Company Debt

By the end of the year, Loewen Group's long-term debt was the highest it had ever been, at $2.3 billion (including debt due within a year). The debt structure was complicated (see Exhibit 1.9). It owed approximately $540 million to a consortium of 25 Canadian and U.S. banks, led by the Bank or Montreal. It also had over $1.5 billion of senior guaranteed notes outstanding, most of which were publicly traded ($300 million of this debt came due on October 1).

Almost all of the debt was secured, or collateralized, by various assets of the company. If Loewen were ever liquidated, secured creditors would be legally entitled to receive the cash generated from the sale of the assets that secured their debt. In 1996, the banks and the note holders had agreed to share most of their security on a pari passu basis (i.e., in the event of liquidation, the two groups of creditors would have equal claim to the resulting cash proceeds).30

Loewen also had large contingent and other liabilities outstanding. This amount included $87.8 million owed to former owners of certain funeral and cemetery properties that Loewen had acquired. For tax reasons, the sellers had chosen to be paid in installments over several years.31 In return, they had signed contracts promising not to compete against Loewen during the life of the payments ("noncompetition agreements").

The company's bank and public debt contained numerous restrictive covenants. Among other things, the covenants specified precise limitations on the amount of debt that the company could have, the amount of dividends that it could pay, and the amount of new preferred stock that it could issue. Other covenants restricted the company's ability to sell assets, or required that when assets were sold the proceeds be used to retire debt. A covenant in Loewen's bonds stated that if ownership of the company's

30The security consisted of accounts receivable and any related rights to receive payment, the capital stock of substantially all of Loewen's majority-owned subsidiaries, and a guarantee by each subsidiary that had pledged its stock. 31As of December 31, 1998, the amounts owed over time were as follows (in Smillions):

1999:

$13.8

2000:

$14.5

2001:

$11.6

2002:

$10.6

2003:

$8.9

Thereafter:

$28.4

stock changed significantly, it would have to offer to repurchase the bonds for 101 percent of their face value.

If Loewen was ever found to be not in compliance with a covenant, or it missed a scheduled interest or principal payment, an event of default would be declared. Creditors would then, after 30 days, have the right to accelerate their claims (i.e., all principal and accrued interest would become immediately due and payable). "Cross default" covenants in the debt ensured that if any one debt contract went into default, all other contracts would be considered in default as well.

In early 1999 Loewen was not in compliance with certain covenants in its bank debt. If it could not persuade its banks to waive the defaults or renegotiate the covenants, the company might have no choice but to file for bankruptcy.

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