Select Committee on Treasury Written Evidence


Appendix 1

GLOSSARY OF TERMS

  Arranging bank—means a bank that has been awarded the mandate by the borrower to arrange the financing package for an LBO.

  Business plan—means 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 obligations.

  A covenant—is 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 lite—means a loan with few financial covenants structured as incurrence covenants rather than maintenance covenants.

  Cure rights—are 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 distribution—means a distribution by a company to its shareholders by way of dividend or other means.

  Due diligence—is 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.

  EBITDA—means earnings before interest, taxes, depreciation and amortisation. Also known as gross operating profit.

  Equity capital—is capital raised from the owners of a business and equity only gets repaid after all liabilities of the business have been met.

  Financial projections—are estimates of the future financial performance of a business.

  First priority security—means 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 securities—are 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 market—means 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 ratio—means the ratio of bank debt to EBITDA. A leveraged transaction will involve a proportionately larger amount of bank debt.

  Mezzanine debt—is 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.

  PIK—means 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 market—refers to the initial syndication of a LBO to banks and other lenders in the market.

  Second lien loan—is 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 market—refers to the marketplace where lenders trade participations in loans among themselves, but subject to agreed restrictions on transfer.

  Senior debt—is 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 costs—are the costs to the borrower of funding all its loans (eg senior, second lien, mezzanine).


 
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Prepared 22 August 2007