General Corporate Finance Flashcards
Corporate Finance
actions that management takes to increase value of a company in short- and long-term: investments to earn returns with varying standard deviation, financing finding the right debt, and equity to fund operations, and dividends how to return cash to owners.
Stock-owners
5% need to report purposes of holdings to SEC
>51% owner
When considering risk, look at who the marginal investor in that company is. May vary between institutions and individuals. Institutions are diversified, individuals are not due to SEC paperwork and only option is to sell/give up ownership. Non-voting shares institutions.
Fixed income
debt instruments that provides returns in the form of regular or fixed interest payments and repayments. Principal risks are CCP default and exchange rate risk for securities denominated in non-USD.
Fixed income instruments
Bonds, treasury bills (safest US Gov’t with no regular coupon (interest), payments and are instead sold at a discount to their face value), money market instruments (commercial paper, CDs, repo, banker’s acceptances), asset backed securities (backed by financial assets that are securitized like credit card receivables, home loans, auto loans)
Stock Owners Types
Government = lower taxes, does not benefit government
Founder = Young companies will typically have founders on top
Corporation = may be for pure investment purposes or for control
Institutional investor = 13F – manages pools of money on behalf of clients. Stockholder has very little power. If buying preferred or non-voting shares, leaving voting rights to the 13F
Activist investors = groups can represent a single investor Berkshire
Syndicated loans
multi-lender transaction where large sums of money are loaned to a single borrower can be underwritten (guaranteed), best-efforts, or club
Principal amortization
paydown
Lien type
Secured (1st or 2nd lien) by the firm’s assets
due to higher default risk of leveraged loans requires 1st lien collateral
2nd lien are less common and if exists, will sit below a 1st lien leveraged loan and is secured if there is excess collateral value after the 1st lien lender is made whole in a bankruptcy
For example, Firm $100 in assets and is in bankruptcy. If the structure is $90 term loan B with 1st lien, $50 term loan C with 2nd lien, and $40 unsecured, term loan B will be made whole and remaining $10 will go to term loan C.
EBITDA
Enterprise value
Capital structure
Senior Debt > subordinated debt > equity
As go to lower tiers, subordination increases, returns increase, and dilution increases
subject to change as business grows ex. 40% senior, 20% subordinated, 40% equity. In 3/5+ years equity will increase and senior debt decreases due to business growth but majority will be transferred to shareholders. When senior debt is maxed, equity is put in place and sub debt should fill gap. Senior 3x EBITDA
Subordinated debt
any type of debt that will not be paid until senior debt is paid in full. High yield bond investors have the highest priority to collect debt in case of financial distress but will incur the lowest return out of all subordinated debt creditors.
Subordinated debt holders can only supply so much debt. To calc how much subordinated debt a company can handle, typically EBITDA 5x due to senior debt 3x EBITDA; EBITDA to cash interest coverage / expense 2x; minimum equity funding 30%-35%
Mezzanine
non-traded debt ex. Debt with warrants, convertible loans stock (convert to equity), convertible preference shares
Term Loan A
pro rata bank debt
Term Loan B/C/D
institutional loans
Leveraged loans
most senior secured bank debt senior debt, senior tranches in a company’s capital structure with bonds usually making up junior tranches. Term loans packaged with a revolving credit facility and are syndicated by an IB to commercial bank. Historically leveraged loans came from banks while bonds came from institutional investors but with the proliferation of CLO funds, institutional investors can be on the leveraged loan side. Institutional loans make up most of leveraged loan market.
Revolvers
Enables companies to draw from or pay down for short term working capital needs packaged with an asset based loan revolver and cash flow revolver (max amount that can be borrowed is based on historical cash flows that the borrower has generated) more restrictive, secured/unsecured
Term Loans
Loan that is repaid on a specified repayment schedule and either a fixed or floating interest rate for long-term and balloon payments if short and intermediate term
Delayed Draw Term Loans
ability to request additional funds after the draw period has already closed, typically IG for acquisitions and do not want to incur immediate debt or interest, purchasing capex, refinancing debt
Bridge Loans
short-term loan with high interest rates, typically up to one year backed by collateral, for working capital needs. Investment bank or venture capital firm provides bridge financing in the form of a loan or equity investment
Use case
IPO bridge = covers expenses associated with the IPO from IB
Debt bridge = approved for a bank loan with six tranches but first tranche will not be available for another six months
Cross-functional teams of RLG
Syndication Banks
Borrowers And External Legal Counsel
Investment Banking
Investment Grade Capital Markets
Leveraged Finance
Legal And Credit Risk Management
Traditional asset managers
Traditional managers provide investment management and other services. Mainly offer products such as
mutual funds, closed-end funds and ETFs
– These products are generally more highly regulated than alternative investment products (such as Private Equity funds or Hedge Funds) and typically have lower
investment minimums, lower returns, and higher liquidity than Private Equity or Hedge Funds (Some managers do offer their own alternative products)
Typically manage assets (“Assets Under Management”, “AUM”) across equity, fixed income, and alternative asset classes
Traditional managers earn revenue through services they provide, including investment management services, distribution services, and other services
– Investment management services: Investment management services are provided to the fund products described above, are generally contractually agreed upon as a
percentage of AUM (which can vary by investment product, strategy, etc.)
– Sales and distribution services: Mutual funds generally pay traditional managers pay distribution fees in return for sales, marketing, and related efforts on their behalf
Investors include retail clients (individuals), institutional clients, and high net-worth clients
Traditional AM TCP
Redemption facilities, committed repo, TOB / VRDP
Alternative AM TCP
Subscription facilities, recourse BDCs, non-recourse IB market solutions, EDG, VFN, Commercial REITs
Traditional AM Funds
Mutual funds, Cayman Subs, Collective Trusts, Managed Accounts, Corporate pensions
hedge and spec derivatives, Repo / TBA / margin lending, TS / IS
AM Markets
Trad and Alt
Mgmt company loan hedge, FX hedging foreign operations, seed capital investing / hedging, compensation expense management
Alt AM Funds
PE hedging, HF of traditional managers, mREITs
Asset Managers as Principal
Cash flow back revolving credit facilities for working capital;
acquisitions; seed capital; compensation funding
Alt Mgrs: incentive fees & comp; years in business
OG based on: Size (AUM); Diversification of AUM; EBITDA; NI
Margin; EBITDA Margin; Leverage; Int. Cvg
LGD: 40% with a couple exceptions
Investment grade standard terms: unsecured; 3x leverage & 4x
interest coverage covenants; minimum AUM
Private Equity
Capital call facilities used to bridge timing between capital calls
and funding
Applicable to commercial real estate funds
OG based on: Liquidity (investment base; called vs. uncalled
capital; diversifications of investors & assets); Size; Leverage;
Performance; Sponsor (track record & AUM)
LGD: 20 to 40%; variance driven by structural protections
DG is based on EDF model
BDC
Closed-end, SEC regulated funds which underwrite lend to
middle market companies
Borrowing base facilities used for leverage
OG based on: Portfolio (performance; composition;
diversification); financial data (price to book; NAV; dividend
coverage; leverage)
LGD: 20%; only Ares and ACAS differ with xx% and xx%,
respectively
Trading Desk Financing Vehicles / SPVs
Various forms of borrowing base facilities to a variety of asset
management vehicles for leverage and / or liquidity
Each facility’s OG is primarily based on: Portfolio (composition
& diversification), structural provisions (LTV, amortization, &
valuation rights) & liquidity (cash flows, future liabilities)
Variable Funded Notes: Redemption like facilities to HF FoF’s.
See HF FoF rating model
EDG: Leverage or redemption like facilities to PE FoF portfolios
IB Market Solutions: Non-recourse lending to a BDC / PE fund.
See Credit-Rates JV rating model
Whole Loan Repo: Lending to REITs or real estate managers to
finance mortgage assets
Traditional AM Risk Rating
The ORRs of the traditional management companies are based on Financial Based Indicators (“FBI”s) and Qualitative and Other Factors (“QOF”). The management company gets
an initial assessment grade based on these factors, which can be further modified depending on the financial reporting constraints
FBIs (weight):
– FPAUM (30%): Fee-paying AUM
– AUM Diversification (10%): Measure of the allocation of a manager’s AUM across five asset classes (equity, bond, money market, balanced/mixed, other)
– Leverage (35%): Gross Debt/EBITDA
– Net fund flows (10%): Net fund flows/AUM
– EBITDA margin (15%): EBITDA/Revenue
Risk Rating for traditional management companies
QOFs (Positive/Neutral/Negative):
– Other financial factors (not included the FBIs): Product concentration, trend, projections, cash flow, CapEx
– Contingencies: Financial and non-financial (e.g. legal and reputational concerns)
– Industry: Risk and cyclicality
– Company operating characteristics: Operating ratios, cost efficiency, technology, product diversification, market share, pipeline, competitive position
– Management: Expertise, track record, leadership, integrity, governance, depth
Administrative Agent
The Bank which acts as an agent for a syndicate of lenders in administering a loan facility with a borrower. After the loan agreement closes, payments and communications between the borrower and the lenders are made
through the administrative agent
Advance Rate
The maximum percentage of the value of collateral that a lender is willing to extend for a loan. For example, if a
borrower pledges $100 of collateral and the advance rate is 60%, the loan amount would be $60 (this is also known as a
Borrowing Base)
Borrowing Base
The amount of money a lender will loan to a company, based on the value of the collateral pledged by the
company and the Advance Rate applied by the lender
Commitment Fee
For revolving credit facilities, the interest rate charged on the unused portion. If a borrower has a revolver with a 37.5bps commitment fee, they will pay an annual rate of 37.5bps on the portion of the revolver that is undrawn
Drawn Spread
For revolving credit facilities, the interest rate charged over a reference rate when the revolver is drawn. For
example, if a loan has drawn pricing of LIBOR + 200bps, the borrower will have to pay an interest rate of the current LIBOR rate
+ 200bps on the amount they have borrowed. The spread is the 200bps charged in addition to LIBOR
Loan to Value (LTV)
Expresses the ratio of a loan to the value of the underlying collateral. Lower LTVs indicate a substantial
cushion between the value of the loan and the value of the underlying collateral
Syndicate:
A grouping of banks formed for the purpose of jointly lending money to a specific borrower. Syndicates are formed to
handle transactions that might be too difficult or too risky for a single bank to handle alone
Upfront Fee
A one-time payment paid by the borrower to the lender(s) upon closing of the transaction. This fee is based of a percentage of the total size of the facility. If a facility has an upfront fee of 50bps on a $1,000 facility, the upfront fee would be $5
Institutional investor
manages pools of money on behalf of clients. Stockholder has very little power. If buying preferred or non-voting shares, leaving voting rights to the 13F
