Giddy | "Hybrid Equity and Mezzanine Finance"

Hybrid Equity and Mezzanine Finance

Prof. Ian Giddy
New York University

The Hybrid Equity and Mezzanine Finance course offers hands-on practice in structuring equity-linked, hybrid and mezzanine finance often used in connection with corporate restructurings as well as acquisitions and buyouts. It covers the design of debt or equity financing techniques in order to solve particular financing or investor problems that cannot be solved by conventional methods, with special emphasis on companies under financial stress.

The Course
The course will be taught in the context of current stressed financial markets, employing in-depth group work on case studies, financial analysis and deal documentation. The focus will be on identifying situations that call for nonstandard corporate finance solutions, and the design and pricing of the situation-specific financing instruments. Examples of such situations include equity and other forms of capital financing, private equity and buyouts, recapitalizations, stress-induced financial restructuring, and arbitrage-driven hybrid debt funding.

Hybrid and equity-linked finance spans the division between debt and equity. Techniques include convertible notes, preferred stock, index-linked securities and hybrid capital notes. Companies seek the best of debt and equity, while lenders and investors often demand the security and priority of claims offered by debt, while expecting some participation on the upside in exchange for the risks they take. Structured products refers to a range of investment instruments designed to meet investors' or issuers' special needs or constraints.

Mezzanine finance is subordinated, unsecured debt including including warrant loans, and others offer corporations and banks a means of financing during circumstances when ordinary techniques fall short. Mezzanine debt is often employed in management buyouts, divestitures, M&A and other forms of ownership transition, as well as corporate recapitalizations.

The course explains why and when corporations and financial institutions should issue hybrid securities, structured notes, mezzanine funding, leveraged finance or other forms of tailored finance. In three information-packed days of instruction and application, we offer an economic cost-benefit analysis of the techniques, an insight into the corporate finance and pricing principles, the risks and how they can be managed, methods of cash-flow modeling, and a roadmap for choosing among the alternative forms of these techniques that are employed in today's capital market.

Who Will Benefit From This Course?
The course is of relevance to both potential originators and investors in hybrid and mezzanine instruments: commercial and investment bankers; corporate finance officers; securities analysts; investment professionals; corporate treasurers and other individuals whose professional future may be enhanced by an understanding of mezzanine finance and hybrid techniques. One goal for participants is to develop a check list or rapid overview of the key criteria in a capital financing or restructuring deal, to consider when analyzing a proposal. This will help participants to grasp the main strengths and risks of each structure after an initial analysis.

Materials
Participants will be provided with a package of materials useful to the structuring and analysis of specially tailored financing techniques, including pertinent articles, rating agency reports and sample documentation from actual deals done in Europe and elsewhere. The course will include case studies of actual financings, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of deals through presentations and discussions.

Key Issues to be Explored

What is hybrid equity finance? Why and when should companies consider the use of hybrid debt, structured notes and subordinated mezzanine financing techniques?
How and when can structured and hybrid notes provide cheaper funding for issuers? From an investor's point of view, how can the security be dissected, and what drives its pricing?
How do bank regulators and the rating agencies determine the equity component of hybrids?
What is mezzanine finance? How do subordinated, quasi-equity financing techniques such as pay-in-kind, warrant-linked and and profit-participation loans work, and when does it make sense to use them? How are they priced?
What is the role of hybrid finance in the creedit crisis? How can these instruments be used in restructuring corporate balance sheets?

Pre-Course Reading

Outline of Course

Date	Topics	Materials
Day 1	Hybrid Instruments, Convertibles and Preferred Stock Overview of Hybrid and Mezzanine Finance Hybrids and Mezzanine in the Credit Crunch Debt, Equity and the "Effective Cost of Capital" When are Hybrid Securities and Mezzanine Notes Cost-Effective? Design of Convertibles, Warrants and Other Debt-Equity Hybrids Warrant Bonds and Warrant Loans: Cost Analysis When Should a Company Use Equity-Linked Financing Techniques? Cost of Capital and Quasi-Equity Instruments Focus: Convertible Bonds Assessing a Company's Cost of Convertible Bond Financing Focus: Preferred Stock Applications of Preferred Stock Issuance High Yield Bonds and Hybrid Capital Notes High Yield Bonds as a Subordinated Financing Technique: US vs European Markets Pricing and Risk of High Yield Debt Terms and Covenants in High Yield Bonds Hybrid Bonds and Perpetuals -- Debt, Equity or Both? Hybrids for Bank Capital Requirements Effect of Bank Capital Erosion on Hybrid Instruments Hybrids in Corporate Acquisition Finance Rating Agency Criteria for Equity Component in Hybrid and Capital Notes Equity Content: The Hybrid Finance Matrix Case Studies of Hybrid Bond Issuance in Europe and North America	Presentations hybrid_and_mezz.pdf hybrids.pdf Case Studies Gateway: WACC in India Singapore Land Golden Telecom Songa Convertible Sealed Air Convertible Piaggio High Yield U.S. Bancorp Hybrid TD Convertible Preferred NEC TPS Lottomatica Spreadsheets WACC_tutorial.xls beta.xls black-scholes.xls dubrovnik_eyewear.xls convertiblebond.xls convertible_and_wacc.xls
Day 2	Callable Bonds and Structured Products Callable Bonds, Options, Swaptions and Other Fixed-Income Derivatives Embedded in Structured Financing Techniques Callable and Puttable Bonds: Embedded Swaptions Demonstration of Hands-On Use of Pricing Models Estimating the Borrower's call Options and Prepayment Rights Structured Products: Performance-Enhancement versus Income-Enhancement Instruments Pure-Play Structured Products Design and Pricing of Equity-Linked Structured Notes Bonds and Loans with Attached Warrants Credit-Linked Notes Mezzanine Finance 1 Structuring Mezzanine Finance Asset-Based Finance Senior Loans: The A-B-C Structure Second Lien Debt Pay-In-Kind (PIK) Notes European Holdco PIKs and Other Developments Mezzanine Notes with Warrants Negotiating a Mezzanine Termsheet Seller Notes and Earn-Outs Acquisition Finance with Leasing Participation: Le Meridien	Presentations structured_products.pdf mezz1.pdf Case Studies Deep Ocean Callable Bavaria Bank Bond Endesa Equity Index Note Oil-Linked Notes Thunderbird CLN Sealy PIK Jefferson Smurfit Woodstream Mezz Woodstream Termsheet The Cognis Refinancing
Day 3	Mezzanine Finance 2 The Mezzanine Matrix Performance-Linked Participation Debt: an Alternative Form of Mezzanine The Participation Financing Spreadsheet What are the Advantages and Disadvantages of an EBITDA-linked Interest Rate? What are the exit possibilities? Setting Targets and Linking Payout to Performance The Language of the Linkage Puts and Calls in Mezzanine What are the Advantages and Disadvantages of a Contingent Payment Unit? What are the exit possibilities? Terms and Pricing of the Mezzanine in No-liquidity Situations Discussion of Appropriate Linkage: Turnover, Cash Flow or Profit? Exit Possibilities and Drag-Along Rights Evaluating a Funding Proposal with Revenue-Linked Mezzanine Debt Equity-Linked Bank Finance in Emerging Markets Mezzanine and Leveraged Finance Leveraged Finance in M&A and LBO deals Leveraged Buyouts: Process and Structure Example of Spreadsheet-Based Debt Capacity Analysis for Leveraged Finance Focus: Synthetic Ratings and Debt Pricing How to Structure and Price the Mezzanine for an Acquisition or Buyout Post-Acquisition Leveraged Finance: Refinancings and Recapitalizations Focus: Exit Strategies and Exit Pricing Deleverage and Restructuring: Debt-Equity Exchanges and Mezzanine Summary of Course	Presentations mezz2.pdf leveraged.pdf Case Studies Shanghai Solutions Suriname Hydropower Banco Nuevo Nukem Security Services The LBO of ISS iss_financials.xls Reykjavik Fleet Leasing Spreadsheets suriname.xls lbocapacity2.xls lbo_exit.xls
	Additional Resources Background Reading Introduction to Cost of Capital Convertibles Convertible Preferred: Sample Termsheet Moodys on Hybrids Hybrids - Empirical Second Lien Loans Second Lien: Sample Termsheet Mezzanine Finance 1 Mezzanine Finance 2 Introduction to Leveraged Finance Useful Links finance.yahoo.com (company data) damodaran.com (industry ratios) standardandpoors.com (bond ratings) bonds.yahoo.com (bond pricing) bondsonline.com (corporate bond spreads) advfn.com (corporate financial ratios) optioneducation.net (option valuation) numaweb.com (convertible bond calculator) financialrestructuring.net (corporate financial restructuring) On-Line Convertible Model Roberts Stock Volatility Morningstar Stock Volatility Corporate Finance and Debt Capacity Tables woodstream.xls suriname solution.xls iss_solution.xls

The Instructor
Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in 45+ 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 the U.S. and abroad. As a banker and consultant he has been involved in the growth of the structured and mezzanine markets in the USA, Europe and several developing countries. 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.