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Hybrid and Mezzanine Finance

Prof. Ian Giddy

New York University

This Hybrid and Mezzanine Finance course covers the design of debt or equity financing techniques in order to solve particular financing or investor problems that cannot be solved by conventional methods. The course offers hands-on practice in structuring equity-linked, hybrid and mezzanine finance often used in connection with corporate restructurings, acquisitions and buyouts.

The Course
The course will be taught around several 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 capital financing, private equity and leveraged buyouts, recapitalizations, stress-induced financial restructuring, and arbitrage-driven hybrid debt funding.

Hybrid and equity-linked finance spans the division between debt and equity. Techniques include convertible notes, preferred stock, index-linked securities  and hybrid capital notes. Companies seek the best of debt and equity, 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. Structured products refers to a range of investment instruments designed to meet investors' or issuers' special needs or constraints.

Mezzanine finance is subordinated, unsecured debt including including warrant loans, and others offer corporations and banks a means of financing during circumstances when ordinary techniques fall short. Leveraged financing uses mezzanine debt, often employed in M&A, management buyouts and other forms of ownership transition, as well as corporate recapitalizations.

The course explains why and when corporations and financial institutions should issue, hybrid securities, structured notes, mezzanine funding, leveraged finance or other forms of tailored finance. In three information-packed days of instruction and application, we offer an economic cost-benefit analysis of the techniques, an insight into the corporate finance and pricing principles, the risks and how they can be managed, methods of cash-flow modeling, and a roadmap for choosing among the alternative forms of these techniques that are employed in today's capital market.

Who Will Benefit From This Course?
The course is of relevance to both potential originators and investors in hybrid and mezzanine instruments: commercial and investment bankers; corporate finance officers; securities analysts; investment professionals; corporate treasurers and other individuals whose professional future may be enhanced by an understanding of mezzanine finance and hybrid techniques. 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 analysis.

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 course will include case studies of actual financings, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of deals through presentations and discussions. 

Key Issues to be Explored
  • What is hybrid finance? Why and when should companies consider the use of hybrid debt, structured notes and subordinated mezzanine financing techniques?
  • How and when can structured and hybrid notes provide cheaper funding for issuers? From an investor's point of view, how can the security be dissected, and what drives its pricing?
  • How do bank regulators and the rating agencies determine the equity component of hybrids?
  • What is mezzanine finance? How do subordinated, quasi-equity financing techniques such as pay-in-kind, warrant-linked and and profit-participation loans work, and when does it make sense to use them? How are they priced?
  • What is the role of hybrid finance in the creedit crisis? How can these instruments be used in restructuring corporate balance sheets?

Pre-Course Reading

Outline of Course



Day 1 

Hybrid Instruments, Convertibles and Preferred Stock
  • Overview of Hybrid and Mezzanine Finance
  • Hybrids and Mezzanine in the Credit Crunch
  • Debt, Equity and the "Effective Cost of Capital"
  • When are Hybrid Securities and Mezzanine Notes Cost-Effective?
  • Design of Convertibles, Warrants and Other Debt-Equity Hybrids
  • Warrant Bonds and Warrant Loans: Cost Analysis
  • When Should a Company Use Equity-Linked Financing Techniques?
  • Cost of Capital and Quasi-Equity Instruments
  • Focus: Convertible Bonds
  • Assessing a Company's Cost of Convertible Bond Financing
  • Focus: Preferred Stock
  • Applications of Preferred Stock Issuance
High Yield Bonds and Hybrid Capital Notes
  • High Yield Bonds as a Subordinated Financing Technique: US vs European Markets
  • Pricing and Risk of High Yield Debt
  • Terms and Covenants in High Yield Bonds
  • Hybrid Bonds and Perpetuals -- Debt, Equity or Both?
  • Hybrids for Bank Capital Requirements
  • Effect of Bank Capital Erosion on Hybrid Instruments
  • Hybrids in Corporate Acquisition Finance
  • Rating Agency Criteria for Equity Component in Hybrid and Capital Notes
  • Equity Content: The Hybrid Finance Matrix
  • Case Studies of Hybrid Bond Issuance in Europe and North America


Case Studies
Gateway: WACC in India
Singapore Land
Golden Telecom
Songa Convertible
Sealed Air Convertible

Piaggio High Yield
U.S. Bancorp Hybrid
TD Convertible Preferred




Day 2

Callable Bonds and Structured Products
  • Callable Bonds, Options, Swaptions and Other Fixed-Income Derivatives Embedded in Structured Financing Techniques
  • Callable and Puttable Bonds: Embedded Swaptions
  • Demonstration of Hands-On Use of Pricing Models
  • Estimating the Borrower's call Options and Prepayment Rights
  • Structured Products: Performance-Enhancement versus Income-Enhancement Instruments
  • Pure-Play Structured Products
  • Design and Pricing of Equity-Linked Structured Notes
  • Bonds and Loans with Attached Warrants
  • Credit-Linked Notes
Mezzanine Finance 1
  • Structuring Mezzanine Finance
  • Asset-Based Finance
  • Senior Loans: The A-B-C Structure
  • Second Lien Debt
  • Pay-In-Kind (PIK) Notes
  • European Holdco PIKs and Other Developments
  • Mezzanine Notes with Warrants
  • Negotiating a Mezzanine Termsheet
  • Seller Notes and Earn-Outs
  • Acquisition Finance with Leasing Participation: Le Meridien


Case Studies
Deep Ocean Callable
Bavaria Bank Bond
Equity Index Note
Oil-Linked Notes
Thunderbird CLN
Sealy PIK
Jefferson Smurfit
Woodstream Mezz
Woodstream Termsheet
The Cognis Refinancing

Day 3

Mezzanine Finance 2
  • The Mezzanine Matrix
  • Performance-Linked Participation Debt: an Alternative Form of Mezzanine
  • The Participation Financing Spreadsheet
  • What are the Advantages and Disadvantages of an EBITDA-linked Interest Rate? What are the exit possibilities?
  • Setting Targets and Linking Payout to Performance
  • The Language of the Linkage
  • Puts and Calls in Mezzanine
  • What are the Advantages and Disadvantages of a Contingent Payment Unit? What are the exit possibilities?
  • Terms and Pricing of the Mezzanine in No-liquidity Situations
  • Discussion of Appropriate Linkage: Turnover, Cash Flow or Profit?
  • Exit Possibilities and Drag-Along Rights
  • Evaluating a Funding Proposal with Revenue-Linked Mezzanine Debt
  • Equity-Linked Bank Finance in Emerging Markets
Mezzanine and Leveraged Finance
  • Leveraged Finance in M&A and LBO deals
  • Leveraged Buyouts: Process and Structure
  • Example of Spreadsheet-Based Debt Capacity Analysis for Leveraged Finance
  • Focus: Synthetic Ratings and Debt Pricing
  • How to Structure and Price the Mezzanine for an Acquisition or Buyout
  • Post-Acquisition Leveraged Finance: Refinancings and Recapitalizations
  • Focus: Exit Strategies and Exit Pricing
  • Deleverage and Restructuring: Debt-Equity Exchanges and Mezzanine
  • Summary of Course


Case Studies
Shanghai Solutions
Suriname Hydropower
Banco Nuevo
Nukem Security Services
The LBO of ISS
Reykjavik Fleet Leasing


Additional Resources
Background Reading
Introduction to Cost of Capital
Convertible Preferred: Sample Termsheet
Moodys on Hybrids
Hybrids - Empirical

Second Lien Loans
Second Lien: Sample Termsheet
Mezzanine Finance 1
Mezzanine Finance 2
Introduction to Leveraged Finance

Useful Links (company data) (industry ratios) (bond ratings) (bond pricing) (corporate bond spreads) (corporate financial ratios) (option valuation) (convertible bond calculator)
On-Line Convertible Model
Roberts Stock Volatility
Morningstar Stock Volatility

Corporate Finance and Debt Capacity Tables
suriname solution.xls

The Instructor
Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in 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 the U.S. and abroad. As a banker and consultant he has been involved in the growth of the structured and mezzanine markets in the USA, Europe and several developing countries. 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. | | | | | contact
Copyright ©2009 Ian Giddy. All rights reserved.