Leveraged and Mezzanine Finance
Transcript of Leveraged and Mezzanine Finance
3Copyright ©2005 Ian H Giddy
Mez
zani
ne D
ebt
Mez
zani
ne D
ebt
NE
WC
O
Dis
kd
rive
bu
sin
ess
Eq
uit
y $0
.25b
Sen
ior
deb
t $1
bW
hat
sec
uri
ties
?W
hat
ret
urn
s?W
hat
inve
sto
rs?
Mez
zan
ine
4Copyright ©2005 Ian H Giddy
The
Fin
anci
ng S
pect
rum
The
Fin
anci
ng S
pect
rum
Expected Return
Ris
k
Sen
ior
secu
red
deb
tS
enio
r se
cure
d d
ebt
Eq
uit
yE
qu
ity
Sen
ior
un
secu
red
deb
tS
enio
r u
nse
cure
d d
ebt
Su
bo
rdin
ated
deb
tS
ub
ord
inat
ed d
ebt
Pre
ferr
ed e
qu
ity
Pre
ferr
ed e
qu
ity
Co
nve
rtib
le d
ebt
Co
nve
rtib
le d
ebt
5Copyright ©2005 Ian H Giddy
Som
e Le
vera
ged
Fin
anci
ng T
echn
ique
sS
ome
Leve
rage
d F
inan
cing
Tec
hniq
ues
�S
enio
r D
ebt
�A
sset
-bac
ked
debt
: firs
t lie
n, m
ortg
age,
leas
ing,
AB
S�
Brid
ge lo
ans,
term
deb
t, re
volv
ing
cred
it fa
cilit
ies
�S
econ
d lie
n no
tes
�S
enio
r un
secu
red
debt
�S
elle
r no
te
�M
ezza
nine
�H
igh-
yiel
d bo
nds
�S
ubor
dina
ted
debt
with
def
erre
d in
tere
st: P
IKs,
ste
p-up
s�
Sub
ordi
nate
d de
bt w
ith e
quity
opt
ions
: war
rant
s, c
onve
rts,
pa
rtic
ipat
ing
�E
quity
�C
onve
rtib
le p
refe
rred
sto
ck –
LBO
san
d V
Cs
�C
omm
on s
tock
: “S
tub”
(pr
evio
us o
wne
rs’ s
hare
); m
anag
ers
6Copyright ©2005 Ian H Giddy
Typ
ical
LB
O T
rans
actio
n S
truc
ture
Typ
ical
LB
O T
rans
actio
n S
truc
ture
Man
agem
ent
LBO
fund
s
Sub
deb
t hol
ders
4-7
year
s ex
it st
rate
gy25
-40%
20-3
0%E
quity
Pub
lic m
arke
t
Insu
ranc
e co
mpa
nies
Hed
ge fu
nds
LBO
/Mez
zani
ne
fund
s
7-10
yea
rs p
ayba
ck
1x-2
x E
BIT
DA
10-2
0%20
-30%
Mez
zani
ne
finan
cing
Com
mer
cial
ba
nks
Insu
ranc
e co
mpa
nies
5-7
year
s pa
ybac
k2x
-3x
EB
ITD
A2x
inte
rest
cov
erag
e
7-10
%50
-60%
Sen
ior
debt
Lik
ely
sou
rces
Len
din
g c
rite
ria
Co
st o
f ca
pit
alP
erce
nt
of
tran
sact
ion
Fin
anci
ng
9Copyright ©2005 Ian H Giddy
Leve
rage
d Le
ndin
g fo
r A
cqui
sitio
nsLe
vera
ged
Lend
ing
for
Acq
uisi
tions
Off
er
sta
ge
De
al st
ag
e
Po
st-a
cq
uis
itio
n s
tag
e
Co
mm
itm
en
t to
Fi
na
nc
e
Brid
ge
Fin
an
cin
g
Re
fin
an
cin
g &
Sa
le o
f A
sse
ts
10Copyright ©2005 Ian H Giddy
Tra
ding
and
Tra
nsfe
rrin
g Lo
ans
Tra
ding
and
Tra
nsfe
rrin
g Lo
ans
AS
SIG
NM
EN
TA
SS
IGN
ME
NT
FU
LL
AS
SIG
NM
EN
TT
he s
ale
of a
llof
the
orig
inat
ing
lend
er’s
or
assi
gnor
’srig
hts
and
inte
rest
in a
cre
dit f
acili
tyto
a p
urch
aser
or
assi
gnee
.
FU
LL
AS
SIG
NM
EN
TT
he s
ale
of a
llof
the
orig
inat
ing
lend
er’s
or
assi
gnor
’srig
hts
and
inte
rest
in a
cre
dit f
acili
tyto
a p
urch
aser
or
assi
gnee
.
AS
SIG
NM
EN
TW
ITH
NO
VA
TIO
N
AS
SIG
NM
EN
TW
ITH
NO
VA
TIO
N
PA
RT
ICIP
AT
ION
PA
RT
ICIP
AT
ION
PA
RT
ICIP
AT
ION
Par
ticip
ants
hav
e de
rivat
ive
right
s,no
tdire
ct r
ight
s ag
ains
t
(or
oblig
atio
ns to
) th
ebo
rrow
er.
PA
RT
ICIP
AT
ION
Par
ticip
ants
hav
e de
rivat
ive
right
s,no
tdire
ct r
ight
s ag
ains
t
(or
oblig
atio
ns to
) th
ebo
rrow
er.
nL
IMIT
ED
VO
TIN
G P
AR
TIC
IPA
TIO
Nn
FU
LL
VO
TIN
G P
AR
TIC
IPA
TIO
Nn
FU
LL
PA
SS
-TH
RO
UG
H P
AR
TIC
IPA
TIO
N
nL
IMIT
ED
VO
TIN
G P
AR
TIC
IPA
TIO
Nn
FU
LL
VO
TIN
G P
AR
TIC
IPA
TIO
Nn
FU
LL
PA
SS
-TH
RO
UG
H P
AR
TIC
IPA
TIO
N
11Copyright ©2005 Ian H Giddy
Syn
dica
ted
Loan
s:S
yndi
cate
d Lo
ans:
Evo
lutio
n of
the
Mar
ket
Evo
lutio
n of
the
Mar
ket
12Copyright ©2005 Ian H Giddy
Ban
k D
ebt
Ban
k D
ebt
�B
ridge
loan
s�
Ban
k lo
ans
prov
idin
g fu
nds
quic
kly
to g
et th
e de
al d
one;
ref
inan
ced
in
1-6
mon
ths
�M
ay h
ave
step
-up
spre
ads
and
othe
r in
cent
ives
to p
ay d
own
early
�T
erm
deb
t�
Priv
ate
plac
emen
ts o
f syn
dica
ted
loan
s un
derw
ritte
n an
d di
strib
uted
lik
e bo
nds
--so
ld to
ban
k an
d in
sura
nce
com
pani
es�
Ofte
n se
cure
d �
Pric
ed a
t sub
stan
tial s
prea
d ov
er L
ibor
�R
epay
men
ts c
an b
e st
raig
ht li
ne a
mor
tizat
ion
with
or
with
out a
“gr
ace
perio
d”
�R
evol
vers
�B
ank
loan
s th
at c
ompa
ny c
an d
raw
dow
n fo
r w
orki
ng c
apita
l, ce
rtai
n ca
pita
l inv
estm
ents
, unf
ores
een
cost
s�
Usu
ally
hav
e on
goin
g fe
es, b
orro
win
g lim
its, c
oven
ants
, and
co
nser
vativ
e re
paym
ent t
erm
s
13Copyright ©2005 Ian H Giddy
Syn
dica
ted
Acq
uisi
tion
Loan
sS
yndi
cate
d A
cqui
sitio
n Lo
ans
�D
ebt i
nstr
umen
ts th
at h
ave
feat
ures
of p
ublic
deb
t suc
h as
an
activ
e se
cond
ary
mar
ket a
nd c
redi
t rat
ings
.�
Syn
dica
ted
loan
s ca
n be
bot
h se
cure
d an
d un
secu
red,
bu
t are
alw
ays
seni
or d
ebt.
�Le
vera
ged
synd
icat
ed lo
ans
are
typi
cally
sen
ior
to a
ll ot
her
debt
in th
e bo
rrow
er’s
cap
ital s
truc
ture
, whi
le
synd
icat
ed lo
ans
of in
vest
men
t gra
de fi
rms
are
ofte
n at
th
e sa
me
leve
l of s
enio
rity
as s
enio
r bo
nds.
�G
ener
ally
cal
labl
e at
par
with
out p
enal
ty –
espe
cial
ly
impo
rtan
t in
leve
rage
d fin
ance
.
17Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: Fin
anci
ng th
e C
ase
Stu
dy: F
inan
cing
the
Val
vex
Val
vex
Acq
uisi
tion
Acq
uisi
tion
�W
ould
you
adv
ise
Con
nexi
onto
use
a s
yndi
cate
d lo
an
to fi
nanc
e its
pro
spec
tive
acqu
isiti
on?
�If
so, h
ow w
ould
it b
e st
ruct
ured
and
dis
trib
uted
? �
How
sho
uld
the
bank
eva
luat
e an
d pr
ice
the
risk?
18Copyright ©2005 Ian H Giddy
Brid
ge F
inan
cing
an
Acq
uisi
tion:
B
ridge
Fin
anci
ng a
n A
cqui
sitio
n: V
alve
xV
alve
x
Th
e C
on
text
�C
onne
xion
is th
e le
adin
g O
EM
sup
plie
r of
one
-way
air
conn
ectio
n va
lves
for
cabi
n pr
essu
rizat
ion
for
the
airli
ne in
dust
ry.
�B
y th
e ac
quiri
ng o
f the
ven
tilat
ion
valv
e di
visi
on o
f Val
vex
Inte
rnat
iona
l, C
onne
xion
was
abl
e to
incr
ease
its
wor
ld-w
ide
mar
ket
shar
e to
23%
F
inan
cin
g N
eed
ed�
Nee
ded
appr
oxim
atel
y E
UR
300
mill
ion
�T
otal
fina
ncin
g of
EU
R 3
01.6
mn:
GB
P 1
72 m
npu
rcha
se p
rice
as
wel
l as
finan
cing
for
gene
ral c
orpo
rate
pur
pose
s T
he
Ch
oic
e�
Use
d te
rm lo
an fu
lly u
nder
writ
ten
by S
ocG
en�
Thr
ee tr
anch
es:
�
EU
R 1
32 M
io. 7
-yea
r te
rm lo
an�
US
D 1
12.5
Mio
. 7-y
ear
term
loan
�E
UR
47
Mio
. 5-y
ear
revo
lver
19Copyright ©2005 Ian H Giddy
Ter
m S
heet
Ter
m S
heet
Source: http://pages.stern.nyu.edu/~igiddy/cases/connexion.doc
20Copyright ©2005 Ian H Giddy
CLO
Exa
mpl
eC
LO E
xam
ple
�S
enio
r lo
ans
now
be
ing
trad
ed a
nd
repa
ckag
ed in
to
asse
t-ba
cked
se
curit
ies
22Copyright ©2005 Ian H Giddy
Sub
ordi
nate
d D
ebt
Sub
ordi
nate
d D
ebt
�O
ptim
izat
ion
of fi
nanc
ial l
ever
age
�R
egul
ator
y-dr
iven
cap
ital r
equi
rem
ents
�R
ated
ass
et s
ecur
itiza
tions
(se
nior
-sub
str
uctu
re in
as
set-
back
ed s
ecur
ities
)�
Insi
der
or s
uppl
ier-
cred
it su
bord
inat
ion
(eg
in p
roje
ct
finan
ce)
�W
ork-
outs
and
res
truc
turin
gs (
exis
ting
borr
ower
s ag
ree
to s
enio
rity
of n
ew lo
ans,
to b
uy ti
me)
23Copyright ©2005 Ian H Giddy
Sec
ond
Lien
Not
esS
econ
d Li
en N
otes
�Lo
aned
aga
inst
rem
aini
ng v
alue
of c
olla
tera
l, so
met
imes
mor
e�
Not
sub
ordi
nate
d in
rig
ht o
f pay
men
t to
first
lien
lend
ers
�M
ay h
ave
seco
nd li
en c
laim
on
mos
t liq
uid
asse
ts, l
ike
rece
ivab
les,
but
firs
t lie
n on
equ
ipm
ent
�H
ighe
r ra
tes
than
sen
ior,
but
less
cos
tly th
an
mez
zani
ne�
No
war
rant
s or
equ
ity k
icke
rs�
Inve
stor
bas
e in
clud
es h
edge
fund
s, s
peci
aliz
ed
inve
stm
ent f
unds
and
mut
ual f
unds
(un
it tr
usts
)�
But
may
hav
e co
mpl
ex in
terc
redi
tor
agre
emen
ts
27Copyright ©2005 Ian H Giddy
Sel
ler
Not
esS
elle
r N
otes
�In
Mar
ch 2
003,
Bla
ckst
one
Gro
up a
cqui
red
TR
W A
utom
otiv
e fr
om
Nor
thro
p G
rum
man
for
$4.7
bill
ion.
�P
art o
f the
deb
t fin
anci
ng w
as a
600
mill
ion,
8%
pay
-in-k
ind
note
pa
yabl
e to
a s
ubsi
diar
y of
Nor
thro
p G
rum
man
Cor
pora
tion
�V
alue
d at
$34
8 m
illio
n on
a 1
5-ye
ar li
fe u
sing
a 1
2% d
isco
unt r
ate
�A
s of
Sep
tem
ber,
200
4, th
e ac
cret
ed b
ook
valu
e to
tale
d $4
17
mill
ion,
and
acc
rete
d fa
ce-v
alue
was
$67
8 m
illio
n
�T
hat m
onth
TR
W A
utom
otiv
e re
purc
hase
d th
e S
elle
r N
ote
and
settl
ed v
ario
us c
ontr
actu
al is
sues
ste
mm
ing
from
the
acqu
isiti
on,
for
a ne
t am
ount
of $
493.
5 m
illio
n.
28Copyright ©2005 Ian H Giddy
Hig
h Y
ield
and
Mez
zani
ne F
inan
cing
Hig
h Y
ield
and
Mez
zani
ne F
inan
cing
�H
igh
yiel
d bo
nds
sold
to th
e pu
blic
�H
igh
inte
rest
rat
es, “
even
t ris
k” p
uts
�S
ubor
dina
ted
priv
ate
plac
emen
ts�
Hig
h in
tere
st r
ates
�P
ay-
in-k
ind
inte
rest
(in
tere
st p
aid
in fo
rm o
f add
ition
al
note
s�
Ste
p-up
rat
es
�W
arra
nts
to p
urch
ase
shar
es
(typ
ical
ly 2
-5%
of n
ew c
ompa
ny)
�C
onve
rtib
le n
otes
So
urc
e:h
ew
ittin
ve
st.c
om
29Copyright ©2005 Ian H Giddy
Sal
eS
ale
-- and
and
-- Lea
seba
ck F
inan
cing
Leas
ebac
k F
inan
cing
�T
his
is a
n ag
reem
ent i
n w
hich
th
e ow
ner
of p
rope
rty
sells
th
at p
rope
rty
to a
per
son
or
inst
itutio
n an
d th
en le
ases
it
back
aga
in fo
r an
agr
eed
perio
d an
d re
ntal
. �
Leas
ebac
k is
ofte
n us
ed b
y co
mpa
nies
that
wan
t to
free
up
cap
ital t
ied
up in
bui
ldin
gs.
�T
he te
nant
/less
ee o
ften
has
som
e ki
nd o
f opt
ion
to b
uy
back
the
prop
erty
at t
he e
nd o
f th
e le
ase
perio
d.
Le
Me
ridie
n
Ho
tels
Ro
ya
l B
an
k o
f Sc
otla
nd
30Copyright ©2005 Ian H Giddy
Hig
h Y
ield
and
Mez
zani
ne F
inan
cing
Hig
h Y
ield
and
Mez
zani
ne F
inan
cing
�H
igh
yiel
d bo
nds
sold
to th
e pu
blic
�H
igh
inte
rest
rat
es, “
even
t ris
k” p
uts
�S
ubor
dina
ted
priv
ate
plac
emen
ts�
Hig
h in
tere
st r
ates
�P
ay-
in-k
ind
inte
rest
(in
tere
st p
aid
in fo
rm o
f add
ition
al
note
s�
Ste
p-up
rat
es
�W
arra
nts
to p
urch
ase
shar
es
(typ
ical
ly 2
-5%
of n
ew c
ompa
ny)
�C
onve
rtib
le n
otes
So
urc
e:h
ew
ittin
ve
st.c
om
31Copyright ©2005 Ian H Giddy
Hig
h Y
ield
Bon
dsH
igh
Yie
ld B
onds
So
urc
e:
inve
stin
gin
bo
nd
s.c
om
34Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: C
ase
Stu
dy:
Pia
ggio
Pia
ggio
�W
ho b
uys
“spe
cula
tive
grad
e”
bond
s?�
Wha
t pro
tect
ions
do
high
yie
ld in
vest
ors
wan
t?
�W
hat y
ield
s do
thes
e in
vest
ors
expe
ct, a
nd
in w
hat f
orm
?
�W
hat d
id P
iagg
ioof
fer?
36Copyright ©2005 Ian H Giddy
Mez
zani
ne’s
Big
Pro
blem
: Hig
h E
xpec
ted
Rat
e of
Ret
urn
Mez
zani
ne’s
Big
Pro
blem
: Hig
h E
xpec
ted
Rat
e of
Ret
urn
So
luti
on
s�
Dee
p di
scou
nt s
ubor
dina
ted
debt
�S
tep-
up r
ates
�S
ubor
dina
ted
debt
with
equ
ity w
arra
nts
�C
onve
rtib
le s
ubor
dina
ted
debt
�P
artic
ipat
ing
subo
rdin
ated
deb
t�
Put
tabl
esu
bord
inat
ed d
ebt
37Copyright ©2005 Ian H Giddy
Fro
m B
ank
of A
mer
ica:
Fro
m B
ank
of A
mer
ica:
�M
ezza
nine
deb
t is
issu
ed w
ith a
cas
h pa
y in
tere
st r
ate
of 1
2 to
12
1/2
perc
ent a
nd a
mat
urity
ran
ging
from
five
to
sev
en y
ears
. T
he r
emai
nder
of t
he r
equi
red
18 to
20
perc
ent a
ll-in
-ret
urn
cons
ists
of w
arra
nts
to b
uy
com
mon
sto
ck, w
hich
the
inve
stor
val
ues
base
d on
the
outlo
ok o
f the
com
pany
, or
incr
emen
tal i
nter
est p
aid
on
a "p
ay-in
-kin
d" o
r P
IK b
asis
. �
The
fee
for
rais
ing
the
mon
ey r
uns
betw
een
two
and
thre
e pe
rcen
t of t
he tr
ansa
ctio
n.�
Dea
l siz
es ty
pica
lly r
ange
from
thre
e m
illio
n to
$25
m
illio
n bu
t can
go
as h
igh
as $
150
mill
ion.
So
urc
e: B
an
k o
f A
me
ric
a
39Copyright ©2005 Ian H Giddy
Eur
opea
n M
ezza
nine
: Som
e D
evel
opm
ents
Eur
opea
n M
ezza
nine
: Som
e D
evel
opm
ents
�S
ecur
ity. S
ome
bene
fit fr
om th
e sa
me
secu
rity-
colla
tera
l pa
ckag
e as
the
seni
or b
anks
(bu
t on
a se
cond
-ran
king
an
d su
bord
inat
ed b
asis
).�
“War
rant
less
" m
ezza
nine
.B
ased
on
the
emer
genc
e of
a
new
cla
ss o
f "in
stitu
tiona
l" m
ezza
nine
inve
stor
in E
urop
e,
who
vie
ws
mez
zani
ne a
s a
"cur
rent
pay
" as
set a
nd
eval
uate
s in
vest
men
ts b
ased
on
coup
on. (
Eg
CD
Os)
�“M
ezza
nine
not
es.”
Sec
uriti
es is
sued
by
the
hold
ing
com
pany
of t
he s
enio
r de
bt b
orro
wer
(as
for
a hi
gh-y
ield
is
sue)
, hav
e hi
gh-y
ield
-sty
le c
oven
ants
and
ben
efit
from
su
bord
inat
ed u
pstr
eam
gua
rant
ees
from
the
seni
or d
ebt
borr
ower
and
its
oper
atin
g su
bsid
iarie
s.
40Copyright ©2005 Ian H Giddy
U.S
. vs.
Eur
opea
n M
ezza
nine
U.S
. vs.
Eur
opea
n M
ezza
nine
So
urc
e: fitc
hra
tin
gs.
co
m, “M
ezz
an
ine
De
bt”
41Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: Jef
fers
on S
mur
fitC
ase
Stu
dy: J
effe
rson
Sm
urfit
�W
hat i
s a
Hol
dco
PIK
?�
List
the
fact
ors
that
det
erm
ine
the
ratin
g of
the
Jeffe
rson
Sm
urfit
PIK
42Copyright ©2005 Ian H Giddy
Mez
zani
ne D
ebt w
ith W
arra
nts
Mez
zani
ne D
ebt w
ith W
arra
nts
�T
ypic
ally
sub
ordi
nate
d de
bt w
ith a
ttach
ed e
quity
w
arra
nts
�P
rinci
pal i
s ty
pica
lly r
epai
d in
a lu
mp
sum
at t
he
mat
urity
of t
he lo
an -
-af
ter
seni
or d
ebt i
s re
paid
�
Cas
h co
upon
�
War
rant
s ar
e ty
pica
lly n
omin
ally
-pric
ed a
nd r
epre
sent
a
min
ority
sta
ke in
the
issu
er
45Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: Who
Got
the
War
rant
s?C
ase
Stu
dy: W
ho G
ot th
e W
arra
nts?
�In
a d
eal t
hat c
lose
d Ju
ne 1
2, B
rock
way
Mor
an
& P
artn
ers
purc
hase
d W
oods
trea
mC
orp.
, a
mak
er o
f wild
ani
mal
cag
e tr
aps,
rod
ent c
ontr
ol
devi
ces
and
pest
icid
es, f
rom
Frie
nd S
kole
r&
C
o. L
LC. T
he $
100
mill
ion
purc
hase
pric
e is
eq
uiva
lent
to b
etw
een
6.5
and
7x E
BIT
DA
. �
Of t
he e
quity
, Bro
ckw
ay c
ontr
ibut
ed 8
5% o
f the
to
tal,
with
man
agem
ent c
hipp
ing
in 1
0%.
Lend
ers
Ant
ares
Cap
ital C
orp.
and
Alli
ed
Cap
ital C
orp.
fill
in th
e re
mai
ning
5%
gap
. Tot
al
equi
ty r
epre
sent
s ap
prox
imat
ely
40%
of t
he
purc
hase
pric
e.
�O
n th
e de
bt s
ide,
Ant
ares
led
a $5
8 m
illio
n se
nior
faci
lity,
alo
ng w
ith M
erril
l Lyn
ch a
nd G
E
Cap
ital C
orp.
The
sen
ior
debt
com
pone
nt a
lso
cont
ains
a r
evol
ver
to b
e us
ed in
the
futu
re a
s w
orki
ng c
apita
l (an
d no
t inc
lude
d in
the
$100
m
illio
n pu
rcha
se p
rice)
. CIT
Priv
ate
Equ
ity a
nd
Den
ali A
dvis
ors
LLC
pro
vide
d a
subo
rdin
ated
no
te in
the
amou
nt o
f $17
mill
ion.
46Copyright ©2005 Ian H Giddy
Cos
t of t
he
Cos
t of t
he M
ezz
Mez
z ??
�S
enio
r de
bt: L
ibor
+ 3
.50%
, 4 y
ear
amor
tizat
ion
�S
ubor
dina
ted
note
s:
�7%
cas
h in
tere
st�
7% p
ay-in
-kin
d in
tere
st�
War
rant
s to
pur
chas
e 5%
of t
he c
ompa
ny’s
eq
uity
at $
0.05
per
sha
re�
Rep
aym
ent a
fter
5 ye
ars
or a
t exi
t eve
nt
�E
quity
27%
req
uire
d re
turn
47Copyright ©2005 Ian H Giddy
Bro
ckw
ay
Bro
ckw
ay ––
One
Way
One
Way
Fac
e va
lue
of d
ebt
17V
alue
of E
quity
40W
arra
nts
5%Y
ear
01
23
45
Out
- P
rinci
pal
-17
In -
Cou
pon
7%1.
191.
191.
191.
191.
19In
- P
IK7%
6.84
In -
Prin
cipa
l17
In -
War
rant
val
ue2
Sum
of c
ash
flow
s-1
51.
191.
191.
191.
1925
.03
IRR
16.4
%
48Copyright ©2005 Ian H Giddy
War
rant
sW
arra
nts
The
ore
tic
al
Va
lue
Ma
rke
t V
alu
eM
ark
et
Pre
miu
m
V a l u e o f W a r r a n t ($)
0P
ric
e P
er
Sha
re o
f C
om
mo
n S
toc
k (
$)
50Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: The
C
ase
Stu
dy: T
he W
oods
trea
mW
oods
trea
mT
erm
shee
tT
erm
shee
t
�E
xam
ine
this
term
shee
t. �
As
inve
stor
, whi
ch fe
atur
es
wou
ld y
ou in
sist
on?
�W
here
wou
ld y
ou b
e w
illin
g to
gi
ve w
ay?
51Copyright ©2005 Ian H Giddy
Do
Do
Con
vert
ible
sC
onve
rtib
les
Mak
e S
ense
as
Mez
zani
ne F
inan
ce?
Mak
e S
ense
as
Mez
zani
ne F
inan
ce?
Co
nve
rsio
nV
alu
e
Stra
igh
tB
on
d V
alu
e
Ma
rke
t V
alu
eM
ark
et
Pre
miu
m
V a l u e o f C o n v e r t i b l e B o n d ($)
0P
ric
e P
er
Sha
re o
f C
om
mo
n S
toc
k
52Copyright ©2005 Ian H Giddy
Pre
ferr
ed E
quity
Pre
ferr
ed E
quity
�Le
gally
a fo
rm o
f equ
ity�
Cla
im s
enio
r to
ord
inar
y eq
uity
�M
ay h
ave
fixed
div
iden
d, o
r m
ay b
e “p
artic
ipat
ing”
�B
ut c
anno
t trig
ger
liqui
datio
n if
paym
ent m
isse
d�
Par
val
ue d
eter
min
es li
quid
atio
n cl
aim
53Copyright ©2005 Ian H Giddy
Con
vert
ible
Pre
ferr
edC
onve
rtib
le P
refe
rred
�U
sed
by v
entu
re c
apita
l firm
s�
Per
mit
inve
stor
s to
par
ticip
ate
in g
row
th�
But
giv
e pr
efer
ence
in li
quid
atio
n if
the
vent
ure
fails
�A
nd d
isgu
ise
shar
e va
lue
(tax
!)�
A v
aria
nt –
PE
RC
S*
give
issu
er r
ight
to c
onve
rt in
to
com
mon
sto
ck
�*P
refe
rred
equ
ity r
edem
ptio
n cu
mul
ativ
e st
ock
54Copyright ©2005 Ian H Giddy
Per
form
ance
Per
form
ance
-- Lin
ked
Par
ticip
atio
n D
ebt
Link
ed P
artic
ipat
ion
Deb
t
�A
n al
tern
ativ
e fo
rm o
f mez
zani
ne�
Ofte
n ba
se in
tere
st r
ate
(fix
ed o
r flo
atin
g) p
lus
a pe
rfor
man
ce-li
nked
spr
ead
�E
xam
ples
:�
Inte
rest
rat
e lin
ked
to p
rofit
�In
tere
st r
ate
linke
d to
EB
ITD
A
�In
tere
st r
ate
linke
d to
sal
es
�W
hich
mak
es s
ense
, in
whi
ch s
ituat
ions
?
56Copyright ©2005 Ian H Giddy
Sum
mar
y: M
ezza
nine
and
Hig
h Y
ield
Deb
tS
umm
ary:
Mez
zani
ne a
nd H
igh
Yie
ld D
ebt
So
urc
e: fitc
hra
tin
gs.
co
m, “M
ezz
an
ine
De
bt”
57Copyright ©2005 Ian H Giddy
App
licat
ion:
Str
uctu
ring
the
Mez
zani
neA
pplic
atio
n: S
truc
turin
g th
e M
ezza
nine
�G
oal:
achi
eve
high
er r
etur
n w
ithou
t bur
deni
ng th
e co
mpa
ny o
r in
frin
ging
on
owne
r’s/s
pons
or’s
con
trol
�M
etho
ds: l
ower
inte
rest
rat
e pl
us p
artic
ipat
ion
in
the
com
pany
’s e
quity
or
perf
orm
ance
�W
arra
nts
�P
aym
ent l
inke
d to
turn
over
�P
aym
ent l
inke
d to
EB
ITD
A
�P
aym
ent l
inke
d to
afte
r-ta
x pr
ofit
�M
ay h
ave
a flo
or o
r a
cap
58Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: Alb
ania
Brid
geC
ase
Stu
dy: A
lban
ia B
ridge
�T
he fo
llow
ing
prel
imin
ary
finan
cing
pla
n ha
s be
en p
ropo
sed.
It m
ust b
e re
fined
in o
rder
to m
eet a
ll th
e pa
rtie
s’ o
bjec
tives
and
pro
vide
a fa
ir re
turn
to in
vest
ors.
Can
yo
u h
elp
?Y
ou m
ay u
se th
e fin
anci
al
info
rmat
ion
prov
ided
in th
e sp
read
shee
t fin
anci
ng_a
bc.x
ls.
Sour
ce
EU
R m
illio
ns
%
Equ
ity/S
ubor
dina
ted
Loa
n
Alb
ania
n S
pons
or E
quit
y 3.
0
Dut
ch S
pons
or E
quit
y 2.
0
FMO
Sub
ordi
nate
d C
onve
rtib
le L
oan
2.0
Sub
tota
l 7.
0 48
.9%
Mez
zani
ne L
oan
a. F
MO
1.
5
Sub
tota
l 1.
5 8.
6%
Seni
or L
oan
a. B
ank
grou
p A
7.
0
b. B
ank
grou
p B
2.
5
Sub
tota
l 9.
5 52
.5%
Tot
al F
inan
cing
18
.0
100%
59Copyright ©2005 Ian H Giddy
Sha
ring
the
Ret
urns
Sha
ring
the
Ret
urns
Cas
h F
low
An
alys
is20
0520
0620
0720
0820
0920
10R
even
ue21
25.2
30.2
33.3
36.6
40.2
EB
ITA
3.15
3.8
4.5
6.7
7.3
8.0
+ D
epre
ciat
ion
22.
12.
22.
32.
42.
6-
Cap
ex-3
-3.2
-3.3
-3.5
-3.6
-3.8
- In
cr in
Net
Wor
king
Cap
-0.8
-0.4
-0.5
-0.3
-0.3
-0.4
FC
F B
efor
e F
inan
cing
1.4
2.3
2.9
5.2
5.8
6.4
�H
ow c
an w
e m
ake
thes
e ca
sh fl
ows
wor
k to
ach
ieve
the
desi
red
retu
rn fo
r al
l the
par
ties?
�S
pons
ors
�F
MO
as
mez
zani
ne in
vest
or
�S
enio
r le
nder
s
60Copyright ©2005 Ian H Giddy
Pos
tP
ost --
Dea
l Mez
zani
ne M
anag
emen
tD
eal M
ezza
nine
Man
agem
ent
�T
he A
BC
dea
l was
fina
nced
as
prop
osed
. It i
s tw
o ye
ars
late
r, a
nd s
ome
of th
e pr
ojec
ts h
ave
been
de
laye
d. A
s a
resu
lt, p
aym
ent h
as b
een
slow
er.
Cov
enan
ts m
ay n
ot b
e m
et. W
hat d
o w
e do
?
Cas
h F
low
An
alys
is20
0520
0620
0720
0820
0920
10R
even
ue21
22.1
24.3
27.9
30.7
33.8
EB
ITA
3.15
2.2
3.6
5.6
6.1
6.8
+ D
epre
ciat
ion
22.
12.
22.
32.
42.
6-
Cap
ex-3
-3.2
-3.3
-3.5
-3.6
-3.8
- In
cr in
Net
Wor
king
Cap
-0.8
-0.1
-0.2
-0.4
-0.3
-0.3
FC
F B
efor
e F
inan
cing
1.4
1.1
2.3
4.1
4.6
5.2
62Copyright ©2005 Ian H Giddy
Pro
f. Ia
n G
iddy
NY
U S
tern
Sch
ool o
f Bus
ines
sT
el +
1.64
6.80
80.7
46; F
ax 2
12.9
95.4
233
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gidd
y@ny
u.ed
uW
eb: g
iddy
.org
Am
ster
dam
Inst
itute
of F
inan
ceT
el +
31 2
0 52
0016
0; F
ax +
31 2
0 52
0016
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eb: a
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tact
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