hey strikershank, mind dropping me a note at porcupines AT gmaiI DOT com?
numi Wrote: ------------------------------------------------------- > also, as an aside, these kinds of questions are > good for everyone to know so no need to preface it > in the subject line as an “i-banking” question. it > is as much a question for private equity investors > and financial sponsors as it is for “i-banking” thanks for your inputs. i am reading “Training The Street” material and it is very spotty. I am reading everything closely and there are gaps here and there. They fail to talk about unleveraging beta, APV, P/BV type ratios…
way the go numi! Looks like you’ve stepped up big time! Nice posts! Keep em coming…back to work now… 
thanks wessun…i owe you a lot of credit too 
btw, the weekend went very well and thanks again for the tips…i’ll definitely fill you in on things in a couple days. hope all is well on your end
bmwhype Wrote: ------------------------------------------------------- > numi Wrote: > -------------------------------------------------- > ----- > > also, as an aside, these kinds of questions are > > good for everyone to know so no need to preface > it > > in the subject line as an “i-banking” question. > it > > is as much a question for private equity > investors > > and financial sponsors as it is for “i-banking” > > > thanks for your inputs. > > i am reading “Training The Street” material and it > is very spotty. I am reading everything closely > and there are gaps here and there. They fail to > talk about unleveraging beta, APV, P/BV type > ratios… hi bmwhype, happy to help. just curious, why do you need all to know unlevered beta and all that other stuff to build a basic LBO model? that type of stuff is more useful for an lbo valuation analysis but just to build a basic transaction model, all you really are concerned with is the interplay between free cash flow generation and ability to pay down debt based on whatever transaction and operating assumptions you are making. also, do you have a copy of the TTS that you can send me? would be curious to see what it is you are looking at. i have a bunch of TTS manuals through in-house training but am not sure of the one you are talking about. would definitely be interested to see what’s in it and can try to point you in the direction of better resources where your manual lacks. you can reach me at porcupines AT gmaiI DOT com if you wish
this is the online TTS curriculum that Citi uses. no hard copy. it starts from public comps and ends at LBOs.
sounds like the overview crash course they used for banking/capital markets training. might want to see if you can get your hands on a guide about complications/advanced techniques for lbo modeling
Most HY bonds have change of control provisions with 100% cash flow sweeps. To your second question, they’re attempting to lower the firm’s WACC to an optimal level. That’s the company line, in reality LBO shops want to contribute as little equity as possible and finance the transaction with as much debt as possible, regardless of whether that’s the “optimal” capital structure. If the markets allowed them to finance a deal with 90% debt they would. They’ll put on as many cheap options as possible.
numi Wrote: ------------------------------------------------------- > sounds like the overview crash course they used > for banking/capital markets training. might want > to see if you can get your hands on a guide about > complications/advanced techniques for lbo modeling do u have the GS LBO model from the other thread?
yes
Hi Numi, good to see you here! I always like your comments and learn a lot from them. I think the key here is that there is a market EV, which is MV(Equity + Debt - Cash), and this is more or less what you can purchase the company for (although there is usually a control premium on top of that which I’m pretty sure is hard to measure and is kind of “negotiated”). Then there is some measure of “intrinsic EV”, which is what one’s valuation model of discounted FCFFs adds up to (there are potentially other ways to measure this, I’m sure, but I’m not sure what they are). In a buyout deal, you are somehow trying to capture the (positive) difference between intrinsic EV and the market EV. Why there is a difference might come from several reasons… maybe the management is poor and so the cash flows aren’t as large as they would be with good management. Or maybe there is some kind of synergy the LBO group can bring to this to add growth that for some reason wouldn’t be expected to be realized in the public marketplace. As far as the debt is concerned, there may be covenants in the HY debt that require it to be refinanced or paid if additional debt is taken on. But my guess is that if the terms of the existing debt are favorable to the LBO firm and there are no covenants that would force payment or refinancing, then a firm might just leave the existing debt as it is.
bchadwick Wrote: ------------------------------------------------------- > I think the key here is that there is a market EV, > which is MV(Equity + Debt - Cash), and this is > more or less what you can purchase the company for > (although there is usually a control premium on > top of that which I’m pretty sure is hard to > measure and is kind of “negotiated”). You almost hit it. Market cap is nshares times today’s inside market, which roughly means you could buy or sell 100 shares or so at that price. MC is neither what you could pay to buy the firm’s equity, nor what you would receive should you sell it all. That’s why MC (and, if you define it as D+MC, EV) is irrelevant for valuation purposes.
wow. people be careful. lots of responses that are straight up wrong. first - original question. Why do HY bonds have to be re-fi’d in an LBO. two reasons. 1 - most HY bonds have change of control covenant which says if there’s a change of control, bondholders can put the bonds back to the co at 101. so, for bondholders who’s upside is capped at the coupon on their bonds - what do you think they would prefer - selling at 101 now, or getting the same coupon in a new highly leveraged entity which rates are not reflective of? - Obv they all put at 101 which forces the co to re-fi. Second reason - even if there is no change of control provision, there are typically incurrence covys that prevent leverage of a certain amount. finally - why are underlevered co’s more attractive LBO candidates. pretty simple. suppose you have a company with 90 million market cap and no debt. cost to buy the company (assuming no premium) is 90m. say its funded with 30% equity check, 70% debt means $27 equity contribution. second company is the same except its got 10m of debt. cost to buy is 100m, 30% funding means $30 equity contribution. if a company already is leveraged - more of the purchase price has to be funded with equity which reduces returns. another way to look is valuation perspective. say company has 10m of EBITDA. 90/10m = 9x, versus 100/10m = 10x.