Lecutre 5: LBOs Flashcards
What are the borrowing options?
- Asset based secured debt
- Unsecured, cash flow
- Long term financing
- Bridge financing
- Payment in kind
What types of unsecured lending are there?
Senior debt
Junior debt
What kind of long term financing is there?
- Junk bonds
2. Leveraged bank loans
What are junk bonds?
High yield risky bonds, avg 4% higher than US treasury, correlated to enquities
What are leveraged bank loans?
Unrated / lower than investment grade bonds
Perhaps second mortgages
What is bridge financing?
Short term financing used in interim before long term financing found
What is payment in kind financing?
Payment in more debt
What are the equity financing options?
- Common shares
2. Preference shares
What are preference shares?
Valued above common shares, below bonds
Often viewed as fixed income
What is seller financing?
When seller defers portion of purchase price
- reduces present value
- shifts operational risk
- helps when financing unavailable
What is a third way of financing other than equity or debt?
Cash in hand or selling redundant assets
What are the roles of private equity/hedge funds in deal financing?
- financial intermediaries
- lenders and investors of last resort
- providers of financial engineering and operational expertise
What are the advantages of LBOs?
- Management incentives
- Better alignment between owner and management
- Tax savings
- Efficient decision making under private ownership
- Improvement in operating performance
- Serves as takeover defence
What are the disadvantages of LBOs?
- High fixed costs of debt raising the BEP
- Vulnerable to business cycle fluctuations
- Not appropriate for firms with high growth or risk
- Potential difficulties raising capital
What are the LBO structures?
- Direct merger
2. Subsidiary merger
