The Amsterdam Institute of Finance

Leveraged Buyouts

Prof. Ian Giddy, New York University

What are Leveraged Buyouts?
LBOs are takeovers of companies using borrowed funds and private equity. Typically, the target company's assets and cash flow serve as support for the funding taken out by the acquirer, which repays the debt out of cash flow and asset disposals of the acquired company.

About the Course
This 3-day intensive course aims to improve participants' understanding of leveraged and management buyouts. The course covers the specific challenges in going-private and  private-to-private transactions, including the use of leveraged finance for LBOs and other purposes, and the various techniques of leveraged buyout financing. These include senior bridge and term loans, subordinated and mezzanine debt instruments, and private equity.

Pre-Course Reading

Course Outline



Day 1   
  • Leveraged Buyouts: The Basic Economics
    • The LBO Market
    • What Makes a Business Suitable for a Buyout?
  • Valuation for Acquisitions
    • Techniques of corporate valuation
    • Valuing the assets
    • Using comparable company valuation methods
    • Valuing the cash flows
  • Valuation for LBOs
    • The keys to LBO value: valuation of the company, valuation of the LBO gains, assessment of debt capacity
    • and the special situation of LBO valuation (financing-driven valuation)
    • Valuing the LBO incentives and gains
    • Adding value -- post-LBO restructuring
  • Modelling the Deal
    • Debt capacity analysis and computations for leveraged finance
    • The 12-step method
    • Focus: synthetic ratings and debt pricing
    • Modelling the LBO cash flows
    • Focus: exit strategies
    • When things go wrong
  • Group Assignment: Developing an LBO Cash Flow Analysis

Case studies
The LBO of AGI
Madras Appliances
Nukem Security
Reykjavik Fleet Leasing

Corporate Valuation Techniques
How to do an LBO in 1 page
What is Private Equity?
How LBO Funds Work


Day 2
  • Leveraged Buyout Financing Instruments
    • Parties to a typical deal: seller, management, private equity house, bankers, mezzanine investors
    • The multi-tier financing structure
  • Senior Loans in Leveraged Finance
    • Senior-sub structure in leveraged finance
    • Secured debt: what collateral? what pricing? what amortization?
    • A/B/C loans
    • Sale-and-leaseback financing
  • Mezzanine Financing Instruments
    • What is the role of mezzanine?
    • Second lien notes
    • Pay-in-Kind notes
    • Mezzanine notes: warrants, and other variations
    • Vendor finance and earnouts
    • Participation mezzanine: payouts linked to EBITDA or performance
  • LBO Cash Flow Analysis
    • Group Assignment: debt capacity and mezzanine analysis for ISS
    • Cash flow analysis: LBO entry and exit valuation
    • Cash flow analysis: key corporate numbers
    • Cash flow analysis: key predictions
    • Cash flow analysis: financing assumptions
  • High Yield Bond Funding for LBOs
    • Role of high yield bonds
    • Pricing and volatility
    • Terms and conditions
    • Hybrid capital funding for acquisitions


Case studies
Le Meridien Hotels
Cusa Busways
Second lien facility
Sealy PIK
Holdco PIKs
Woodstream term sheet
Cognis Refinancing
Suriname Hydro
Jordan Cement
Hertz High Yield Bonds


Second Lien Loans
Second lien term sheet
Mezzanine Finance 1
Mezzanine Finance 2
Subordinated notes term sheet


Day 3
  • Refinancing, Recapitalization and Exit
    • Pricing the leveraged cost of capital
    • Debt repayment
      • Debt paydown through registered placements and disposals
      • Post-acquisition refinancing
    • Leveraged recapitalizations and partial exit
    • Illustration of use of recaps and "stapled finance" in buyouts
    • Exit strategies and "Plan B"
  • Preparation, Screening, Due Diligence and Documentation
    • The acquisition strategy
    • Role of seller's and buyer's advisors
    • Pre-offer preparation
    • Due diligence checklist
    • Key documentation sequence
    • When diligence goes wrong
    • Legal structure of the deal
  • Applied Buyout Structuring
    • The sequence and the players
    • Private Equity
      • The players and their requirements
      • The equity instruments
    • Suitability of the target
    • Costing out a deal
    • Structuring the senior financing
    • Selling down the loans: syndication and CDOs
    • Role of mezzanine investors
    • Structuring the relationship between the partners
    • Setting up the legal structure
    • Closing and refinancing
    • Post-LBO deal management
      • When things fall apart
  • Group work on valuation and structuring of a leveraged buyout
    • Summary and conclusions


Case studies
Ahlsell's Recap
New York Magazine
Marsh Diagnostics Term Sheet
Bostonian Capital
Profile of KKR
Marsh Diagnostics Term Sheet
KKR Financial CLO
IHG Mezzanine Partners

RFL Malaysia
Regal Cinemas

LBO Performance
LBO Legal Checklist


Additional Resources

Articles and Books
Notes on cost of capital and capital structure
Second Lien Loans
Mezzanine Finance 1
Mezzanine Finance 2
Subordinated notes term sheet

Useful Links (bond ratings) (corporate bond spreads) (industry ratios) (corporate financial ratios)
Corporate Finance and Debt Capacity Tables

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. | | | | | contact
Copyright ©2008 Ian Giddy. All rights reserved.