Mezzanine Financing. Tools, Applications and Total Performance. Luc Nijs

Transcription

1 Mezzanine Financing Tools, Applications and Total Performance Luc Nijs WlLEY

2 Contents Preface xiii 1 Introduction The Bi-polar World of Finance Demarcation of the Product Group Positioning and Use of Mezzanine Finance The Risk-Return Conundrum Providers of Mezzanine Finance The Market for Mezzanine Products 18 2 The Mezzanine Product Group Categorization of the Mezzanine Product Group Subordinated debt with step-up rates Subordinated debt with PIK interest Subordinated debt with profit participation Subordinated debt with Warrants Convertible loans Preferred shares The wider space of hybrid Instruments Case Study: The Kratos Company - Merger Finance Kratos Inc. A closer look Case guidance Datasets 73 3 The Implicit Cost of Mezzanine Products Measuring Risk Risk and return expectations How do you measure risk? What risks do we compensate for? Types of Risk Diversification as a rule reduces or eliminates firm-typical risk Modern financial theory is eyeing a certain type of Investor 81

3 viii Contents Measuring market risk: the CAPM (capital asset pricing model) theory The capital asset pricing model Equity Risk Versus the Risk of Borrowing: Default Risk and the Cost of Debt What are the drivers behind default risk? The risk-free rate Putting It All Together How Much Risk is There in a Mezzanine Product? Cost Versus Return Dynamics for Mezzanine Products 94 4 The 'Pricing' Question and Further Financial Dynamics of Convertible Loans and Preferred Convertible Shares Pricing Grid for Mezzanine Products Financial Dynamics of Convertibility in Convertible Loans and Preferred Convertible Shares Convertible bonds Convertible preferred stock (CPS) Valuation and pricing of (embedded) options Case Study: JJ Bars & Restaurants - Mezzanine for Expansion Europewide Capital Partners The Dutch and European restaurant industry Industry segments JJ Bars & Restaurants Datasets Questions: JJ Bars & Restaurants The Mezzanine Product Group and the Financial Industry The Basel Committee and Framework The Evolution of the Basel Rules (Basel I and II) The first pillar The second pillar The third pillar Capital definitions under Basel II Objectives of Basel III and the Central Themes Capital definitions under Basel III Impact on the Use of Mezzanine Products in the Financial Sector Regulation in the Insurance Sector Impacting the Use of Mezzanine Products Solvencyll Regulated capital under Solvency II CoCo Bonds - Contingent Convertible Bonds Outlook for the product Annex I - Summary Basel III Annex II Basel III - Specific Features ] Case Study Positions: Mezzanine Financing for Financial Institutions Case Study 1: Financing the Future of Bank Alhanbra Caseguidance Case Study 2: Growing the Brazilian Market Caseguidance 186

4 Contents ix 5.12 Case Study 3: Financing a South African FI which is Part of a Larger Conglomerate Prior to an IPO Case guidance Mezzanine and Project Finance Types of Projects Financing Aspects Securitizing Project Loans Case Study 1: Developing a Toll Road in Poland (A2) Other financial peculiarities Case guidance Case Study 2: Building and Operating a Wind Park Security Real Estate Projects and Mezzanine Finance Wider Application Other Applications and Return Issues Case Study: Financing a Real Estate Company in the CEE Region Projections Points for consideration Mezzanine and the Private Equity Space Drivers of Return LBO Structure Senior debt Second lien Mezzanine/HY loans PIKnotes Equity Tax Implications Alternative Transactions Using Similar Financing Structures Summary of Different Compartments in the LBO Structure Summary of Types of Securities in the Leverage Structure of an LBO Case Study: Buying Orangina - a Typical LBO with Some Interesting Questions Ahead! Getting the deal done! Valuation, pricing and deal mechanics Case guidance Datasets How did it all end? Mezzanine Products and the World of the Rating Agencies and Accountancy Boards Rating Agencies and the Debt-Equity Continuum Permanence and deferral characteristics Simplified continuum for banks' (FIs') and insurers' hybrid capital security 272

5 x Contents 9.2 Case Study: Fitch's Approach to Rating Hybrid for Corporates At Initiation and thereafter when fundamentale are acceptable; coupon payments are occurring as expected As fundamental«decline and the probability of some form of loss absorption increases When loss absorption features are activated When normal payments are resumed (and the Instrument resumes debt-like Performance) Mezzanine Debt, Rating Agencies, the Regulator and Financial Institutions After The impact of Basel III Phasing out of hybrid capital due to regulatory changes Notehing down and strueturing Capacity limits in the balance sheets of financial institutions and insurers Basel III and Solvency II Appendix 1: Equity-Content Maximization and Strueturing Criteria at Moody's Appendix 2: S&P's and Moody's Key Strueturing Considerations The Intricacies of the Accounting World Classification and measurement Impairment methodology Hedge accounting Substance over form Examples of equity Instruments IFRS 9 requirements in relation to hybrid Instruments Hybrid financial liabilities Preferred shares Demarcation Lines and Product Modeling Contractual Obligation to deliver cash or other financial assets Term Sheets, Inter-creditor Agreements and Debt Restructuring Groups of Covenants Review of Key Covenants for Mezzanine Products Other Covenants 31g 10.4 Case Studies: The Good, the Bad and the Ugly Good covenants Bad covenants Ugly covenants A Comparison of Debt Asset Classes Covenants which relate speeifieally to liquidity events in private market transactions Mezzanine providers and inter-creditor agreements Lien Subordination and inter-creditor agreements A quick reminder of the distinetion between lien and payment Subordination 326

6 Contents xi 10.6 Case Study: LyondellBasell and Lyondell Chemical Company Specifics of the Lyondell DIP facility Resistance against the proposed DIP facility Theoutcome Datasets Case guidance Outlook Introduction The Not-Too-Distant Past New Kids on the Block The Unitranche Product Reorganization of Insolvency Laws in Europe Islamic Finance: Sukuks and Non-Risk-Free Bond Look-Alikes Originalton Sources for Mezzanine The Role of Governmental Organization The Refinancing Wall: Opportunities and Challenges Performance of Mezzanine Products 363 Appendix 1 Overview of Term Sheets and/or Model Contracts for the Mezzanine Product Group 367 Appendix 2 First Lien/Second Lien Inter-creditor Agreement 415 Glossary 479 Case Guidance/Solutions 489 Index 505