Kingston-Murray Enterprises

The senior financial analyst for Kingston-Murray Enterprises must decide what funding technique to recommend to the company's chief financial officer. The firm's recent discoveries of gold and sulfur reserves have created a need for $500 million in operating cash. Because of the company's low credit rating and high cost of borrowing, senior management has restricted the financing choices to either common stock or convertible bonds. The zero-coupon convertible under consideration is a LYON (liquid-yield option note). Before recommending whether to issue LYONs, the analyst wants to understand fully the details of these subordinate, zero-coupon, callable, putable, convertible notes. Excerpt UVA-F-1108 KINGSTON-MURRAY ENTERPRISES On June 30, 1991, Bonnie Tyler, senior financial analyst for Kingston-Murray Enterprises (KME), was contemplating what funding technique she should recommend to the chief financial officer. One intriguing possibility for raising $ 500 million in operating cash for the company was to issue zero-coupon convertible bonds. The need for the funds had been created by two recent discoveries of gold and sulfur reserves which KME wanted to begin developing as soon as possible. As a result of the company's low credit rating and high cost of borrowing; however, senior management restricted the financing choices to either common stock or convertible bonds. A zero-coupon convertible under consideration called a LYON (liquid-yield option note) had been introduced to the market in 1985, and gradually gained acceptance as a viable alternative to the more frequently used coupon-bearing convertibles. Before recommending whether Kingston-Murray Enterprises should issue LYONs; however, Tyler wanted to understand fully the details of these subordinated, zero-coupon, callable, putable, and convertible notes. Company History Kingston-Murray Enterprises was a Fortune 300 company involved in the exploration, discovery, development, production, and processing of natural resources. KME's principal products included copper, gold, sulfur, oil, natural gas, and uranium. The company was also one of the largest phosphate-fertilizer producers in the United States. Although KME was officially formed in 1981, as the result of a merger between Kingston Minerals Company and Murray Oil & Gas Company, its history dates back to the beginning of the century. Founded in 1912, Kingston Minerals began operations as a Texas-based sulfur-mining company. By the mid-1930s, Kingston Minerals had expanded into neighboring states. From then until its merger with Murray Oil & Gas, Kingston Minerals continued to expand, both around the globe and into other areas of natural-resources exploration and production. . . .