General Corporate Finance

Question 1

Corporate Finance

Answer 1

actions that management takes to increase value of a company in short- and long-term: investments to earn returns with varying standard deviation, financing finding the right debt, and equity to fund operations, and dividends how to return cash to owners.

Question 2

Stock-owners

Answer 2

5% need to report purposes of holdings to SEC
>51% owner

When considering risk, look at who the marginal investor in that company is. May vary between institutions and individuals. Institutions are diversified, individuals are not due to SEC paperwork and only option is to sell/give up ownership. Non-voting shares institutions.

Question 3

Fixed income

Answer 3

debt instruments that provides returns in the form of regular or fixed interest payments and repayments. Principal risks are CCP default and exchange rate risk for securities denominated in non-USD.

Question 4

Fixed income instruments

Answer 4

Bonds, treasury bills (safest US Gov’t with no regular coupon (interest), payments and are instead sold at a discount to their face value), money market instruments (commercial paper, CDs, repo, banker’s acceptances), asset backed securities (backed by financial assets that are securitized like credit card receivables, home loans, auto loans)

Question 5

Stock Owners Types

Answer 5

Government = lower taxes, does not benefit government

Founder = Young companies will typically have founders on top

Corporation = may be for pure investment purposes or for control

Institutional investor = 13F – manages pools of money on behalf of clients. Stockholder has very little power. If buying preferred or non-voting shares, leaving voting rights to the 13F

Activist investors = groups can represent a single investor Berkshire

Question 6

Syndicated loans

Answer 6

multi-lender transaction where large sums of money are loaned to a single borrower can be underwritten (guaranteed), best-efforts, or club

Question 7

Principal amortization

Answer 7

paydown

Question 8

Lien type

Answer 8

Secured (1st or 2nd lien) by the firm’s assets

due to higher default risk of leveraged loans requires 1st lien collateral

2nd lien are less common and if exists, will sit below a 1st lien leveraged loan and is secured if there is excess collateral value after the 1st lien lender is made whole in a bankruptcy

For example, Firm $100 in assets and is in bankruptcy. If the structure is $90 term loan B with 1st lien, $50 term loan C with 2nd lien, and $40 unsecured, term loan B will be made whole and remaining $10 will go to term loan C.

Question 9

EBITDA

Answer 9

Enterprise value

Question 10

Capital structure

Answer 10

Senior Debt > subordinated debt > equity

As go to lower tiers, subordination increases, returns increase, and dilution increases

subject to change as business grows ex. 40% senior, 20% subordinated, 40% equity. In 3/5+ years equity will increase and senior debt decreases due to business growth but majority will be transferred to shareholders. When senior debt is maxed, equity is put in place and sub debt should fill gap. Senior 3x EBITDA

Question 11

Subordinated debt

Answer 11

any type of debt that will not be paid until senior debt is paid in full. High yield bond investors have the highest priority to collect debt in case of financial distress but will incur the lowest return out of all subordinated debt creditors.

Subordinated debt holders can only supply so much debt. To calc how much subordinated debt a company can handle, typically EBITDA 5x due to senior debt 3x EBITDA; EBITDA to cash interest coverage / expense 2x; minimum equity funding 30%-35%

Question 12

Mezzanine

Answer 12

non-traded debt ex. Debt with warrants, convertible loans stock (convert to equity), convertible preference shares

Question 13

Term Loan A

Answer 13

pro rata bank debt

Question 14

Term Loan B/C/D

Answer 14

institutional loans

Question 15

Leveraged loans

Answer 15

most senior secured bank debt senior debt, senior tranches in a company’s capital structure with bonds usually making up junior tranches. Term loans packaged with a revolving credit facility and are syndicated by an IB to commercial bank. Historically leveraged loans came from banks while bonds came from institutional investors but with the proliferation of CLO funds, institutional investors can be on the leveraged loan side. Institutional loans make up most of leveraged loan market.

Question 16

Revolvers

Answer 16

Enables companies to draw from or pay down for short term working capital needs packaged with an asset based loan revolver and cash flow revolver (max amount that can be borrowed is based on historical cash flows that the borrower has generated) more restrictive, secured/unsecured

Question 17

Term Loans

Answer 17

Loan that is repaid on a specified repayment schedule and either a fixed or floating interest rate for long-term and balloon payments if short and intermediate term

Question 18

Delayed Draw Term Loans

Answer 18

ability to request additional funds after the draw period has already closed, typically IG for acquisitions and do not want to incur immediate debt or interest, purchasing capex, refinancing debt

Question 19

Bridge Loans

Answer 19

short-term loan with high interest rates, typically up to one year backed by collateral, for working capital needs. Investment bank or venture capital firm provides bridge financing in the form of a loan or equity investment

Use case

IPO bridge = covers expenses associated with the IPO from IB

Debt bridge = approved for a bank loan with six tranches but first tranche will not be available for another six months

Question 20

Cross-functional teams of RLG

Answer 20

Syndication Banks

Borrowers And External Legal Counsel

Investment Banking

Investment Grade Capital Markets

Leveraged Finance

Legal And Credit Risk Management

Question 21

Traditional asset managers

Answer 21

Traditional managers provide investment management and other services. Mainly offer products such as
mutual funds, closed-end funds and ETFs

– These products are generally more highly regulated than alternative investment products (such as Private Equity funds or Hedge Funds) and typically have lower
investment minimums, lower returns, and higher liquidity than Private Equity or Hedge Funds (Some managers do offer their own alternative products)
 Typically manage assets (“Assets Under Management”, “AUM”) across equity, fixed income, and alternative asset classes
 Traditional managers earn revenue through services they provide, including investment management services, distribution services, and other services
– Investment management services: Investment management services are provided to the fund products described above, are generally contractually agreed upon as a
percentage of AUM (which can vary by investment product, strategy, etc.)
– Sales and distribution services: Mutual funds generally pay traditional managers pay distribution fees in return for sales, marketing, and related efforts on their behalf
 Investors include retail clients (individuals), institutional clients, and high net-worth clients

Question 22

Traditional AM TCP

Answer 22

Redemption facilities, committed repo, TOB / VRDP

Question 23

Alternative AM TCP

Answer 23

Subscription facilities, recourse BDCs, non-recourse IB market solutions, EDG, VFN, Commercial REITs

Question 24

Traditional AM Funds

Answer 24

Mutual funds, Cayman Subs, Collective Trusts, Managed Accounts, Corporate pensions

hedge and spec derivatives, Repo / TBA / margin lending, TS / IS

Question 25

AM Markets

Answer 25

Trad and Alt Mgmt company loan hedge, FX hedging foreign operations, seed capital investing / hedging, compensation expense management

Question 26

Alt AM Funds

Answer 26

PE hedging, HF of traditional managers, mREITs

Question 27

Asset Managers as Principal

Answer 27

Cash flow back revolving credit facilities for working capital; acquisitions; seed capital; compensation funding  Alt Mgrs: incentive fees & comp; years in business  OG based on: Size (AUM); Diversification of AUM; EBITDA; NI Margin; EBITDA Margin; Leverage; Int. Cvg  LGD: 40% with a couple exceptions  Investment grade standard terms: unsecured; 3x leverage & 4x interest coverage covenants; minimum AUM

Question 28

Private Equity

Answer 28

 Capital call facilities used to bridge timing between capital calls and funding  Applicable to commercial real estate funds  OG based on: Liquidity (investment base; called vs. uncalled capital; diversifications of investors & assets); Size; Leverage; Performance; Sponsor (track record & AUM)  LGD: 20 to 40%; variance driven by structural protections  DG is based on EDF model

Question 29

BDC

Answer 29

 Closed-end, SEC regulated funds which underwrite lend to middle market companies  Borrowing base facilities used for leverage  OG based on: Portfolio (performance; composition; diversification); financial data (price to book; NAV; dividend coverage; leverage)  LGD: 20%; only Ares and ACAS differ with xx% and xx%, respectively

Question 30

Trading Desk Financing Vehicles / SPVs

Answer 30

 Various forms of borrowing base facilities to a variety of asset management vehicles for leverage and / or liquidity  Each facility’s OG is primarily based on: Portfolio (composition & diversification), structural provisions (LTV, amortization, & valuation rights) & liquidity (cash flows, future liabilities)  Variable Funded Notes: Redemption like facilities to HF FoF’s. See HF FoF rating model  EDG: Leverage or redemption like facilities to PE FoF portfolios  IB Market Solutions: Non-recourse lending to a BDC / PE fund. See Credit-Rates JV rating model  Whole Loan Repo: Lending to REITs or real estate managers to finance mortgage assets

Question 31

Traditional AM Risk Rating

Answer 31

The ORRs of the traditional management companies are based on Financial Based Indicators (“FBI”s) and Qualitative and Other Factors (“QOF”). The management company gets an initial assessment grade based on these factors, which can be further modified depending on the financial reporting constraints  FBIs (weight): – FPAUM (30%): Fee-paying AUM – AUM Diversification (10%): Measure of the allocation of a manager’s AUM across five asset classes (equity, bond, money market, balanced/mixed, other) – Leverage (35%): Gross Debt/EBITDA – Net fund flows (10%): Net fund flows/AUM – EBITDA margin (15%): EBITDA/Revenue

Question 32

Risk Rating for traditional management companies

Answer 32

 QOFs (Positive/Neutral/Negative): – Other financial factors (not included the FBIs): Product concentration, trend, projections, cash flow, CapEx – Contingencies: Financial and non-financial (e.g. legal and reputational concerns) – Industry: Risk and cyclicality – Company operating characteristics: Operating ratios, cost efficiency, technology, product diversification, market share, pipeline, competitive position – Management: Expertise, track record, leadership, integrity, governance, depth

Question 33

Administrative Agent

Answer 33

The Bank which acts as an agent for a syndicate of lenders in administering a loan facility with a borrower. After the loan agreement closes, payments and communications between the borrower and the lenders are made through the administrative agent

Question 34

Advance Rate

Answer 34

The maximum percentage of the value of collateral that a lender is willing to extend for a loan. For example, if a borrower pledges $100 of collateral and the advance rate is 60%, the loan amount would be $60 (this is also known as a Borrowing Base)

Question 35

Borrowing Base

Answer 35

The amount of money a lender will loan to a company, based on the value of the collateral pledged by the company and the Advance Rate applied by the lender

Question 36

Commitment Fee

Answer 36

For revolving credit facilities, the interest rate charged on the unused portion. If a borrower has a revolver with a 37.5bps commitment fee, they will pay an annual rate of 37.5bps on the portion of the revolver that is undrawn

Question 37

Drawn Spread

Answer 37

For revolving credit facilities, the interest rate charged over a reference rate when the revolver is drawn. For example, if a loan has drawn pricing of LIBOR + 200bps, the borrower will have to pay an interest rate of the current LIBOR rate + 200bps on the amount they have borrowed. The spread is the 200bps charged in addition to LIBOR

Question 38

Loan to Value (LTV)

Answer 38

Expresses the ratio of a loan to the value of the underlying collateral. Lower LTVs indicate a substantial cushion between the value of the loan and the value of the underlying collateral

Question 39

Syndicate:

Answer 39

A grouping of banks formed for the purpose of jointly lending money to a specific borrower. Syndicates are formed to handle transactions that might be too difficult or too risky for a single bank to handle alone

Question 40

Upfront Fee

Answer 40

A one-time payment paid by the borrower to the lender(s) upon closing of the transaction. This fee is based of a percentage of the total size of the facility. If a facility has an upfront fee of 50bps on a $1,000 facility, the upfront fee would be $5

Question 41

Institutional investor

Answer 41

manages pools of money on behalf of clients. Stockholder has very little power. If buying preferred or non-voting shares, leaving voting rights to the 13F