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THE FINOVA GROUP, INC. (A) Case Solution & Answer

THE FINOVA GROUP, INC. (A) Case Solution 

Introduction

In March 2001, Finova Group, a finance company with$14 billion worth, filed for bankruptcy, which was considered as the largest bankruptcy filing, and it was the greatest default on the bonds after the Great Depression. However, the filing for bankruptcy gave rise to a bidding contest by different vulture investors, including: Leucadia, Berkadia and the GE Capital. Berkadia made the final agreement for the company’s re-organization, in which it offered $ 6 billion to the company, and it received 51% ownership of the company’s shares, without offering any developmental plans for the restructuring. Other investors believed that the company had a great going concern value and it was supposed to be acquired by Berkadia at a very lower rate. The vulture investors bought the debt and equity capital of the company so that they could earn some profits on the company’s bankruptcy. (Staurt C Gilson, 2003).

1.Finova’s Business Model and Growth Strategy

In 1954, Finova started operating as “Greyhound Finance Corp”, which went public in 1992, and was then renamed as Finova in 1195. The business model of the company was based on offering customized level of financial services to the specific market niches. The products included:equity capital, revolving credit, term loans and leases. The niche market included three specific segments, i.e. Commercial Finance, Specialty Markets and the Capital Markets. Finova’s largest and profitable business line included the transportation finance, which provided equipment loans, direct finance and loans for acquisitions for different airlines around the world. The transaction in a transportation segment usually reached $5 million to $30 million, and it had even reached to $100 million at times.Finova’s product line also included financing receivables of the time share resorts, where a transaction usually involved $5-%35 million. Finova’s growth was mainly due to its conservative lending strategy; whereby, it offered loans at a higher interest rates as compared to its competitors. Many of the customers typically owed $1.2 – $2million to the company. According to analysts, the policies adopted by Finova in fits financial services, were conservative but it had been a pride for the company, in maintaining a stringent lending discipline. In comparison to a bank with deposits as a source of financing; Finova provided its financial services from its investments in commercial papers, investment grade bonds and loans etc. The two main reasons behind Finova’s growth till 1999, were: aggressive lending and acquisition programs. Finova was believed to be a departmental store by the management, from where not even a single customer went unversed, as a result of its acquisitions. Furthermore, the company made massive-profits, by charging higher interest rates (i.e. high spread between the cost of capital and the interest charges) as compared to different competitors. In 1999, the spread amounted to 5 percentage points, which was one to two times higher than the interest rates charged by any typical bank. This aggressive growth strategy of lending and acquisition enabled the company to be the best performing company among 400 companies in Forbes Platinum 400’s list. Also, the company was given 161strank in 2001 and 121st rank in 1999 by the Fortune magazine, as one of the top performing companies in America.

2.Indicators of Economic Troubles before the Announcement

The key indicator of Finova’s economic troubles lies in its policy to provide multiple and large financing transactions to a single customer, which exposed the company to a higher risk of default by the client, as the transaction started from $5million, and had even reached $100 million at times.The customers of Finova included only 100 companies, whose credit worthiness were not strong, as required by the banks. These large transactions to an individual customer led the company to be in the write-off of $70 million towards a single client, i.e. West Coast Computer Distributor. Similarly, looking at financials (See Exhibit 2),the company’s percentage for non-accruing assets increased, its provisions for credit losses increased, dollar value of non-accruing assets and reserves for credit losses also increased suddenly in 2000. For instance, the provisions for credit losses increased from $97.7 million to $111.2 million and the non-accruing assets increased from $229.3 million to $421 million, out of which $117.4 was only given to Sunterra Corporation. These figures can be considered as a result of wrong target market and multiple transaction policy to an individual customer. The write-offs suddenly increased as the company was providing loans to the companies which had bad credit histories, and this whole system was facing breakdown in credit controls, which created further economic disturbance for the company, in 2000…………………….

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