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 and subordinated debt with a special emphasis on the
private sector in emerging markets.
The
workshop will include case studies of actual FMO 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
acquisition 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.
Outline
of Workshop
Date
|
Topics
|
Resources
|
| Day One |
Structured Finance and Effective Cost Analysis
- What is Mezzanine Finance, and where
does it fit into a company's financing structure?
- Why mezzanine for FMO? Why
participate in more than one level of the capital structure?
- Case
study: Viva Bulgaria! Entry and exit in a mezzanine loan.
- 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: Changing WACC in South
Africa)
- 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 hybrids
- 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
- Design of convertibles, warrants and
other hybrids for emerging markets (Example: Ban-Pu Coal Convertible Bond)
- Use of mezzanine and hybrids in
buyouts,
acquisition finance and privatizations
- Case
study: Logistic Services (Turkey). 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?
- 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
- Seller notes
- 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?
- An alternative to warrants:
valuation-linked exit
- Performance-linked participation
debt: an alternative form of mezzanine
- Mezzanine as a catalyst in private
development finance
- Case
study: Shanghai Retail Alliance. What are the advantages and
disadvantages of the Contingent Payment Unit in this deal? What are the
exit possibilities?
|
Presentations
fmo1.pdf
fmo2.pdf
Case Studies
Viva
Bulgaria
WACC
in South Africa?
Singapore
Land
Logistic
Services (Turkey)
Second
lien facility
Woodstream
Mezz
Woodstream
Termsheet
Shanghai
Retail Alliance
Spreadsheets
wacc.xls
beta.xls
black-scholes.xls
dubrovnik_eyewear.xls
convertible_and_wacc.xls
fitch_loss_tables.xls
woodstream.xls
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Day
Two
|
Emerging
Market Mezzanine and Hybrid Capital and
- Mezzanine in emerging-market
acquisition finance
- Terms and pricing of the mezzanine in
no-liquidity situations
- Setting targets and linking payout to
performance
- 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?
- Post-deal mezzanine management
- Review: the cost of equity capital
- Hybrid capital notes and
senior equity finance
- Case
study: Banco Nuevo
- Four forms of mezzanine for emerging
markets: performance-participation notes, subordinated debt with
warrants, convertible notes, and preferred stock
- Discussion
session: Structural features and a cost-benefit analysis of four forms
of mezzanine
Debt
Capacity Analysis and Mezzanine
- 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
- How to structure and price the
leverage for an acquisition or buyout
- Post-acquisition re-financing
- Paydown
and exit analysis
- Exit
and ownership transition
- Case
study: Reclamation Group. Financing and legal structure of an
ownership transition
- Summary session: Review and analysis
of the four forms
of mezzanine
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Presentations
fmo3.pdf
fmo4.pdf
Case Studies
Suriname
Hydropower
Banco
Nuevo
Ubuntu
Properties
Reclamation Group
Spreadsheets
ubuntu.xls
lbocapacity2.xls
roadshow.xls
jordan_lbo_model.xls
financing_abc.xls
suriname
solution
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Additional Resources
Background
Reading
Notes
on cost of
capital
and capital
structure
Corporate
Finance and Debt
Capacity Tables
Note
on Leveraged Buyouts
Second
Lien Loans
Mezzanine
Finance 1
Mezzanine
Finance 2
Senior_Secured_Facilty
term sheet
Subordinated
notes term sheet
Useful Links
standardandpoors.com (bond
ratings)
bondsonline.com (corporate bond
spreads)
damodaran.com
(industry ratios)
advfn.com (corporate financial ratios)
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.
About FMO
The Netherlands Development Finance
Company (Financierings-Maatschappij voor Ontwikkelingslanden, or FMO
for short) supports the private
sector in developing countries and emerging markets in Asia, Africa,
Latin America and Central and Eastern Europe. FMO does this with loans,
participations, guarantees and other investment promotion activities.
The organization's goal is to contribute to the structural and
sustainable economic
growth in these countries and, together with the private sector, obtain
healthy returns. FMO is a joint venture of the Dutch State, the large
Dutch banks and the Dutch business community. For further details, see fmo.nl.
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