Sealed Air Corporation’s Leveraged Capitalisation Essay Example

less inventory, less capital expenditure and faster collection. World class Manufacturing would help the firm maintain fewer inventories to cut the cost on inventory by applying the principles of Just in Time and Total material usage. Through Total Quality Control measures the firm would be able to cut the cost which is incurred on reworking of the products.

Employee involvement would help the firm achieve the objectives of JIT, TQM and TMU. Total preventive maintenance would help them reduce the expenses incurred on fixing the defective plant and machinery and the opportunity loss arising out of less or no production. The company was generating "free cash flow". Free cash flow in excess of that required to fund all the company's positive net present value investment opportunities tempts companies to waste money.

At Sealed Air, capital tended to have limited value attached to it - cash was perceived as being free and abundant. For some companies, the most productive use of free cash flow is to distribute it to shareholders and allow them to reinvest of spend it as they choose. Paying out today's cash balance ($54 million) would not have solved the problem at Sealed Air Corp. Borrowing and paying the proceeds to shareholders served to reinforce management's promise not to retain future excess cash. It also helped the company in formulating a new priority list for operating Sealed Air Corp.

The constraint imposed on capital expenditure under the bank lending agreement in our opinion is bad for the company because should the opportunity arises in the future for production more than the installed capacity the company would not be able to be meet the

requirements of their existing customers leave alone the new customers. However, the company has studied the environment is of opinion that they have sufficient production capacity to meet its future requirements. The company may feel the heat only when there is some unusual surge on the demand side.

The company has good free cash flow and they are confident of increase in the future cash flows. Moreover they will not be paying any dividend for atleast a couple of years in future so the company can use the cash flow to repay the interest and the principal in excess to the statutory requirement. This will help the company in creating a good track record and will also increase the credit rating. Based on the assumption that company will follow the above mentioned strategy for repayment of interest and principal we are of opinion that managers will be able to successfully renegotiate this covenant in company’s favour.

Increase in leverage would not be good for all the companies. For a company which has a very good growth potential such leverage would be suicidal in nature. To capitalize on the existing growth potential the company would be required to make capital expenditure to increase the production capacity. Such companies may find it difficult to raise the required funds from debt market as well as the equity market. In our opinion such an increase in leverage will be good only for those companies which have fairly good free cash flows and excess of installed capacity.