1
Q
Securitization
A
Technique used to convert illiquid assets/claims into tradable securities.
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.
3
Q
Benefit of securitization for investors
A
- Tailored instruments,
- Portfolio diversification,
- Risk sharing.
4
Q
Credit enhancement technique
A
- Over-collateralization
- Guarantee
- Diversification
- Selection of assets
- Tranches
5
Q
Structured finance instruments
A
- Pooling of assets,
- Tranching of liabilities that are backed by the asset pool,
- Special purpose vehicle (SPV)
6
Q
Which instrument differentiates structured finance from traditional “pass-through” securitizations?
A
Tranching of liabilities that are backed by the asset pool.
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.
8
Q
What effects after removing loans from balance sheet of banks?
A
Macro-economic benefits as banks can create more new lending.
9
Q
Types of Consumer & Residential ABS
A
- Auto loans and leases,
- Credit card receivables,
- Student loans,
- Residential mortgage loans.
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).
11
Q
ABS
A
Asset-Backed Securities.
12
Q
Commercial ABS
A
- Aircraft lease,
- Maritime container lease,
- Equipement lease,
- Commercial mortgage loans.
13
Q
Whole Business ABS
A
- Franchise royalty,
- Brand royalty,
- Billboard lease.
14
Q
Different risks
A
- Country
- Forex
- Market
- ESG
- Natural disaster
- Political
- Construction
- Operational
- Weather
- Supplier
- Terrorism
- Legal
15
Q
Mitigation
A
The action of reducing the severity, seriousness, or painfulness of something.
16
Q
Waste to energy project
A
Collecting waste to burn it and create energy/ electricity.
Project from Eolia.
17
Q
For who was created the project waste to energy?
A
The subway of Mexico.
18
Q
Why the waste to energy project stopped?
A
Green mayor of Mexico said stop because of the CO2 emissions.
19
Q
How do you mitigate a political risk?
A
Negotiations.
20
Q
How to mitigate a market risk?
A
Study.
21
Q
How is call a construction risk?
A
An achievement risk.
22
Q
How to mitigate an achievement risk?
A
Guarantee (bid bonds or performance bonds)
23
Q
What’s the issue of a construction risk?
A
- Achievement
- Delays
- Cost overuns
- Quality
24
Q
How to mitigate an operational risk?
A
- Training,
- Expats,
- Contract.
25
How to mitigate a Forex risk?
- Hedging program,
- Derivatives
26
How to mitigate a country risk?
ECA (export credit agency):
- EXXIM,
- Euler Hermes,
- BPI
27
How to mitigate a supplier risk?
Diversification
28
How can we mitigate terrorism risk?
Security
29
EACOL
East African Crude Oil Line
30
For what BNP Paribas has been sue?
Inaction on the climate
31
How can we mitigate an interest rate risk?
- Hedging program
- Derivatives
32
How to mitigate the legal risk?
- Legal team
33
5 steps to launch a project (project financing)
1. Study the cash flows,
2. Risks
3. Mitigation of risks
4. Participation
5. Syndication
34
Debt Service Coverage Ratio
CF1/ DS1 > 1.5
Net operating income/ Total debt service
35
Acquisition Finance
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.
36
2 forms of acquisition finance
- Strategic Acquisition Finance
- Leverage Finance
37
ECM
Equity Capital Markets
38
4 steps of M&A
1. Idée
2. Arguments
3. Valorisation
4. Réalisation
39
The business lines involved
- Compliance,
- Coverage,
- M&A,
- ECM (equity capital markets),
- DCM (debt capital markets),
- Acquisition finance
- Risks,
- Global markets.
40
Leveraged Buy-Out (LBO)
Financial arrangement that consists of a takeover of a target company largely financed by debt.
41
LBO
Leveraged Buy Out
42
3 levers of Leverage Buy Out
- Financial leverage,
- Legal leverage
- Tax leverage.
43
The target company must present certain characteristics, which one?
- A healthy financial situation,
- Good visibility on future cash flows,
- Quality management,
- Growth potential,
- Competitive strengths,
- Transferable know-how.
44
What is a healthy financial situation?
Significant profitability, reasonable and controlled debt, activity low capital consumption (investments and WCR).
45
What means a good visibility on future cash flows?
Recurrent surplus cash flows, predictability of free cash flows
free cash flow => highly cyclical or declining sectors should be avoided.
46
What are the competitive strengths?
- Strong market position,
- Appropriate production facilities,
- Limited environmental threats.
47
Different types of LBO
- 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).
48
LBU
Leveraged Build Up
49
The Leveraged Build Up
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
LTA
Leveraged Turn Around
51
Leveraged Turn Around
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
MBO
Management Buy Out
53
The Management Buy Out
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
MEBO
Management and Employees Buy Out
55
Management and Employees Buy Out
Structure in which the capital of the holding company is shared between managers, employees of the target and investment funds.
56
MBI
Management Buy In
57
The Management Buy In
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
BIMBO
Buy In Management Buy Out
59
Buy In Management Buy Out
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
The senior debt
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
What is the purpose of covenants?
To give the creditor a right of review, or even a means of pressure on the borrower's actions.
62
What are the different forms a covenant can take?
-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
How long is the mezzanine debt term?
Between 7 and 10 years.
64
How long is the senior debt term?
Average term of 4-7 years
65
DSCR
Debt Service Coverage Ratio
66
LLCR
Loan Life Coverage Ratio
67
PLCR
Project Life Coverage Ratio
68
Corporate financial solution
- Capital Increase (Equity)
- Issue securitized debt
- Loan/ Credit (Debt)
- Sell assets
69
What can be capital increase?
EQUITY:
- Shareholders, employees, friends;
- Private equity;
- IPOs
70
RCF
Revolving Credit Facilities
71
What are the 2 types of Credit?
- Term loans
- RCF
72
How can we sell assets?
- Trade receivable/ factoring
- Securitization
73
Qui assure les aircrafts risks?
Export Credit Agency Financing
74
How to mitigate the risk of international trade?
- Prepayments
- Letters of credit (L/C)
- Drafts
- Consignments
- Open account
75
Financial leverage
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
Legal leverage
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
Tax leverage
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
2 categories of debt
- 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
The subordinated debt
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
Aircraft/ Aviation financing
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
Challenges of aircraft financing
- 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
Main aircraft financing participants
- Manufacturers,
- Airlines,
- Leasing companies & operating lessors,
- Owner trusts & owner trustees or SPV's,
- Export Credit Agencies.
83
The commercial bank finance structure raises several issues that may make it an unattractive option for some airlines including:
- 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
In an operating or true lease structure, an owner or lessor: (actions)
- 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
2 types of operating lease
- Dry lease
- Wet lease
86
Dry lease
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
Wet lease
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
Advantages of the operating lease structure
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
Disadvantages of operating leases
- 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
Advantages of finance leases
- 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
What promotes ECAs?
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
In any international trade transaction, credit is provided by either:
- The supplier (exporter),
- The buyer (importer),
- One or more financial institutions,
- Any combination of the above.
93
Payment methods for International Trade
- Prepayments,
- Letters of credit,
- Drafts (Bills of exchange),
- Consignments,
- Open accounts
94
Supplier credit
The form of credit whereby the supplier funds the entire trade cycle.
95
Prepayments method for international trade
- 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
Letters of credit method for International Trade
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
Drafts (Bills of Exchange payment method for International Trade
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
Consignment payment method for International Trade
- 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
Open Accounts payment method for International Trade
- 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
Trade finance methods
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
Accounts receivable financing - Trade Finance Methods
An exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the account receivable.
102
Factoring (Cross-Border Factoring) - Trade Finance Methods
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
Letters of credit (L/C) - Trade Finance Methods
- 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
Banker's acceptance - Trade Finance Methods
- 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
Working capital financing - Trade Finance Methods
Banks may provide short-term loans that finance the working capital cycle, from the purchase of inventory until the eventual conversion to cash.
106
Medium-Term Capital Goods Financing (Forfaiting) - Trade Finance Methods
- 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
Countertrade - Trade Finance Methods
- 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
Export-Import Bank of the U.S. (Ex-Imbank)
- 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
SPV
SPECIAL PURPOSE VEHICLE
110
Why is the SPV created?
A separate company with its own balance sheet by a corporation to isolate financial risk (fund limited company any type of structure).
111
Project finance
Financing of an infrastructure, industrial project, or public service based on a non-recourse or limited recourse financial structure.
112
Main sectors financed in project finance
- Power (50%);
- Oil & Gas;
- Transportation;
- Telecommunications;
- Leisure & Property
113
How to mitigate a technological risk?
Studies.
114
How to mitigate a qualification risk?
Training
115
How to mitigate a money laundry risk?
internal procedures → KYC
116
PLCR
Project Life Coverage Ratio
117
Project Life Coverage Ratio
NPV/ debt service
118
How is ensured the Debt service (interest payments and maturity repayments) underwritten by the holding company?
By the CF generated by the target (dividends, management fees, etc.)
119
On what is based the LBO structure?
LBO structure is based on the leverage effect of the debt.
120
Acquisition Audit
Documents that compiles information gathered on the target.
121
Liability guarantee
– 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
Benefits of SPV
- Isolate risk
- Tax benefit
- Securitization
- Flexibilty/ diversification
4A EDHEC
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