Gap Inc. (A)

It was no surprise to Heidi Kunz, CFO of Gap Inc., when CEO Mickey Drexler called asking for an update on her analysis of the company’s capital structure. She knew that her boss was getting a lot of pressure from the board to lay out a specific road map for recovering from the problems that had developed during the previous year. What had started out as misdirected merchandising decisions regarding the designs that went into their clothing stores had snowballed into a plummeting stock price and downgrades of the company’s debt by two major rating agencies. To make matters worse, these problems could quickly evolve into an increasingly ominous cash flow situation should her organization fail to secure some fresh financing. Although the immediate decision before her was whether to pursue the convertible note offering that had been suggested by their investment bankers, or to opt for a more traditional issuance of debt or equity, she understood that the real issue at stake was how to best rescue Gap Inc.’s capital structure in the prevailing market environment.