 percent increase in revenue for each funeral service conducted under the auspices of his growing company. In 1987, The Lowen Group reported earnings of $786,000 on revenues of approximately $14 million. Yet this was not enough capital to expand the company as rapidly as Lowen wished. So the founder decided to sell 10 percent of the company to the public and, as a result, raised $4.6 million to fund his ever-growing list of acquisitions. As it happened, however, the year reflected a very mediocre performance for the worldwide stock exchanges, consequently diminishing the inflow of capital that Lowen initially had expected. His ability to make acquisitions was curtailed, and, as he experienced unexpected difficulties turning around the acquisitions he had recently made, Lowen arranged a management conference in Vancouver to discuss the direction of the company. At the conference, Lowen asked how many of the former funeral home owners who were now within The Lowen Group had previous experience managing their business within the framework of a budget. Out of a total of 160 former owners, only 4 people had such experience. Lowen immediately initiated a comprehensive plan to teach each funeral home director the intricate details of balancing a budget. Lowen's commonsense strategy was that it was much easier to teach a funeral home director how to do accounting than it was to teach an accountant how to treat grieving relatives of the deceased. At the beginning of fiscal 1988, The Lowen Group owned and operated 98 funeral homes and 5 cemeteries. One year later, that number had risen to more than 120 funeral homes and 10 cemeteries. The focus of Ray Lowen's acquisition strategy during these years, a strategy that has remained relatively unchanged, was his concentration on small, family-operated funeral homes and cemeteries. Lowen's modus operandi was to acquire a funeral home or cemetery, keep the existing management in place, retain the name of the acquired funeral home, and provide funeral directors with generous stock options in the company. Lowen's unique strategy of "regional partners" also proved highly successful. Regional partners were the leading operators of acquired businesses who were allowed to strike a formal affiliation with The Lowen Group and were permitted to retain an interest of approximately 10 percent in the future appreciation of the company's entire regional operation. This arrangement gave the regional partner the ability to benefit from The Lowen Group's financial support, while the parent company benefited from the regional partner's involvement in the local community and ability to identify potential candidates for acquisition. Lowen's "regional partner" strategy worked so well that within two years nearly 30 percent of all company acquisitions of family-run funeral homes had been identified by regional partners.

The Lowen Group was also able to take advantage of the stability of what had come to be called the "death care provider" industry. From 1983 onward, demographic statistics showed that not less than two million people in North America would die each year. And as baby boom survivors reached the age of 65, it was projected that the annual death rate would surpass three million. Thus, regardless of economic conditions, the death rate assured the industry of a regular customer base. By continuing its strategic acquisition policy of "mom and pop" family funeral homes and capitalizing on the gradual rise in death rates across North America, by the beginning of 1990 the company had acquired almost 300 funeral homes and approximately 25 cemeteries. In April 1991, to accommodate the growth of the company and the expansion of its administrative offices, The Lowen Group moved its headquarters to a large, three-story building in Burnaby, British Columbia. Always cognizant of the welfare of its employees, during this period of time the company established an employee share ownership program for both full-time and eligible part-time employees. By the end of fiscal 1993, The Lowen Group had acquired an additional 83 funeral homes and 33 cemeteries; by the end of fiscal 1994, the company had acquired another 108 funeral homes and 46 cemeteries. The total number of funeral homes and cemeteries owned by The Lowen Group on September 18, 1995 was 764 and 172, respectively, an astounding six-fold increase since 1989. Along with this phenomenal period of acquisition and expansion, however, came an event that threatened the very existence of the company. The Lowen Group, in the course of its expansion strategy, acquired several local funeral homes in the immediate area of Biloxi, Mississippi. Valued at a cost of $8.5 million, two of the funeral homes belonged to Jerry O'Keefe, a former mayor of the city of Biloxi. The purchase ended O'Keefe's exclusive arrangement to sell his own insurance in the funeral homes that The Lowen Group had purchased. Therefore, O'Keefe decided to sue The Lowen Group for the right to sell his own insurance. Rather than litigate over what management at The Lowen Group regarded as a minor issue, the company agreed to combine funeral-insurance operations in the funeral homes purchased from O'Keefe. When The Lowen Group backed out of the agreement, O'Keefe returned to court and sued the company for fraud and antitrust violations. O'Keefe had hired an extremely enterprising lawyer who convinced the local jury to award his client between $100 and $400 million in compensatory and punitive damages. These amounts would have wiped out the net worth of The Lowen Group, and the company decided to appeal the verdict. To make matters worse, however, the Mississippi judge ruled that The Lowen Group would have to post 125 percent of the award within one week, a total of $625 million, if the company wished to continue with the appeal. Company management was understandably stunned. They considered a range of alternatives, from borrowing the money for the bond to declaring bankruptcy under Chapter 11. At the eleventh hour, after endless meetings and sleepless nights, management at the company's headquarters in Burnaby, British Columbia finally agreed to settle out of court for $240 million. Although the company's stock fell from a high of $41 per share to an all-time low of $8 during the litigation, Ray Lowen was determined not to let this episode prevent him from forging ahead. In early 1995, Lowen acquired the Osiris Holding Company for $103.8 million. Located in Philadelphia, Pennsylvania, Osiris owned and operated 22 cemeteries and 4 combination funeral home/cemetery facilities, all of the properties within the United States. In August of 1995, the company purchased MHI Group, Inc., an operator of 13 funeral homes, 4 cemeteries, and 3 crematories in the state of

Florida, and 5 additional properties in Colorado. One of the most significant properties involved in this transaction was the Star of David funeral home/cemetery facility that served a large Jewish community in Fort Lauderdale, Florida. During late 1995 and early 1996, the company concluded two more major acquisitions, including the Shipper Group and Ourso Investment Corporation. Shipper Group owned and operated a total of 7 cemeteries in the New York/New Jersey area, including Beth Israel Cemetery in Woodbridge, New Jersey. Beth Israel Cemetery was the largest cemetery serving the Jewish community in the state of New Jersey. Ourso Investment Corporation, located in Louisiana, was the owner of 15 funeral homes, 2 cemeteries, and a growing life insurance business. With annual revenues of more than $70 million, The Lowen Group expected high returns from Ourso within a very short time.

SCI s Hostile takeover bid Described in media as arch rivals SCI tried to take over Lowen in a hostile take over but was promptly rejected by Lowen board. In 1996 SCI bid for Lowen by offering $43 per share although the share was hovering around $30. Board rejected the offer saying that it was depressed due a negative verdict the company had to face in Mississipi. Soon the company joined hand with the blackstone group to continue with its aggressive growth strategy. During all of 1996 Lowen acquired 159 funeral holmes,136 cemeteries and 2 insurance companies for a total of $620 million. The debt kept on piling for the company. At the end of 1996 Lowen debt/equity ratio was 1.4:1. Which was maintained by simultaneous equity issue Distress Call With its aggressive growth policy the interest expense on long term debt increased from $93million to $132 million. The business however was beginning to underperform. The main reason was sighted as the slow in death rates. Although revenue had increased by 9%, the margins were shrinking. The trend worsened in 1998 with the company share trading at a low of $8 roundabouts. The company could not deliver on the forecasted profit as well. New Management In a series of event which started by a lower predicted profit for next quarter Ray Lowen stepped down as company CEO and subsequently as the chairman. John Lacey, a hardvard graduate replaced Lowen on the back of his reputation as the turnaround specialist. Company Debt The long term debt of the company was at its highest ever at $2.3 billion. The companys bank and public debt contained numerous covenants. In case of violation of the covenant series of default would be declared. Creditors would then have the right to accelerate their claims. Cross covenants would have resulted in multi defaults had one default occurred. If the company was not able to convince banks to waiver the covenants default it might had to file for bankruptcy.

Bankruptcy in US Bankruptcy in US was governed by the US Bankruptcy code. If a company files for bankruptcy it is allowed to conduct its normal business and propose a financial restructuring plan. The underlying assumption being a going concern was more profitable than a liquidated one. To emerge from bankruptcy management of bankrupt firm would give a creditor restructuring plan. The plan would divide company debtors in classes. Each class would vote for the plan. If the class approved the plan with in number or 1/3rd in value the plan would be passed. Management had the exclusive right to purpose the restructuring plan. The plan has to be presented within 120 days of filing for bankruptcy. In addition to being protected from the creditors the firm was protected in other ways too. They dont have to give interest on unsecured loan. They could cancel leases and so called executor contracts. They could also borrow from new lenders. The major problem in this case was that the company had assets in Canada as well. A bankruptcy in USA would almost likely cause bankruptcy in Canada as well. In Canada bankruptcy is managed under CCAA which was tougher than chapter 11 bankruptcy in USA. Creditors have the power to remove management. The company has only one chance to present its case for restructuring which if not accepted by court could end up in the company being liquidated. Hence some sort of administrative protocol would be required between the courts of two countries to take the matter forward. The company options John lacy was considering the way forward. The company suspended dividend payout for shareholders and was consider liquidating some of its asset to repay the immediate loan. The slowing death rate was a cause of concern. Whether company should file for bankruptcy or not was the major question which needed due thought from the management. Solution The company eventually filled for bankruptcy in both Canada and USA. After two and a half years, the Lowen Companies emerged from bankruptcy protection. In a landmark judgement on December 7, 2001, Mr. Justice Farley issued his final order in the CCAA proceeding recognizing and implementing in Canada the U.S. Plan of Reorganization. The U.S. Plan of Reorganization effectively restructured over $3 billion in debt and approximately 1,000 operating companies. In January 2002 after emerging from bankruptcy, the reorganized company, rechristened itself as Alderwoods Group, Inc. Ironically In November 2006, Alderwoods was acquired by Service Corporation International in a US$1.2 billion deal.

Implications of Letter Ratings: AAAExtremely strong capacity to meet financial commitments. Highest Rating. AAVery strong capacity to meet financial commitments. AStrong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. BBBAdequate capacity to meet financial commitments, but more subject to adverse economic conditions. BBB-Considered lowest investment grade by market participants. BB+Considered highest speculative grade by market participants. BBLess vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. BMore vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. CCCCurrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments. CCCurrently highly vulnerable. CCurrently highly vulnerable obligations and other defined circumstances. DPayment default on financial commitments.

USA Bankruptcy Law: There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code: Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts Chapter 11: rehabilitation or reorganisation, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganisation which typically allows companies to continue to function while they follow debt repayment plans Chapter 12: rehabilitation for family farmers and fishermen; Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.

Indian Bankruptcy Law: India does not have a clear law on corporate bankruptcy even though individual bankruptcy laws have been in existence since 1874. The current law in force was enacted in 1920 called Provincial Insolvency Act. Legal meaning of the terms bankruptcy, insolvency, liquidation and dissolution are contested in the Indian legal system.

There is no regulation or statute legislated upon bankruptcy which denotes a condition of inability to meet a demand of a creditor as is common in many other jurisdictions. Winding up of companies is in the jurisdiction of the Courts which can take a decade even after the Company has actually been declared insolvent. On the other hand, supervisory restructuring at the behest of the Board of Industrial and Financial Reconstruction is generally undertaken using receivership by a Public Finance Institution.