La Polar Crisis

La Polar is the fourth largest department store operator in Chile, with 40 locations totaling roughly 161,000 square meters of selling space. In addition, the company has five department stores in Colombia. In both Chile and Colombia, La Polar provides credit to customers through its credit card operation. In terms of department store sales, La Polar has about 9% market share in Chile.

The last financial problem that happened in La Polar S.A. in 2011 was one of the biggest crises that Chilean companies suffer in the last time. And the problem was worst when SERNAC was who show the first part of the iceberg due to the clients were complaining, even the high manager never did nothing about this issue.

The problem started as a straightforward notification to stock market overseers, then it became in a significant revelation of corporate fraud in the Chilean financial history. In June the company (one of the 4 biggest retailer in Chile) informed to the market that the previous financial reports that they made had very under provisioned its consumer card portfolio. This fact was hide to the market and the CEO and the principal administration never reflected the lost in each time. Indeed, they took this bad debt and put together with the normal debt, in this sense they renegotiate unilaterally the debt without any consents of the customers or at least awareness of them. But, it was not only a customer problem, because the shareholders never know about these uncollective debts. This problem affects around 1 million of La Polar’s customers and was a great magnitude.

This problem was showed when SERNAC received several complaints from La Polar’s customers about how the company manages the customer credit program. One year later the company announce that loan loss reserves would increase in US$100 million from $421 to $521, it was more than eight times what it earned in the previous year, around $64 million. Notwithstanding, only one week later the company published that the estimate was doubled to $884 millions, and probably it could rose to $1.13 billion. All of this news meant that in the first week after the announcement the stock’s price declined by more than 80%, losing more than $1 billion in its market value. We can see how the stock price goes down in the next graph.

The stock performance was under market and it fell a lot in 2011 when the company assumes the problem and the market could realize about the magnitude of this fraud. The first day after the announcement the stock fell 42%, only in one day

On the other hand, if we analyze the yield on the La Polar’s bonds, it increased from 1.37 to 23.98. Indeed, the risk classification of La Polar’s bond reflex the change in the financial capacity to respond or paid it, as a consequence the of this bad administration and management the risk past from A- to D, it does mean that the bond that in the beginning was a strong bond change to a bond

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