Sponsored & Leveraged Finance

Course review:

A guide to structuring focusing on leveraged finance techniques for credit and origination professionals involved in devising and analysing innovative financial solutions.

Course ObjectivesParticipants will be equipped to:

• Apply analytic tools to identify potential 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 are 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.

ContentANALYTIC OVERVIEWIntroduction

• Using leverage - the rationale
• Market trends - leverage multiples, capital structures, parties and instruments
• Current market conditions: fall-out from the US sub-prime mortgage crisis
• Definitions - primary buy-outs, secondary buy-outs, dividend recapitalisations etc.
• 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 BUY-OUTSUsing 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 buy-outs and recapitalisations) influence capital structures
• Estimating the impact of funding structures on issuer default and recovery ratings
• Secondary buy-outs and refinancings: 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 securitizations, 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
• 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
• The development of "covenant light"
• 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 etc.
• Assessing risk~return profiles
• Exploiting value in the capital structure.