Using Leveraged Finance to Enhance Return on Equity - IACCT

Document Sample
Using Leveraged Finance to Enhance Return on Equity - IACCT Powered By Docstoc
					  Using Leveraged Finance
to enhance Return On Equity
                   Nov 2007
           Global Treasurers Summit


                 Wilson Wan
              Managing Director
   Leveraged and Structured Finance Division
About BOCI




              Investment     Leveraged and        Asset
 Securities                                                  Private Equity
               Banking     Structured Finance   Management




                                                                         1
What is Leveraged Finance?


    Funding a company with more than normal debt.

    • Riskier and more costly.

    • To achieve a specific, often temporary, objective:

      --   acquisition,
      --   buy-out,
      --   repurchase shares,
      --   fund a one-time dividend,
      --   invest in a self-sustaining cash-generating asset.




                                                                2
What are the main products of Leveraged Finance?




    • Leveraged loans
      – 125 basis points or more over the London interbank offered rate.

    • High-yield or junk bonds
      – less than BBB.




                                                                           3
Typical Examples of Leveraged Finance




                     Leveraged Acquisition Finance

                     • Management Buy-Out

                     • Management Buy-In

                     • Leveraged Buy-Out




                                                     4
Typical Examples of Leveraged Finance


                        Leveraged Recapitalizations

    • Taking on significant additional debt to pay an extraordinary dividend or
      repurchase shares.

    • Often used as a “shark repellant” to defend against hostile takeover by
      listed companies.




                                                                                  5
Typical Examples of Leveraged Finance



                       Leveraged Corporate Credit

    • Provision and management of credit products, for below investment grade
      companies that rely heavily on debt financing.




                                                                                6
Typical Examples of Leveraged Finance



             Leveraged Asset or Cash Flow Based Finance

    • Highly leveraged non- or limited-recourse funding of assets or projects.

    • Examples: Leasing,
                Project Financing
                Securitization




                                                                                 7
How Sizable is the Leveraged Finance Market?


  Larger than Equity Market


                                              USD1009bn
                                          Investment Grade
                                             Loan Market
               USD687bn
             Leveraged Loan
                 Market




                                      USD140bn
                                      U.S. Equity
                                      New Equity
                    USD132bn          Insurance
                  High Yield Bond


                                                           Source: Bloomberg USA market 2006


                                                                                               8
What is the Typical Leveraged Finance Structure?

    • A key instrument is mezzanine debt, which can be in various forms, and
      rewarded with equity-like returns.

           Common Equity /
           Shareholder Loan




       Mezzanine   Unsecured Note




            Secured Bank
                Loan




                                                                               9
Evolving Capital Structures of Leveraged Finance

Conventional Leveraged Financing Structure         New Leveraged Finance Structures




                                                             Common Equity /
              Common Equity /                                Shareholder Loan
              Shareholder Loan                              Equity Co-investment
                                                              Hybrid Preferred

                                                       PIK Note            PIK Loan
         Mezzanine    Unsecured Note


                                                    Unsecured Note       Mezzanine
                                                                                       R
                                                                                       e
                                                                                       p
                                                    2nd Lien Note      2nd Lien Note   a
                                                                                       c
                                                                       Institutional   k
              Secured Bank                                             B/C Tranches    s
                  Loan
                                                    1st Lien Note
                                                                        Secured Bank
                                                                            Loan




                                                                                           10
Why should borrowers tap into the Leveraged Finance Market?


           Achieve a Specific, Temporary Purpose

           Shark Repellant

           Increase Borrowing Capacity

           Enhance ROE

           Non-recourse Financing

           Regulatory Considerations




                                                              11
Case: A Top-Tier Company using Leveraged Finance

     Among the largest ever Leveraged Finance in Asia Pacific
     PBL is Australia’s largest media company
     On 18 October 2006, PBL enter into an agreement to sell a portfolio of
     media assets for AUD5.523Bn to a company jointly owned by PBL (50%)
     and CVC (50%).
     Purchase price equates 10.9 x EBITDA
     The acquisition was supported by Leveraged Finance of AUD3.75Bn,
     equates 7.4 x EBITDA
      6-yr
      6-yr
      6-yr
      6-yr                                                          68%
     6.5-yr
      7-yr
                                                                    32%

              Senior loan at BBSY + 225bp
                                                                       Source: media


                                                                                 12
Conclusion




         Take Advantage of Leverage
                                      13
Contact Details




      温 兆 华                             Wilson Wan
      董事总经理
                                        Managing Director
      杠杆及结构融资部主管                        Head of Leveraged and Structured Finance Division


      中 银 国 际                           BOC INTERNATIONAL

      香港花园道一号                           26/F, Bank of China Tower,
      中银大厦二十六楼                          1 Garden Road, Hong Kong.

      電話:    (852) 2230-8888
      直線:    (852) 2230-8118            Tel(General): (852) 2230-8888
      傳真:    (852) 2152-0808            Tel(Direct): (852) 2230-8118
      網址:   www.bocigroup.com           Fax:          (852) 2152-0808
      電郵:    wilson.wan@bocigroup.com   Website: www.bocigroup.com
                                        E-mail: wilson.wan@bocigroup.com




                                                                                            14

				
DOCUMENT INFO