The Structuring & Negotiating Mezzanine, PIK, Second Lien And Unitranche Course

£725.00 +VAT

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This Structured Debt Course can also be presented face to face in-house or via live in-house webinar.

Structured Debt Course Objectives:

This structured debt course is designed to give insight to the structuring & negotiating of mezzanine, PIK, second lien and unitranche elements involved with corporate finance and debt principles.

Participants will:

  • Gain an introduction to the junior debt spectrum
  • Explore the structuring parameters – how much senior and how much junior debt is appropriate in a given structure
  • Get to grips with the different types of mezzanine: its use and key issues
  • Master the features of second lien finance
  • Be taught about PIK (PIYC, PIYW, Toggles)
  • Develop an understanding of products within unitranche & direct lending
  • Get to grips with relevant intercreditor issues and agreements among lenders (“AAL”)
  • Learn about the draft ECB Guidance on Leveraged Transactions

Structured Debt Course Content:

Introduction to the junior debt spectrum

  • Overview of the market
  • The role of direct lenders
  • Review of the various products
    • Mezzanine
    • PIK, PIYC & Toggles
    • Second Lien
    • Unitranche

Structuring parameters – how much senior and how much junior debt

  • Typical approaches to gauging debt capacity / capital structure
  • What are the key criteria to consider
    • Multiples vs Capital approach
    • Key ratios (covenants where relevant) used to right-size the debt
  • How Jurisdiction can affect debt capacity (and how to mitigate)

Types of Mezzanine: use and key issues

  • Main features of the mezzanine
  • European vs US vs Asian mezzanine
  • Warrantless mezzanine – return structure
    • Fixed vs floating rate
    • Cash pay
    • PIK
    • Redemption premia – stepped vs linear
  • Other tools for achieving the target IRR
    • OID to enhance returns
    • Using Libor/Euribor floors
    • Fees
  • Call protection – hard vs soft call protection
    Key issues for warranted mezzanine

    • Key issues & pitfalls for warrantless mezz
    • Dealing with recaps & refinancing
  • The order of priority vis-a-vis PE loan notes
    Other variants of mezzanine

    • Senior mezzanine
    • Junior mezzanine
    • Hybrid mezzanine

Second Lien

  • Use and application
  • Market trends / recent deals
  • Documenting the 2nd Lien – composite or separate facility agreement
  • “Typical” terms, leverage, pricing and call protection
  • Pros and cons of 2L vs unitranche, high yield bonds
  • Other tools for achieving the target IRR

PIK (PIYC, PIYW, Toggles)

  • Pay-in-Kind (PIK) generally
  • Different types PIK
    • PIYW
    • Toggle
    • PIYC
  • “Typical” terms, leverage and pricing
  • Call protection – hard vs soft call protection
  • Market trends / recent deals

Unitranche & direct lending products

  • The onward march of direct lenders in Europe
    • Market trends
    • Recent developments
  • Where and how its used
  • Review of different “unitranche” structures
    • Classic product
    • Clubbed
    • Dual tranche
    • Structured
    • First out / last out
  • Interaction with bank led finance & impact on bank lenders
  • “Typical” terms & leverage
  • “Typical” pricing
    • Cash coupon
    • PIK
    • Warrants
  • Other tools for achieving the target IRR
  • Leverage – how much and impact on returns
  • Call protection
    • Why it matters to lenders
    • Hard vs soft call protection
  • Pros & cons vs other types of products
    • Senior / junior (mezz/2L)
    • High Yield Bonds

Intercreditor issues & Agreement Among Lenders (“AAL”)

  • Typical inter-creditor issues for junior debt
    • Enforcement standstills
    • Turnover – why and where this matters
    • Option to purchase – Practical issues
  • Key issues in distress
    • Information rights
    • Why going on the Board may not help
    • Costs in distress
    • Valuation in distress (q.v. IMO Carwash)
    • Release of collateral (q.v. European Directories)
  • The role of the Agents – how and why it matters in distress
    • Appointing a separate Facility Agent
    • Appointing a separate Security Agent – key issues to consider

Draft ECB Guidance on Leveraged Transactions

  • Which lenders are affected
  • Which deals are affected
  • EBITDA calculation
  • Ramifications for market players

Background of the Trainer:

The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the UK, Europe, and Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure / project finance module for the MBA programme at the Cass Business School in London.

Structured Debt Course Summary:

Credit markets continue to provide copious amounts of liquidity across the funding spectrum from senior debt through second lien, mezzanine and PIK-style instruments driven by traditional funding sources and a significant increase in capital formation from alternative lenders. Although unitranche continues to comprise the most popular offering from alternative lenders, these funds adopt an eclectic approach to credit and are willing to provide established junior products such as mezzanine and PIK either in conjunction with senior debt or to complement their unitranche offering.

The Second Lien market experienced a resurrection in July 2014 (after a nascent period post 2007) but, according to S&P, is expected to experience a renaissance in 2017, for a number of reasons. The appeal to borrowers is first, the ability to increase leverage from 2L to fund higher purchase price multiples; second, reduced public disclosure and need for credit ratings; third, lower pricing than senior/ mezzanine structures and finally, is easier to restructure in distress than high yield bonds. Lenders are keen to take the product as it provides higher margins than senior debt, includes some level of call protection, provides additional investment opportunities (given the relative dearth of senior paper) and is structured differently to first generation deals, so providing greater protection in distress.

Mezzanine continues to face pressure from other cheaper products (2L in larger deals and unitranche in smaller deals), Despite this, global mezzanine funds have raised very large amounts of capital over the last year (GSO, Highbridge, Prudential and Crescent together raised nearly $20 billion). Competition from competing forms of capital means it is less likely these funds will be deployed in entirely conventional structures so these lenders have had to evolve new strategies to deploy their funds although there remains demand for the traditional senior / mezzanine structure.  Despite the decline in mezzanine issuance, mezzanine continues to exert a strong influence on other junior debt products as many direct lenders had their roots in mezzanine and have been willing to apply the practices in that market to direct lending (e.g. the use of PIK and warrants).

PIK itself continues to find a place in the sun for a wide range of purposes including LBOs and the €3.6 billion Schaeffler multi-tranche PIK in late 2016 (up-scaled from €2.5 billion) evidenced strong demand for that product notwithstanding the miserly pricing (275bps on the 5 year Euro). Many of these deals now tend to be issued in note, rather than loan, form. In current market conditions, PIK is expected to remain popular as lenders chase returns up the risk/reward curve.

European direct lending funds reportedly have c $17 billion of capital to deploy. Unitranche continues to be the most dynamic product in that market however the offering has splintered from the original-classical structures to more structured bespoke products embracing a wider range of more complex structures including dual unitranche, first-in/ first-out. Banks, unwilling to be left on the sidelines, have also proved willing to fund both the bank-led facilities as well as some of the unitranche itself. The recent £475 million unitranche financing Bridgepoint’s acquisition of Zenith illustrates that direct lending can compete with head-on high yield bonds whilst the recent redemption of Soho Houses’ high yield bonds, with a £275 million unitranche, reinforces that notion. The large amounts of dry powder available to funds coupled with stiff competition from the traditional senior/junior loans has compressed pricing so lenders have had to find innovative/alternative ways of deploying their funds. Despite this, the recent ECB leverage guidance is expected to hamper banks and boost direct lending in general.

Whilst junior debt offers attractive returns, this is not without risk and the lesson from the credit crisis is that these providers invariably ended up receiving little or nothing in distress (e.g. Imo Carwash, Stabilus). Against this background, junior lenders have sought ways to mitigate these risks and have been assisted by an updated LMA Intercreditor (2012). However, many, more sophisticated providers have sought other ways to improve their position, for example through the appointment of their own Facility and even Security Agents, although this is not without controversy.

This Structured Debt Course examines the range of junior debt loan products available in the market, their use and application, the typical terms and conditions, market pricing and returns. The program also considers the various techniques junior lenders can adopt to structure their credit ab initio (via Intercreditor issues), how they can monitor their credit thereafter (and have advanced warning of impending distress) and finally how they can maximise recovery in distress.  The course is highly practical and interactive and will include case studies which will first, require participants to devise appropriate junior debt structures and second, to consider the various Intercreditor and other matters which can protect their position in distress.

The Structured Debt Course will review the impact of the draft ECB guidance on leveraged transactions.

A model will be provided in advance of the programme and participants will be required to bring a laptop to the course with that model loaded.

 

What Redcliffe’s clients are saying about the course:
“High quality and relevance of the material covered.”

Investment Manager, BNP Paribas

BNP Paribas United Kingdom

 

“Comprehensive materials and knowledgeable presenter.”

Vice President, Rabobank

 

“Very useful course with a good overview of all topics related to PIK/Mezz and second lien.”

Corporate Finance, Ernst & Young LLP

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Discounts

5-6 participants – 20% discount,7-8 participants – 25% discount,Over 9 participants – 30% discount

Select-your-course-date

27 November 2018, 25 February 2019, 21 June 2019, 18 November 2019