France Telecom: The 2002 Financial Distress

This case focuses on the financial distress of France Telecom in 2002. It takes the student through the events that led to this crisis by focusing on the succession of credit rating actions from 1995 through 2004. It gives the information needed to understand the changes in FT's business environment, how management responded, what wake-up calls FT received from the CRAs, how FT's asset quality evolved, what hidden forces affected its moves, what off-balance sheet liabilities it incurred and how its financing dynamics worked. The case allows the student to draw conclusions as to why and how FT's credibility collapsed, dragging creditworthiness down in its fall.

The case is very versatile and the teacher can pursue any or all of the following objectives, during two to three classes: - How to do credit rating analysis and reach a credit rating action; - How to formulate and tactically implement financial policy in the light of the dynamics of the business, competitive and securities markets cycles; - How to anticipate financial distress, how to see and measure it, how to get out of it; - How to measure, analyze and manage financial flexibility; - How to apply structural Merton type models to extract default probabilities from market prices (a C program can be made available to compute implied asset volatility, asset valuation and default probability); - How to analyze the path to financial distress by applying put-call based valuation of the short put of the debt.