Structured Finance: Leveraged Buyouts, Project Finance, Asset Finance and Securitization

388 Pages·2022·5.251 MB·English

by  Charles-Henri Larreur

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Structured Finance
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Structured Finance
Charles-Henri Larreur
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Thiseditionfirstpublished2021
Copyright©2021byCharles-HenriLarreur.
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ToTammy,Clémence,andAlexandre
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Contents
Preface xix
Introduction 1
ABriefHistoryofStructuredFinance 1
DefiningStructuredFinance 4
WhywasStructuredFinanceSetUp? 6
PARTI Leveraged Buyout(LBO) 13
CHAPTER1 WhatisanLBO? 15
1.1 TheMainFeaturesofanLBO 15
1.1.1 Definition 15
1.1.2 DebtSizing 15
(cid:2) 1.1.3 VariousTypesofLBOs 16 (cid:2)
1.2 AThree-stepLeverage 17
1.2.1 FinancialLeverage 18
1.2.2 TaxLeverage 18
1.2.2.1 LittletonoDividendTax 18
1.2.2.2 TaxGroupsandInterest
Deductibility 19
1.2.2.3 Alternatively,aMergeroraDebt
PushDown 19
1.2.3 ManagerialLeverage 20
1.2.3.1 LBOsbyInvestmentFirms 20
1.2.3.2 TheAcquisitionofanSMEbyan
IndividualBuyer 21
1.2.3.3 TheBuild-up 21
CaseStudy1:TheHarley-DavidsonLBO(1981–1986) 22
CHAPTER2 TheDifferentStakeholders 26
2.1 TheTargetCompany 26
2.1.1 StableandRecurringCashFlow 27
2.1.2 PossibilityofImprovingOperating
Processes 27
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2.1.3 GrowthOpportunities 29
2.1.3.1 OrganicGrowth 29
2.1.3.2 ExternalGrowth 30
2.1.4 LowLevelofNetLong-termDebt 31
2.1.5 LowWorkingCapitalRequirement 32
2.1.6 SomeAssetscanbeCollateralized(Ideally) 32
2.1.7 NoDirtyLittleSecrets 32
2.1.8 PeopleMatter 34
2.1.8.1 ATop-notchManagementTeam 34
2.1.8.2 ChangeofCulture 34
2.2 Buyers 35
2.2.1 PrivateEquityFirms 35
2.2.1.1 PrivateEquitySponsors 35
2.2.1.2 TheOriginsofLBOs 35
2.2.1.3 LBOFirmsvs.LBOFunds 36
2.2.1.4 ProfitSharingbetweenLPsand
LBOFirms 38
2.2.1.5 Fund’sLifetime 38
2.2.1.6 PerformanceTargets 39
2.2.2 IndividualBuyers 39
2.3 Lenders 40
2.3.1 BasicConcepts 40
2.3.1.1 Sizing 40
(cid:2) 2.3.1.2 DebtStructure 40 (cid:2)
2.3.2 TermLoans 41
2.3.2.1 HowDoesitWork? 41
2.3.2.2 Covenants 41
2.3.2.3 EventsofDefault 42
2.3.2.4 Cov-liteStructures 42
2.3.2.5 BankingPools 43
2.3.2.6 Non-bankInvestors 43
2.3.2.7 OtherCreditFacilities 44
2.3.3 SubordinatedDebt 44
2.3.3.1 SecondLien 45
2.3.3.2 MezzanineDebt 45
2.3.3.3 High-yieldBonds 45
2.3.4 UnitrancheDebt 46
2.3.4.1 Whatisit? 46
2.3.4.2 BifurcatedUnitranche 47
CaseStudy2:MichaelMilkenandtheBirthofthe
High-YieldBondMarket 47
CaseStudy3:MalcolmGlazerandtheManchesterUnited
LBO 53
CHAPTER3 TheLBOProcess 63
3.1 TheSaleProcess 63
3.1.1 PreliminaryAnalysis 64
3.1.2 Valuation 65
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Contents ix
3.1.2.1 ComparativeMethod 65
3.1.2.2 IntrinsicMethod 67
3.1.2.3 DeterminingtheOfferPrice 68
3.1.3 LetterofIntent 68
3.1.4 DueDiligence 70
3.1.5 StructuringandClosing 70
3.1.6 AftertheAcquisition 71
3.1.6.1 PrivateEquityFirms 71
3.1.6.2 IndividualBuyers 72
3.2 ExitStrategies 72
3.2.1 InitialPublicOffering 72
3.2.2 Sale 73
3.2.2.1 ToaCompany 73
3.2.2.2 ToAnotherPrivateEquityFirm 75
3.2.3 DividendRecapitalization 76
3.2.3.1 HowDoesitWork? 76
3.2.3.2 Constraints 77
3.3 LBOandPrivateEquity 77
3.3.1 FocusonVentureCapitalandGrowth
Capital 78
3.3.1.1 VentureCapital 78
3.3.1.2 VentureCapitalFirms 79
3.3.1.3 SeveralRounds 79
(cid:2) 3.3.1.4 HistoryofVentureCapital 80 (cid:2)
3.3.1.5 GrowthCapital 81
3.3.1.6 GrowthCapitalvs.Venture
Capital 83
3.3.2 LBOComparedwithVentureCapitaland
GrowthCapital 84
CaseStudy4:HiltonHotelsLBO,theMostProfitable
PrivateEquityDealEver 85
Summary LBOs:WhatHaveWeLearnt? 92
PARTII ProjectFinance 95
CHAPTER4 TheABCofProjectFinance 97
4.1 Definition 97
4.1.1 ThePurposeofProjectFinance 97
4.1.2 FinancingtheConstructionof
InfrastructurewithNon-recourseDebt 97
4.2 WhyChooseaProjectFinanceStructure 99
4.2.1 TwoDifferentOptionstoFinance
InfrastructureAssets 99
4.2.2 AdvantagesoftheProjectFinanceOption 100
4.2.2.1 IsolatingRisks 100
4.2.2.2 OptimizingLeverage 100
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4.2.2.3 ExtendingDebtMaturity 101
4.2.2.4 IdealSolutionforConsortiums 101
4.2.2.5 IdealSolutionforFinancial
Sponsors 102
4.2.2.6 OnlySolutionforSmallor
Medium-sizeSponsors 102
4.3 ConstraintsoftheProjectFinanceStructure 103
4.4 HowtoChoosebetweenCorporateandProject
Financing 103
CaseStudy5:TheConstructionoftheEiffelTower 105
CHAPTER5 TheMainPartiestoProjectFinancing 110
5.1 DifferentTypesofProjects 110
5.1.1 ProjectswithLong-termPurchaseContracts 110
5.1.1.1 HowDoesitWork? 111
5.1.1.2 FinancingaProjectBenefiting
fromaLong-termPurchase
Agreement 111
5.1.2 ProjectswithTrafficorMerchantRisk 112
5.1.2.1 Definition 112
5.1.2.2 AHigherLevelofRiskthan
ProjectsBenefitingfromOfftake
Agreements 112
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5.1.2.3 Subsidies 113
5.1.2.4 ProjectsPartlyExposedto
MerchantRisk 113
5.1.3 PPPs 114
5.1.3.1 Concessions:aHistorical
Approach 114
5.1.3.2 PPPs:fromtheUnitedKingdom
totheRestoftheWorld 114
5.1.3.3 FinancingPPPs 116
5.1.3.4 LegalFormsofPPPs 116
5.2 Sponsors 117
5.2.1 IndustrialSponsors 117
5.2.2 FinancialSponsors 119
5.2.2.1 Definition 119
5.2.2.2 AGrowingCompetitionbetween
FinancialSponsors 119
5.2.2.3 FinancialandIndustrial
SponsorsWorkTogether 120
5.2.3 GreenfieldandBrownfieldInvestments 121
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5.2.4 StockExchangeListing 122
5.2.4.1 ListingofInfrastructure
Companies 122
5.2.4.2 ListingofInfrastructureFunds 122
5.2.4.3 Yieldcos 123
5.2.5 Infrastructure-likeAssets 127
5.2.5.1 Definition 127
5.2.5.2 FinancingofInfra-likeAssets 127
5.3 Lenders 127
5.3.1 Banks 127
5.3.1.1 LeadingBanksinProjectFinance 127
5.3.1.2 WhatTypesofLoansDoThey
Offer? 129
5.3.1.3 JuniorLoans 130
5.3.2 InfrastructureDebtFunds 130
5.3.2.1 NewPlayersintheInfrastructure
Space 130
5.3.2.2 RegulatoryBackground 131
5.3.2.3 WhoareTheseFunds? 132
5.3.3 ProjectBonds 132
5.3.4 DevelopmentFinanceInstitutions 133
5.3.4.1 Definition 133
5.3.4.2 MultilateralDevelopmentBanks 134
(cid:2) 5.3.4.3 MDBsinProjectFinance 135 (cid:2)
5.3.4.4 PreferredCreditorStatus 135
5.3.4.5 A/BLoans 135
5.3.5 ExportCreditAgencies 136
5.3.5.1 Definition 136
5.3.5.2 RulesApplicabletoECAs 137
5.3.5.3 Example 138
5.3.5.4 AdvantagesofECAs 139
5.3.5.5 StructuringOptions 139
5.4 TheRoleofPublicAuthorities 140
5.4.1 Framework 141
5.4.2 PublicTenders 141
CaseStudy6:TheNearBankruptcyofDisneylandParis 142
CHAPTER6 ProjectFinanceStructuring 149
6.1 PreliminaryAnalysisoftheProject 149
6.1.1 ConstructionRisk 149
6.1.2 ResourceRisk 150
6.1.3 CreditRisk 151
6.1.4 MarketRisk 152
6.1.5 RateRisk 152
6.1.6 ForeignExchangeRateRisk 153
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6.1.7 OperationalRisk 154
6.1.8 TechnologicalRisk 154
6.1.9 PoliticalRisk 154
6.1.10 EnvironmentalRisk 155
6.1.11 ForceMajeureandOtherRisks 155
6.1.11.1 ForceMajeure 155
6.1.11.2 OtherRisks 156
6.2 ProjectFinanceLegalStructure 156
6.2.1 EstablishmentoftheSPV 156
6.2.1.1 CharacteristicsoftheProject
Company 156
6.2.1.2 Employees 157
6.2.2 LoanAgreement 157
6.2.2.1 MainFeaturesofaProject
FinanceLoan 157
6.2.2.2 ReserveAccounts 158
6.2.2.3 DebtServiceCoverageRatio 159
6.2.2.4 LoanLifeCoverRatio 160
6.2.2.5 OtherCovenants 160
6.2.2.6 EventsofDefault 160
6.2.2.7 JuniorLoan 161
6.2.3 TheSecurityPackage 161
6.2.3.1 DescriptionoftheSecurity
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6.2.3.2 AnalysisoftheSecurityPackage 162
6.2.4 OtherFinancialDocuments 163
6.2.4.1 IntercreditorAgreement 163
6.2.4.2 VATFacility 163
6.2.5 ProjectDocuments 164
6.2.5.1 Construction(orEPC)Contract 164
6.2.5.2 OperationandMaintenance
Contract 164
6.2.5.3 OfftakeAgreements(andother
ContractsthroughwhichanSPV
GeneratesRevenues) 165
6.2.5.4 LeaseAgreement 165
6.2.5.5 Agreement(s)withtheHost
Country 165
6.3 FinancialStructure 166
6.3.1 TheFinancialModel 166
6.3.1.1 BuildingaFinancialModel 166
6.3.1.2 IdentifyingOperatingCashFlow 167
6.3.1.3 RoleoftheFinancialAdvisor 168
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