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