Financing MG Rover Through Bankruptcy: Some Risk Financing Lessons

Risk Management, Vol. 9, pp. 59-81, 2007

Posted: 15 Apr 2010

See all articles by Stanley Mutenga

Stanley Mutenga

City University - Cass Business School

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Date Written: 2007

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.

Keywords: MG Rover, Financial distress, Post-loss risk financing

Suggested Citation

Mutenga, Stanley and Staikouras, Sotiris, Financing MG Rover Through Bankruptcy: Some Risk Financing Lessons (2007). Risk Management, Vol. 9, pp. 59-81, 2007, Available at SSRN: https://ssrn.com/abstract=1588963

Stanley Mutenga

City University - Cass Business School ( email )

London
United Kingdom

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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