CORPORATE FIACIAL MAAGEMET

The Loewen Group, Inc.

Professor: J.BEDRISS

Ashish BAID B00330494 Smail BEAI B00271028 Soeren Martin BERGER B00410957 Gwenal BOULEAU B00132800 Amina CHARF B00338556

Executive Summary
The second largest player in the fragmented but highly attractive US death care market, Loewen Group grew explosively through the 1980's and 1990's by acquiring many small operators and also taking over more established chains in the later years. In 1999, the publicly traded Loewen Group owned over 1,100 funeral homes and more than 400 cemeteries in the US and Canada, with minor assets in the United Kingdom. Based on consolidation, its operational strategy was to increase its margin by reducing both fixed and variable costs. Managers of the acquired operators were kept in order to retain their connections with local communities. A financial strategy relying on leverage was also incremental for Loewen's rapid growth. It provided the required capital for expansion while beneficial tax shields and higher returns were created. Such accomplishments aroused the interest of SCI, the company's biggest competitor that made a substantial offer to acquire Loewen Group in September 1996. To counter the attack, Ray Loewen - the CEO at that time and heir of the company founder - accelerated its acquisition program in order to increase firm value enough to prevent further attempts of SCI. In 1995, however, the company's good financial situation started to erode, mainly due to the conjoint negative effects of degrading market conditions, exceptional litigation costs, overly generous dividend policy and raising interest servicing from overpriced acquisitions. The 1996 to 1998 acquisition period proved to be even more detrimental for both the firm's profitability and leveraging, as the firm went on to buy even larger and more overpriced death care firms through the use of increasingly expensive debt. Loewen's successfully opposition to the SCI takeover therefore came at an unsustainable cost. In 1998, total liabilities had become six times larger than the market value of equity. The company over-reliance on short- term debt had worsened the situation to a point that a $940.3 million debt was due in 1999, accounting for roughly 82% of 1998 sales. Additionally, covenants securing current debt were making debt restructuring as well as renegotiating impossible. In general, Loewen Group's failure was mainly due to an aggressive expansion policy. The high levels of debt required constantly growing profits and free cash flows in order to comply with growing repayment commitments. Loewen, however, did not succeed in optimizing deficient operational processes. When investors took notice of that, debt as well as equity financing of acquisitions became increasingly difficult and the growth strategy of the company collapsed in the end. Facing a fatal financial situation, newly appointed CEO John Lacey will probably not be able to refinance the company without filing for multi-jurisdictional bankruptcy in 1999. Indeed, Chapter 11 protection appears to be the only way to give the company the time to reorganize and refinance, cut costs and sell assets. It will allow creating a plan for reorganization while keeping business running through post petition creditor privilege and executory contract provisions. John Haley's top priority will thus be to start planning for the bankruptcy filing, while disposing of some assets to prevent breaches of covenants before the proceeding starts.

1. How was the Loewen Group able to grow explosively for the first half of the 1990s? What were the advantages of debt financing enjoyed by the firm in this phase? a) The external growth strategy of Loewen Group: consolidation and pre-needs sales Starting in 1969, Loewen Group followed a strategy of growth that surpassed the growth of the market for death care services by far. The market as such naturally only offers limited growth opportunities with the number of deaths annually increasing by 0.8% since 1960. On the other hand the industry was and still is highly fragmented. There are many small players, who incur comparatively high fixed cost. These can be reduced, if several businesses are consolidated, a strategy that first was implemented by Service Corporation, Loewen's biggest competitor (they achieved an average reduction of fixed costs from 65% to 54% of revenues). The area of pre-need sales has been another growth opportunity in the past, as people increasingly acquired death care services before their actual death (the shares in funeral and cemetery revenues grew from 22% to 41% and from 61% to 75% respectively between 1995 and 1998). Generating cash flows before rendering the service was a beneficial side effect of this business model. Moreover, the market of death care services offers a high degree of stability. Revenues are very predictable due to constant death rates as well as a lack of price competition and market shares are easy to keep because there are high barriers of entry (tradition and reputation play a big role). In general, Loewen Group operated in a not overly competitive market, which offered, however, only limited potential for growth. Their expansion was mainly based on acquisitions of smaller competitors, a strategy that implied high needs of capital. Loewen therefore started raising capital by issuing high amounts of debt and also equity. The funds from operations were not enough to finance the acquisitions (internal funding would have only enabled a fraction of the actual growth). Interestingly, in the operational sector, Loewen's growth strategy differed substantially from its largest competitor: The former business owners were usually employed as managers and retained a high degree of autonomy. Financing was provided for capital improvements while aggressive sales tactics were avoided. In addition, former owners usually retained a minority stake in their old businesses and/or received Loewen stock as part of the purchase price. b) The advantages of debt financing In the context of their growth strategy Loewen Group issued large amounts of debt, including both bank loans and publicly traded bonds. The major advantages of debt financing enjoyed by Loewen are the following:
1989 Pretax income Taxes paid expense 11.0 4.8 7.5 40.5% 1990 18.5 11.1 40.2% 1991 27.6 12.2 37.3% 19.8 1992 32.7 15.6 35.9% 21.7 1993 43.5 19.7 32.3% 34.2 1994 60.9 -47.2 40.4% 53.6 1995 -116.8 29.1 29.1% 91 1996 100.1 5.1% 127.5 1997 52.5 1998 756.4

2.7 -164.5 Tax rate 43.6% -21.7% Interest 182.3

8.2 12.4 17.1

Tax shield

3.6

5.0

6.9

7.4

7.8

11.1

21.7

26.5

6.6

-39.6

Table 1: Tax shields incurred by Loewen Group

 Tax shields: Loewen incurred high tax shields as the level of debt was constantly
growing. The tax rate, however, was decreased by trend as net income was decreasing. Particularly during the last years, the full potential of the tax shields could therefore not be taken advantage of (see table 1). Provision of required capital: Debt funding only enabled Loewen to make their numerous acquisitions and therefore gain a superior market share compared to all competitors but SCI. The position in the market also entitled them to potential operational benefits that might have not been exploited in their entirety. Low risk: The secure market environment of Loewen Group (see section a) as well as their financial health until the 1990's probably enabled them to incur low interest rates. Debt financing was therefore a very cheap way of financing. Signaling: Debt financing in contrast to other sources of finance usually signals strength to the capital market. As a consequence their share price might have benefited from the policy of debt financing, which is confirmed by the constant increase until 1996.

2. How did Loewen get to the position it found itself in 1999? In 1999, Loewen was in a very difficult situation. An unprecedented loss of $599 million was accompanied by a substantial downgrading by rating agencies, a crash of the stock price and upcoming repayments of debt that amounted to almost $1 billion. Loewen was on the edge of filing for bankruptcy, which is everything but normal in the death care services industry with its predictable revenues and low rates of business failure. The reasons for this demise are manifold as will be shown in the following.
Loewen SCI Stewart Carriage
ual cha 77 27 10 450 4,5 7 1050% 46% 234% 68% -

1996 1998 annnge 1996 1998 annnge 1996 1998 annnge 1996 1998 annnge ual ual ual cha cha cha Sales Operating profit et profit Market value of equity Return on book equity [%] Operating CF 899 1136 195 64 2311 -47 78 625 -125 13% 2294 2875 -30% 541 265 11,9 210 652 342 10,9 330 13% 10% 14% -4% 29% 433 104 51 9,4 12 648 179 42 5,0 18 25% 36% -9% 29% -23% 29% 40 5 0 190 -0,7 0

-599 -519%

-36% 6613 9866 -83%

25% 1432 2261

6,2 -81,2 -705%

Table 2: Business development of Loewen from 1996 to 1998 compared to major competitors1

First of all, Loewen faced a more difficult business environment with declining death rates and increasing reserves for doubtful debt. Given the superior performance of the company's competitors (see table 2), this can, however, not be the main reason for Loewen's trouble. In contrast to The Loewen Group, all other major firms in the industry were able to increase their market values of equity and their operational cash flows. The verdict leading to a penalty of $500 million from 1995 is not a convincing aeplanation either. It can only serve as a plausible explanation for the bad 1995 results and a certain loss of investor confidence, while the negative development of the following years should have predominantly other causes. In fact, Loewen's extreme growth strategy of all problems as it showed the following shortcomings:
1

Annual changes are calculated as the arithmetic average of the time frame considered.

a) Purchase prices The prices paid for the acquired companies were often too high, especially compared to SCI, Loewen's main competitor (see table 3). The price premium became particularly large in 1998 when Loewen's growth strategy was already about to collapse. Moreover, the sales of the targets as well as their fair values were lower than expected by Loewen. Substantial write- downs from 1998 are evidence of that ($652.1 million, accounted for as special item in the income statement).
Amount spent on acquisitions / revenues of acquired companies The Loewen Group SCI Stewart Enterprises Carriage Services

1996

1997

1998

2.47 2.02 2.60 2.42

2.91 2.47 2.37 2.76

9.55 2.65 2.44 3.06

Table 3: Acquisition-revenue multiples for Loewen and major competitors

b) Operational strategy Loewen's operational strategy was clearly deficient in the late 1990's as comparisons with their competitors as well as operational cash flows prove (see table 4). The reason for that might be found in Loewen's integration of the newly acquired subsidiaries. In contrast to SDI, they employ the former owners as managers and grant them high level of autonomy. Despite the owners' minority shares, their motivation might not be sufficient in the new situation. In addition, the opportunity to provide them with superior knowledge about management practices was forfeited and advantages of consolidation such as reduced fixed costs and variable costs (e.g. due to increased buying power) were not (fully) taken advantage of. In general, the price premiums paid for the acquirees could not be justified by superior operational efficiency. In fact, efficiency was even worse at Loewen Group: Selling, general and administrative expenses are clearly higher compared to the competitors whereas the operating margin is lower than the competitor's ones. Furthermore, the trend for both ratios is very negative in 1997 and 1998. The write-downs for doubtful receivables are further indication of deficient operational processes.
Loewen
1996 Sales SG&A Operating profit Operating CF 1997 1998 1996

SCI
1997 1998 1996 433.4 66.8 651.9 329.6 14.1 104.0 11.6

Stewart
1997 532.6 15.4 141.8 -15.2 1998 648.4 16.6 179.4 18.3 1996 40.3

Carriage
1997 77.4 5.3 14.1 9.7 1998 116.8 7.6 26.7 6.6

899.4 1114.1 1114.1 2294.2 2468.4 2875.1 76.6 195.1 99.5 199.8 125.2 78.0 63.2 541.2 209.9 66.8 620.8 299.4

2.5 4.7 0.3

-46.9 -160.7 -124.5

SG&A / Sales Operating margin

8.5%

8.9% 11.2%

2.8%

2.7%

2.3%

3.3%

2.9%

2.6%

6.2%

6.8%

6.5%

21.7% 17.9%

7.0% 23.6% 25.1% 22.7% 24.0% 26.6% 27.7% 11.7% 18.2% 22.9%

Table 4: Operational efficiency of Loewen compared to major competitors

c) Dividend policy Although following a growth strategy, Loewen's dividend payout ratio has systematically increased over the last decade. This does not really suit the approach of growth, especially if you want to grow at rates as high as Loewen's growth rates. Additionally, Loewen financed the dividends with debt. Instead of using the earnings to stabilize the financial position (and as a consequence improve credit ratings to facilitate cheaper funding), cash was given to shareholders. This action as well as Loewen's overly aggressive investment policy of the last years can be considered as an example of agency costs of debt (risk shifting). Management distributes dividends and invests in risky projects instead of optimizing the company's chances to go on as a going concern in the long-term. d) Inconsiderate growth Loewen Group followed an overly aggressive growth strategy that did not only exhibit the weaknesses in implementation being named above, but that also disregarded which scale of growth was appropriate for Loewen. Although sales and operating profits grew rapidly, the interest coverage ratio was constantly deteriorating in the second half of the 1990's. Acquisitions financed with debt were carried on without considering the amount of debt the company could absorb. This development was further fueled by the share price increase having its climax in 1996, when SCI made its takeover offer. Given Loewen's worsening operational performance, the stock price was overrated. All in all, the company was not able to generate sufficient operational cash flows to pay for the funds needed for investing activities. Instead, it relied solely on financing cash flows (see table 5), which were, however, more and more difficult to obtain as leverage increased and operational performance worsened. Nevertheless, as part of a defensive maneuver to counter SCI's takeover attempt, the company went on to spend even larger amounts of funds on overpriced acquisitions, while it would have been more advisable to financially recover first (see table 5).
1989 Operating cash flow 7.2 1990 14.0 1991 28.7 1992 35.2 1993 47.2 1994 43.2 1995 10.2 1996 -46.9 1997 -160.7 1998 -124.5

Investing cash flow Capital expenditures Acquisition expenditures Financing cash flow

-36.5 -3.1 -36.0 46.5

-172.8 -8.6 -159.7 14.4

-104.4 -14.0 -78.4 91.2

-104.4 -12.6 -83.2 60.5

-182.4 -20.7 -147.6 139.8

-346.0 -39.8 -265.6 313.5

-569.0 -36.1 -487.9 586.0

-787.5 -72.6 -619.6 813.1

-491.6 -85.3 -546.5 671.0

-304.4 -62.7 -252.6 486.3

Table 5: Cash flows of The Loewen Group

3. Some might describe Loewen as "financially distressed". Is this a fair description of its problem? What are the manifestations and apparent costs of this so-called financial distress? A view at Loewen Group's financial data from late 1998 and early 1999 easily reveals the difficulties the company is in. The financial distress of the firm is not only due to the 6

Looking at the financial data of recent years we can rationally conclude that Loewen is financially distressed. This distress arises from a mix of increasingly high level of leverage, maturing of debt (with a significant proportion being due within one year), the high interest expenses, investors' reluctance to provide further funds and Loewein'csreinsainigliltyy hto gelnveratoef suvfficiee tbproafits and ltoquhiditmatoureiymbrurserietsodehbet debt (with a n ab igh e e l le erag n ut lso due i t e y t rit st uctu ft holders.gnihiecsetfaprooportwoln bbeienxamiuned itnhimoonedeyteairl )i,n thee hoiglhwintere-st expenses incurred, si T f an ct rs i i l e g d e w n re a th f l o ing : outsiders' probable reluctance to provide further funds and, most of all, Loewen's inability to generate sufficient profits as well as free cash flows to reimburse its debt holders. These factors will be examined in more detail in the following.
a) Leverage Loewen's expansion strategy in the last decade was heavily financed by debt. As a consequence the leverage and several other key ratios, which heavily impact the firm's credit rating (and thus the interest rates to be paid by Loewen) deteriorated.
1989 Total assets 163.4 1990 341.3 1991 446.1 1992 547.0 1993 748.5 1994 1115.7 1995 2263.0 1996 3496.9 1997 4503.2 1998 4673.9

Market value of equity Book value of equity

NA 59.9

301.6 134.3

438.1 197.1

550.8 245.7

980.7 324.8

1086.9 411.1

1219.2 614.7

2310.6 891.1

1903.2 1383.1

624.9 748.3

Total liabilities Long-term debt Debt due within one year

94.9 79.7 5.1

207.1 172.1 7.2

249.0 217.0 6.9

301.4 251.5 7.9

423.7 334.4 6.6

704.6 471.1 45.5

1648.3 864.8 69.7

2448.7 1428.6 79.6

2962.9 1750.4 43.5

3768.5 1393.9 940.3

Total debt/total assets Total debt/bv of equity Total debt/mv of equity

58.1% NA

60.7% 68.7%

55.8% 56.8%

55.1% 54.7%

56.6% 43.2%

63.2%

72.8%

70.0%

65.8%

80.6% 503.6% 603.1%

158.4% 154.2% 126.3% 122.7% 130.4% 171.4% 268.1% 274.8% 214.2% 64.8% 135.2% 106.0% 155.7%

Debt due in 1 yr/total debt Debt due in 1 yr/bv of equity Debt due in 1 yr/mv of equity

5.4% 8.5% NA

3.5% 5.4% 2.4%

2.8% 3.5% 1.6%

2.6% 3.2% 1.4%

1.6% 2.0% 0.7%

6.5% 11.1% 4.2%

4.2% 11.3% 5.7%

3.3% 8.9% 3.4%

1.5% 3.1% 2.3%

25.0% 125.7% 150.5%

Table 6: Leverage ratios of Loewen Group

The proportion of total debt compared to total assets, book value and market value of equity remains relatively stable until 1993. Afterwards, there is a significant increase, which culminates in 1998 when total liabilities are six times larger than the market value of equity. The increase from 1997 to 1998 is particularly extreme with the ratio of total debt to market value of equity quadrupling within a single year. This reflects Loewen's satisfaction of short- term liquidity needs with short-term debt as well as the rapidly decreasing share price that accounts for investors' loss in trust in the company. This is correct b) The maturity structure of debt The increasing total amount of debt that is due within one year and its share of total debt demonstrate Loewen's immediate need of liquid funds. As for leverage ratios, these numbers remained stable until 1993 before showing a major increase in 1994 and another, even more extreme rise in 1998. Especially the amount of $940.3 million due in 1999 is worrisome because it accounts for roughly 82% of last year's sales. Without obtaining further funding at high interest rates, which would induce even more leverage and higher interest expenses, a

timely repayment is impossible. Loewen finds itself in a vicious circle, from which a breakout seems highly unlikely. c) Lack of trust from investors
1993 Credit rating Share price BBB 25.38

Reduced investor confidence

1994 BBB 27.00

1995 BBB 25.31

1996 BB+ 39.13

1997 BB+ 25.75

1998 BB 8.44

1999 B1.93

Table 7: Credit ratings and share price of Loewen Group

The deterioration of financial ratios, of course, is reflected in Loewen's credit ratings. From BBB (investment grade) it goes down to B- (highly speculative). As a consequence, Loewen has incurred and will incur high interest payments. In face of the large amount of debt outstanding, this clearly endangers the company's viability. In addition, equity investors have lost faith, too. The share price indicates that they do not believe in Loewen's ability to generate future distributable profits. Further evidence of general mistrust comes from the company's reluctance or inability to issue new equity capital in 1998 (the amount of newly issues equity went down from $439.4 million in 1997 to 1.8 million in 1998). d) Interest expense
1989 Interest expense Operating profit 8.2 17.7 1990 12.4 31.0 1991 17.1 44.4 1992 19.8 52.0 1993 21.7 66.6 1994 34.2 94.6 1995 53.6 131.9 1996 91.0 195.1 1997 127.5 199.8 1998 182.3 78.0

Interest coverage ratio

2.2

2.5

2.6

2.6

3.1

2.8

2.5

2.1

1.6

0.4

Table 8: Interest expense of Loewen Group

As the total level of debt increases, so does the amount of interest expense with the climax of $182.3Amielwononn1998.aApiargt ftrom'reheuaceounusindebt.pterfoincreascegcatnerbet rates due to li i t m t of ss he in in es deterioratainn ere.pOtinratptregsardnnbeohfetshumdertitodbbhasnotewreflaetxprmacnd. r' t hat number. ibute ma in igng cnd 7 as e ad cle te i ishe l c orlaoneontgross o trg s g cd di ti a Especiallydd e interest c6overage ratio being clearly below 1 in 1998 indicates Loewen's th inability to tisf . d bt obee s' de nds De redsuacedy Ineoctholdr r1998,meaarni.ngsffaourlt3rdequsartoerbrednlced byat3e0r%.f weeks or se m t e o u y a m t o months. Also we can highlight how the acquired assets were not performing well using the 'Acquisition Revenue Multiple' which increased drastically e) Debt cfovenan9ts 6-98 and is very high compared to other firms in the industry. rom 19 Table of this multiple is at the bottom of pg.11 of the case. Debt covenants that are imposed by numerous debt holders of the company limit Loewen's actions. Dividend payouts as well as the issuance of new debt are restricted by these covenants.

Moreover, violations of the agreements lead to immediate default and accelerated repayment claims. The maturity structure of Loewen's debt is therefore likely to deteriorate even further. f) Hidden commitments Another major obligation worsening Loewen's situation is the "put option" by Blackstone that allows them to sell their share in Prime Succession Inc. and Rose Hills cemetery to 8

Loewen at prices clearly above market prices. It is questionable whether the commitment is already included in the balance sheet. Given the (improbable) short-term survival of the Loewen Group over the next one or two years, the company's medium-term viability would be heavily endangered by the arrangement as even more funds would be needed to acquire the Blackstone stake. in this point one could also add that it is also g) Loewen's inability to reimburse debt holders difficult to raise liquidity through the sales of the assets (fire sale).
1989 Operating cash flow Financing cash flow et income 7.2 46.5 6.2 1990 14.0 14.4 11.1 1991 28.7 91.2 16.5 1992 35.2 60.5 20.5 1993 47.2 139.8 27.9 1994 43.2 313.5 38.5 1995 10.2 586 -76.6 1996 -46.9 813.1 63.9 1997 -160.7 671.0 42.7 1998 -124.5 486.3 -599.0

Table 9: Cash flows and net income of Loewen Group

Add another row 'short term debt' on this table.

Loewen's negative operating cash flows as well the enormous deficit in net income in 1998 (mainly due to unanticipated depreciations) show their inability to generate the profits and the cash flows that are required to satisfy the commitments related to its high level of (short-term) debt. Moreover. the imbalance between financing and operating cash flows becomes apparent and exposes Loewen's exclusive reliance on external funding to achieve growth. The decrease in acquired cash from financing activities also indicates their growing difficulties to obtain new funds. instead of 'mainly due to unanticipated deprecations' we should write 'mainly due to h) The costs of financial distress asset impairment expense for a write down of This is the propeties to fair value' For Loewen being in financial distress is not only dangerous but very costly. The most answer for apparent effect is, of course, the restricted ability to raise new funds, which would be needed the 2nd part of the urgently. Financial distress leads to deteriorated credit ratings, increased borrowing costs, a diminished number of investors willing to lend money to the company, potential default events question that would trigger new repayment commitments and also a decreasing share price that probably and scares off equity investors. should be The company's growth strategy that heavily relies on external funding is therefore destined to fail. written The decrease in acquisition expenditures during the last two years is clear evidence of that (from separately $619.9 million in 1996 to 546.5 in 1997 and 252.6 in 1998). A last effect to mention concerning and not in fund raising is the violation of debt covenants leading not only to aggravated issuance of capital point h. but even to a prohibition. Moreover, asset sales become almost impossible because the assets were granted as securities for the debt holders. As a consequence, Loewen is neither able to generate cash flows from operating nor from financing nor from investing and its liquidity is therefore fully disrupted. Further indirect bankruptcy cost incurred by Loewen result from the fading trust of its stakeholders. On the one hand employees might lose motivation and confidence, which negatively influences their performance. As a consequence, operational efficiency is likely to deteriorate even more. On the other hand, customers can also be afraid of choosing Loewen as their death care service company, particularly in the pre-need services sector where the viability of the company is the pre-condition of the deal. The following decrease in sales would substantially worsen Loewen's operating cash flows as a large share of their costs is fixed and could thus not be reduced parallel to the sales. Direct costs of distress will occur when the company files for bankruptcy. Legal fees, business disruption costs, losses in value from fire sales and advisory and consultancy cost 9

will be inevitable. In 1998 the first direct costs have already been incurred as investment bankers were employed. 4. What are Loewen's alternatives? What would you recommend to John Lacey? At the beginning of 1999 Loewen Group faces serious financial distress. While only having $30 millions in cash on hand and no major positive cash flows to expect, $42 million coming due in April and March 1999, out of a total $875 millions of long-term debt coming due in 1999, have to be reimbursed. The company thus has to find new sources of financing to meet its commitments. Basically, four possibilities of obtaining funds emerge: 1) Issuance of new capital 2) Sales of assets to reimburse debt holders at least partially Where is the point to renegotiate 3) Finding an investor to buy the company with the investors and undergo 4) Filing for bankruptcy restructuring? Just looking at these points. a) Issuance of new capital Generally, two kinds of capital can be issued. Raising sufficient funds with new debt is practically impossible due to the reasons named above: limited options to pledge new assets, numerous existing covenants, junk rating by S&P, a recent fall of 30% in bond prices and an inadequate ability to generate profits and free cash flows. Public investors as well as banks will not be willing to accept these risks at acceptable conditions for Loewen. They would have to accept the old debt holders to be senior to them while old debt holders would have to be convinced to permit the issuance. Present failure to negotiate a debt restructuring with the banks makes that seem highly improbable. On the other hand, issuing equity is equally difficult. Financial ratios, missing trust by investors, debt covenants and the recent deterioration of the stock price will not allow generating sufficient funds by a seasoned equity offering. Even diluting present equity holders by 90% with a 666 million of shares issuance would generate less than $1.285 billion. Moreover, the old shareholders who have just witnessed the price drop from over $40 to $1.93 are likely to be reluctant to invest further cash in Loewen. b) Sales of assets to reimburse debt holders Raising large amounts of cash through asset sales will be extremely difficult, too. The numerous covenants concluded to secure existing bank debt and securities substantially limit the number of assets - cemetery and funeral homes - that could be sold, as the most valuable ones are already pledged and the company would not be free to sell them. Moreover, the complexity of the acquisition agreements would probably not allow for a quick sell. The recent license suspensions for accounting violations in Florida as well as the major writedown of big parts of Loewen's assets will also send bad signals to potential buyers. Thorough preacquisition due diligences will be the least to be expected, which would make things even more complicated given the time pressure Loewen Group faces. Furthermore, ongoing anti-trust investigations by both federal and state authorities against SCI could eliminate a potentially important buyer. A last problem to mention is the knowledge of prospective purchasers about Loewen's problems. They are therefore likely to take advantage of the situation and to use their bargaining power. c) Selling the Company 10

Similarly, rapid sale of the whole company seems unlikely. The Federal Trade Committee or the US Department of Justice might not allow selling Loewen to SCI, whose share exchange offer at 45$ per share was refused two years ago. Apart from these problems, SCI's willingness to buy Loewen is very questionable given the high level of debt and the operational problems of the target. Other players in the market are probably too small to provide the funds necessary to buy and restructure Loewen Group. In addition, debt-holders' covenants would include a clause specifying that a change of control is considered to be an event of default, resulting in immediate termination of the loan.

d) Filling for multi-jurisdictional bankruptcy Therefore, placing the firm under Chapter 11 protection, before the firm goes totally bankrupt and reaches insolvency should be John Lacey's first priority. As Loewen Group also has operations and assets in Canada and in the UK, it should try to file for bankruptcy simultaneously in each country, to prevent its creditors from ceasing UK and US assets in response of the firm filling for bankruptcy in the US. Because of potential jurisdictional conflicts and different bankruptcy laws, John Lacey must ask qualified legal counsels to guide the firm through legal planning and proceedings. With regard to Chapter 11 provisions, the anticipated minimum 2 years timeframe to propose a plan of reorganization to the judge and creditor committees should give Loewen the time to obtain new money by renegotiating with the creditors committee (debt reorganization and consolidation), cutting operational costs and selling progressively assets. Automatic stay will prevent or stop covenant breaches and cross-defaults from accelerating outstanding debt, forcing all creditors to cease collection attempts, and making post-petition debt collection efforts void. Then, new money privilege and executory contract provisions will allow day-to- day operations to continue (post petition creditors are senior to pre petition ones). With regard to the Canadian Companies' Creditor Arrangement Act, it should be noted that there are no provisions for debtor in possession financing and that the plan for restructuring can only be presented once. Also, it is easier for creditors to ask for executive managers to be removed. Thus, top executive managers might be reluctant to haste things, as there is a risk of creditors convincing the judge to replace them. Still, as a newly appointed CEO and renowned turnaround specialist, John Lacey should be confident to keep his job. In the end, we come to the conclusion that filing for bankruptcy is Loewen's only viable action. As the legal planning of filing for multi-jurisdictional bankruptcy will take some time, Loewen needs to avoid covenant breaches leading to default until its legal strategy is ready. Meanwhile, rapid but limited sales of assets might be necessary in order to meet the March and April repayments.2 Afterwards a restructuring of the company can be tried, although the successful realization of that undertaking is rather improbable.

Note that it might be possible to latter ask the judge to void pre-petition sales if the price obtained was less than fair market value.

11