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
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?
a company or business unit with more debt than would be considered
normal for that company or industry. Higher-than-normal debt implies
the funding may be riskier, and therefore more costly, than normal
borrowing. As a result, leveraged finance is commonly employed to
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
workshop on leveraged financing techniques will be taught
around seven major topics employing in-depth group work on case
financial analysis and
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
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.
workshop explains why and when corporations
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
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
exercises, and will give participants the opportunity to augment
understanding of deals through group work, presentations and
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
securities analysts, private equity specialists, asset managers, and
individuals whose professional future may be enhanced by an
of leveraged and mezzanine finance techniques.
will be provided with a
useful to the structuring and analysis of specially tailored leveraged
pertinent articles, rating agency reports and sample documentation from
actual deals done in North America, Europe and elsewhere.
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
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?
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
- 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?
Finance: Debt Restructuring Opportunities
- The global market for leveraged
- Leverage: the good, the bad and the
- Performance-driven leveraged finance
- Defensive leveraged finance
- Deal-driven leveraged finance
- Leverage in ownership transition
corporate debt restructuring opportunities
study: Spacemasters. The owner of a
private company is looking for a
cash-out. Delegates estimate the company's debt capacity and the
- Establishing required rates of return: the
"Fierce Creatures" method and others
- Adjusting the costs of debt and
equity for leverage
taxation and capital structure
- Leverage optimization through WACC
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.
valuation in a leveraged finance context, with higher costs of debt and
high private equity required returns
- Sponsor vs
comparing valuation analysis
useful data sources and other resources
- Types of buyouts and how
they are financed
finance as a temporary capital structure
- Spreadsheet-based Debt Capacity
for leveraged finance
versus cash flows as support for leverage
- Focus: synthetic ratings and debt
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
study: The LBO
of ISS. Delegates undertake a step-by-step analysis of the
company's debt capacity and the LBO financing possibilities.
the relationship between the partners
- Post-acquisition refinancing and
and exit analysis
to Leveraged Finance
Note on LBOs
Build-Ups and Leveraged Recapitalization
leverage: roll-ups and recaps
of high leverage on business efficiency and shareholder risk
recaps with share buybacks or special dividends to enhance shareholder
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
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
study: Truck Toys. In this example of a company using leverage
effect a change in control, delegates discuss shareholders' options.
- Survey of leveraged finance
techniques, and when it makes sense to use them
the optimal financing mix: debt, equity or mezzanine?
- Case study: CUSA Busways. How
second-lien lending contributed to the leveraged buy-out of a bus
of a PIK
study: Jefferson Smurfit. Delegates identify the factors that
determine the rating of this "Holdco PIK"
- Warrant notes
study: Woodstream. Who gets the warrants, and what are they
- The mezzanine termsheet
- Convertible notes and preferred
study: Suriname Hydropower Services. Teams seek to structure a
performance-linked mezzanine note for a private emerging-market company.
Second lien term
Value of Loan Covenants
Financing a Buyout: Cash Flow Modeling
Yield Bond Financing
- Modeling a LBO: key corporate numbers
a LBO: key predictions
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.
in covenants, pricing and defaults
- Example: The Piaggio Bond
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
What terms and conditions would such a bond require, and what pricing
and fees would be involved?
of US and Eurobond market
review of pricing and other key terms and their negotiation
Structuring a Leveraged Deal: Players and
- Proposing a buyout: example (Kaydon)
- Implementing a management buyout:
and equity finance
- The sequence and legal structure
equity investors: how a fund looks at a deal
fund pitchbook (Bostonian Capital)
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
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?
and pricing of credit default swaps
synthetic CDOs and super-senior credit default swaps
the mezzanine finance
investors: how a fund looks at a deal (IHG
but not least: Restructuring and recovery
study: Dole's Debt
High Yield Bonds
Diagnostics Term Sheet
High-Yield Debt Market
Sources: damodaran.com, Bank of America
Business Capital, and others
- Valuation Models
(xls) - Rough calculation for choosing the correct valuation model.
Finance and Debt
Capacity Tables - Ratios and comparables to
estimate normal gearing and valuation
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.
Role in Leveraged Debt Financing
- Sample documentation for
leveraged loans, leases, etc
- More reading: Mergers,
Acquisitions, and Corporate Restructurings by Patrick A.
Gaughan; Introduction to Structured
Finance by Frank J. Fabozzi; Leveraged
website at fitchratings.com
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
Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The
author of more than fifty articles on international finance, he has
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
River Watertrail Guide. He and his wife are the founders of
Cloudbridge, a nature reserve in Costa Rica.