Leveraged Buy-Outs (LBOs): Term Loans, High-Yield Bonds and Financial Modelling
Leveraged Buy-Outs (LBOs): Term Loans, High-Yield Bonds and Financial Modelling
May 19th 2020, Uden/ The Netherlands
Consultant & Trainer: Joris Kersten
Joris (1980) is an independent Corporate Finance consultant with his firm “Kersten Corporate Finance” at Uden (The Netherlands).
He provides consulting and deal making in Mergers & Acquisitions (M&As) of medium sized companies in The Netherlands.
Moreover, he provides training in “Business Valuation” and “Financial Modelling” at leading “bulge bracket” investment banks in New York, London and Hong Kong.
In addition, he provides training in Corporate Finance at Universities and at Corporations all over the world (e.g. Mongolia, Surinam, Kuwait, Peru, Luxembourg, Saudi Arabia, Dubai, The Netherlands, Belgium etc.).
At last, he writes blogs on LinkedIn on Corporate Finance, almost 60 of his (free) blogs can be found at the end of this one (and on his LinkedIn page under “articles”).
NEW: 100% Online training “Certificate Investment Management”
On September 1st 2020 you can start (100% online) with obtaining your “Certificate Investment Management” given out by “Kersten Corporate Finance” in The Netherlands.
In 19 webinars (19 topics) of about 3 hours each, I will teach you the key elements of “investment management”. And this in 6 main themes.
After the webinars you practice with cases and exercises yourself, including questions from past CFA exams (level 1, 2 and 3). In the cases and exercises I will also teach you to actively use “Microsoft Excel” since this is an important tool in Corporate Finance.
The correct answers of the cases and exercises are also presented to you by webinars, worked out in detail. This in order to check your own work.
When you have finished the 19 webinars and have practised with the exercises and cases (all online), then there is an online exam to take (whenever you feel ready).
And when you pass the exam then you will receive the “Certificate Investment Management” of “Kersten Corporate Finance”. (pass = grade above 5.5 on a scale of 10)
Your name, and certificate number, will then be mentioned in the register on www.joriskersten.nl.
So for example your employer can then verify that you obtained the “Certificate Investment Management” of “Kersten Corporate Finance”.
Level training:
Participants get from a "foundation" level to "intermediate" level. This takes about 1 month to 3 months, depending on your own speed.
Foreknowledge needed for the training: A basic understanding of the Profit & Loss statement, cash flow statement and balance sheet. Moreover, a basic understanding of Microsoft excel.
The “course manual” with all info and conditions of the training will be available in the week of June 8th 2020.
And registration & subscription will also start in the week of June 8th 2020.
The 19 topics of the webinars, divided over 6 main themes are:
Theme 1: Key elements of investments
1) Asset classes and financial instruments. 2) Securities markets. 3) Mutual funds and other investment companies.
Theme 2: Portfolio theory
4) Risk, return and the historical record. 5) Efficient diversification. 6) Capital asset pricing model and arbitrage pricing theory. 7) Efficient market hypothesis.
Theme 3: Debt securities
8) Bond prices and yields. 9) Managing bond portfolios.
Theme 4: Security analysis
10) Macroeconomic and industry analysis. 11) Equity valuation. 12) Financial Statement Analysis.
Theme 5: Derivative markets
13) Option markets. 14) Option valuation. 15) Future markets and risk management.
Theme 6: Active investment management.
16) Evaluating investment performance. 17) International diversification. 18) Hedge funds. 19) Taxes, inflation and investment strategy.
The “course manual” with all info and conditions of the training will be available in the week of June 8th 2020.
Open (real life) training programs
The open training programs of Joris Kersten in The Netherlands take place at the dates below.
And for registration just write an email ([email protected]) or look at www.joriskersten.nl.
· 17, 18, 19, 20 and 22, 23 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;
· 24, 25, 26, 27 and 29, 30 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;
· 19, 20, 21, 22 and 23 July 2020: 5 days – Training with Certificate in Investment Banking. Location: Dubai/ United Arab Emirates;
· 16, 17, 18, 19 and 20 August 2020: 5 days – Training Master Financial Modelling Specialist. Location: Riyadh/ Saudi Arabia;
· 28, 29, 30, 31 October 2020 + 2, 3 November 2020: 6 days - Business Valuation & Deal Structuring. Location: Amsterdam Zuidas/ The Netherlands;
· 16, 17, 18, 19 November 2020: 4 days - Financial Modelling in Excel. Location: Amsterdam Zuidas/ The Netherlands.
Leveraged Buy-Outs (LBOs)
This is a sequence of blogs on so called “Leveraged Buy-Outs” (LBOs).
In a number of blogs I will describe what LBOs are and how they are structured.
Topics that will come back are:
· The advantage of leverage;
· The parties involved in LBOs;
· Financial modelling for LBOs;
· Building the LBO analysis;
· What price can you pay for the target in an acquisition;
· Debt analysis;
· Returns analysis and sensitivity analysis.
I have written a blog in the past already on the “financial modelling” of LBOs.
In case you have not read it yet, and when you are interested, I will give you the link here:
Leveraged Buyout (LBO) Analysis (older blog):
https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/
For this sequence of blogs, I have used the book below as a source.
I really recommend you to read to book when you are interested in this topic, since it discusses LBOs within a practical setting and in a very clear way! ??
· Source blog: Leveraged Buyouts: A practical introductory guide to LBOs (2012). Author: David Pilger. Publisher: Harriman House Great Britain.
Sequence on: Leveraged Buy-Outs (LBOs)
The first article in this sequence (May 18th 2020) was an introduction to the topic.
In case you have not read this first article yet, and when you are interested, I will give you the link:
Article 1: Leveraged Buyouts (LBOs): Key mechanics of LBOs
In the blog of today I will look at the parties involved in LBOs:
· LBO Investors;
· Banks;
· Bond Investors;
· Current owners and current credit suppliers.
Moreover, I will make a start with looking at how LBOs are “modelled” for analysis.
LBO Investors
An LBO always starts with the investors.
The investor is the individual or “Private Equity” (PE) party that starts with the LBO process.
In this case they need to start searching for takeover targets with:
· Small amounts of debt;
· Strong and stable cash flows;
· Assets free to use as collateral;
· Room for cutting costs in the operations.
The investor analyses the above situation with use of financial models (in Microsoft Excel).
Moreover, they think about the suggested capital structure with (lots of) debt.
But obviously here they are also dependent on whether parties are willing to provide the debt.
An ideal LBO has theoretically the following characteristics, it has the:
· Greatest amount of debt possible without that it bankrupts the company;
· Ability to pay down the debt;
· Ability to increase the earnings (EBITDA);
· Ability to improve the company (to increase the exit multiple of EBITDA in the end).
(Source used: David Pilger, 2012)
Lenders/ banks: Senior Bank Debt
Banks are one of the major lenders in an LBO.
In general banks provide the loans that are “senior”, and “secured” by the assets of the company that is acquired.
Banks typically act as “syndicated lenders”, so they “share” the bank debt amongst multiple banks to reduce the risk.
An investment bank usually arranges the “syndication”, and commercial banks become part of the different lenders, along with investment banks.
(Source used: David Pilger, 2012)
High yield debt investors
Debt investors are often the “unsecured” creditors in a leveraged deal.
And because of this they demand a higher fixed rate of interest. And this is referred to as “high yield”.
So the interest is relatively high because:
· As mentioned the debt is not “secured”;
· It is “junior debt” so they are “junior” in relation to the “senior debt” in the pecking order.
These investors buy this debt through buying “high yield bonds”.
And these “high yield bonds” are issued, and underwritten, by investment banks.
(Source used: David Pilger, 2012)
Existing creditors
Most likely the existing creditors (before the LBO) are traditional lenders.
This such as commercial banks specialising in making traditional commercial loans.
These existing lenders do not play a major role in the LBO, they just receive the loan principle back plus any interest due.
On top of that they will likely get a “pre-payment fee” which is a “fine” for paying back the debt early.
The pre-payment fee usually lies between 1% and 1.5% of the loan.
Sometimes though, the existing creditors are willing to participate in the LBO. This when the lender is large enough and has a certain risk appetite.
(Source used: David Pilger, 2012)
Modelling an LBO: An introduction
In order to “model” an LBO we need to have an overview of the “financial statements” of the target.
Here fore we make “pro forma” financial statements.
So basically these are financial statements that we have estimated for after the deal is done!
We do this by looking at historical trends, and with making reasonable assumptions on how a company will perform in the future.
When we look at the (pro forma) balance sheet of a company after the LBO, you see a large shift in the amount of debt in relation to equity.
The assets will not change a lot immediately after the deal.
This since an LBO is primarily a matter of changing the capital structure of a company! This is an important issue to notice!
The (pro forma) income statement is important since we want to assess whether the company can generate earnings over time.
And the income statement also gives us an idea about the development of the EBITDA.
This is very important since it give us an idea about the “enterprise value” at the “exit moment” in for example 5 to 7 years.
The (pro forma) cash flow statement is even more important since is helps us to judge whether the company can pay back the debt.
So the “cash flow available to pay down debt” is critical to analyse closely in any LBO!
(Source used: David Pilger, 2012)
Debt sweep
At last, every LBO model has a “debt sweep”.
You cannot find a debt sweep on an accounting balance sheet, but you can find a "debt sweep" in a financial model of an LBO (in Microsoft Excel).
When we actively use (“switch on”) this “debt sweep” then:
1. Excess cash is used to pay down debt;
2. This reduces debt on the pro forma balance sheets;
3. And this again reduces interest paid in the pro forma P&Ls and cash flow statements.
Concerning the debt sweep, you might take a “pre-payment fee” on (certain) debt into account (1%-1.5% on loan).
I will talk about the debt sweep in much more detail in the upcoming blogs, since it is a crucial component in any LBO model!
(Source used: David Pilger, 2012)
The upcoming blog on LBOs will be on:
· Further modelling an LBO;
· LBO analysis;
· Steps in building an LBO model (in Microsoft Excel).
Stay tuned!
Source
For this sequence of blogs, I have used the book below as a source.
I really recommend you to read to book when you are interested in this topic, since it discusses LBOs within a practical setting and in a very clear way! ??
· Source blog: Leveraged Buyouts: A practical introductory guide to LBOs (2012). Author: David Pilger. Publisher: Harriman House Great Britain.
Under here you can find the links to my previous free articles (almost 60) on business valuation.
Earlier blogs on “net debt” (cash & debt free)
Article 1: Valuation: Introduction to "net debt" (cash & debt free)
https://www.dhirubhai.net/pulse/valuation-introduction-net-debt-cash-free-joris-kersten-msc-bsc-rab/
Article 2: Valuation: Net debt (cash & debt free)
https://www.dhirubhai.net/pulse/valuation-net-debt-cash-free-joris-kersten-msc-bsc-rab/
Article 3: Valuation: Adjusted net debt – Cash like items
https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-cash-like-items-kersten-msc-bsc-rab/
Article 4: Valuation: Adjusted net debt – Debt like items
https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-like-items-joris-kersten-msc-bsc-rab/
Earlier blogs on “valuation of banks”
Article 1: Valuation of Banks: Business models of Banks
https://www.dhirubhai.net/pulse/valuation-banks-business-models-joris-kersten-msc-bsc-rab/
Article 2: Bank Valuation: Financial Statements of Banks (part 1)
https://www.dhirubhai.net/pulse/bank-valuation-financial-statements-banks-part-1-joris/
Earlier blogs on “Valuation of Oil & Gas Companies”
Article 1: Valuating Oil & Gas Companies: The Oil Industry
https://www.dhirubhai.net/pulse/valuating-oil-gas-companies-industry-joris-kersten-msc-bsc-rab/
Article 2: Valuating Oil & Gas Companies: The Oil Industry – Part 2
https://www.dhirubhai.net/pulse/valuating-oil-gas-companies-industry-part-2-kersten-msc-bsc-rab/
Earlier blogs on “Leveraged Buy-Outs (LBOs)”
Article 1: Leveraged Buyouts (LBOs): Key mechanics of LBOs
Earlier blogs on “Debt & Leverage”
Article 1: Debt: Ratio “debt/ GDP” in the US, The Netherlands, Germany and Japan
https://www.dhirubhai.net/pulse/debt-ratio-gdp-us-netherlands-germany-japan-kersten-msc-bsc-rab/
Article 2: Debt: Why global debt increased over the last 100 years
https://www.dhirubhai.net/pulse/debt-why-global-increased-over-last-100-years-kersten-msc-bsc-rab/
Article 3: Debt of companies: Leverage, Private Equity, Solvency and Bankruptcy
https://www.dhirubhai.net/pulse/debt-companies-leverage-private-equity-solvency-kersten-msc-bsc-rab/
Earlier blogs on “Weighted Average Cost of Capital (WACC) – step by step”
Article 1: Capital Market History Lessons – Corporate Finance (part 1)
https://www.dhirubhai.net/pulse/capital-market-history-lessons-corporate-finance-part-joris/
Earlier blogs on Financial Modelling
Article 1: Financial Modelling in Excel: Circular references, interest calculations and iterations
https://www.dhirubhai.net/pulse/financial-modelling-excel-circular-references-kersten-msc-bsc-rab/
Article 2: Excel basics for Finance: SUM, MAX, MIN, AVERAGE, IF, cell referencing, named ranges
https://www.dhirubhai.net/pulse/excel-basics-finance-sum-max-min-average-cell-named-joris/
Article 3: Excel for Valuation: COUNTIF, VLOOKUP, INDEX and MATCH
https://www.dhirubhai.net/pulse/excel-valuation-countif-vlookup-index-match-kersten-msc-bsc-rab/
Article 4: Excel for Business Valuation: OFFSET, FORECAST and CHOOSE
https://www.dhirubhai.net/pulse/excel-business-valuation-offset-forecast-choose/
Article 5: Excel for Business Valuation: NPV, IRR, PMT and EOMONTH
https://www.dhirubhai.net/pulse/excel-business-valuation-npv-irr-pmt-eomonth-kersten-msc-bsc-rab/
Article 6: Excel for Business Valuation: Custom Formatting, Conditional Formatting and Sparklines
https://www.dhirubhai.net/pulse/excel-business-valuation-custom-formatting-sparklines-joris/
Earlier blogs on “various topics”
Article 1: Financing a M&A transaction: An introduction
https://www.dhirubhai.net/pulse/financing-ma-transaction-introduction-joris-kersten-msc-bsc-rab/
Article 2: Valuation: How to adjust for “Operating Lease” (under Dutch GAAP)
https://www.dhirubhai.net/pulse/valuation-how-adjust-operating-lease-under-dutch-gaap-joris/
Article 3: M&A closing mechanisms: Locked Box & Completion Accounts
https://www.dhirubhai.net/pulse/ma-closing-mechanisms-locked-box-completion-accounts-joris/
Article 4: Scoping a financial model built primarily for business valuation:
https://www.dhirubhai.net/pulse/scoping-financial-model-built-primarily-business-joris/
Article 5: Consolidation of M&A targets and Purchase Price Allocation (PPA)
https://www.dhirubhai.net/pulse/consolidation-ma-targets-purchase-price-allocation-joris/
Article 6: Economics: Do economies have to grow to maintain the same level of prosperity ???
https://www.dhirubhai.net/pulse/economics-do-economies-have-grow-maintain-same-level-joris/
Earlier blogs on “bonds”
Article 1: Bonds - An introduction
https://www.dhirubhai.net/pulse/corporate-finance-bonds-introduction-joris-kersten-msc-bsc-rab/
Article 2: Bonds & Bond Markets
https://www.dhirubhai.net/pulse/bonds-bond-markets-corporate-finance-joris-kersten-msc-bsc-rab/
Article 3: Bonds, Rating Agencies and Credit Ratings
https://www.dhirubhai.net/pulse/bonds-rating-agencies-credit-ratings-joris-kersten-msc-bsc-rab/
Earlier blogs on “Valuation & funding of start-ups”
Article 1: Valuation & funding of start-ups - Funding rounds
https://www.dhirubhai.net/pulse/valuation-funding-startups-rounds-joris-kersten-msc-bsc-rab/
Article 2: Startup valuation: Pre-money and post-money valuation
https://www.dhirubhai.net/pulse/startup-valuation-pre-money-post-money-joris-kersten-msc-bsc-rab/
Article 3: Valuation methods for Startups (early stage) – Part 1
https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-1-kersten-msc-bsc-rab/
Article 4: Valuation methods for Startups (early stage) – Part 2
https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-2-kersten-msc-bsc-rab/
Article 5: Startups in Silicon Valley: The beginning – Part 1
https://www.dhirubhai.net/pulse/startups-silicon-valley-beginning-part-1-joris-kersten-msc-bsc-rab/
Article 6: Startup Funding & Convertible Debt (part 1)
https://www.dhirubhai.net/pulse/startup-funding-convertible-debt-part-1-joris-kersten-msc-bsc-rab/
Earlier blogs on “Mergers & Acquisitions (M&As)” and “M&A transactions”
Article 1: M&A Transactions: Share Deals, Asset Deals and Legal Mergers and Divisions
https://www.dhirubhai.net/pulse/ma-transactions-share-deals-asset-legal-mergers-kersten-msc-bsc-rab/
Earlier blogs on “Business valuation to Enterprise Value”
From June until August I have written the following blogs on valuation:
1) Leveraged Buyout (LBO) Analysis:
https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/
2) M&A Analysis – Accretion/ Dilution:
https://www.dhirubhai.net/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/
3) Discounted Cash Flow Valuation:
https://www.dhirubhai.net/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/
4) Valuation Multiples 1 – Comparable Companies Analysis:
https://www.dhirubhai.net/pulse/valuation-multiples-1-comparable-companies-analysis-joris
5) Excel Shortcuts & Business Valuation:
https://www.dhirubhai.net/pulse/excel-shortcuts-business-valuation-joris-kersten-msc-bsc-rab
6) Valuation Multiples 2 – Precedent Transaction Analysis:
https://www.dhirubhai.net/pulse/valuation-multiples-2-precedent-transaction-kersten-msc-bsc-rab
Earlier blogs on “Investment Management”
Article 1: Investment Management: Securitization, Subprime Loans and Collateralised Debt Obligations
https://www.dhirubhai.net/pulse/investment-management-securitization-subprime-loans-joris/
Earlier blogs on “Energy Transition”
Article 1: Energy transition: Introduction to Sustainable/ Renewable Energy
Article 2: Energy transition: Energy mix of The Netherlands & Goals for co2 reduction
https://www.dhirubhai.net/pulse/energy-transition-mix-netherlands-goals-co2-reduction-joris/
Earlier blogs on Wall Street
Article 1: Wall Street – A general introduction
https://www.dhirubhai.net/pulse/wall-street-general-introduction-joris-kersten-msc-bsc-rab/
Article 2: Wall Street – The Federal Reserve banking system
https://www.dhirubhai.net/pulse/wall-street-federal-reserve-banking-system-kersten-msc-bsc-rab/
Earlier blogs on the “cost of capital”
Article 1: Valuation & Betas (CAPM)
https://www.dhirubhai.net/pulse/valuation-betas-capm-joris-kersten-msc-bsc-rab/
Article 2: Valuation & Equity Market Risk Premium (CAPM)
https://www.dhirubhai.net/pulse/valuation-equity-market-risk-premium-capm-joris-kersten-msc-bsc-rab/
Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)
https://www.dhirubhai.net/pulse/capital-asset-pricing-model-dead-capm-joris-kersten-msc-bsc-rab/
Article 4: Valuation & the cost of debt (WACC)
https://www.dhirubhai.net/pulse/valuation-cost-debt-wacc-joris-kersten-msc-bsc-rab/
Article 5: Valuation & Capital Structure (WACC)
https://www.dhirubhai.net/pulse/valuation-capital-structure-wacc-joris-kersten-msc-bsc-rab/
Article 6: International WACC & Country Risk – Part 1
https://www.dhirubhai.net/pulse/valuation-international-wacc-country-risk-part-1-joris/
Article 7: International WACC – Part 2
https://www.dhirubhai.net/pulse/valuation-international-wacc-part-2-joris-kersten-msc-bsc-rab/
Article 8: Present Values, Real Options, the Dot.com Bubble
https://www.dhirubhai.net/pulse/valuation-present-values-real-options-dotcom-bubble-joris/
Article 9: Valuation: Different DCF & WACC techniques
https://www.dhirubhai.net/pulse/valuation-different-dcf-wacc-techniques-joris-kersten-msc-bsc-rab/
Article 10: Valuation of a company abroad
https://www.dhirubhai.net/pulse/valuation-company-abroad-joris-kersten-msc-bsc-rab/
Article 11: Valuation: Illiquidity discounts, control premiums and minority discounts
https://www.dhirubhai.net/pulse/valuation-illiquidity-discounts-control-premiums-joris/
Article 12: Valuation: Small firm premiums
https://www.dhirubhai.net/pulse/valuation-small-firm-premiums-joris-kersten-msc-bsc-rab/
Earlier blogs on Financial Due Diligence
Blogs on this topic coming soon
Earlier blogs on Derivatives
Blogs on this topic coming soon
Earlier blogs on Distressed M&A and distressed Valuation
Blogs on this topic coming soon
Earlier blogs on Debt crises
Blogs on this topic coming soon
Earlier blogs on How inflation works
Blogs on this topic coming soon
Earlier blogs on Tax and tax evasion
Blogs on this topic coming soon
Earlier blogs on Financial modelling in excel: step by step model building
Blogs on this topic coming soon
Earlier blogs on Hedge funds
Blogs on this topic coming soon
Earlier blogs on Central banking and the supply of money (quantitative easing)
Blogs on this topic coming soon
Earlier blogs on Advanced Valuation
Blogs on this topic coming soon
Earlier blogs on Finance for Non Financials
Blogs on this topic coming soon
In case you like to see back certain topics within my blogs, please email your suggestions and I will take them into account: [email protected]
Financial Controller at Al-Muhaidib Group
4 年Joris Kersten, MSc BSc RAB i have sent you a private msg,awaiting your response