Structuring a Leveraged Buy-out Using A Mortgage Instrument

Aubrey K. Mutale, CEO

www.unicapitalsa.com

Presentation to the Southern Africa Round Table

May 7-9 2007,

Zambezi Sun Livingstone Zambia

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 2

Leveraged Buy-out

Equity like Investments in public or privately owned companies utilizing leverage or borrowed funds to purchase a significant portion or majority control of their ownership.

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 3

Mortgage

Method of using property as security for the payment of a debt. Refers to a legal device used in

securing the property Commonly used to refer to debt

secured by the mortgage.

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 4

Fundamentals of a Mortgage

LEGAL ASPECTS: There are essentially two types of

legal mortgage.

Mortgage by Demise Creditor becomes the owner of the

mortgaged property until the loan is repaid in full (Known as redemption).

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 5

Fundamentals Of A Mortgage Cont..

Mortgage by Legal Charge Debtor remains the legal owner of the

property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 6

Transaction – Unicapital S.A. Unicapital secured financing from three

international banks who had agreed to provide financing subject to company B providing a warranty against any liability arising from financing asbestos related transactions.

Although the target company was profitable the banks felt that it was risky to provide acquisition finance and end up with undefined environmental liabilities

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 7

Mortgage Financing Structure

Acquiring

Company A

Target Company B

Sale/Purchase Agreement (SPA)

Shares

Loan/CashBank

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 8

Transaction Creditor

Company B had legal rights to the debt secured by the mortgage and made a loan of $30 to company A, the debtor, of the purchase money for the company

Typically creditors are banks, insurers or other financial institutions who are sometimes referred to as mortgagee or lender

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 9

Transaction Debtor

Company A as a debtor was required to meet its obligations under SPA imposed by the creditor in order to avoid the creditor (Company B) enacting provisions of the mortgage to recover the debt.

Typically debtors will be individual home owners, landlords or businesses who are purchasing property by way of loan.

Sometimes referred to as mortgagor, borrower or obligor

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 10

Amortization of Capital & Interest In the case of company A, mortgage

repayments were monthly payments containing a capital element and an interest element. Target company was valued at US$30m in form of stocks and debtors of stock

Proceeds for the ring fenced debtors and stocks were used to pay the creditor

In the event that company A did not make good on its obligations, the creditor would reposes the shares

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 11

CHALLENGES OF STRUCTURING AN LBO/MORTGAGE INSTRUMENT

Financial illiteracy Limited access to finance Lack of trust among participants Political interference in some

African Countries Lack of origination

Presentation to the Southern Africa Round Table - Zambezi Sun Livingstone Zambia - May 7-9 2007 12

Conclusion The rights and obligations of company A (The Acquiring

Company) are not in any way different from the rights and obligations of a homeowner under a simple mortgage structure.

African governments must encourage or empower locals to participate in investment through deliberate polices i.e.

BEE or AA in RSA X amount shares be accrued to locals

Financial institutions should invest in staff training in Corporate Finance

Financial institutions should come with more innovative transactions than generic ones

The secret about wealth creation lies in originating