Giddy | Euromoney Leveraged Finance Workshop

Euromoney Training
www.euromoneytraining.com
3-Day
Leveraged & Mezzanine Finance Workshop
Instructor:
Prof. Ian Giddy
New York University

Leveraged Finance is the strategic use of debt financing to achieve a specific objective. The technique has become widely used to effect management buyouts and refinancings, and to bridge-fund acquisitions. Today many companies are looking at leveraged and mezzanine finance as a broader tool, including the use of leverage for share buybacks and special dividends or to facilitate ownership transitions, or as an alternative to a trade sale or IPO for exit.

Why Leveraged Finance?

Leveraged Finance entails funding a company or business unit with more debt than would be considered normal for that company or industry. Higher-than-normal debt implies that the funding may be riskier, and therefore more costly, than normal borrowing. As a result, leveraged finance is commonly employed to achieve a specific, often temporary, objective: to make an acquisition, to effect a buy-out, to repurchase shares or fund a one-time dividend, or to invest in a self-sustaining, cash-generating asset. Mezzanine finance is typically an essential component of the funding in leveraged finance.

The Workshop

This workshop on leveraged financing techniques will be taught around seven major topics employing in-depth group work on case studies, financial analysis and deal documentation. The focus will be on identifying situations that call for highly levered finance solutions, and the design and pricing of the high-spread loans and high-yield bonds as well as the equity instruments that support the leverage. Examples of such situations include private equity and leveraged buyouts, financing acquisitions, defensive financial restructuring, recapitalizations, and asset-based techniques such as leveraged leasing. A catalyst for leveraged buyouts is so-called mezzanine finance that falls between senior debt and pure equity.

This workshop explains why and when corporations and financial institutions employ leveraged funding, and in what form. In three information-packed days of instruction and application, we offer an economic analysis of the techniques and their pricing, an insight into when LBOs succeed and when they fail, paydown and exit strategies, methods of cash-flow modeling, and a framework for choosing among alternative leverage and mezzanine techniques. One goal for participants is to develop a checklist of the key criteria in a leveraged finance deal. This will help them to identify the main strengths and risks of each structure or proposed deal.

The workshop includes case studies of actual financings and sample documentation. It offers hands-on exercises, and will give participants the opportunity to augment their understanding of deals through group work, presentations and discussions.

Who Should Attend?

The seminar is of relevance to potential corporate borrowers, to lenders, and to those involved in buyouts and acquisitions. This includes corporate officers, commercial and investment bankers, securities analysts, private equity specialists, asset managers, and other individuals whose professional future may be enhanced by an understanding of leveraged and mezzanine finance techniques.

Materials

Participants will be provided with a package of materials useful to the structuring and analysis of specially tailored leveraged financing techniques, including pertinent articles, rating agency reports and sample documentation from actual deals done in North America, Europe and elsewhere.

Key Issues

Some of the issues to be explored:

What is leveraged finance? Why and how should companies add substantial debt to their balance sheets?
What is the future of leveraged finance in a disrupted credit market?
How can senior and mezzanine debt be used to facilitate a management buyout or other forms of ownership transition? How can one assess a company's borrowing capacity?
What are the key credit, pricing and rating issues surrounding leveraged financing?
Leveraged recapitalizations: how do they really work, and what are their advantages and disadvantages? How can recaps be used for stock repurchases, dividends and as shark repellants?
What is the right pricing and covenant structure for leveraged acquisition lending?
How do mezzanine financing techniques such as warrant notes work, and when does it make sense to use them? How are they priced?
How can one model the cash flows and debt paydown in a leveraged buyout?
How can credit default swaps and collateralized debt obligations be used to manage a leveraged loan portfolio?
When should a company employ asset-based high-leverage funding, such as leveraged leasing?

Outline of Workshop

Date	Topics	Resources
Day 1	Leveraged Finance: Debt Restructuring Opportunities The global market for leveraged finance Leverage: the good, the bad and the ugly Performance-driven leveraged finance Defensive leveraged finance Deal-driven leveraged finance Leverage in ownership transition Identifying corporate debt restructuring opportunities Case study: Spacemasters. The owner of a private company is looking for a cash-out. Delegates estimate the company's debt capacity and the owner's options. Establishing required rates of return: the "Fierce Creatures" method and others Adjusting the costs of debt and equity for leverage Corporate taxation and capital structure Leverage optimization through WACC simulation Case study: UPS. Delegates compute the effective cost of capital for a company with various degrees of leverage, and consider how leverage fits in with the company's business and financial strategy. Using valuation in a leveraged finance context, with higher costs of debt and high private equity required returns Sponsor vs trade acquisitions: comparing valuation analysis Some useful data sources and other resources Leveraged Buyout Analysis Types of buyouts and how they are financed Leveraged finance as a temporary capital structure Spreadsheet-based Debt Capacity Analysis for leveraged finance Assets versus cash flows as support for leverage Focus: synthetic ratings and debt pricing Case Study: Nukem Security Services. How can this LBO be financed? Focus: when Things fall apart How to structure and price the funding for an acquisition or buyout Case study: The LBO of ISS. Delegates undertake a step-by-step analysis of the Danish company's debt capacity and the LBO financing possibilities. Structuring the relationship between the partners Post-acquisition refinancing and asset sales Paydown and exit analysis	Presentations leveraged-restructuring leveraged-buyouts Case Studies Spacemasters UPS Nukem Security Services Linens 'n Things Linens financials The LBO of ISS iss_financials Articles Introduction to Leveraged Finance Debt-to-EBITDA Rating a Company Covenant Examples A Note on LBOs Leveraged Finance Update Spreadsheets wacc.xls spacemasters.xls ups2007.xls firmvolatility.xls leverage_effect.xls lbocapacity2.xls iss_solution.xls
Day 2	Leveraged Build-Ups and Leveraged Recapitalization Proactive leverage: roll-ups and recaps Impact of high leverage on business efficiency and shareholder risk Leveraged recaps with share buybacks or special dividends to enhance shareholder value Case study: Sealed Air Corporation. Delegates learn how a company with stable and growing free cash flows can exploit its debt capacity, and discuss the risks it takes in doing so. Leveraged recaps for ownership transition or cash-out Case study: Ahlsell's Leveraged Recap. We look at the tiering of funding instruments in this Swedish leveraged dividend recapitalization. Leveraged defensive recaps Leverage and exchange offers Case study: Truck Toys. In this example of a company using leverage to effect a change in control, delegates discuss shareholders' options. Mezzanine Financing Techniques Survey of leveraged finance techniques, and when it makes sense to use them Finding the optimal financing mix: debt, equity or mezzanine? Senior secured financing Second lien financing Case study: CUSA Busways. How second-lien lending contributed to the leveraged buy-out of a bus company. Pay-in-kind (PIK) notes Terms of a PIK Case study: Jefferson Smurfit. Delegates identify the factors that determine the rating of this "Holdco PIK" Mezzanine and more Senior sub debt Warrant notes Case study: Woodstream. Who gets the warrants, and what are they worth? The mezzanine termsheet Subordinated vendor financing Convertible notes and preferred stock Case study: Suriname Hydropower Services. Teams seek to structure a performance-linked mezzanine note for a private emerging-market company.	Presentations leveraged-recaps leveraged-techniques Case Studies Sealed Air Ahlsell's Recap Truck Toys CUSA Busways Second lien term sheet Norcross PIK Jefferson Smurfit Woodstream Woodstream Termsheet Suriname Hydro Articles Leveraged Rollups Leveraged Recaps The Value of Loan Covenants Second Lien Loans Pay-in-kind notes Mezzanine Finance Spreadsheets trucktoys.xls woodstream.xls financing_abc.xls suriname_solution.xls
Day 3	Financing a Buyout: Cash Flow Modeling Modeling a LBO: key corporate numbers Modeling a LBO: key predictions Modeling a LBO: financing assumptions Case study: Jordan Cement. This case offers a framework to explore the power of cash flow modeling and sensitivity analysis in a leveraged buyout. High Yield Bond Financing Trends in covenants, pricing and defaults Example: The Piaggio Bond Focus: The US high yield market for non-US issuers Case study: Hertz High Yield Bonds. Delegates consider a high yield bond issue in the context of a leveraged acquisition. What terms and conditions would such a bond require, and what pricing and fees would be involved? Comparison of US and Eurobond market A review of pricing and other key terms and their negotiation Structuring a Leveraged Deal: Players and Pricing Proposing a buyout: example (Kaydon) Implementing a management buyout: senior, mezzanine and equity finance The sequence and legal structure Private equity investors: how a fund looks at a deal Sample fund pitchbook (Bostonian Capital) Arranging the bank finance: pricing and distribution of the loan Case study: Funding Marsh Diagnostics. Delegates examine the pricing and syndication structure of a term acquisition loan and revolver. Leveraged finance in the CDO market Case study: KKR Financial CLO. Why did KKR get involved with the CDO market? How did it achieve an AAA rating on a portfolio of leveraged and mezzanine debt? Structure and pricing of credit default swaps Leveraged synthetic CDOs and super-senior credit default swaps Arranging the mezzanine finance Mezzanine investors: how a fund looks at a deal (IHG Mezzanine Partners) Post-deal management Last but not least: Restructuring and recovery Case study: Dole's Debt Summary and Recap	Presentations leveraged-cashflow leveraged-highyield leveraged-structuring Case Studies Jordan Cement Hertz High Yield Bonds Kaydon Bostonian Capital Marsh Diagnostics Term Sheet KKR Financial CLO IHG Mezzanine Partners Dole's Debt Articles Europe's High-Yield Debt Market Asset-based Loans CDOs and Synthetics LBO Legal Checklist Spreadsheets Jordan_LBO_model.xls noname_synthetic_clo.xls
More Resources Corporate information: finance.google.com, finance.yahoo.com, reuters.com Valuation Models (xls) - Rough calculation for choosing the correct valuation model. Corporate Finance and Debt Capacity Tables - Ratios and comparables to estimate normal gearing and valuation Rating Calculation (xls) - Estimates a rating and cost of debt based on the coverage of debt by an organization. LBO Valuation (xls) - Analyzes the value of equity in a leverage buyout. Sponsors' Role in Leveraged Debt Financing Sample documentation for leveraged loans, leases, etc ISS Actual Financing More reading: Mergers, Acquisitions, and Corporate Restructurings by Patrick A. Gaughan; Introduction to Structured Finance by Frank J. Fabozzi; Leveraged Finance website at fitchratings.com Sources: damodaran.com, Bank of America Business Capital, and others The Instructor Ian Giddy, a native of South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over forty 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 leveraged and mezzanine markets in the USA, Europe and emerging markets. 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.