Arranging bankmeans a bank that has been
awarded the mandate by the borrower to arrange the financing package
for an LBO.
Business planmeans a document that summarises
the operational and financial objectives of a business and contains
the detailed plans and budgets showing how the objectives are
to be realised.
CDOs and CLOs are funds in which the underlying
assets are collateralised debt obligations or collateralised loan
A covenantis an agreement binding the
person or persons giving the covenant to perform or give something
to the other, or to abstain from the performance of certain things.
Covenant litemeans a loan with few financial
covenants structured as incurrence covenants rather than maintenance
Cure rightsare rights for the owners
to inject capital into the business to prevent the occurrence
of an event of default (arising by reason of breach of financial
covenant) or to remedy an event of default if one already exists.
A distributionmeans a distribution by
a company to its shareholders by way of dividend or other means.
Due diligenceis the process designed
to uncover and understand all liabilities of the business and
check what the owners are saying is true, eg, nature and condition
of the assets, no major disputes.
EBITDAmeans earnings before interest,
taxes, depreciation and amortisation. Also known as gross operating
Equity capitalis capital raised from
the owners of a business and equity only gets repaid after all
liabilities of the business have been met.
Financial projectionsare estimates of
the future financial performance of a business.
First priority securitymeans security
that can be enforced in priority to all other security in the
case of an event of default or insolvency of the borrower.
High yield debt securitiesare bonds rated
by credit rating agencies as sub-investment grade (in other words,
below BBB in the case of Standard & Poor's or below Baa in
the case of Moody's). They tend to be fixed rate, with maturities
of seven to ten years, usually with a bullet repayment at maturity.
The institutionalisation of the loan marketmeans
the trend whereby institutional investors (eg pension funds, insurance
companies, investment vehicles) are becoming increasingly involved
in the primary market for loans.
An LBO (Leveraged Buy Out) is a buyout that
involves a higher level of borrowings normally through using the
assets of the buyout vehicle/target as security.
Leverage ratiomeans the ratio of bank
debt to EBITDA. A leveraged transaction will involve a proportionately
larger amount of bank debt.
Mezzanine debtis debt finance that ranks
in priority behind senior debt (and second lien) but ahead of
trade creditors or equity; often secured and sometimes convertible
into equity of the borrower.
PIKmeans pay-in-kind or payment-in-kind
loans where the lenders receive rolled up interest adding to the
amount of the loan in place of cash interest.
Primary marketrefers to the initial syndication
of a LBO to banks and other lenders in the market.
Second lien loanis a type of secured
loan that may be characterised as:
(i) Sharing the same security package as
the senior loan, in terms of the assets that are secured.
(ii) Ranking behind the senior loan (but
ahead of junior and unsecured loans) with regard to the proceeds
of enforcement of the security package.
Secondary marketrefers to the marketplace
where lenders trade participations in loans among themselves,
but subject to agreed restrictions on transfer.
Senior debtis debt that is not subordinated
and, in the context of a LBO, would be secured. For example, a
loan (from a single bank or a syndicated loan) that is intended
to rank ahead of other unsecured and unsubordinated debt on the
insolvency of the borrower.
Service(of interest payments) means that
the borrower must be able to service, ie pay to the lender, the
interest due on the loans it has borrowed.
Sponsor and financial sponsor refers
to the private equity firm proposing to invest in the equity of
a company and to mandate one or more arrangers to arrange an LBO
financing to support its proposed investment.
A syndicated loan is a credit facility
granted by more than one bank to a borrower or associated borrowers
under the terms of one agreement. Syndication is the process by
which one bank "sells"" a portion of its debt to
a syndicate of lenders, so reducing its own exposure but at the
same time reducing its reward. An agent bank is appointed to liaise
with the borrower on behalf of the members of the syndicate to
receive payments and distribute them in the correct portions to
the additional lenders.
Total funding costsare the costs to the
borrower of funding all its loans (eg senior, second lien, mezzanine).