What
is Mezzanine Finance?
Mezzanine finance
is corporate debt that, from a
security
perspective, ranks behind senior debt finance such as traditional bank
loans and overdrafts, but ranks in front of equity investment. This
increased risk and the fact that there is little or no security
available, means that a higher investment return is required. The
return may be in the form of a higher interest rate, or equity
participation, or some other form of deferred payout.
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The
Course
This two-day interactive
course offers a practical study of the techniques and pricing of
mezzanine, subordinated and equity-linked debt with a special
emphasis on smaller and private companies.
The
workshop will include case studies of actual deals, showing how
mezzanine debt can serve as a
catalyst to help an enterprise or project to get started or raise
capital. We'll use
lecture-discussions, spreadsheet analysis, deal memorandums and
hands-on
exercises. These will give participants the opportunity to demonstrate
their
understanding of techniques that can be employed in structuring
transactions in the future .
Some
Features of the Course
What can participants expect to gain from this course?
- Learn
or update knowledge of required rates of return, cost of capital, and
acquisition finance
- Identify the key elements of mezzanine
finance
- Be able to identify appropriate
subordinated and mezzanine financing techniques for particular
situations
- Work out appropriate rates of return for
risks taken, and how to structure the payment of these returns
- Perform a cash flow analysis to model the
senior, mezzanine and equity paydown
- Learn post-deal mezzanine loan management,
restructuring and exit decisions.
Workshop
participants will be provided with a package of
materials
useful for developing mezzanine financing proposals, including
pertinent articles, case studies based on
actual deals, and sample
spreadsheets.
Suggested
Pre-Course Reading
Outline
of Workshop
Date
|
Topics
|
Resources
|
| Day One |
Corporate Finance: Debt, Equity and Mezzanine
- What is Mezzanine Finance, and where
does it fit into a company's financing structure?
- Why mezzanine for private companies?
Why
would a bank participate in more than one level of the capital
structure?
- Introduction to The Mezzanine Matrix
- Mezzanine example: Dubrovnik Eyewear
- The investor's required return on
debt and on equity
- The corporate cost of funding:
techniques of effective cost analysis
- Cost of capital analysis
(Example: WACC for a private company)
- Cost of funding with debt, equity and
hybrids
- Use and pricing of debt-with-warrants
- Case
study: Singapore Land warrant-linked loan facilities. Why did
this company use warrants in its debt financing?
- How would we estimate a company's
effective cost of financing? Application to Dubrovnik Eyewear)
- Putting it together: WACC with
convertibles and hybrids
- Convertible loans and notes
- Case
study: Songa Convertible. We consider a convertible bond to
work out its
pricing and the effective cost to the issuer.
- Convertible preferred shares
- Case
study: Sealed
Air Convertible. We dissect a convertible to work out its
pricing and the effective cost to the issuer.
- Callable debt: pricing the borrower's
call options and prepayment rights
- Application:
Deep Ocean. How are these options valued?
- Negotiating mezzanine
and hybrids: what are the key requirements? When should options be
included?
Mezzanine Financing Techniques
- Checklist of senior and subordinated
financing techniques
- Senior secured debt in emerging
markets -- what does it mean?
- Application:
Example of terms and conditions of a senior secured loan
- Global default and recovery tables
- Second lien versus senior-sub
mezzanine
- Case
study: Second Lien Facility. How would you adapt this term sheet
to your client's needs?
- Sale-and-leaseback financing
- Step-up rates, PIKs, participations,
warrants, preferred
- The structure and pricing of sub debt
and warrants
- Example:
Woodstream's
Mezzanine. What is the effective cost to the issuer of this
mezzanine debt issue?
- Terms and conditions of a mezzanine
termsheet
- Case
study: The Woodstream Termsheet. Examine this termsheet. Which
features would you, as investor, insist on? Where would you be willing
to give way?
- The warrant financing spreadsheet
- Seller notes:
a useful financing instrument
- An alternative to warrants:
valuation-linked exit
- Issue: how should documents define
exit value? What options to include?
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Presentations
mezzanine1.pdf
mezzanine2.pdf
Case Studies
Gateway:
WACC
in India
Singapore
Land
Songa
Convertible
Convertible
Preferred
Sealed
Air Convertible
Deep
Ocean Callable
Senior
Secured Facility
Second
Lien Facility
Woodstream
Mezz
Woodstream
Termsheet
Spreadsheets
WACC_tutorial.xls
beta.xls
black-scholes.xls
dubrovnik_eyewear.xls
convertiblebond.xls
convertible_and_wacc.xls
warrant_mezz.xls
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Day
Two
|
Mezzanine
and Debt Capacity
- Debt capacity analysis
for private companies
- Case
study: Spacemasters.
A private company is looking for a means of financing an expansion in
South Africa. Participants estimate the company's debt capacity and the
owner's
financing options.
- Debt capacity analysis and
computations for leveraged finance
- The 12-step method
- Focus: synthetic ratings and debt
pricing
- Modelling the debt paydown cash flows
- Focus: exit strategies
- Case
study: ISS
- Introducing mezzanine: the financing
catalyst
- How to make a mezzanine deal work for
all parties
Participation Mezzanine
and Hybrid
Capital
- Performance-linked participation
debt: an alternative form of mezzanine
- The participation financing
spreadsheet
- Application:
Frutas Nicas. What rate of return can you project for DEMF's
investment in Frutas Nicas?
- Setting targets and linking payout to
performance
- The language of the linkage
- Case
study: Shanghai Solutions. What are the advantages and
disadvantages of the Contingent Payment Unit in this deal? What are the
exit possibilities?
- Terms and pricing of the mezzanine in
no-liquidity situations
- Evaluating a funding proposal with
revenue-linked mezzanine debt
- Case
study: Suriname Hydropower Services. Can you model the rate of
return on the senior and mezzanine funding for this privatization
investment?
- Discussion of appropriate linkage:
turnover, cash flow or profit?
- Post-deal mezzanine management
- Exit
and ownership transition
- Review: the cost of equity capital
funding
- Hybrid capital notes and senior
equity finance
- Case
study: Lottomatica
- Perpetual notes,
preferred and convertible preferred stock
- Capital finance: temporary or
permanent?
- Exit possibilities and drag-along
rights
- Summary
session: Review and analysis
of mezzanine choices
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Presentations
mezzanine3.pdf
fmezzanine4.pdf
Case Studies
Spacemasters
Shanghai
Solutions
Suriname
Hydropower
US
Bancorp
Spreadsheets
spacemasters.xls
participation_mezz
suriname.xls
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Additional Resources
Background
Reading
Introduction
to cost of
capital
Second
Lien Loans
Mezzanine
Finance 1
Mezzanine
Finance 2
How
to Survive an Earnout
Useful Links
damodaran.com
(industry ratios)
standardandpoors.com (bond
ratings)
bondsonline.com (corporate bond
spreads)
advfn.com (corporate financial ratios)
optioneducation.net (option valuation)
numaweb.com
(convertible bond calculator)
suriname
solution.xls
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.
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