Private Equity Masterclass LBO Modeling Focus (2.5 days)

LBO Valuation

Learning Outcomes

• What an LBO is and how it can create value
• LBO valuation as an alternative valuation methodology
• Characteristics of suitable LBO candidates
• Estimating cash flows available to capital holders
• Estimating debt capacity
• Simplified debt/equity split for entry capital structure
• Sources and uses of funds
• Debt structure
• Estimating the exit value
• Calculating the IRR
• Sensitizing the model

Debt Structuring, Capital Structure, Rating and Financing

Learning Outcomes

• Debt structuring
• Covenant vs. cash flow based debt capacity
• Structural vs. contractual subordination
• Capital structure decisions in the context of corporate strategy
• What is capital structure analysis?
• The impact of financial leverage on earnings and returns
  
  • Using ratios to measure leverage
  • Leverage increases earnings volatility
  • Capital structure in the context of WACC
  • Impact of leverage on EPS and the importance of the use of debt proceeds
  • Using leverage to increase ROE
• The impact of financial leverage on corporate value
  
  • The value of the tax shield on interest expense
  • Does an optimal capital structure exist?
• Capital structure and rating analysis
• Ratio analysis for credit ratings
• Investment grade vs. high yield
• Key items of terms sheets
• The concept of cash flow lending
  
  • The lender’s perspective: risk, return and exit routes
• Advanced structural vs. contractual subordination - case studies
• Financial instruments used in IG and levered transactions
  
  • Senior debt (revolving facility, terms A, B and C)
  • Second lien
  • Mezzanine loans
  • High yield bonds
  • PIK notes
  • Preferred shares, shareholder loans and vendor loan notes
  • Ordinary equity

Complex LBO Modeling and Sponsor Management

Learning Outcomes

• Sponsors and their investment perspective
• Overview of different type of financial sponsors
• Sovereign wealth funds - how do they differ from more traditional sponsors?
• Deal and market update - what is currently happening in the sponsors' space?
• Sponsor exits
  
  • Timing considerations
  • Routes to exit
  • Advantages and disadvantages of full exit vs. staged exit
  • Dual track vs. other combined or "hybrid" exit routes
  • Lessons learned from "exits gone wrong"
• Sponsor return analysis
  
  • IRR vs. money multiple
  • IRR vs. MIRR vs. XIRR
• Capital structure and rating implications for the sponsor
• The concept of cash flow lending
  
  • The lender’s perspective: risk, return and exit routes
• Structural vs. contractual subordination
• Financial instruments used in sponsor transactions
• Key pros and cons of various leveraged instruments from a sponsor perspective
  
  • Senior debt (revolving facility, terms A, B and C)
  • Second lien
  • Mezzanine loans
  • High yield bonds
  • PIK notes
  • Preferred shares, shareholder loans and vendor loan notes
  • Ordinary equity
• Hands on analysis of all items discussed
  
  • Sources and uses of funds table
  • Ownership structure
  • Management and mezzanine entry vs. exit
  • How to analyze and negotiate warrants
  • Goodwill calculation - sponsors view on goodwill
  • Deal adjustments, including amortization of debt issuance fees
  • Cash flows available for debt servicing
  • Repayment schedules for individual debt instruments
  • Acceleration of debt payments using a cash sweep mechanism
  • RCF - how can the sponsor decide the correct amount to be provided by the banks
  • PIK interest
  • Sensitizing the various chosen debt instruments
  • Sensitizing the capital structure
  • Detailed return analysis to sponsor, management and mezz provider

LBO Modeling Issues

Learning Outcomes

• Leveraged recapitalization
• Multiple capital structure scenarios
• Management ratchets
• Incorporate a revolving credit facility in the sources and uses of funds
• Date related IRRs (XIRR)