Initial Financing Indication Flashcards
• What do you share with lenders to get their prelim view of deal?
o Financials. Don’t show aggressive numbers
• Are lenders more concerned with backwards or forward looking financials when making prelim assessments?
o Historical financials as they are concerned with the downside case since they do not partake in future upside. Continued cash generation to meet debt obligations is of highest importance
• How should you think about assumptions shown to lenders?
o Do not be too aggressive. Should always try and get a cushion for the covenants
o Lender case should be below base case so debt covenants are off a lower base
• What are you looking for in an initial financing indication?
o Rates (For calculating interest) o Maturities o Amortization (Payments to reduce principal)
• What areas are usually included in Indicative term sheets?
o Debt tranches/size/leverage
o Maturities of debt (When it must be paid by)
o Covenants/Other provisions (Rules to stick by otherwise recall)
o Interest rates/Spreads (Cost of debt)
o Amortization and Optional repayments (Any penalties?)
o Fees
• How is collateral normally done?
o Usually lean on the whole company
o Can be tied to specific amount of available collateral (rarer)
• Why would you want prepay debt?
o To deleverage and lower interest burden
o However, in practice you don’t see a lot of paydown hence you get given cash flow sweep requirements from lenders
• Who are non-bank lenders to pe firms and what is a key characteristic with such lenders and prepayments?
o BDCs (Business Development Companies) and have more aggressive debt terms and force borrower to pay a premium for prepayment. They normally require a higher return vs normal banks hence the prepayment charge.
• What is unitranche debt?
o Blended hybrid of senior debt and subordinated debt
• What are highly confident letters?
o Issued by bank saying they will be able to finance the deal but they are not committing to it just yet
• What is staple financing?
o Sell side advisor can provide some debt and then sell it to debt focused hedge funds or institutional investors, Usually bigger banks with DCM function
• What is the lender/equity investor disconnect?
o It is the misalignment in incentives in terms of potential returns. Lenders are thus more risk averse and focus on downside cases whilst equity investors have more risk appetite and focus on potential upside projects/initiatives.
• Why are non-senior lenders more concerned about downside than senior?
o They sit below senior lenders in the capital structure
