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.
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 .
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
- 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.
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
Outline of Workshop
||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?
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
- Use and pricing of debt-with-warrants
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
study: Songa Convertible. We consider a convertible bond to work
out its pricing and the effective cost to the issuer.
- Convertible preferred shares
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
Deep Ocean. How are these options valued?
- Negotiating mezzanine
and hybrids with clients: what are the key requirements? When should
options be included?
study: Logistic Services (Ghana). What options does the borrower
have in this proposed mezzanine financing?
Mezzanine Financing Techniques
- Checklist of senior and subordinated
- Senior secured debt in emerging
markets -- what does it mean?
Example of terms and conditions of a senior secured loan
- Global default and recovery tables
- Second lien versus senior-sub
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,
- The structure and pricing of sub debt
Mezzanine. What is the effective cost to the issuer of this
mezzanine debt issue?
- Terms and conditions of a mezzanine
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:
- Issue: how should documents define
exit value? What options to include?
Gateway: WACC in India
Sealed Air Convertible
Deep Ocean Callable
Logistic Services Ghana
Senior Secured Facilty
Second Lien Facility
Market Mezzanine and Debt Capacity
Funding Financial Institutions: Mezzanine and Hybrid
- Debt capacity analysis for private
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
- Mezzanine in emerging-market
- Performance-linked participation
debt: an alternative form of mezzanine
- The participation financing
Frutas Nicas. What rate of return can you project for DEMF's
investment in Frutas Nicas?
- Setting targets and linking payout to
- The language of the linkage
study: Shanghai Solutions. What are the advantages and
disadvantages of the Contingent Payment Unit in this deal? What are the
- Terms and pricing of the mezzanine in
- Evaluating a funding proposal with
revenue-linked mezzanine debt
study: Suriname Hydropower Services. Can you model the rate of
return on the senior and mezzanine funding for this privatization
- Discussion of appropriate linkage:
turnover, cash flow or profit?
- Post-deal mezzanine management
and ownership transition
- Mezzanine as a catalyst in private
- Review: the cost of equity capital
- Hybrid capital notes and senior
equity finance for banks
- Perpetual notes,
preferred and convertible preferred stock
- Capital finance: temporary or
- Exit possibilities and drag-along
study: Banco Nuevo. What are the exit possibilities for this
investment in a Central American bank?
of mezzanine in financial institutions:
to price the required rate of return
to design the terms
to plan for exit.
session: Review and analysis of theFMO/DEG Mezzanine Matrix
Introduction to cost of
Second Lien Loans
Mezzanine Finance 1
Mezzanine Finance 2
How to Survive an
(corporate bond spreads)
(corporate financial ratios)
optioneducation.net (option valuation)
(convertible bond calculator)
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.
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.