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Structured Finance & Restructuring

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Structured Finance & Restructuring 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 Copyright ©2004 Ian H. Giddy Structured Finance 2 Ian H. Giddy/NYU Structured Finance-2 Structured Finance Copyright ©2004 Ian H. Giddy Structured Finance 3 Assignments z Individual 30% z Team 30% z Caselets 20% z Final 40% Copyright ©2004 Ian H. Giddy Structured Finance 4 Ian H. Giddy/NYU Structured Finance-3 Investor economics SPONSORING COMPANY ACCOUNTS RECEIVABLE Rates Ratings Risk SALE OR Liquidity ASSIGNMENT SPECIAL PURPOSE Spread analysis VEHICLE ISSUES ACCOUNTS ASSET-BACKED RECEIVABLE CERTIFICATES Copyright ©2004 Ian H. Giddy Structured Finance 5 Bowie Rights: Where’s the Money? Copyright ©2004 Ian H. Giddy Structured Finance 6 Ian H. Giddy/NYU Structured Finance-4 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) Copyright ©2004 Ian H. Giddy Structured Finance 7 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 Copyright ©2004 Ian H. Giddy Structured Finance 8 Ian H. Giddy/NYU Structured Finance-5 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 Copyright ©2004 Ian H. Giddy Structured Finance 9 Convertibles Bond Value Option Value 100 90 Breakeven stock price Stock Price Current stock price Copyright ©2004 Ian H. Giddy Structured Finance 10 Ian H. Giddy/NYU Structured Finance-6 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 Copyright ©2004 Ian H. Giddy Structured Finance 11 LBO Financing NEWCO Senior debt $1b Cash What securities? What returns? Flow Mezzanine What investors? Business Equity $0.25b Copyright ©2004 Ian H. Giddy Structured Finance 12 Ian H. Giddy/NYU Structured Finance-7 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 Copyright ©2004 Ian H. Giddy Structured Finance 13 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 Copyright ©2004 Ian H. Giddy Structured Finance 14 Ian H. Giddy/NYU Structured Finance-8 Restructuring at Tower Portfolio? Financial? Organizational? Or what? Copyright ©2004 Ian H. Giddy Structured Finance 15 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 Copyright ©2004 Ian H. Giddy Structured Finance 16 Ian H. Giddy/NYU Structured Finance-9 Dynegy Copyright ©2004 Ian H. Giddy Structured Finance 17 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 Copyright ©2004 Ian H. Giddy Structured Finance 18 Ian H. Giddy/NYU Structured Finance-10 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) Copyright ©2004 Ian H. Giddy Structured Finance 19 “Nexus of Contracts” Lessors Senior lenders Salespeople Subordinated lenders ? Shareholders Copyright ©2004 Ian H. Giddy Structured Finance 20 Ian H. Giddy/NYU Structured Finance-11 Example Conseco Debt Equity Bondholders were offered the chance to get a more senior position in exchange for deferring repayment of their debt. Copyright ©2004 Ian H. Giddy Structured Finance 21 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 Copyright ©2004 Ian H. Giddy Structured Finance 23 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 Copyright ©2004 Ian H. Giddy Structured Finance 25 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 Copyright ©2004 Ian H. Giddy Structured Finance 26 Ian H. Giddy/NYU Structured Finance-14 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 Copyright ©2004 Ian H. Giddy Structured Finance 27 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 Copyright ©2004 Ian H. Giddy Structured Finance 28 Ian H. Giddy/NYU Structured Finance-15 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? Copyright ©2004 Ian H. Giddy Structured Finance 29 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 Copyright ©2004 Ian H. Giddy Structured Finance 30 Ian H. Giddy/NYU Structured Finance-16 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?) Copyright ©2004 Ian H. Giddy Structured Finance 31 Copyright ©2004 Ian H. Giddy Structured Finance 32 Ian H. Giddy/NYU Structured Finance-17 Next: Asset-Backed Securities Copyright ©2004 Ian H. Giddy Structured Finance 33 Ford Negotiation Ford KBIF Goldman. Copyright ©2004 Ian H. Giddy Structured Finance 34 Ian H. Giddy/NYU Structured Finance-18 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]) Copyright ©2004 Ian H. Giddy Structured Finance 35 Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 [email protected] http://giddy.org Copyright ©2004 Ian H. Giddy Structured Finance 40.
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