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. Mezzanine finance plays an important role in DEG's
investment portfolio, stimulating risk capital in emerging markets.
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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 the private sector in emerging markets.
The workshop will
include case studies of actual development bank deals and other
emerging market financings, showing how mezzanine debt can serve as a
catalyst to help an enterprise or project to get started. 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 risk finance
- Identify the key elements of mezzanine
finance
- Be able to identify appropriate
subordinated and mezzanine financing techniques for particular
situations in emerging markets
- 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 |
Emerging Market Finance: Debt, Equity and Mezzanine
- What is Mezzanine Finance, and where
does it fit into a company's financing structure?
- Why mezzanine for DEG? Why
participate in more than one level of the capital structure?
- Case
study: Vista Tunisia. Entry and exit in a mezzanine loan.
- Introduction to The FMO/DEG Mezzanine Matrix
- The investor's required return on
debt and on equity
- The corporate cost of funding:
techniques of effective cost analysis
- Cost of capital in emerging markets
(Example: WACC for an Indian 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 client's
effective cost of financing? (Example: 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.
- Design of convertibles, warrants and
other hybrids for emerging markets (Example: Ban-Pu Coal Convertible Bond)
- Callable debt: pricing the borrower's
call options and prepayment rights
- Application:
Deep Ocean. How are these options valued?
- Negotiating mezzanine
and hybrids with clients: what are the key requirements? When should
options be included?
- Case
study: Logistic Services (Ghana). What options does the borrower
have in this proposed mezzanine financing?
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:
Georgepipe'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 Georgepipe 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
deg1.pdf
deg2.pdf
Case Studies
Vista Tunisia
Gateway: WACC in India
Singapore Land
Songa Convertible
Convertible Preferred
Sealed Air Convertible
Deep Ocean Callable
Logistic Services Ghana
Senior Secured Facilty
Second Lien Facility
Georgepipe Mezz
Georgepipe
Termsheet
Spreadsheets
WACC_tutorial.xls
beta.xls
black-scholes.xls
dubrovnik_eyewear.xls
convertiblebond.xls
convertible_and_wacc.xls
warrant_mezz
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Day
Two
|
Emerging
Market Mezzanine and Debt Capacity
- Debt capacity analysis for private
companies
- Case
study: Ubuntu Properties. 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.
- Focus: synthetic ratings and debt
pricing
- Mezzanine in emerging-market
corporate finance
- 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
Funding Financial Institutions: Mezzanine and Hybrid
Capital
- Mezzanine as a catalyst in private
development finance
- Review: the cost of equity capital
funding
- Hybrid capital notes and senior
equity finance for banks
- Perpetual notes,
preferred and convertible preferred stock
- Capital finance: temporary or
permanent?
- Exit possibilities and drag-along
rights
- Case
study: Banco Nuevo. What are the exit possibilities for this
investment in a Central American bank?
- Review
of mezzanine in financial institutions:
- how
to price the required rate of return
- how
to design the terms
- how
to plan for exit.
- Summary
session: Review and analysis of theFMO/DEG Mezzanine Matrix
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Presentations
deg3.pdf
deg4.pdf
Case Studies
Ubuntu Properties
Shanghai
Solutions
Suriname Hydropower
Banco Nuevo
Spreadsheets
ubuntu.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)
georgepipe.xls
suriname solution.xls
About the Instructor
Dr. Ian Giddy, born
in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago
and in over 45 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.
About DEG
DEG, a member of the
German KfW banking group, has been financing and structuring the
investments of private enterprises in developing and transition
countries since 1962. As one of Europe's largest development finance
institutions, it promotes private business structures to contribute to
sustainable economic growth and improved living conditions. For
further details, see deginvest.de.
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