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4A EDHEC > Structured Finance > Flashcards

Structured Finance Flashcards

1
Q

Securitization

A

Technique used to convert illiquid assets/claims into tradable securities.

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2
Q

Benefits of securitization for lenders

A
  • Creation of liquidity,
  • Funding diversification,
  • Reduction in funding costs,
  • Risk reduction and transfer,
  • Regulatory capital relief,
  • Raise capital without prospectus-type disclosure.
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3
Q

Benefit of securitization for investors

A
  • Tailored instruments,
  • Portfolio diversification,
  • Risk sharing.
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4
Q

Credit enhancement technique

A
  • Over-collateralization
  • Guarantee
  • Diversification
  • Selection of assets
  • Tranches
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5
Q

Structured finance instruments

A
  • Pooling of assets,
  • Tranching of liabilities that are backed by the asset pool,
  • Special purpose vehicle (SPV)
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6
Q

Which instrument differentiates structured finance from traditional “pass-through” securitizations?

A

Tranching of liabilities that are backed by the asset pool.

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7
Q

What securitization provides to investors?

A

Attractive and diversified investment opportunities without the need to set up a complex and expensive client-facing infrastructure.

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8
Q

What effects after removing loans from balance sheet of banks?

A

Macro-economic benefits as banks can create more new lending.

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9
Q

Types of Consumer & Residential ABS

A
  • Auto loans and leases,
  • Credit card receivables,
  • Student loans,
  • Residential mortgage loans.
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10
Q

Corporate ABS

A
  • CLO (Collaterized Loan Obligation),
  • CBO (Collaterized Bond Obligation),
  • ABS CDO (Asset Backed Securities Collaterized Debt Obligation),
  • CRE CDO (Commercial Real Estate Collaterized Debt Obligation).
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11
Q

ABS

A

Asset-Backed Securities.

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12
Q

Commercial ABS

A
  • Aircraft lease,
  • Maritime container lease,
  • Equipement lease,
  • Commercial mortgage loans.
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13
Q

Whole Business ABS

A
  • Franchise royalty,
  • Brand royalty,
  • Billboard lease.
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14
Q

Different risks

A
  • Country
  • Forex
  • Market
  • ESG
  • Natural disaster
  • Political
  • Construction
  • Operational
  • Weather
  • Supplier
  • Terrorism
  • Legal
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15
Q

Mitigation

A

The action of reducing the severity, seriousness, or painfulness of something.

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16
Q

Waste to energy project

A

Collecting waste to burn it and create energy/ electricity.
Project from Eolia.

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17
Q

For who was created the project waste to energy?

A

The subway of Mexico.

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18
Q

Why the waste to energy project stopped?

A

Green mayor of Mexico said stop because of the CO2 emissions.

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19
Q

How do you mitigate a political risk?

A

Negotiations.

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20
Q

How to mitigate a market risk?

A

Study.

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21
Q

How is call a construction risk?

A

An achievement risk.

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22
Q

How to mitigate an achievement risk?

A

Guarantee (bid bonds or performance bonds)

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23
Q

What’s the issue of a construction risk?

A
  • Achievement
  • Delays
  • Cost overuns
  • Quality
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24
Q

How to mitigate an operational risk?

A
  • Training,
  • Expats,
  • Contract.
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25
Q

How to mitigate a Forex risk?

A
  • Hedging program,
  • Derivatives
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26
Q

How to mitigate a country risk?

A

ECA (export credit agency):
- EXXIM,
- Euler Hermes,
- BPI

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27
Q

How to mitigate a supplier risk?

A

Diversification

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28
Q

How can we mitigate terrorism risk?

A

Security

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29
Q

EACOL

A

East African Crude Oil Line

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30
Q

For what BNP Paribas has been sue?

A

Inaction on the climate

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31
Q

How can we mitigate an interest rate risk?

A
  • Hedging program
  • Derivatives
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32
Q

How to mitigate the legal risk?

A
  • Legal team
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33
Q

5 steps to launch a project (project financing)

A
  1. Study the cash flows,
  2. Risks
  3. Mitigation of risks
  4. Participation
  5. Syndication
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34
Q

Debt Service Coverage Ratio

A

CF1/ DS1 > 1.5
Net operating income/ Total debt service

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35
Q

Acquisition Finance

A

The use of debt, equity and hybrid financing techniques to achieve an acquisition.

The focus of acquisition finance is on identifying the optimal financing solution for a company.

This occurs when the cost and flexibility of the financing structure is linked to the company’s cash-flow based value and growth potential.

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36
Q

2 forms of acquisition finance

A
  • Strategic Acquisition Finance
  • Leverage Finance
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37
Q

ECM

A

Equity Capital Markets

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38
Q

4 steps of M&A

A
  1. Idée
  2. Arguments
  3. Valorisation
  4. Réalisation
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39
Q

The business lines involved

A
  • Compliance,
  • Coverage,
  • M&A,
  • ECM (equity capital markets),
  • DCM (debt capital markets),
  • Acquisition finance
  • Risks,
  • Global markets.
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40
Q

Leveraged Buy-Out (LBO)

A

Financial arrangement that consists of a takeover of a target company largely financed by debt.

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41
Q

LBO

A

Leveraged Buy Out

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42
Q

3 levers of Leverage Buy Out

A
  • Financial leverage,
  • Legal leverage
  • Tax leverage.
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43
Q

The target company must present certain characteristics, which one?

A
  • A healthy financial situation,
  • Good visibility on future cash flows,
  • Quality management,
  • Growth potential,
  • Competitive strengths,
  • Transferable know-how.
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44
Q

What is a healthy financial situation?

A

Significant profitability, reasonable and controlled debt, activity low capital consumption (investments and WCR).

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45
Q

What means a good visibility on future cash flows?

A

Recurrent surplus cash flows, predictability of free cash flows
free cash flow => highly cyclical or declining sectors should be avoided.

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46
Q

What are the competitive strengths?

A
  • Strong market position,
  • Appropriate production facilities,
  • Limited environmental threats.
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47
Q

Different types of LBO

A
  • The Leveraged Build-Up (LBU),
  • The Leveraged Turn Around (LTA),
  • The Management Buy Out (MBO),
  • The Management and employees Buy Out (MEBO),
  • The Management Buy-In (MBI),
  • The Buy In Management Buy Out (BIMBO).
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48
Q

LBU

A

Leveraged Build Up

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49
Q

The Leveraged Build Up

A

Developmental LBO that targets external growth transactions.
A first target (launching pad) is acquired, then other companies are bought by the target or the holding company.
The aim is to merge all of these structures to create a large company with the capacity to compete and grow in the market.
The aim of the arrangement is to correct the dispersion of the market and to seek synergies and economies of scale around the initial target.

50
Q

LTA

A

Leveraged Turn Around

51
Q

Leveraged Turn Around

A

Concerns a company in difficulty.
It is a package whose strategy is based on the recovery and rescue of the target.
Carried out by specialised investors, this turn around capital operation is therefore interested in deteriorated targets, often with low valuations.
The arrangement consists of an economic and financial restructuring of the target.
The failure rate is relatively high, but significantly lower than for companies of the same type held by a traditional shareholder.

52
Q

MBO

A

Management Buy Out

53
Q

The Management Buy Out

A

The acquisition of a target by its managers.
The holding company is majority controlled by the managers alongside a fund that contributes its expertise.
It is often unwound by sale. The MBO has several limitations: the ability of managers to raise finance, agreement and cooperation between them (power management issues), skills.

54
Q

MEBO

A

Management and Employees Buy Out

55
Q

Management and Employees Buy Out

A

Structure in which the capital of the holding company is shared between managers, employees of the target and investment funds.

56
Q

MBI

A

Management Buy In

57
Q

The Management Buy In

A

The operation is not based on existing managers, but on one or more managers who are recruited specifically for the operation in which they participate financially, by taking a share of the holding company’s capital. These are often individual managers who are used to this type of operation and who have capital.
The risk of a “clash” with the management in place is therefore to be monitored.

58
Q

BIMBO

A

Buy In Management Buy Out

59
Q

Buy In Management Buy Out

A

Mixed operation in which the capital of the holding company is held by managers in place in the target company and one or more managers -investors-recruited for the operation.

60
Q

The senior debt

A

Conventional bank loan, granted at a variable rate and amortised in constant annual instalments.
Senior debt is structured as bonded or undivided debt and is generally accompanied by collateral or personal guarantees.
Senior debt may also be subject to contractual financial clauses, also known as “covenants”.

61
Q

What is the purpose of covenants?

A

To give the creditor a right of review, or even a means of pressure on the borrower’s actions.

62
Q

What are the different forms a covenant can take?

A

-The clause can stipulate that the creditor must give its consent to an asset sale;
- The clause can set a level of indebtedness beyond which the debt becomes immediately due and payable.
- The covenants therefore have an essentially warning role and make it possible, where necessary, to alert creditors to the increase in risk.
- Breaches of covenants can thus lead to a restructuring of the debt (with a postponement of the maturity or an extension of the maturity) and/or a renegotiation of the financing conditions.

63
Q

How long is the mezzanine debt term?

A

Between 7 and 10 years.

64
Q

How long is the senior debt term?

A

Average term of 4-7 years

65
Q

DSCR

A

Debt Service Coverage Ratio

66
Q

LLCR

A

Loan Life Coverage Ratio

67
Q

PLCR

A

Project Life Coverage Ratio

68
Q

Corporate financial solution

A
  • Capital Increase (Equity)
  • Issue securitized debt
  • Loan/ Credit (Debt)
  • Sell assets
69
Q

What can be capital increase?

A

EQUITY:
- Shareholders, employees, friends;
- Private equity;
- IPOs

70
Q

RCF

A

Revolving Credit Facilities

71
Q

What are the 2 types of Credit?

A
  • Term loans
  • RCF
72
Q

How can we sell assets?

A
  • Trade receivable/ factoring
  • Securitization
73
Q

Qui assure les aircrafts risks?

A

Export Credit Agency Financing

74
Q

How to mitigate the risk of international trade?

A
  • Prepayments
  • Letters of credit (L/C)
  • Drafts
  • Consignments
  • Open account
75
Q

Financial leverage

A

Based on the massive use of debt to increase the profitability of the funds invested. The creation of a buyout holding company allows the target company to bear the financing of the transaction: the debt contracted at the holding company level is repaid by the target cash flows.

76
Q

Legal leverage

A

Effect resulting from the creation of a holding company and the subscription of part of its capital by external professional investors (specialised investment funds, private equity company). It thus allows the buyers to increase their control capacity with a limited initial investment.

77
Q

Tax leverage

A

Effect resulting from the application, on option, of the tax consolidation regime. This system allows the holding company to be the only company liable for corporate income tax on the basis of the overall result and, as a result, to deduct the financial costs relating to its loans from the profits of the target company (= the holding company’s financial costs are tax deductible).

78
Q

2 categories of debt

A
  • Ordinary bank debt, known as senior debt,
  • Subordinated or mezzanine debt for which the lenders will demand a higher remuneration in view of the risk they incur.
79
Q

The subordinated debt

A

Mezzanine debt: financing that comes between equity and senior debt. It makes it possible to reconcile the interests of senior debt providers who do not wish to exceed a certain level of risk and fund providers who do not wish to increase their participation so as not to reduce the leverage effect.

80
Q

Aircraft/ Aviation financing

A

The financing of the purchase and operation of one or more aircraft and related assets, by an airline, aircraft lessor or other entity using one of a variety of financing structures.

Depending on the needs of the participants, the financing may be structured as a secured loan, a debt offering, or a lease (whether an operating lease or finance lease).

81
Q

Challenges of aircraft financing

A
  • High cost & mobility,
  • The potential liability for participants involved in aircraft financing transactions in case of an accident or other loss event,
  • The illiquid nature of the aviation market,
  • Aircraft are expensive to maintain with high variable operating costs.
82
Q

Main aircraft financing participants

A
  • Manufacturers,
  • Airlines,
  • Leasing companies & operating lessors,
  • Owner trusts & owner trustees or SPV’s,
  • Export Credit Agencies.
83
Q

The commercial bank finance structure raises several issues that may make it an unattractive option for some airlines including:

A
  • The loan is a balance sheet transaction and is full recourse to the airline or the leasing company.
  • The loan documents include typical events of default and other provisions customary to secured loan
    transactions which may unduly restrict the leasing company’s or the airline’s ability to operate its business.
  • The leasing company or airline may not be investment grade, resulting in a more expensive loan.
  • The airline or leasing company may not be able to incur the amounts needed to purchase the aircraft under the
    terms of its existing loan documents.
84
Q

In an operating or true lease structure, an owner or lessor: (actions)

A
  • Acquires or owns aircraft that it leases to an airline or other lessee.
  • Retains substantially all the risks and rewards incident to the ownership of the aircraft.
  • Regains possession of the aircraft at the end of the lease term.
  • Re-leases or sells the aircraft once the it is returned by the previous lessee.
85
Q

2 types of operating lease

A
  • Dry lease
  • Wet lease
86
Q

Dry lease

A

Operating lease in which the owner or lessor only provides the aircraft and the lessee is
responsible for operating, maintaining, insuring, and providing a crew for the aircraft.

87
Q

Wet lease

A

The owner or lessor:
- Retains operational control of the aircraft;
- Operates flights for the airline;
- Maintains and insures the aircraft;
- Provides a crew for the flights.

88
Q

Advantages of the operating lease structure

A

To an airline or other lessee include giving lessees greater flexibility in managing their fleet because they can contract for increased capacity only as and when needed.

89
Q

Disadvantages of operating leases

A
  • While operating leases enable airlines to manage their fleets, this can be a more expensive structure relative to other forms of financing.
  • For example, in wet leases, the owner’s or lessor’s costs of providing all the services are passed to the airline lessee in the form of higher lease payments.
90
Q

Advantages of finance leases

A
  • The risks and rewards incident to the ownership of the aircraft are transferred to the airline or lessee.
  • The lessee has either a right or an obligation to purchase the aircraft at the end of the lease term.
  • The equity investor (the owner participant) earns a return on its investment
91
Q

What promotes ECAs?

A

ECAs promote the export of aircraft by directly financing or guaranteeing the purchase of aircraft by foreign buyers. In an ECA financing transaction, the ECA can either make direct loans or guarantee loans made by other lenders (ECA lenders) to an owner or less or to finance the purchase by that owner or less or of one or more aircraft from a manufacturer under their jurisdictional purview.

92
Q

In any international trade transaction, credit is provided by either:

A
  • The supplier (exporter),
  • The buyer (importer),
  • One or more financial institutions,
  • Any combination of the above.
93
Q

Payment methods for International Trade

A
  • Prepayments,
  • Letters of credit,
  • Drafts (Bills of exchange),
  • Consignments,
  • Open accounts
94
Q

Supplier credit

A

The form of credit whereby the supplier funds the entire trade cycle.

95
Q

Prepayments method for international trade

A
  • The goods will not be shipped until the buyer has paid the seller.
  • Time of payment: Before shipment
  • Goods available to buyers: After payment
  • Risk to exporter: None
  • Risk to importer: Relies completely on exporter to ship goods as ordered
96
Q

Letters of credit method for International Trade

A

These are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents.
- Time of payment: When shipment is made
- Goods available to buyers: After payment
- Risk to exporter: Very little or none
- Risk to importer: Relies on exporter to ship goods as described in documents.

97
Q

Drafts (Bills of Exchange payment method for International Trade

A

These are unconditional promises drawn by the exporter instructing the buyer to pay the face amount of the drafts.
Banks on both ends usually act as intermediaries in the processing of shipping documents and the collection of payment. In banking terminology, the transactions are known as documentary collections.

  1. Sight drafts (documents against payment): When the shipment has been made, the draft is presented to the buyer for payment
    - Time of payment: On presentation of draft
    - Goods available to buyers: After payment
    - Risk to exporter: Disposal of unpaid goods
    - Risk to importer: Relies on exporter to ship goods as described in documents
  2. Time drafts (documents against acceptance): When the shipment has been made, the buyer accepts (signs) the presented draft.
    - Time of payment: On maturity of draft
    - Goods available to buyers: Before payment
    - Risk to exporter: Relies on buyer to pay
    - Risk to importer: Relies on exporter to ship goods as described in documents.
98
Q

Consignment payment method for International Trade

A
  • The exporter retains actual title to the goods that are shipped to the importer.
  • Time of payment: At time of sale by buyer to third party
  • Goods available to buyers: Before payment
  • Risk to exporter: Allows importer to sell inventory before paying exporter
  • Risk to importer: None
99
Q

Open Accounts payment method for International Trade

A
  • The exporter ships the merchandise and expects the buyer to remit payment according to the agreed-upon terms.
  • Time of payment: As agreed upon
  • Goods available to buyers: Before payment
  • Risk to exporter: Relies completely on buyer to pay account as agreed upon
  • Risk to importer: None.
100
Q

Trade finance methods

A
  1. Accounts receivable financing,
  2. Factoring (Cross-border factoring),
  3. Letters of credit (L/C)
  4. Banker’s acceptance (BA)
  5. Working capital financing
  6. Medium-Term Capital Goods Financing (Forfaiting)
101
Q

Accounts receivable financing - Trade Finance Methods

A

An exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the account receivable.

102
Q

Factoring (Cross-Border Factoring) - Trade Finance Methods

A

The accounts receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer.

103
Q

Letters of credit (L/C) - Trade Finance Methods

A
  • These are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents.
  • The importer pays the issuing bank the amount of the L/C plus associated fees.
  • Commercial or import/export L/Cs are usually irrevocable.
  • The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment).
  • Sometimes, the exporter may request that a local bank confirm (guarantee) the L/C.
104
Q

Banker’s acceptance - Trade Finance Methods

A
  • This is a time draft that is drawn on and accepted by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity.
  • If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA.
105
Q

Working capital financing - Trade Finance Methods

A

Banks may provide short-term loans that finance the working capital cycle, from the purchase of inventory until the eventual conversion to cash.

106
Q

Medium-Term Capital Goods Financing (Forfaiting) - Trade Finance Methods

A
  • The importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years.
  • The exporter then sells the note, without recourse, to a bank (the forfaiting bank).
107
Q

Countertrade - Trade Finance Methods

A
  • These are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country.
  • Common countertrade types include barter, compensation (product buy-back), and counterpurchase.
  • The primary participants are governments and MNCs.
108
Q

Export-Import Bank of the U.S. (Ex-Imbank)

A
  • This U.S. government agency aims to create jobs by financing and facilitating the export of U.S. goods and services and maintaining the competitiveness of U.S. companies in overseas markets.
  • It offers guarantees of commercial loans, direct loans, and export credit insurance.
109
Q

SPV

A

SPECIAL PURPOSE VEHICLE

110
Q

Why is the SPV created?

A

A separate company with its own balance sheet by a corporation to isolate financial risk (fund limited company any type of structure).

111
Q

Project finance

A

Financing of an infrastructure, industrial project, or public service based on a non-recourse or limited recourse financial structure.

112
Q

Main sectors financed in project finance

A
  • Power (50%);
  • Oil & Gas;
  • Transportation;
  • Telecommunications;
  • Leisure & Property
113
Q

How to mitigate a technological risk?

A

Studies.

114
Q

How to mitigate a qualification risk?

A

Training

115
Q

How to mitigate a money laundry risk?

A

internal procedures → KYC

116
Q

PLCR

A

Project Life Coverage Ratio

117
Q

Project Life Coverage Ratio

A

NPV/ debt service

118
Q

How is ensured the Debt service (interest payments and maturity repayments) underwritten by the holding company?

A

By the CF generated by the target (dividends, management fees, etc.)

119
Q

On what is based the LBO structure?

A

LBO structure is based on the leverage effect of the debt.

120
Q

Acquisition Audit

A

Documents that compiles information gathered on the target.

121
Q

Liability guarantee

A

– Only covers unrecognised changes in assets or liabilities
To guarantee the buyer against the risk of an increase in liabilities (or a reduction in assets), a
price revision clause to be paid by the seller is very often inserted in the sale contract of the target.

122
Q

Benefits of SPV

A
  • Isolate risk
  • Tax benefit
  • Securitization
  • Flexibilty/ diversification

4A EDHEC (5 decks)

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