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 one-day
introductory
course for legal staff 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 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, termsheet 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 FMO legal staff expect to gain from this course?
- Discuss role of mezzanine compared to other
forms of FMO investment
- Learn
or update knowledge of required rates of return and cost of capital
- 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 terms and conditions
of deals without making them too complex
- Identify legal's role in post-deal
mezzanine loan management,
restructuring and exit decisions.
Workshop
participants will be provided with a package of
materials
useful for designing mezzanine financing transactions, including
pertinent articles, case studies based on
actual deals, and sample
termsheets.
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?
- Mezzanine as a catalyst in private
development finance
- Why mezzanine for FMO? Why
participate in more than one level of the capital structure?
- Averting conflicts of interests
- The FMO/DEG Mezzanine Matrix. What are the key
legal issues?
- The corporate cost of funding:
techniques of effective cost analysis
- What expected rate of return
to FMO and other participants?
- Design and documentation of
convertibles, warrants and
other hybrids for emerging markets
- 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?
- 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
- Callable notes and other embedded
options: Deep Ocean
- How are these options valued?
- Case
study: Logistic Services (Turkey). What options does the
borrower have in this proposed mezzanine financing? What is FMO's
expected return?
Mezzanine Financing Techniques
- Checklist of senior and subordinated
financing techniques
- Senior secured debt in emerging
markets -- what does it mean? What risks?
- Senior secured lending: key terms and
conditions
- Example:
Senior Secured Loan facility
- Techniques in leveraged finance:
Second
lien, step-up rates, PIKs, participations,
warrants, preferred
- Second lien versus unsecured
mezzanine
- Case
study: Second Lien Facility. How would you adapt this term sheet
to your client's needs?
- Unsecured debt: high yield 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
mezzanine-with-warrants
- Case
study: The Woodstream Termsheet. Examine this termsheet. Which
features would you, as investor, insist on? Where would you be willing
to give way?
- Seller notes
- An alternative to warrants:
valuation-linked exit
- Issue: how should documents define
exit value? What options to include?
- Performance-linked participation
debt: an alternative form of mezzanine
- Hybrid capital notes and
senior equity finance
- Case
study: Frutas Nicas. How long should the participation feature
last?
- Issue: exit possibilities and
incentives
- Case
study: Shanghai Retail Alliance. How can FMO exit from this
investment?
- Review of four forms of mezzanine for emerging
markets: performance-participation notes, subordinated debt with
warrants, convertible notes, and preferred stock
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Presentations
fmo-mezz-legal1.pdf
fmo-mezz-legal2.pdf
Case Studies
Viva
Bulgaria
Singapore
Land
Songa
Convertible
Convertible
Preferred
Deep
Ocean Callable
Logistic
Services (Turkey)
Senior
Secured Facilty
Second
lien facility
Subordinated
Notes
Warrant
Termsheet
Woodstream
Termsheet
Shanghai
Retail Alliance
Spreadsheets
wacc.xls
dubrovnik_eyewear.xls
woodstream.xls
fmo_participation_mezz.xls
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Additional Resources
Background
Reading
Notes
on cost of
capital
and capital
structure
Second
Lien Loans
Mezzanine
Finance 1
Mezzanine
Finance 2
Useful Links
fitchratings.com (bond
ratings)
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 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 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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