The case study is about the National Convenience Store that incorporated in 1992. The president of the company is Van Horn and he was also the Chief Executive officer of National Convenience. It was one of the largest 20 largest operator’s convenience stores in the United States of America. The company has been working under Chapter 11 of the Bankruptcy Code since 1991. It is operating 725 specialty convince stores in six cities in three Sunbelt states. In the area of Houston and San Antonio, it was operating a large convenience store.
Its stores are extended-hour retail facilities and all of the stores were open every day of the year and over 95% operated 24 hours a day. It offers a diverse range of over 3000 high traffic items including fast foods, beer, wine, beverages fountain, candy, snacks, groceries, soft drinks, groceries, health and beauty aids, magazines, newspaper, seasonal, automotive products and promotional items.
The prices of National Convenience products are comparatively higher than other super markets and other retail outlets. It serves approximately 700,000 customers a day. Its sales are mostly in the form of hard cash, whereas, the company accepted most major credit cards as well. The company was performing well in 1984 but after the financial crises in Texas, the operation of the company was directly affected in the fiscal year 1985. The financial crises of Texas directly affected the customer base of the company and due to the crises people became jobless in the year 1985. In the financial crises of the company, the management of the company adopted the strategy of increasing stores that focused in key markets while selling stores in market where it had the limited presence.
The company was in commission under Chapter 11 Bankruptcy Code, therefore; it seeks to emerge from Chapter 11. Thus, the company is considering restructuring its debt ratio to determine the enterprise value. The various electorates such as unsecured debt and secured debt, the company is considering finding out the enterprise value that is related to the management’s interest.
The company had the higher burden of debt; therefore, everyday it lost opportunities. The company is paying more for the gasoline, which represented approximately 40% of sales. It is considering to come off of Chapter 11 and reduce the debt burden from the company by restructuring the business operations and applying such activities though which the company can do lot of cost savings therefore, it had to complete a plan of Reorganization and have it approved by its creditors. The company has to make a forth plan that how will the company would change its operations after Chapter 11.
Financial performance analysis
The financial crises of Texas had also affected the operations of the company as it had lost most of it customers, therefore, its customer portfolio decreased because of the financial crises of the company. After the financial crises, its insurance, interest expense and rent expense had increased.
It had repositioned its assets by applying repositioning strategy between 1985 and 1988. It had increased its debt ratio by issuing term loan because of which its financial leverage had increased. In 1988, its debt to equity ratio had increased drastically from 2.5x in 1988 to 4.6x in 1988. The increased in debt ratio also tend to increase the cost of debt of the company from $ 22.2 million of interest expense to $ 34.8 million in 1989. This measure allowed it to meet debt repayment schedule on time and reduce its debt to equity ratio to 2.7x and paid around $125 million long term in order to reduce the debt burden from the company.
The Chief executive officer of the company initiated that the in-house compensation program could be managed more effectively and in result in significant cost saving. The Chief executive officer of the company also believed that the short term obligation would continue to be a burden for the company as the old claim will be rising out of the state-managed program. The company had faced a huge problem because of debt burden, therefore, the company’s EBITDA levels per store reduced by more than half from $ 42,626 in 1990 to $19,190 in 1991.
The company needed to cure its defaults of various financial coverage ratios test. If the company wants to take the debt form the bank, then the company has to put additional collateral to its bankers. The company was forced to file for bankruptcy under chapter 11 and it had to put collateral on of all of its assets including gasoline and merchandise inventory as they could be put as collateral in order to raise debt…………………
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