Leveraged Finance: Structures & Safeguards

Course Objectives

Participants will be equipped to:

• Apply analytic tools to identify appropriate candidates for leverage
• Understand the motivations of the various parties to a transaction and how this can drive capital structures
• Understand how changing market conditions are likely to affect structures in the market place
• Use forecasts of the key cash-flow drivers to determine an appropriate debt quantum and the relationship between amortising and non-amortising debt
• Understand the relative advantages and disadvantages of various debt instruments and understand the factors affecting their availability: including senior debt, second lien, mezzanine, high yield notes and PIK notes
• Structure leveraged transactions combining different debt instruments
• Be aware of the key terms and conditions of senior and subordinated debt
• Understand the key elements of an intercreditor agreement and how the inter-relationships of the debt providers are governed
• Understand why and how recapitalisations have been used by sponsors and the effect they have on lenders.

Target Audience

Experienced banking and finance professionals responsible for credit risk management, marketing, structuring or evaluating leveraged transactions.

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

Content

ANALYTIC OVERVIEW

Introduction

• Using leverage: the rationale
• Market trends: leverage multiples, capital structures, parties and instruments
• Current market conditions: impact of the credit crunch and economic downturn
• Definitions: primary buyouts, secondary buyouts, dividend recapitalisations etcetera
• Key players: parties to the transaction and their motivations.

Purpose payback

• Using purpose payback concepts to understand structures of different classes of debt
• Cash-flow
• Asset sales
• Refinancing.

Instruments

• Overview of the structural features, required market conditions and pricing of LBO instruments and how these are changing
• Bank debt products used in leveraged transactions: alphabet loans, revolvers, working capital, bridge finance, acquisition, restructuring and CAPEX lines
• Intermediate capital and hybrid products: high yield, warranted and warrantless mezzanine, second lien, vendor notes, PIK notes
• Equity: types of equity and their impact on debt providers.

IDENTIFYING CANDIDATES AND FORECASTING PERFORMANCE

• Characteristics of an “ideal” LBO: identifying candidates for leverage
• Identifying key drivers within the company cash-flow
• Modelling performance: building assumptions, sensitising forecasts and benchmarking.

STRUCTURING LEVERAGED BUYOUTS

Using forecasts to determine the capital structure

• Using cash-flow forecasts to determine debt capacity
• Balancing amortising and non-amortising debt structures
• Quantifying and pricing acceptable levels of refinancing risk
• How exit strategies (trade sales, IPOs, secondary and tertiary buyouts and recapitalisations) influence capital structures
• Estimating the impact of funding structures on issuer default and recovery ratings
• Secondary buyouts and refinancing: market conditions needed and impact on debt quantum and structure.

Debt profile

• Structuring debt: amount, currency, tenor, drawdown and amortisation profile
• Impact of the institutional investor
• Financing CAPEX, acquisitions, working capital
• Use of securitisations, sale and leaseback, borrowing base facilities to maximise debt quantum
• Assessing asset quality and assigning “haircuts” to determine loan amounts
• Devising and monitoring effective borrowing base structures
• Structuring bridge facilities: risks associated with repayment sources
• Combining bank debt with intermediate capital.

Seniority

• Defining ranking: contractual (legal), structural and constructive subordination
• Establishing and maintaining ranking within the capital structure
• The impact of alternative funding products on senior lenders: evolving market conventions.

Terms and conditions

• Senior debt covenant packages: “standard” terms and conditions, establishing headroom
• The rise and fall of “covenant light”: the need for warning signals and the impact on lenders of different control mechanisms
• Special circumstances: the need for customised commercial and financial safeguards
• Understanding the terms and conditions of subordinated debt
• Examining the interrelationship between senior debt, stretched senior and other subordinated instruments.

Pricing

• Pricing conventions in the leveraged market: fees, cash and deferred margins, warrants etcetera
• Assessing risk~return profiles
• Exploiting value in the capital structure.

Workshop Times