Certificate In Leveraged Finance Analysis

This certification is comprised of two courses: Structuring Leveraged Buy-Outs and LBO Modeling.  It will provide participants with the framework to identify appropriate candidates for leverage, build a model to demonstrate the impact of debt on the financials, and the skills to structure a leveraged finance transaction. 

The first two days focus on understanding the terms, the market environment, the frameworks and structuring. The final day will focus on practical model building

Key Learning Outcomes:

• Apply analytic tools to identify suitable candidates for leverage and use forecasts of the key cash flow drivers to determine an appropriate debt quantum and the relationship between amortizing and non-amortizing debt
• Structure transactions combining different debt instruments used in leveraged finance
• Understand the key elements of an inter-creditor agreement and how the inter-relationships of the debt providers are governed
• Appreciate the importance of safeguards to enable early intervention in deteriorating credits and the correlation between early intervention and ultimate recovery rates in distressed credits.
• Understand how operating and financial leverage work
• Identify the value drivers of an LBO
• Determine the financing possibilities
• Construct an LBO model
• Identify interesting LBO candidates from an IRR or money multiple perspective

Who Should Attend:

• Experienced finance professionals responsible for credit risk management, marketing, structuring or evaluating leveraged transactions, as well as anyone who needs to be able to analyse the transaction finance structure of a deal in order to maximise returns.

Content:

• Day One
• Overview
• The basics of the LBO market are explained including the parties involved, current market trends in structures and the debt providers’ perspective in determining the appropriate level of indebtedness rationale.
• Market trends: Leveraged debt market, leverage multiples, capital structures and parties
• Distinction between 'ordinary' leveraged finance, primary buyouts, secondary buyouts, etc.
• Sources of demand and supply for leveraged transactions
• Current market condition; default and recovery rates
• Key parties to a leveraged transaction and their motivations and how this impacts transaction structures
• Rationale behind leveraged buy outs  
• Application of analytical tools to determine what kind of company makes a suitable candidate for high leverage
• Repayment sources and structures of different classes of debt
• Funding Solutions
• An overview of corporate funding strategy, structuring of LBOs and private equity exit options. The key characteristics and features of the main funding instruments used in leveraged transactions are outlined.
• Corporate funding strategy and its impact on choices for company capital structure and funding instruments
• Shareholder considerations and measuring return on equity in leveraged finance
• Overview of the structural features, required market conditions and pricing of LBO instruments and how these are changing
• Senior bank and DCM products used in leveraged transactions: Alphabet loans, revolvers, working capital, bridge finance, acquisition, restructuring and capital expenditure lines
• Intermediate capital and hybrid products: High yield bonds, warranted and warrantless mezzanine, second lien, vendor notes, PIK Hold Co notes
• Equity: Types of equity and their impact on debt providers
• Private equity investment horizon and exit strategies
• Dividend recapitalizations
• Forecasting
• Explanation of the importance of forecasting company cash flows in an LBO environment in order to assess the sustainable amount of leverage.
• Debt Structuring
• Participants will learn how to structure leveraged transactions including identifying the appropriate amount of debt, using different debt instruments and understanding characteristics and relationships of the various debt instruments.
• The use of cash flow forecasts to determine debt capacity
• Balance amortizing and non-amortizing debt structures
• Quantifying and pricing acceptable levels of refinancing risk
• How exit strategies (trade sales, IPOs, secondary and tertiary buyouts and recapitalizations) influence capital structures
• The impact of funding structures on issuer default and recovery ratings
• Recycled credits (refinancing and secondary/tertiary buyouts)
• Debt Profile
• Structuring debt: Amount, currency, tenor, drawdown and amortization profile
• Capital expenditure, acquisitions, working capital
• Borrowing base structures – asset quality and assigning ‘haircuts’ to determine loan amounts
• Bridge facilities: Risks associated with repayment sources
• Combining bank debt with intermediate capital
• Day Two
• Debt Profile (continued)
• Ranking
• The mechanisms used to establish and maintain ranking in an LBO are explained.
• Define ranking: Contractual (legal), structural and constructive subordination
• Super senior, first, second lien and unsecured tranches
• Key terms of an inter-creditor agreement and their impact on senior and junior creditors
• Cross default and cross acceleration
• Safeguards
• Different types of terms and conditions and the protections they afford are considered.
• Senior bank debt covenant packages: ‘Standard’ terms and conditions, establishing headroom
• The rise and fall of ‘covenant lite’: The need for warning signals and the impact on lenders of different control mechanisms
• The terms and conditions of subordinated debt
• Stress testing to ensure appropriate levels of attainment and trigger covenants
• Pricing (For Reference)
• Pricing conventions in the leveraged market: Fees, cash and deferred margins, warrants, etc.
• Pricing trends
• Risk~return profiles
• Day Three
• The Fundamentals of LBOs
• Ensuring the participants are aware of the key success factors in an LBO is necessary so they understand the context of each step in the model build.
• How do LBOs work?
• Unlevered versus leveraged returns compared
• What makes a good LBO candidate?
• LBO analysis as a transaction valuation technique
• Key constituents of a leveraged transaction
• Comparison of LBO valuation with other valuation techniques
• Financing an LBO
• Senior debt (Term A, B and C) and second lien
• Junior debt sources including high yield and mezzanine
• Amortizing and bullet repayment loans
• Alternatives to ordinary equity: shareholder loan, preference shares
• PIK instruments, warrants, yield enhancing structures
• Creating the Operating Model
• Based on some historic data and a little guidance about forecast drivers the operating estimates are created in the model in order to derive the key metrics of EBITDA and CFADS.
• Sales, EBITDA, capex and working capital
• Tax (incl. losses)
• Indicative Valuation
• Understanding that the business generates enough EBITDA and CFADS, we can assess what the likely cash-free, debt-free value is for that business (transaction enterprise value or TEV). The sponsor is likely to pay only for the equity and so the adjustments necessary to extract such a value from TEV are explained and built.
• Suitability of entry multiples
• Entry EV to equity bridge
• Sources and Uses of Funds
• The session starts by looking at the idiosyncrasies between TEV and the uses of the funds. Calculating this amount gives us a number to match with the sources of funds. Understanding that a sponsor may choose third parties to finance this, we need to explore the dynamics of these other sources, before deriving the optimum capital structure.
• Uses of funds:  Equity acquisition, refinanced debt, options, fees
• Sources: Debt capacity, debt/EBITDA multiples, senior tranches, mezz, high Yield
• Building the Debt Schedules
• The different tranches of debt are likely to have different features. Best practice is to model one highly flexible debt schedule which can then be copied and pasted to fulfil the requirements of each other instrument. Updating the financials for the impacts of all debt instruments will indicate whether the capital structure is still regarded as appropriate.
• Circularity issues – planning to avoid
• Amortising vs. bullet tranches
• PIK interest
• Revolver
• Exit Valuation and Returns
• A sponsor will only get in if they can get out. But when is that exit likely to take place and at what value? We build the model so that it can identify the optimum timing of any exit, based on defensible assumptions about the exit value.
• Exit multiples and timing
• Exit bridge and equity return: IRR and cash/money multiple
• Value creation profile: Sales growth vs. margin vs. deleverage vs. exit multiple arbitrage
• Identifying the Key LBO Success Factors
• We conclude by reviewing the model and identifying what the key success factors are in an LBO.
• Length of investment
• Exit routes
• Cash generation and profitability growth of business being acquired
• Source, length and credibility of forecasts
• Exit multiple growth
• Finance mix
• Typical profiles