Financing Structure                          M&A for Entrepreneurs Elective© 2008 Babson College
Major Components of the Deal                        Senior Debt                        Long Term Debt                     ...
What drives the structure of Deals?                         Historical Cash Flow                         Predictability ...
Key Leveraged Financing Guidelines                        Maximize lowest cost debt                        Cash flow must ...
Bank Loan Decision Criteria                         Quality and experience of mgmt. and capital providers                ...
Senior Debt                        Senior Debt                         Commercial Finance                          (Asset...
Commercial Finance Loans                                 Commercial Finance Loans                        Amount of the lin...
Revolver/Revolver-Term Loans                          Revolver/Revolver-Term Loans                         Collateralized...
Subordinated Debt/Mezzanine Debt                          Subordinated Debt or Mezzanine Debt                         Jun...
Equity Kickers                        Equity                         Set as a fee, warrant/option,                       ...
Inter-creditor Agreements                         Established who is ‘agent’                         Priority in bankrup...
What can go Wrong?                         Failure to follow management plan                         Slow Reaction to of...
Harris Seafood     LBO
1986 (A)   1987    1988   1989                   Revenue (MM)        $97    $104    $116   $125                   EBITDA  ...
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Mergers and Acquisition - session 3

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Mergers and Acquisition - session 3

  1. 1. Financing Structure M&A for Entrepreneurs Elective© 2008 Babson College
  2. 2. Major Components of the Deal Senior Debt Long Term Debt Subordinated Debt or Mezzanine Debt Seller “Takebacks” Equity© 2008 Babson College
  3. 3. What drives the structure of Deals?  Historical Cash Flow  Predictability vs. Projections  Industry  Amount of Debt Financing Available© 2008 Babson College
  4. 4. 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© 2008 Babson College
  5. 5. 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© 2008 Babson College
  6. 6. Senior Debt Senior Debt  Commercial Finance (Asset-based) Loans  Revolving Line of Credit (Generally Secured) • Revolver • Revolver/Term© 2008 Babson College
  7. 7. 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© 2008 Babson College
  8. 8. Revolver/Revolver-Term Loans 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© 2008 Babson College
  9. 9. 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© 2008 Babson College
  10. 10. Equity Kickers Equity  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© 2008 Babson College
  11. 11. 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© 2008 Babson College
  12. 12. 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© 2008 Babson College
  13. 13. Harris Seafood LBO
  14. 14. 1986 (A) 1987 1988 1989 Revenue (MM) $97 $104 $116 $125 EBITDA 14 17 20 21 FCF 11.6 9.3 8.4 10.3 Int. Exp. 1.4 5.7 5.1 4.7 Debt + Int. 10.6 8.9 10.3 Int. Cover 1.6x 1.6x 1.5x Unused Borr. (7.0) 0.4 8.6 Available ($)© 2008 Babson College

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