Giddy | Barclays Capital Leveraged Finance Workshop

DC Gardner
Barclays Capital
Leveraged Finance Workshop

Prof. Ian Giddy, New York University

Leveraged Finance is the strategic use of debt, equity and mezzanine instruments to achieve a specific acquisition or refinancing objective. These technique have 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 transition in distress, or as an alternative to a trade sale or IPO for exit.

The Workshop

This Barclays Capital workshop on leveraged financing techniques will be taught around several 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 leveraged 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.

In the workshop we consider why and when corporations and financial institutions employ leveraged funding, and in what form. In two 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 modelling, 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 credit risks as well as the strengths of each structure or proposed deal.

Methods and Materials

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. 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 to be Explored

What is leveraged finance? Why and how should companies add substantial debt to their balance sheets?
How can senior and mezzanine debt be used to facilitiate 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?
When should a company or bank issue hybrid and subordinated "capital note" financing insturments?

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 (Sealed Air) Defensive leveraged finance Deal-driven leveraged finance (ISS) Leverage in ownership transition Identifying corporate debt restructuring opportunities Case study: Spacemasters. The owner of a private company is looking for leveraged finance. Participants 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: Oracle. We 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. Corporate valuation for acquisiitons Example: Tropical Paper Products. A live example of valuations applied to an acquisition. Valuation in a leveraged finance context, with a changing capital structure, higher costs of debt and high private equity required returns The "VC Method" -- Valuation driven by private equity IRR Buyout Finance Analysis Types of acquisitions and how they are financed Sponsor vs trade acquisitions: comparing valuation analysis Leveraged finance as a temporary capital structure: entry, paydown. exit Implementing a leveraged acquisition: senior, mezzanine and equity finance Case study: Madras Appliances. Teams evaluate a variety of creative financing techniques in the context of this challenging acquisition situation. Retail securitisations as an acquisition finance take-out Raising the money: Debt Capacity Analysis How to structure and price the funding Focus: shadow ratings and debt pricing Case Study: Nukem Security Services. A management team hopes to acquire the company's security services division. How much of the purchase cost could be financed with debt? Debt paydown & refinancing Role of mezzanine, sponsor equity, management equity, "envy factor" Exit timing, methods and valuation Teamwork Group Exercise: The LBO of ISS. Teams undertake a step-by-step analysis of the Danish company's debt capacity and the LBO financing possibilities.	Presentations barcap-leveraged-restructuring barcap-leveraged-buyouts Case Studies Spacemasters Oracle tropical_paper.xls Madras Appliances Nukem Security The LBO of ISS iss_financials.xls Articles Introduction to Leveraged Finance A Note on LBOs Debt-to-EBITDA LBO Legal Checklist Spreadsheets wacc.xls spacemasters.xls oracle.xls tropical_paper.xls Corporate Finance and Debt Capacity Tables lbocapacity2.xls
Day 2	Leveraged Recapitalizations and Roll-Ups 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 leveraged dividend recapitalization. "Stapled-on finance" Leveraged defensive recaps Case study: Houston Exploration. Do you agree with all the recommendations of Jana Partners? Leveraged roll-ups: The funeral story. Leveraged Financing Techniques: Mezzanine and More Survey of leveraged finance techniques, and when it makes sense to use them Finding the optimal financing mix: debt, equity or mezzanine? The players and the market today: LBO funds, private equity houses, advisory firms and others Syndicated acquisition lending Assets versus cash flows as support for leverage Sale leaseback and other asset-based funding Second lien financing Case study: CUSA Busways. How second-lien lending contributed to the leveraged buy-out of a bus company. Second lien termsheet analysis Structuring the relationship between the partners Pay-in-kind (PIK) notes Case study: Sealy PIK Holdco PIKs Case study: Jefferson Smurfit. Participants 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? What is the effective cost of financing to the company? Analysis of a mezzanine termsheet Convertible notes and preferred stock The high-yile bond market Case study: Piaggio Performance-linked participation debt: an alternative form of mezzanine Case study: Suriname Hydropower. Exit without an exit event? Subordinated vendor financing Equity, including hybrids in acquisition finance (US Bancorp, Lottomatica) Concluding case study: Cognis Refinancing. The post-LBO refinancing of this German chemicals company illustrates the legal relationship among debt sources. Summary and Conclusions	Presentations barcap-leveraged-recaps barcap-leveraged-techniques Case Studies Sealed Air Ahlsell's Recap Houston Exploration CUSA Busways Second lien facility Sealy PIK Jefferson Smurfit Woodstream Mezz Woodstream Termsheet Piaggio Suriname Hydro US Bancorp Hybrid Bond Cognis Refinancing Articles Leveraged Rollups Leveraged Recaps The Value of Loan Covenants Second Lien Loans Mezzanine Finance 1 Mezzanine Finance 2 Spreadsheets woodstream.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. The Leveraged Loan Market Sponsors' Role in Leveraged Debt Financing Leveraged Finance articles Sample documentation for leveraged loans, leases, etc ISS Actual Financing 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.