Rosario Acero

ROSARIO ACERO CASE

ISSUE STATEMENT. How should Pablo Este and the rest of senior management of Rosario Acero ("RA") raise the $7.5 million in long-term capital RA needs? Should they: (1) issue a private placement of debts and warrants (the "debt scenario"); (2) undergo an IPO (the "equity scenario"); or (3) sell the company? For the purposes of this analysis, option number (3) is not considered as a viable option because senior management is presumed not to desire a complete change of control at this time. Should we consider it???

FINANCIAL ANALYSIS. Income Statements Effects. Top-line (revenue) numbers are the same under both the debt and equity scenarios, as are COGS, SG&A and EBIT. Interest under the equity scenario is considerably lower, both in the service of older debt (which is paid down under the equity but not under the debt scenario), and in the new loan (which the equity scenario doesn't take on). Thus, profit is significantly higher under the equity scenario (see Exhibit 1). However, EPS under the equity scenario is lower.

Balance Sheets Effects. Although total liabilities and equity remain the same under both scenarios (because both options raise capital by issuing some outstanding commitment), the components change under the different scenarios. Current liabilities are significantly lower under the equity scenario, whereas new long-term debt is obviously much higher under the debt scenario. Deferred tax liability is also higher under the equity scenario, as is Common Stock, APIC, and Retained Earnings ("RE").

RA's ratios differ under both scenarios as well. EBIT/Interest is much higher under the debt scenario, because of the required debt payments, but still lies at a comfortable margin of 4. There are more outstanding liabilities relative to equity under the debt scenario, but this could be due to the dilutive effects of greater amounts of equity. Profit/revenues are higher under the equity scenario, and Profit/equity is higher under the debt scenario, but this is most likely due to the dilutive effects of greater equity.

RECOMMENDATIONS TO SENIOR MANAGEMENT. Pursue the equity scenario. The equity scenario provides RA with greater flexibility to respond to unforeseen risks financing requirements that may occur. The principal risks RA faces are: (1) Interest rate risk: the risk of debt payments increasing if inflation continues to rise and interest rates increase as well; (2) Strong Covenants risk: the debt covenants are fairly strong and require RA to maintain an EBIT