Ian H. Giddy/NYU Structured Finance-1
Structured Finance & Restructuring
Prof. Ian Giddy New York University
Structured Finance
z Corporate financial restructuring z Asset-backed securitization z Synthetic and whole business securitization z Credit-linked structured finance z Structured financing techniques Debt-linked Equity-linked z Leveraged finance
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Structured Finance
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Assignments
z Individual 30% z Team 30% z Caselets 20% z Final 40%
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Investor economics
SPONSORING COMPANY
ACCOUNTS RECEIVABLE Rates Ratings Risk SALE OR Liquidity ASSIGNMENT SPECIAL PURPOSE Spread analysis VEHICLE
ISSUES ACCOUNTS ASSET-BACKED RECEIVABLE CERTIFICATES
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Bowie Rights: Where’s the Money?
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Credit-Linked Notes
BANK Credit Default Swap SPV
Credit Guarantee Deposits Credit- REFERENCE Linked POOL OF LOANS Fee Notes (like spread on bond) T-bonds (ABS)
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Structure of the US MBS Market
MortgageMortgage Loan Loan BankBank (mortgage (mortgage originator) originator) makes makes a a whole whole loan loan Ancillary:Ancillary: brokers, brokers, servicers, servicers, insurers insurers
MortgageMortgage Pass-Through Pass-Through FNMAFNMA or or GMAC GMAC (conduit) (conduit) pools pools mortgagemortgage loans loans with with similar similar characteristics characteristics
CMOCMO or or REMIC REMIC MortgageMortgage Strips Strips TakesTakes a a mortgage mortgage pool pool and and makes makes the the Interest-OnlyInterest-Only and and Principal-Only Principal-Only cashcash flows flows more more predictable predictable by by assigning assigning prioritypriority of of claims claims to to the the cash cash flows flows
MBSMBS Portfolio Portfolio InstitutionalInstitutional investor investor evaluates evaluates risk/return risk/return behaviorbehavior of of mortgage-backed mortgage-backed securities securities through through option-adjustedoption-adjusted price price and and spread spread analysis analysis
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Convexity of Callables
Mortgage-backed securities and other callable bonds may have negative convexity which cushions a bond’s price rise and accelerates its fall!
PRICE
102 100
YIELD
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Convertibles
Bond Value Option Value 100 90
Breakeven stock price
Stock Price Current stock price
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Getting LBO Financing to Work
Free Cash Flow Analysis of LBO
600000 400000 200000 0 -200000 123456 -400000 -600000 -800000
FCFF Interest*(1-T) Principal repayment FCFE
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LBO Financing
NEWCO
Senior debt $1b Cash What securities? What returns? Flow Mezzanine What investors? Business Equity $0.25b
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Structured Finance
z Corporate financial restructuring z Asset-backed securitization z Synthetic and whole business securitization z Credit-linked structured finance z Structured financing techniques Debt-linked Equity-linked z Leveraged finance
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Corporate Financial Restructuring
Why Restructure?
Proactive Defensive Distress Example: Example: Example: Sealed Air Loewen 1996 Loewen 1999
Management acts to Management acts to Lenders and preserve or protect company, shareholders lose, enhance stakeholders and but try to work out shareholder value management from best way to change in control minimize loss
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Restructuring at Tower
Portfolio? Financial? Organizational? Or what?
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Match the Solution to the Problem
Trouble!
The financing Business The company Reason is bad mix is bad is bad
Raise equity, or Sell some businesses Change control Remedy Do debt/equity swap or assets or management Or change debt mix to pay down debt through M&A
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Dynegy
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What is Corporate Restructuring?
z Any substantial change in a company’s financial structure, or ownership or control, or business portfolio. z Designed to increase the value of the
firm Restructuring
Improve Improve Change ownership capitalization debt composition and control
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A Simple Framework
z A company is a “nexus of contracts” with shareholders, creditors, managers, employees, suppliers, etc z Restructuring is the process by which these contracts are changed – to increase the value of all claims. z Applications: restructuring creditor claims (Conseco); restructuring shareholder claims (AT&T); restructuring employee claims (UAL)
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“Nexus of Contracts”
Lessors Senior lenders
Salespeople Subordinated lenders
? Shareholders
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Example
Conseco
Debt
Equity Bondholders were offered the chance to get a more senior position in exchange for deferring repayment of their debt.
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Novartis Ian H. Giddy/NYU Structured Finance-12
Novartis: Financial Restructuring
Fixed the cash Fixed the and working Assets Liabilities capital capital structure Cash Debt
Fixed Equity Assets Divested Non-core business
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Novartis Ian H. Giddy/NYU Structured Finance-13
Financial Restructuring
The increase in value that comes from a purely financial effect: z Lower taxes z Higher debt capacity z Better use of idle cash
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Corporate Restructuring: It’s All About Value
z How can corporate and financial restructuring create value?
Assets Liabilities
Fix the Or fix the Operating Debt business financing Cash Flows Equity
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Restructuring Checklist
Figure out what the business is Use valuation model – present value worth now of free cash flows Fix the business mix – divestitures Value assets to be sold Fix the business – strategic partner Value the merged firm with or merger synergies Fix the financing – improve D/E Revalue firm under different structure leverage assumptions – lowest WACC Fix the kind of equity What can be done to make the equity more valuable to investors? Fix the kind of debt or hybrid What mix of debt is best suited to financing this business? Fix management or control Value the changes new control would produce
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Getting the Financing Right Step 1: The Proportion of Equity & Debt
Achieve lowest Debt weighted average cost of capital May also affect the Equity business side
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Getting the Financing Right Step 2: The Kind of Equity & Debt
Short term? Long term? Short term? Long term? Baht? Dollar? Yen? Baht? Dollar? Yen?
Debt Bonds? Asset-backed? Bonds? Asset-backed? Convertibles? Hybrids? Convertibles? Hybrids?
Debt/Equity Swaps? Equity Debt/Equity Swaps? Private? Public? Private? Public? Strategic partner? Strategic partner? Domestic? ADRs? Domestic? ADRs?
Ownership & control? Ownership & control?
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Restructuring and Structured Finance
z Restructuring debt to make it cash-flow responsive z Converting debt into equity z Securing asset-backed funding z Securing mezzanine and subordinated debt financing z Securing equity-linked and hybrid financing z Raising new equity
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The Challenge
z Solving corporate financing problems by creating securities that are responsive to investors’ and issuers’ needs, constraints and views. z Example: Getronics (how did this work?)
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Next: Asset-Backed Securities
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Ford Negotiation
Ford KBIF Goldman.
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Ford In-Class Negotiation Assignment
z Three teams: Ford: why does the ABS deal it make sense? What are the cost and funding advantages? Goldman: how can I persuade both parties, and make good money on this deal? Korean Bond Investment Fund: which tranche should I buy, if any?
z Assignment: Study the Ford Motor Credit prospectus, and define the key differences among the securities being offered Negotiate a placement agreement that specifies how much money Ford raises, and at what cost; and how much KBIF invests, and in which securities Turn in your Team Report (2 pages plus exhibits) listing the terms of the agreement by 6pm Friday 20th. (Send it by email to [email protected], with cc to [email protected])
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Contact Info
Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 [email protected] http://giddy.org
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