Download - Mergers and Acquisition - session 3
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Financing StructureM&A for Entrepreneurs Elective
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Major Components of the Deal
Senior Debt
Long Term Debt
Subordinated Debt or Mezzanine Debt
Seller “Takebacks”
Equity
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What drives the structure of Deals?
Historical Cash Flow
Predictability vs. Projections
Industry
Amount of Debt Financing Available
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Key Leveraged Financing Guidelines
Maximize lowest cost debt
Cash flow must support senior and junior debt
Cash flow must be adequate to cover seasonality or blips
Leverage assets appropriately
Covenants must be flexible to allow debt pmts and C/F problems
Avoid conflicts among lenders and equity partners
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Bank Loan Decision Criteria
Quality and experience of mgmt. and capital providers
Bank’s experience in the industry and with deal players involved
Credibility of projections and historical profits
Cash flow
Industry trends
Quality of assets as collateral
Amount of equity & subordinated debt/mezzanine debt
Asset liquidation plan (future cash flow generation)
Fees and equity participation attractiveness
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Senior Debt
Commercial Finance (Asset-based) Loans
Revolving Line of Credit (Generally Secured)
• Revolver• Revolver/Term
Senior Debt
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Commercial Finance Loans
Commercial Finance Loans
Amount of the line of credit is based on bank’s view of quality and liquidation value of the collateral and EBITDA/FCF/Cash Flow
A/R: 70-80% of A/R within 60 days past due
Complications: Service Receivables
Foreign Receivables
Inv: 0-60% depending on bank’s view of inv.
Appraised Value
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Revolver/Revolver-Term Loans
Collateralized in leveraged deals
“Cash Flow is King” (EBITDA/FCF)
Covenants and terms
• EBITDA/Cash Interest
• Bank Debt/EBITDA
• Total Debt/EBITDA
• CAPEX Limits
• Leverage Ratios
• Restrictions on other debt
Revolver/Revolver-Term Loans
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Subordinated Debt/Mezzanine Debt
Subordinated Debt or Mezzanine Debt
Junior to bank debt in liquidation of co.
High coupon with equity kicker
Some covenants
Objective is to maximize equity return
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Equity Kickers
Set as a fee, warrant/option, % of profit or cash flow
Amount of kicker depends on the percentage of the deal provided by the sub debt/mezz lenders
Equity
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Inter-creditor Agreements
Established who is ‘agent’
Priority in bankruptcy established
Covenant and default consistency
Affirms asset sale flexibility & amount
Orders principal & interest payments
Defines rules around prepayment
Sets voting rules in syndicates
Defines refinancing rights
Establishes consistent curing provisions
Governs sale of obligations by various parties
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What can go Wrong?
Failure to follow management plan
Slow Reaction to off plan performance
Failure to run the company to maximize cash
Revenue declines vs. projections
Overly optimistic projections
Conflicts among the lenders
Lack of understanding of how to manage leverage
Loss of confidence in management by lenders
Harris Seafood LBO
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1986 (A) 1987 1988 1989
Revenue (MM) $97 $104 $116 $125
EBITDA 14 17 20 21
FCF 11.6 9.3 8.4 10.3
Int. Exp. 1.4 5.7 5.1 4.7
Debt + Int. 10.6 8.9 10.3
Int. Cover 1.6x 1.6x 1.5x
Unused Borr. Available ($)
(7.0) 0.4 8.6