What
is Mezzanine Finance?
Mezzanine finance
is corporate debt that, from a
security
perspective, ranks behind senior debt finance such as traditional bank
loans and overdrafts, but ranks in front of equity investment. This
increased risk and the fact that there is little or no security
available, means that a higher investment return is required. The
return may be in the form of a higher interest rate, or equity
participation, or some other form of deferred payout.
|
The
Course
This two-day interactive
course offers a practical study of the techniques and pricing of
mezzanine, subordinated and equity-linked debt with a special
emphasis on private corporate clients.
The course will
include case studies of actual Fortis deals and other
subordinated financings, showing how mezzanine debt can serve to fill
the financing gap between debt and equity. We'll use
lecture-discussions, spreadsheet analysis, deal memorandums and
hands-on
exercises. These will give participants the opportunity to demonstrate
their
understanding of techniques that can be employed in structuring
transactions for corporate cleints.
Some
Features of the Course
What can participants expect to gain from this course?
- Understand the key role that subordinated
mezzanine finance can play in Fortis principal investment strategy
- Learn
or update knowledge of required rates of return, cost of capital, and
acquisition finance
- Identify the main elements of mezzanine
finance
- Be able to identify appropriate
subordinated and mezzanine financing techniques for particular
corporate financing situations
- Work out appropriate rates of return for
risks taken, and how to structure the payment of these returns
- Perform a cash flow analysis to model the
senior, mezzanine and equity paydown
- Learn post-deal mezzanine loan management,
restructuring and exit decisions.
Participants
will be provided with a package of
materials
useful for developing mezzanine financing proposals, including
pertinent articles, case studies based on
actual deals, and sample
spreadsheets.
Outline
of Workshop
Date
|
Topics
|
Resources
|
| Day One |
Corporate Finance: Debt, Equity and Mezzanine
- What is Mezzanine Finance, and where
does it fit into a company's financing structure?
- Why mezzanine for Fortis Bank
principal finance unit? Why
participate in more than one level of the client's capital structure?
- Case
study: Viva Bulgaria. Entry and exit in a mezzanine loan.
- The Fortis Mezzanine Matrix
- Application:
Tripod Enterprises. Alternative solutions for a Fortis PF
client.
- The investor's required return on
debt, and on equity
- The corporate cost of funding:
techniques of effective cost analysis
- Common and preferred shares: what
required return?
- Case
study: Target Shipping. We consider the leverage and required
IRR to justify an investment in this company.
- Cost of funding with debt, equity and
hybrids
- Use and pricing of debt-with-warrants
- Case
study: Singapore Land warrant-linked loan facilities. Why did
this company use warrants in its debt financing?
- How would we estimate a client's
effective cost of financing? (Example: Dubrovnik Eyewear)
- Can we be sure to include the value
of options in negotiating loan term sheets?
- Callable debt: pricing the borrower's
call options and prepayment rights
- Design of convertibles, warrants and
other hybrids for corporate clients (Example:
Photronics Convertible Bond)
- Use of mezzanine and hybrids in
acquisition finance and ownership transition
- Case
study: Logistic Services (Turkey). What options does the
borrower have in this proposed mezzanine financing?
- Spreadsheet analysis of
warrant-linked debt
Mezzanine Financing Techniques
- Checklist of senior and subordinated
financing techniques
- Global default and recovery tables
- Second lien versus senior-sub
mezzanine
- Case
study: Second Lien Facility. How would you adapt this term sheet
to your client's needs?
- Sale-and-leaseback financing
- Step-up rates, PIKs, participations,
warrants, preferred
- Case
study: PIK Note.
- Seller notes (vendor finance)
- The structure and pricing of sub debt
with warrants
- Example:
Woodstream's
Mezzanine. What is the effective cost to the issuer of this
mezzanine debt issue?
- Terms and conditions of a mezzanine
termsheet
- Case
study: The Woodstream Termsheet. Examine this termsheet. Which
features would you, as investor, insist on? Where would you be willing
to give way?
- An alternative to warrants:
valuation-linked exit
- Performance-linked participation
debt: an alternative form of mezzanine
- Spreadsheet analysis of EBITDA-linked
debt
- Case
study: Maputo Fruit. What are the advantages and
disadvantages of the Contingent Payment Unit in this deal? What are
the
exit possibilities?
|
Presentations
fortispf-mezz1.pdf
fortispf-mezz2.pdf
Case Studies
Viva
Bulgaria
Target Shipping
Singapore
Land
Logistic
Services (Turkey)
Second
lien facility
Sealy
PIK
Woodstream
Mezz
Woodstream
Termsheet
Spreadsheets
wacc.xls
dubrovnik_eyewear.xls
convertible_and_wacc.xls
fitch_loss_tables.xls
woodstream.xls
warrant_mezz.xls
|
Day
Two
|
Debt
Capacity Analysis and Mezzanine
- Debt capacity analysis
for private companies and divisions
- Case
study: Nukem Security Services.
A private group is looking for a means of financing the purchase of a
division of a utility. Participants estimate the company's debt
capacity and the buyers'
financing options.
- Focus: synthetic ratings and debt
pricing
- How to structure and price the
leverage for an acquisition or buyout
- Post-acquisition re-financing
- Paydown
and exit analysis
- Exit
and ownership transition
- Case
study: Funding the ISS Buyout. Financing and legal structure of
an leveraged acquisition, illustrating the use of debt capacity
analysis and mezzanine finance.
Mid-Cap Mezzanine and Hybrid Capital
- Mezzanine in mid-cap market
acquisition finance
- Terms and pricing of the mezzanine in
no-liquidity situations
- Setting targets and linking payout to
performance
- Evaluating a funding proposal with
revenue-linked mezzanine debt
- Case
study: Suriname Hydropower Services. Can you model the rate of
return on the senior and mezzanine funding for this privatization
investment?
- Post-deal mezzanine management
- Hybrid capital notes and
senior equity finance
- Application: Lottomatica. What effect
did this hybrid financing have on the company's rating?
- Review: the cost of equity capital
and value of warrants
- Case
study: Planet Shipping
- Four forms of mezzanine for SME
clients: performance-participation notes, subordinated debt with
warrants, convertible notes, and preferred stock
- Post-deal mezzanine loan management,
restructuring and exit decisions
- Discussion
session of Mezzanine Matrix and application to Fortis corporate clients
|
Presentations
fortispf-mezz3.pdf
fortispf-mezz4.pdf
Case Studies
Nukem
Security Services
The LBO of
ISS
iss_financials.xls
Suriname
Hydropower
Planet Shipping
Spreadsheets
lbocapacity2.xls
financing_abc.xls
suriname
solution
financingiss.xls
participation_mezz.xls
|
Additional Resources
Background
Reading
Notes
on cost of
capital
and capital
structure
Corporate
Finance and Debt
Capacity Tables
Note
on Leveraged Buyouts
Second
Lien Loans
Mezzanine
Finance 1
Mezzanine
Finance 2
Subordinated
notes term sheet
Useful Links
fitchratings.com (bond
ratings)
damodaran.com
(industry ratios)
advfn.com (corporate financial ratios)
About the Instructor
Dr. Ian
Giddy,
born in South Africa, has taught finance at NYU, Columbia, Wharton,
Chicago and
in over 40 countries worldwide for the past three decades. He was
Director
of
International
Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The
author of more than fifty articles on international finance, he has
served
at the International Monetary Fund and the U.S. Treasury and has been a
consultant with numerous corporations and financial institutions in
North and South America, Europe, Asia, the Middle East and Africa. As a
banker and consultant he has been involved in the
growth of the structured finance market in the USA, Europe and Asia. He
is the author
or co-author of The International Money Market, The Handbook
of International Finance, Cases in International Finance,
Global Financial Markets, Asset Securitization in Asia and The
Hudson
River Watertrail Guide. He and his wife are
the founders of Cloudbridge, a nature reserve in Costa Rica.
|
