Giddy | Euromoney Structured Finance School

Euromoney Training
www.euromoneytraining.com

Structured Finance School

Prof. Ian Giddy
New York University

Structured Finance is the design of debt or equity financing techniques in order to solve particular issuer or investor problems that cannot be solved by conventional methods.

The Course

The goal of this course is to understand how structured financing techniques can work for bankers and corporate finance professionals in Brazil and other emerging markets. The course will be taught around five 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 nonstandard corporate finance solutions, and the design and pricing of the situation-specific financing instruments. Examples of such situations include stress-induced financial restructuring, recapitalizations, private equity and leveraged buyouts, and arbitrage-driven hybrid notes

We learn about the current state of the market in securitization and CDOs (collateralized debt obligations), as well as the broader field known as structured credit risk transfer -- funded asset-backed securities, synthetic securitization, credit derivatives, and more.

Equity-linked securities, including warrant bonds, convertible notes, preferred stock, hybrid capital securities and others now offer corporations and banks a means of financing during circumstances when ordinary techniques fall short. There is no longer a clear division between debt and equity. Companies seek the best of each, while lenders and investors often demand the security and priority of claims offered by debt, while expecting some participation on the upside in exchange for the risks they take.

Leveraged financing methods are often employed in M&A, management buyouts and other forms of ownership transition. Recently many companies are looking at using leveraged finance as a broader tool, including capital investment financing, share buybacks and special dividend payouts. As a catalyst for leveraged finance, companies sometimes employ so-called mezzanine finance that falls between senior debt and pure equity.

One goal for participants is to develop a check list or rapid overview of the key criteria in a structured finance deal, to consider when analyzing a proposal, so as to grasp the main strengths and risks of each structure after an initial rapid analysis. For those involved in financing, the course provides a roadmap for choosing among the alternative forms of structured financing techniques.

Who Should Attend?

The seminar is of relevance to both potential originators and investors in structured securities: corporate finance officers, commercial and investment bankers, securities analysts; investment officers; corporate treasurers and other individuals whose professional future may be enhanced by an understanding of structured finance techniques.

Course Materials

Participants will be provided with a package of materials useful to the structuring and analysis of specially tailored financing techniques, including pertinent articles, rating agency reports and sample documentation from actual deals done in Europe and elsewhere. The workshop will include case studies of actual financings in Asia, Europe and the Americas, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of deals through presentations and discussions.

Key Issues

Some of the issues to be explored:

What is structured finance? Why and when should companies consider the use of structured financing techniques?
How has the "credit crunch" impacted structured financing?
What are the key legal and credit issues surrounding asset-backed financing, and how can they be satisfied?
How have developments in the MBS/CDO markets affected securitization?
Synthetic ABS: how do they really work, and what are their strengths and shortcomings? How are credit derivatives used in conjunction with synthetics?
What role do "structured notes" play in a corporation's funding strategy?
How do equity-linked financing techniques such as convertible bonds work, and when does it make sense to use them? How are they priced?
What are the various forms of subordinated and mezzanine finance?
What is leveraged finance? How can it be use to facilitate a management buyout or other forms of ownership transition? When should a company undertake a leveraged recapitalization?

Outline of Workshop

Date	Topics	Resources
Day 1	Structured Finance: Effective Cost Analysis and Asset-Backed Securities What is Structured Finance? The state of strucutred finance: surviving a disrupted market Survey of structured finance techniques, and when it makes sense to use them Techniques of effective cost analysis Case study: A Day in the Life. Delegates compare the techniques and effective cost of various structured bond issues. The ABS market and the securitization process Gettng a deal to market Case study: Finance Company Ltd. Delegates study an example of a typical ABS structure and cash flows Legal, tax, accounting and bank capital aspects of ABS Case study: Ford Motor Credit. Delegates dissect the pool quality, legal structure and cash flow modelling of a fixed-pool auto loan securitization. Cost-benefit evaluation Capital cost analysis for financial institutions Credit enhancement and the rating process Deal diagnosis: seller/originator risk; servicer performance risk; swap counterparty risk; legal risks; sovereign risk. Originator, servicer, counterparty and manager analysis Techniques of credit enhancement: credit risk management; overcollateralization; senior-subordinated structures; excess servicing and liquidity accounts; financial guarantees Case study: Chase Credit Card Securitization. How would you assess the credit risk in this deal? What are the other risks? What protections do investors have? Rating agency analysis: stress testing approach Credit statistics: understanding default probabilities and recovery rates Pool analysis: ratings and historical loss rates Assignment: Rating CDOs. What determines the rating on a securitization of leveraged loans?	Presentations sf-effectivecost.pdf sf-abs.pdf Case Studies A Day in the Life Finance Company Ltd. Ford Motor Credit Chase Credit Card ABS Rating European CDOs Articles Introduction to ABS Spreadsheets wacc.xls costbenefit.xls
Day 2	Securitization and Beyond Focus: CLOs and CDOs: Collateralized loan and collateralized debt obligations Tiering the liabilities of a CDO CDO pricing and cash flow analysis Case study: Atrium. What are the assets in this CDO deal, and how are they funded? Credit enhancement analysis for cash flow and market value CDOs Group work: Designing a CDO. Using information in the case study and current market data, delegates are set the task of designing an arbitrage CDO. Synthetic structures and role of credit derivatives Credit default swaps, total return swaps, and credit options Credit-linked notes Case study: Artemis This deal illustrates the role of credit default swaps in synthetic asset-backed securities and credit-linked notes Leveraged synthetic CDOs and super-senior credit default swaps Case study: A Synthetic CLO. Delegates learn the role of the super-senior unfunded tranche in a synthetic CDO. Using CDS and CDO techniques to lay off the risk in of a portfolio of loans. Counterparty risk of funded versus unfunded risk transfer Group work: Orion Synthetic CDO. In this hands-on exercise, delegates assemble the elements of a synthetic securitization with an unfunded super-senior tranche. Securitization of rights and intangibles, and future flows Focus: whole business and future flow securitization Case study: Dunkin Donuts. Delegates use this deal to investigate the legal framework and bankruptcy-remote issues involved in the securitization of corporate cash flows. Project Finance: standalone, project-payment based funding Sources and structure of project finance; allocating the risks Case study: Don Pedro Hydro. This power generation project has local currency revenues. Can it be financed with conventional project finance?	Presentations sf-cdo.pdf sf-futureflow.pdf Case Studies Atrium Designing a CDO Artemis Noname Bank Synthetic CLO Orion Synthetic CDO Dunkin Donuts Don Pedro Hydro Articles Fitch CDO Criteria Credit Derivatives 101 and 102 Synthetic ABS Whole Business Securitization Spreadsheets CDOexample.xls
Day 3	Structured Notes and Hybrid Financing Debt- and equity-linked securities When should a company issue quasi-equity or hybrid securities? Callable bonds, options, swaptions and other fixed-income derivatives embedded in structured financing techniques Case studies: Bavaria Bank Bond and Endesa. Insight into Design and Pricing of Structured Notes Design of convertibles, warrants and other debt-equity hybrids Case study: Sealed Air Convertible Capital-protected index-linked notes -- and variants Case study: JP Morgan Equity-Index Linked Note Unprotected and protected equity bull and bear notes Case study: RBC Bear ELNs Hedge fund linked products Warrant-linked loans Case study: Dubrovnik Eyewear. What is the effective spread on this loan? Hybrid bonds as a financing instrument Case study: US Bancorp Hybrid. Is this debt or equity? Sale and leaseback finance Case study: Le Meridien. Delegates work out the possible structured lease financing possibilities for an acquisition of this hotel group.	Presentations sf-equitylinked.pdf sf-hybrids.pdf Case Studies Bavaria Bank Bond Endesa Sealed Air Convertible Equity Index Note U.S. Bancorp Hybrid Le Meridien Articles Structured Notes Lyons Warrant Bonds Spreadsheets On-Line Model dubrovnik_eyewear.xls
Day 4	Leveraged and Mezzanine Finance The role of leverage and structured securities in M&A and LBO deals How the credit crunch has affected leveraged finance Leveraged buyouts, roll-ups, recapitalizations, and refi's Case study: Sealed Air's Recap. How a company can exploit its debt capacity, and the risks it takes. Leveraged acquisition finance Focus: synthetic ratings and debt pricing Case study: Ubuntu Properties. A private company is looking for a cash-out, and delegates estimate the company's debt capacity and the owner's options. Implementing a leveraged buyout: senior, mezzanine and equity finance Syndicated acquisition lending Assets versus cash flows as support for leverage Covenants and debt capacity Example: The LBO of Nukem Security Services Teams work on spreadsheet-based debt capacity analysis for leveraged finance Senior and second lien financing Case study: Cognis. How second-lien lending contributed to the leveraged refinancing of a German chemicals company. Negotiating a second lien termsheet Pay-in-kind (PIK) notes Case study: Sealy. When do the investors get repaid? How much? Structural subordination in PIKs Mezzanine and more Warrant notes Case study: Woodstream. Who gets the warrants, and what are they worth? Negotiating a mezzanine termsheet Performance-linked mezzanine notes Case study: The Suriname Termsheet. How does this mezzanine finance work? Hands-on example of participation finance in emerging markets Team work: Frutas Nicas. Delegates evaluate a mezzanine investment in a Central American company Summary and recap	Presentations sf-leveraged.pdf sf-mezzanine.pdf Case Studies Sealed Air's Recap Ubuntu Nukem Sealy PIK Woodstream Woodstream Termsheet Suriname Hydro Frutas Nicas Articles Mezzanine Finance 1 & Mezzanine Finance 2 Spreadsheets leverage_effect.xls ubuntu.xls woodstream.xls Corporate Finance and Debt Capacity Tables lbocapacity.xls suriname.xls frutas_nicas.xls
Additional Reading Introduction to Structured Finance by Frank J. Fabozzi Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments by George Chacko, Anders Sjöman, Hideto Motohashi, and Vincent Dessain
The Instructor Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in over forty countries abroad 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 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.