HL Debt Advisory BSQ Flashcards
Why Debt Advisory ?
Debt advisory is about having the biggest impact through investing and improving assets to be the best possible —> Kibaha —> hospitals curing thousands, markets making communities thrive —> made me interested in the scale of capital
Part of internships was helping raise capital through debt. Underwrote refinancing of $220 million valued luxury european hotel. Saw how rates were very preferable around 6% + SONIA. Also saw how debt (VICI) allows capital preservation, a strong capital position in a huge variety of assets in a prime time. Being exposed to a variety of different internships with a huge deal flow and great places to learn. Mention equity carve out.
Why HL Debt Advisory
Boutique - being in small team and learniong from the best, exactly where I was at Avington
World Class reputation in credit and RX - gives it access to very interesting deals for example notived the M&A team advised KKR on sale of Civica and the Debt Advisory team secured a £725 million fianng faciliity for it in 2022
Deal Type - Does a large amount of smaller deals, really gain the sectoral exposure that I like about debt; for example doing over 50 dealing 2022 despite the strong market volatility shown by expertise with the Houlihan Lokey MidCapMonitor
How does the HL Debt Advisory team work
Houlihan Lokey’s Debt Advisory team, operating within the Capital Markets Group, specializes in providing clients with comprehensive debt financing solutions. The team assists clients in accessing financing through both private and public capital markets by issuing debt, equity, or hybrid securities.
Key Functions of the Debt Advisory Team:
- Structuring and Syndicating Financings: The team collaborates with industry coverage groups and the Financial Sponsors Group to combine sector-specific knowledge with debt capital markets expertise. This collaboration enables the structuring and syndication of financings tailored to clients’ strategic objectives.
- Capital Raising Services: Serving a diverse clientele—from large, publicly held multinational corporations to privately held companies—the team provides equity and debt capital-raising services. This includes facilitating private issuances of corporate loans, leveraged loans, mezzanine debt, and minority equity, as well as public offerings of common stock, equity-linked securities, and high-yield bonds.
- Private Capital Solutions: Acting as a placement agent, the team offers clients access to private capital, including revolving credit facilities, first-lien, second-lien, and unitranche term loans, mezzanine debt, HoldCo PIK notes, preferred equity, and convertible preferred equity. These solutions cater to various needs such as acquisition finance, growth capital, recapitalizations, refinancings, asset-based structures, shareholder liquidity, and special situations.
- Public Capital Markets Advisory: Providing independent advisory services, the team assists clients in determining optimal market access, appropriate structures, and effective positioning with rating agencies, banks, and institutional investors to achieve favorable terms. In the U.S., they also serve as underwriters or bookrunners for traditional debt and equity offerings, including leveraged loans and public offerings of debt, equity-linked, and equity securities.
- Liability Management: The team advises clients on addressing maturities and other capital structure constraints through strategies like amend-and-extend or covenant reset transactions, balance sheet deleveraging, and structuring M&A and other strategic transactions for companies with over-leveraged capital structures.
With a global presence and deep relationships with various capital providers, Houlihan Lokey’s Debt Advisory team offers clients flexibility and support to meet their capital needs, delivering tailored financing solutions without conflicts of interest.
Can you start by giving an overview of the broad trends in the debt markets as outlined in Houlihan Lokey’s Q2 2024 MidCap Monitor?
The Q2 2024 MidCap Monitor shows a significant resurgence in debt market activity, particularly in pan-European private equity-sponsored financing. There was a 67% increase in unitranche transactions compared to Q1 2024, with 135 deals completed. This suggests that companies are adapting well to the higher interest rate environment. Anticipation of rate cuts in Europe further bolsters expectations for continued strong deal flow in the second half of 2024.
Debt funds have maintained or increased their market share against banks in major regions such as the UK, Germany, and Benelux. This marks a trend of direct lenders asserting dominance over traditional banks in financing high-quality assets.
What are the key regional developments noted in the report?
Regionally, the UK led the activity with 43 transactions, a 23% increase from Q1. France and Germany showed even stronger growth, with transaction volumes doubling. France saw a remarkable 107% increase, while Germany recorded a 110% rise. The Nordic region also experienced substantial growth, especially in Sweden and Denmark, with a 175% quarter-on-quarter increase.
However, markets like Austria and Switzerland lagged, with a decrease in activity, primarily driven by dominance of bank-led transactions.
Were there any notable trends in the financing purposes across these regions?
Yes, financing purposes varied, reflecting regional priorities. Add-on acquisitions remained a major driver, constituting 40% of deals, while new financing represented 41%. Refinancing and dividend recapitalizations accounted for 19%. This indicates sponsors’ focus on leveraging buy-and-build strategies for value creation.
Interestingly, leveraged buyouts (LBOs) saw a resurgence in key regions. In the UK, LBO financings rose to 42% of total deals, aligning with pre-2023 levels. Similarly, in France, LBOs and add-ons represented 87% of transactions, underlining robust M&A activity.
How are pricing and yields evolving in the debt market?
Pricing trends reflect the persistence of high-interest rates. The all-in yield for European private credit reached 10.82% in Q2 2024, slightly higher than the previous quarter. Spread compression was offset by sustained floating rate conditions. Despite this, European yields remain 240 basis points above the Leveraged Loan Index and just below the US private credit market average.
What insights can you provide about market dynamics between debt funds and banks?
Debt funds continue to dominate key markets like the UK and Benelux, capturing 77% and 76% of transactions, respectively. In France and Spain, banks held the majority share, reflecting a nuanced competition. Notably, debt funds are increasingly attractive for complex, high-yield transactions, often outpacing banks in deal-making flexibility.
Finally, what does the outlook for H2 2024 look like based on the report?
The outlook is optimistic. A robust M&A pipeline and potential ECB rate cuts are expected to fuel deal activity. While financing parties remain selective, they are open to quality assets. The resurgence of LBO activity and improved leverage conditions point to a dynamic second half for the debt markets.
GOUSTO - ESG linked ginancing
Houlihan Lokey played a pivotal role in securing financing for Gousto, a fast-growing meal kit provider, as it sought to scale operations and enhance its technological capabilities.
Deal Overview: Gousto required a financing solution that could support its ambitious growth plans while maintaining its commitment to sustainability. The team structured a bespoke financing package that incorporated ESG-linked incentives. These included lower interest rates tied to meeting sustainability targets, such as reducing packaging waste and carbon emissions.
Challenges:
Convincing lenders of the long-term viability of a food-tech business in a competitive market.
Aligning the deal with Gousto’s strong ESG framework, which was integral to its brand and operational strategy.
Why it Stands Out: This deal is a prime example of Houlihan Lokey’s ability to innovate within the rapidly evolving ESG financing landscape. By leveraging its expertise, the team attracted impact-focused lenders, which not only aligned with Gousto’s values but also provided favorable terms. This approach set a benchmark for ESG integration in the private debt market.
Do you have any questions?
Strategic and High-Level Questions
Market Positioning:
Houlihan Lokey often highlights its independence as a key differentiator. How does this translate into client trust when competing with banks that have balance sheets to deploy?
Given the rising influence of private credit funds, do you see a risk of traditional banks losing relevance in mid-cap financing? How does Houlihan Lokey leverage this shift?
Innovation and Trends:
Debt markets are evolving rapidly with ESG-linked instruments gaining traction. How do you assess the true impact of ESG considerations on a company’s cost of capital?
With increasing market uncertainty, how do you innovate in structuring covenants and repayment terms to mitigate risks for both lenders and borrowers?
Houlihan Lokey’s Unique Approach:
Houlihan Lokey is known for its bespoke solutions. Can you share an instance where a completely unconventional approach to financing yielded success for a client?
How does the Debt Advisory team balance creating aggressive but realistic capital structures to attract lenders while protecting client interests?
Client-Centric Questions
Tailoring Solutions:
For companies with limited access to capital markets, how do you build a compelling narrative for potential lenders?
What’s the process for aligning the expectations of private equity sponsors with the realities of debt markets, especially in leveraged transactions?
Challenging Clients:
Have you ever had to advise a client to scale back their ambitions due to market conditions? How do you communicate such challenging recommendations while maintaining trust?
Team Dynamics and Culture
Internal Collaboration:
Given the multi-faceted nature of deals, how does the Debt Advisory team collaborate with other Houlihan Lokey divisions, such as restructuring or M&A, to maximize client outcomes?
How does the team ensure that junior professionals develop not only technical skills but also strategic thinking?
Decision-Making:
Can you share an example of a time when conflicting perspectives within the team led to a breakthrough solution for a client?
How does the team handle “deal fatigue” during long negotiations, ensuring quality and creativity aren’t compromised?
Industry-Specific and Technical Insights
Complex Structuring:
How do you approach pricing risk for a business with highly volatile cash flows, such as those in the hospitality or energy sectors?
What is the most creative way you’ve structured a deal to address client-specific risks, such as regulatory changes or market disruptions?
Debt Market Trends:
With interest rates remaining volatile, how do you anticipate this affecting demand for unitranche financing versus traditional structures?
How do you see the role of hybrid instruments like convertible debt evolving in mid-cap markets?
Broader Financial Ecosystem
Competitor Analysis:
Given that some competitors are also strong in debt capital markets, what does Houlihan Lokey do differently to remain a leader in mid-cap financing?
With global private credit funds aggressively deploying capital, how do you position Houlihan Lokey as a preferred advisor in competitive processes?
Technology and Analytics
How do you leverage financial modeling tools or technology to improve deal execution or offer unique insights to clients?
Do you see AI or other technological innovations playing a role in simplifying complex debt structuring in the near future?
Personal Reflection Questions
Professional Growth:
What’s the most valuable lesson you’ve learned about the debt advisory market that isn’t obvious from textbooks or training programs?
If you could redo one deal with the benefit of hindsight, what would you do differently and why?
Future Outlook:
How do you see the role of debt advisors evolving in a world increasingly dominated by data-driven decision-making?
What do you predict will be the next big disruption in debt markets, and how is Houlihan Lokey preparing for it?
Colohouse - Financing Data Centres
Colohouse, a rapidly growing provider of data center and colocation services, was pursuing a strategic acquisition to expand its asset base and customer reach. The acquisition targeted data centers in key metropolitan areas, critical for meeting the rising demand for secure, high-capacity storage and connectivity infrastructure.
Deal Specifics:
Structure:
Houlihan Lokey arranged a unitranche facility to finance the acquisition. The package also included a delayed-draw term loan for future capital expenditures related to the acquired data centers.
Innovative Financing Elements:
The financing allowed for scalable debt, which could be drawn incrementally as Colohouse expanded its footprint. This reduced the immediate cost burden while securing resources for future growth.
The debt package incorporated cash flow-based triggers, linking repayment terms to operational performance metrics, ensuring the client could manage repayments sustainably.
Challenges and Solutions:
High upfront capital costs: Houlihan Lokey structured the deal to minimize immediate equity dilution by emphasizing the strong cash-flow-generating capacity of the acquired assets.
Sector-specific complexity: The team highlighted Colohouse’s competitive positioning and the growing importance of edge computing, which bolstered lender confidence in the company’s long-term viability.
Market volatility: Amid fluctuating interest rates, Houlihan Lokey negotiated a rate cap mechanism to mitigate future financing cost increases.
Houlihan Lokey’s Role:
Orchestrated discussions with a wide array of lenders, including infrastructure-focused debt providers and private credit funds.
Conducted due diligence on the acquisition target to validate the financial projections and ensure the debt package aligned with operational realities.
Acted as a strategic advisor, aligning the financing with Colohouse’s broader growth strategy, including plans for additional acquisitions over the next 24 months.
Why It’s Unique:
The transaction exemplified Houlihan Lokey’s foresight in structuring scalable financing solutions tailored to a high-growth, capital-intensive sector. By incorporating delayed-draw and performance-linked elements, the deal balanced immediate financing needs with long-term flexibility, ensuring Colohouse could execute its expansion strategy without overleveraging.
