Giddy | Rand Merchant Bank Leveraged Finance Workshop

Rand Merchant Bank
Leveraged Finance Workshop

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 South African 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 black empowerment ownership, or as an alternative to a trade sale or IPO for exit.

The Workshop

This RMB 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 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 and recapitalizations. A catalyst for leveraged buyouts is so-called mezzanine finance that falls between senior debt and pure equity.

Methods and Materials

The workshop employs 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 Europe, South Africa, 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 Leveraged finance in the credit crunch 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: Ubuntu Properties. The owner of private KNZ company is looking for acquisition 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: UPS. 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. Using valuation in a leveraged finance context, with higher costs of debt and high private equity required returns Some useful data sources and other resources Leveraged Buyout Analysis Implementing a management buyout: senior, mezzanine and equity finance Leveraged finance as a temporary capital structure Spreadsheet-based Debt Capacity Analysis for leveraged finance Assets versus cash flows as support for leverage Case Study: Nukem Security Services. How can this LBO be financed? Focus: synthetic ratings and debt pricing How to structure and price the funding for an acquisition.or buyout Case study: The LBO of ISS. Teams 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 rmb-restructuring rmb-buyouts Case Studies Ubuntu Properties UPS The LBO of ISS iss_financials.xls Articles Introduction to Leveraged Finance A Note on LBOs LBO Legal Checklist Spreadsheets wacc.xls ubuntu.xls ups2007.xls firmvolatility.xls leverage_effect.xls Corporate Finance and Debt Capacity Tables lbocapacity2.xls iss_solution.xls lbo_exit.xls
Day 2	Leveraged Recapitalizations and Build-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 Swedish leveraged dividend recapitalization. Leveraged defensive recaps Leverage and exchange offers Case study: Roadshow. We evaluate a proposed leveraged exchange offer to give management more control of a company. High Yield and Hybrid Bond Financing Trends in covenants, pricing and defaults Example: Piaggio high yield bond Focus: The US high yield market for non-US issuers A review of pricing and other key terms and their negotiation Hybrid bonds and capital note finance: debt or equity? Case study: Reclamation Group. In this example of a company using leverage to effect a change in control, we discuss the financing 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? The players and the market today: LBO funds, private equity houses, advisory firms and others Senior leveraged lending: terms and conditions Case study: Funding Marsh Diagnostics. Delegates examine the pricing and syndication structure of a term acquisition loan and revolver. Institutional investors and CDOs as lenders After the crunch: changes in spreads and covenants 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 Pay-in-kind (PIK) notes Case study: Sealy PIK Holdco PIKs Mezzanine and more Junnior subordinated debt Warrant notes Case study: Woodstream. Who gets the warrants, and what are they worth? The mezzanine termsheet Convertible notes and preferred stock Subordinated vendor financing Four forms of mezzanine for emerging markets: performance-participation notes, subordinated debt with warrants, convertible notes, and preferred stock Case study: Maputo Fruit. What are the advantages and disadvantages of the Contingent Payment Unit in this deal? What are the exit possibilities? Post-deal management Last but not least: Restructuring and recovery Case study: Dole's Debt Summary and Conclusions	Presentations rmb-recaps rmb-highyield rmb-techniques Case Studies Ahlsell's Recap RoadShow Reclamation Group Marsh Diagnostics Term Sheet CUSA Busways Second lien term sheet Sealy PIK Woodstream Woodstream Termsheet Dole's Debt Articles Leveraged Rollups Leveraged Recaps The Value of Loan Covenants Second Lien Loans Mezzanine Finance 1 Mezzanine Finance 2 Spreadsheets roadshow.xls woodstream.xls participation_mezz.xls
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 Wildcliff, a nature reserve in the Western Cape.