Читать книгу Leveraged Buyouts - David Pilger - Страница 16

Chapter 3: Players in a Leveraged Buyout

Investor

Every LBO starts with the investor. The investor is the individual or private equity group that sees an opportunity and sets the process in motion. They have access to capital for investment and the best way for them to make money is to put the money that they do have to work, in the form of investments. They look for a strong takeover target with small amounts of debt, strong cash flow, assets free for use as collateral, and plenty of room for cost cutting in the current operations. The investors spend lots of time analyzing the potential returns from prospective deals and eventually choose whether to move on a company or not.

“The investor is motivated to realize the greatest return possible on his investment. This is easier said than done. There are many factors that can affect the outcome.”

The investor is the catalyst behind the transaction. He decides how aggressive or conservative any offer that is put forth to the current ownership should be. To a certain extent, the investor also decides how much leverage to use in a transaction. It’s only to ‘a certain extent’ because at points of excessive leverage or non-creditworthy deals the lenders will simply decline to extend credit. The investor also has discretion over the multiple of earnings it is willing to assign as valuation and therefore the purchase price for a company. It is up to the investor to decide what a reasonable valuation and offer price is for a company and it is a decision that must take multiple factors into consideration.

The investor is motivated to ultimately realize the greatest return possible on his investment. This is easier said than done. There are many factors that can affect the outcome. In the most simple sense, it is easier to realize greater returns on equity if that equity is a small number. In an earlier example we demonstrated how an investor could triple the return on investment by using leverage combined with smaller equity investments. However, the investor does not want to saddle the company with such debt that he risks losing his entire investment because of a possible default. For this reason, the investor is motivated to find a balance. The ideal is the greatest amount of debt possible that will not also sink the company down the road, leaving it able to pay down debt, increase earnings and eventually be sold at greater multiple of earnings than it was purchased for.

“The ideal amount of debt is the greatest amount possible that will not also sink the company down the road.”

Lenders – Senior Bank Debt

The banks are one of the major lenders in the leveraged buyout transaction. Typically, banks extend loans that are senior in the credit pecking order and secured by the assets of the company being acquired and sometimes by the assets of the investing company. Banks may participate as syndicated lenders. Under this scenario, as explained in Chapter 1, several banks will come together to lend a portion of the total loan amount. This reduces the credit exposure each bank has to the borrower, while still allowing them to participate as a lender. An investment bank often arranges the syndication, while commercial banks make up a large number of the lenders, along with other investment banks, participating in the syndication as lenders in the deal.

It is the role of the bank to evaluate the projected credit situation of the company post-transaction, and to offer or decline lending terms based on the creditworthiness of the company under the proposed capital structure. This includes the value of the collateral that is being put up to secure the loans. The banks in many respects can function as the breaks in any given transaction by either extending less credit than the investor was originally looking for or by offering lending terms that make the deal less attractive to the investor.

The banks are motivated to assess the risk of lending correctly and set interest rates that are an appropriate reflection of that risk. If a bank does lend, it wants to make sure it is receiving adequate payment for the risks involved.

Debt investors – high yield

Debt investors are oftentimes the unsecured creditors in the deal and, as a matter of course, command a higher fixed rate of interest, often referred to as high yield, which is compensation for 1) being unsecured and 2) being junior in the credit pecking order to the senior secured bank debt. These creditors find their place in the deal through the purchase of high-yield bonds, which are underwritten and arranged by an investment bank. These creditors are often professional fixed-income investors that understand the risks associated with high-yield corporate bonds.

Similar to the senior secured lenders, the unsecured lender’s role is to evaluate the credit quality of the company post-leveraged buyout and determine the risk of the company not being able to pay back its loan. The unsecured lender has to consider the fact that it will only receive its money after the senior secured lender gets paid. In the end the amount of unsecured debt that is issued can make a significant difference in the amount of leverage available in a deal.

“Debt investors are oftentimes the unsecured creditors in the deal and, as a matter of course, command a higher fixed rate of interest, often referred to as high yield.”

Unsecured creditors are motivated by the large interest payments that are associated with high-yield bonds. Although unsecured loans used to finance leveraged buyout carry significant risks, ultimately it is the large coupon payments that bring investors forward to purchase the securities once the investment bank issues the bonds. Once again the motivation is a balance between the greed and fear of the creditor, the same two things that run the entire credit markets.

Current owners – sellers

The current owners of the company are the people who should know the most about the company, both inside and out. They understand the history and development of the company as well as the operating environment in which they do business. They should also have a keen sense of where the market for their product is heading.

It is up to the owners of the company to consider and ultimately accept or decline offers to sell their ownership in the company. As part of the process, the owners will most likely try to negotiate a larger multiple of earnings into the purchase price. It is the job of the owners to test the upper limits of what the purchasers are willing to pay for ownership in the company and then try to take that offer price a bit further. Business owners will find all sorts of justification for deserving a larger multiple for their earnings; after all, that is what they are supposed to do.

“When a business owner arrives at the decision to sell, there are few greater motivations than, you guessed it – money.”

When a business owner arrives at the decision to sell, there are few greater motivations than, you guessed it – money. Although some business owners may also consider such things as the identity of the purchaser, the future of the company post-sale, and the likelihood and degree of cost-cutting after sale, rarely do any of these considerations trump monetary pay-off. It is safe to say that the primary motivation of the business owner is to get the greatest valuation and sale price possible for the business.

If the company has a bright future and growth potential is still relatively high, a savvy owner will demand a greater multiple of earnings for a purchase price before agreeing to sell.

Existing creditors

This group of creditors is made up of lenders that issued debt to the company before there was any talk of a leveraged buyout. The existing creditors presumably lent money to the company to help them expand operations or meet liquidity needs or both. Most likely, existing creditors are traditional lenders, such as a commercial bank specializing in making traditional commercial loans. This group likely has a relationship with the company and has a reasonable understanding of the company’s credit situation.

The existing lenders do not play a major role in the transaction. They receive the loan principal plus any interest due and pre-payment fees once the leveraged buyout transaction goes through. Generally speaking, institutions that are in the business of making loans like this receive a steady, predictable interest payment on time and leave more exciting affairs to their cousins in the capital markets business. In a situation such as the pre-payment of a bank loan there is typically a pre-payment fee between 1% and 1.5% that is agreed at the initial extending of the loan. The fee is paid to the lender at the time of pre-payment. Once a borrower decides to pre-pay on a loan, the existing lender then becomes focused on seeing that its extended loans and other monies due and receivable are paid back.

“In the event that a lender is large enough, it may be motivated to seek participation as one of the lenders in the leveraged buyout transaction.”

In the event that a lender is large enough, it may be motivated to seek participation as one of the lenders in the leveraged buyout transaction. This would present an opportunity for the lender to extended additional loans.