Trefica of HondurasMark BainesJawad HaiderWilliam Myers

FIN 570Fall 2008

October 8, 2008

The Company

Bekaert had original ownership Political unrest in S. American countries in early 1980’s Antonio Vente bought Trefica in 1984 Production and commercialization of wire-related products Rebar, chain-link fencing, nails, metal wire, wire mesh Annual wire drawing capacity at 72,000 metric tons Annual revenues at 483 million Honduran lempiras (1997) Choluteca, Honduras

Honduras

Second largest country in South America Bordered by El Salvador, Guatemala, Pacific and Caribbean Per capita income at $750 Emerging democracy Least developed economy in Americas 60% agricultural economy Emerging market

Honduras (cont’d)

Honduras (cont’d)

Emerging Markets

Markets and culture are demanding High rates of emigration to the developed world Fragmented markets Populations are youthful and growing Limited income and space Weak infrastructure Underdeveloped technologies Weak distribution channels 86% of the global markets are developing

Trefica’s Market

Virtual monopoly in 1980’s Lack of competition High tariffs and import duties Seller’s market Political turmoil in the region Honduras total external debt exceeded $ 3.3 billion Lempira devalued – exports grew Economic reforms introduced in 1990’s Consumer inflation running at 36% in 1991 Bank loan rates running at 32% in 1997

Problem Areas Financial distress Ownership and control Quality and Capacity issues Country debt Global competition Faulty machinery Sales and Marketing

challenges Least government support Red flags on Income statement

(Millions of Lempiras) Trefica Industry average

Selling expenses 8.8 1.3

Interest expenses 10.8 2.2

Causes and Effects

Monopoly

High tariffs High import duty

Political turmoil Lack of competition

Causes and Effects (cont’d)

Illiquid financial sector

High political risk

Country debt Only S.T local debt

No foreign L.T debt

High selling expenses

Ownership issues

Currency devaluation

Financial distress

Issue Matrix

Marketing Strategy

COGS

Ownership & Control

Financing Resources

Importance

Urgency

LOW

LOW

HIGH

HIGH

Alternatives

Stay the course Find a U.S. partner Sell control to a Mexican supplier Sell control to LAEI

1. Stay the Course

Solidified relationship with LAEI Favorable cash position Ownership maintained by the Vente family Focus on restructuring debt

2. Find a U.S. Partner

20% equity position in Trefica Access to new distribution channels and

new credit Product rationalization Injection of US$1.9 million; capital base

increased to US$8.6 million Juan Antonio would remain as company

president

Buyout of LAEI Majority stakeholder of Trefica (66%) Injection of US$4 million; capital base

increased to US$10.7 million Juan Antonio to remain as company

president until 1999

3. Sell Control to a Mexican Supplier

4. Sell Control to LAEI

Sell remaining Vente stake to LAEI (55%) LAEI proposal – US$5 million

Decision Criteria

Maintain ownership of Trefica Secure long-term debt financing Seek opportunities for increased

distribution and expansion

Ownership Breakdown

Stay the course Find a U.S. partner Sell control to a Mexican supplier

Sell control to LAEI

55%

35% 34%

20%

66%

45% 45%

100%

Vente family U.S. partner Mexican supplier LAEI

Debt Structure

1997 1998 1999 2000Short term debt in lempiras 101,746,784 33,638,283 32,879,043 31,090,195 Short term debt in US$ 52,415,010 18,112,922 17,704,100 16,740,874 Total short term debt 154,161,794 51,751,205 50,583,143 47,831,069 Long term debt (US$ debt) 16,930,243 96,109,381 93,940,124 88,829,130 Total debt 171,092,037 147,860,586 144,523,267 136,660,199

1997 2000

Interest Rate Comparison – U.S. vs. Honduras

Alternative Analysis & Evaluation Alternative #1 - Stay The Course Generating increased cash flows, but no

accounting profit currently Need to pay down high floating interest short-

term loans which is unlikely on current path Ideal for family to maintain ownership but

requires time they don’t have Too risky an alternative with current limited

market access

Alternative Analysis & Evaluation Alternative #2 – Find a U.S. partner 20% equity and U.S. access would increase

capital base $1.9 million to $8.6 million (+28%) – a start but not enough

Brings needed distribution access to U.S. markets

Enables moving some production to U.S. with lower costs of selling and distribution

Not significant enough capital, but access to U.S. markets might be

Alternative Analysis & Evaluation Alternative #3 – Sell control to a Mexican supplier

Family ownership drops from 55% to 34% (-38%) of larger company - not good

Increases capital $4 million to $10.7 million (+167%), buys out LAEI – loss of major supplier of 10+ years

Good capital infusion, reduces cost of debt, but potential for loss of family interest is too much

Alternative Analysis & EvaluationAlternative #4 – Sell control to LAEI

Buys Vente family out completely, increasing family capital, losing the business – not certain this is the goal

$5 million for Vente family interest (75% of current capital structure) – “manageable”

Not certain Vente family wants to lose the business and future increased cash flow opportunities, so not an option

Alternative Selection Finding a U.S. partner is most viable solution

Key: Does Vente want capital or the business? Short term debt still somewhat of an issue with

small capital infusion Entry into U.S. for selling and distribution helps

by: Immediate opportunity for distribution of potential

overcapacity Greater avenue for capital growth in U.S. markets Opening of new foreign markets with U.S. aid Maintains interest of company with Vente family

Action Plan

0-3 months - Finalize U.S. partnership3-6 months - Open commercial sales center in U.S.3-12 months - Implement production rationalization

with U.S. 6-12+ months - Utilize U.S. distribution channels 12-24 months - Open commercial sales centers in

neighboring C.A countries/Mexico and beyond Ongoing - Distribute increased revenues toward

A/P for short term floating loan debtOngoing - Continue toward global sales

opportunities