Financing MG Rover Through Bankruptcy: Some Risk Financing Lessons

Abstract

The current study delves into the post-loss financing options MG Rover (MGR) could have used, in addition to the UK government bridging loan, before its collapse in 2005. An examination of the pre-bankruptcy state of MGR was carried out, and it confirms the existence of high security holder agency costs arising from debt overhang and adverse selection problems. In addition, the findings show that due to steep private information costs and negative trend in earnings, the use of equity, debt, government loans and contingent financing as post-loss funding vehicles was not an optimal financial decision in markets where capital is rationed. In this case, the existence of both trade debt and legacy costs made it difficult for potential investors to assess the full value of MGR's assets, before debt retirement. Issuing low priced risky securities would have imposed a net loss on existing securities and made them unattractive to investors. A conclusion reached is that the only way of addressing post-loss risk financing problems at MGR was either through issuing securities whose value was least sensitive to revelation of ultimate information or through bankruptcy which is what they rightly did.