Bourland Case Study
Question 1: Without performing any numerical analysis, what are the qualitative issues (pros and cons) that Bourland should consider in comparing and evaluating the three financing options being considered?
Following is a list of considerations in comparing the three financing options.
Forecast the performance of the properties and ascertain if they are worth keeping.
Identify which financing strategy best fits the corporate strategy of the firm.
The amount of debt that is required across the two properties.
The risks associated with each financing strategy.
Understand if either option helps Glen to retire in Florida.
The importance of maintaining a long-term relationship with the Bank of Boston.
Understand that increased capital from securitization is expected to lower barriers to entry for developers or acquirers.
Understand the extent of asset liability matching for each option.
In terms of fees, identify the cheapest option for Bourland.
Understand the inherent interest rate risk in addition to the upfront cost of financing.
Analyze the counterparty risk for each of the three options.
Identify the option that minimizes equity injection.
Understand if there is a need to diversify the sources of capital for the firm.
Analyze the flexibility loss due to covenants such as debt service coverage ratio requirement.
Prepayment optionality could be critical if business does better than expected.
Non-recourse financing limits personal liability in case of default.
Long maturity of financing gives the flexibility to weather an economic downturn.
Calculate the switching cost (including opportunity cost) to switch from Bank of Boston.
Using the above parameters, we can assess pros and cons of the three options.
Miniperm
Pros:
Lowest upfront cost assuming additional 2.2% not paid to cap interest rate at 11%
Maintain and leverage relationship with Bank of Boston
Only option without a prepayment penalty.