CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Corporate Advisory Services

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

Corporate Advisory Services

Module B: Investment Banking

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CAIIB – SUPER NOTES

Corporate Banking: Corporate Advisory Services





Contents

Coverage:

1. Corporate Advisory Services

2. What happened to the Merchant Banks

3. The Impact of Global Financial Crisis

4. Capital Restructuring

5. Advantages and Disadvantages of Financing Options

6. Benefits of Capital Restructuring

7. Private Equity

8. Project Advisory Services

9. Introduction to Venture Capital

10. What is involved in the Investment Process

11. Loan Syndication

12. Important Roles in Syndicated Loans

13. Benefits of Loan Syndication for borrowers





CORPORATE ADVISORY SERVICES

1.





Corporate Advisory Services

• The activity of advising organisations including corporations,

institutions and government bodies on mergers and

acquisitions and other transactions which involve a change in

ownership of a company or business.

• Also includes services related to matters pertaining to Finance

and Taxation





Advisors in M&A Transactions

Financial Advisors Financial Advisors

Legal Advisors

Legal Advisors

Financiers Financiers

Independent Experts

Independent Experts

Other Advisors

Other Advisors





Role of Corporate Advisor

Advise on overall approach to transaction

Advise on overall approach to transaction

Assistance with selection of proper

team of advisors

Assistance with selection of proper

team of advisors

Co-ordination of advice received

from other advisors

Co-ordination of advice received

from other advisors

Valuation Valuation

Assisting in conducting Due

Diligence

Assisting in conducting Due

Diligence

Advise on optimal structure for

proposed transaction

Advise on optimal structure for

proposed transaction

Advise on proposed financing

arrangements

Advise on proposed financing

arrangements

Advise on likely market reaction to

a proposed transaction

Advise on likely market reaction to

a proposed transaction

Advise and assist in design of

investor communications

Advise and assist in design of

investor communications

Oversight of production of

transaction documentation

Oversight of production of

transaction documentation





Corporate Advisors

Global Investment Banks

Global Investment Banks

• Offer a ‘one stop shop’ solution

• A situation of conflict of interest may arise

Specialist Corporate Advisory businesses Specialist Corporate Advisory businesses

• Solely offer M&A advise





WHAT HAPPENED TO THE MERCHANT BANKS

2.





What happened to the Merchant Banks

• Historically,

– Merchant Banks provided Trade Finance in the form of debt capital to

merchants from their own balance sheet

– Investment Banks provided capital by intermediating between sources

of capital and clients requiring funds

• Over time, the distinction blurred, as merchant banks

accessed capital markets and investment banks begun

investing their own capital





THE IMPACT OF GLOBAL FINANCIAL CRISIS

3.





The Impact of Global Financial Crisis

• The trend of major corporate and governments increasingly

turning to independent advisory businesses for advice has

continued

• There is greater regulation in certain markets on certain

services





CAPITAL RESTRUCTURING

4.





Capital Restructuring

• Capital is generally the assets, often monetary, that are available to

generate more assets. Thus, the liquidity of capital should be high.

• Restructuring means reallocating the capital to improve its

availability(liquidity)

• The process requires selling assets to buy different ones in order to

improve owner’s monetary position so that they can improve their asset

position thus enabling them to earn more.

• It can be defined as a fundamental, voluntary change in a firm’s capital

structure, effected by altering voting rights of the providers of equity

capital and loan capital





Capital Restructuring

• Makes companies attractive to potential stakeholders, reduces costs,

increases efficiency, increases EPS and gives better returns

• Competitive pressures, shareholder’s demands, management decisions

and regulatory and political environment, all warrant that companies keep

on changing

• Approaches to restructuring include:

– Expansion

– Contraction

– Corporate Control

– Changes in ownership structure





Changes in ownership structure

• Share repurchase or buyback is one of the most important

strategies. However, it may also send negative signals.

• Buyback methods include:

– Repurchase Tender

– Open Market Purchase

– Privately Negotiated Repurchases

• Share buyback is also an information signal to the market

apart from being a strictly financial decision





ADVANTAGES AND DISADVANTAGES OF FINANCING OPTIONS

5.





Debt Financing

Allows founders to retain ownership and control of the business

Provides small business owners greater degree of financial freedom

Easy to administer

Less expensive for small businesses over the long term

Requires regular monthly payments which may be difficult for small businesses

Availability is often limited to established businesses

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Equity Financing

No obligation to repay the money

Easy availability for concept and early stage businesses

Investors are often good sources of advice and contacts

Founders must give up control

Can be complex and difficult to administer

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BENEFITS OF CAPITAL RESTRUCTURING

6.





Benefits of Capital Restructuring

Improved Reinvestment

Decisions

Improved Reinvestment

Decisions

Improved Asset

Management

Improved Asset

Management

Reduced Information

Asymmetries

Reduced Information

Asymmetries

Information Dissemination

Information Dissemination

Due to these advantages capital is put to optimal use, resulting in greater efficiency in operations culminating in higher profitability and consequently a higher EPS.





PRIVATE EQUITY

7.





Private Equity

• Equity capital which is not quoted on a public exchange

• Consists of investors and funds that make investments directly into

private companies or conduct buyouts of public companies that

result in delisting of public equity

• Commit large sums of money for long periods of time

• Conduct Leveraged BuyOuts

• Venture Capitalists are early stage investors whereas PE investors

step in for growth and consolidation

• Most PE firms are structured as limited partnerships





PROJECT ADVISORY SERVICES

8.





Project Advisory Services

Promoting Company/SPV’s

Overview

Promoting Company/SPV’s

Overview

Project Review: Structure and

Costs

Project Review: Structure and

Costs

CPM Schedule Preparation and

Review

CPM Schedule Preparation and

Review

Project team, documentation

and process evaluation

Project team, documentation

and process evaluation

Change Order Evaluation

Change Order Evaluation

Time Extension Evaluation

Time Extension Evaluation

Cost Recovery Audit

Cost Recovery Audit

Fraud Consulting, investigations and internal audit co-

sourcing

Fraud Consulting, investigations and internal audit co-

sourcing

Contract Compliance reviews and

Contract closeout

Contract Compliance reviews and

Contract closeout

Looking for Capital Structuring

Looking for Capital Structuring

Arranging finance at reasonable cost Arranging finance at reasonable cost

Suggest Financial Modeling

Suggest Financial Modeling

Risk analysis, allocation and

mitigation measures

Risk analysis, allocation and

mitigation measures

Advising and Development of a security package

Advising and Development of a security package





INTRODUCTION TO VENTURE CAPITAL

9.





Venture Capital

• Long Term committed share capital to help unquoted

companies grow and succeed

• VC investors are interested in companies with high growth

prospects, managed by experienced and ambitious teams

who are capable of turning the business plan into reality

• A form of Risk Capital

• Investment for 3-7 years or more

• VC firms obtain funds from various sources





WHAT IS INVOLVED IN THE INVESTMENT PROCESS

10.





Initial evaluation of Business Plan

• Is the product or service commercially viable?

• Does the company have potential for sustained growth?

• Does management have the ability to exploit this potential

and control the company through growth phases?

• Does possible reward justify the risk?

• Does the potential financial return on investment meet the

investment criteria?





Additional Financing (other than VC)

Clearing Banks (ODs and STLs) Clearing Banks (ODs and STLs)

Merchant Banks Merchant Banks Finance Houses Finance Houses

Factoring Companies Factoring

Companies

Government and European

Commission Sources

Government and European

Commission Sources

Mezzanine Financing Firms

Mezzanine Financing Firms





Making the Investment – Due Diligence

Management Information

Systems

Management Information

Systems

Forecasting Techniques and accuracy of past

forecasting

Forecasting Techniques and accuracy of past

forecasting

Assumptions on which financial

assumptions are based

Assumptions on which financial

assumptions are based

Latest available management

accounts

Latest available management

accounts

Bank facilities and leasing

agreements

Bank facilities and leasing

agreements Pension funding Pension funding

Employee Contracts etc.

Employee Contracts etc.

Due diligence review aims to support or contradict the V C firm’s own initial impressions of the business plan formed during the initial stage





LOAN SYNDICATION

11.





Loan Syndication

• Syndication is an arrangement where a group of banks which may not have

any other business relationship with the borrower participate in a single loan

• Banks in the syndicate share the risk of large, indivisible investment projects.

– Additional syndicate members provide informative opinions of investment projects or

additional expertise after the funding has been extended

– Enable banks to participate in projects which they would not be able to finance singly

because of regulatory constraints

• Traditionally, syndicated loans are structured as term loans or operating

revolvers. However, they may also include tranche or segmented structures,

LCs, acquisition facilities, construction financing, asset based structures,

project finance and trade finance





Loan Syndication

• Corporates opt for syndication when:

– The borrower wants to raise large amount of money quickly and conveniently

– The amount exceeds the exposure limits or appetite of any one lender

– The borrower does not want to deal with a large number of lenders individually

• Euro syndicated loan is usually a floating rate loan with fixed maturity, fixed

draw down period and a specified repayment schedule

• Drop Lock Feature: Converts floating rate loan into a fixed rate loan if the

benchmark index hits a specified floor

• Multi Currency Option: Allows the borrower to switch the currency of

denomination on a roll over date

• Security requirements vary





IMPORTANT ROLES IN SYNDICATED LOANS

12.





Important Roles in Syndicated Loans

•Responsible for placing the syndicated loan with other banks

•Entitled to arrangement fee

•Bear reputation risk

Arranger/Lead Manager Arranger/Lead Manager

•Bank that commits for supplying the funds to the borrower

Underwriting Risk Underwriting Risk

•Lends a portion of the total amount

Participating Bank Participating Bank

•Takes care of all administrative arrangements over the term of the loan

•May be either the lead manager or the underwriting bank

Facility Manager/Agent Facility Manager/Agent





Types of Lead Bank Arrangement

• Lead bank ties up the entire requirement amongst its close contacts

• In case of very lucrative or small deals

Club Deal Club Deal

• Lead bank does not promise or guarantee the success of its efforts

Best Effort Best Effort

• Lead Bank gives assurance for the success of the syndication in mobilizing the requirements of the borrower

Full Commitment Full Commitment





Syndication Stages

Pre-Mandate Phase

• Lead Bank identifies the needs of the borrower, designs an appropriate loan structure, develops a persuasive credit proposal, and obtains internal approval

Pre-Mandate Phase

• Lead Bank identifies the needs of the borrower, designs an appropriate loan structure, develops a persuasive credit proposal, and obtains internal approval

Placing the Loan

• Lead bank prepares Information Memorandum, Term Sheet, and legal documentation and approaches the banks

• Lead manager carries out negotiations and deal is closed

Placing the Loan

• Lead bank prepares Information Memorandum, Term Sheet, and legal documentation and approaches the banks

• Lead manager carries out negotiations and deal is closed

Post Closure Phase

• Agent now handles day to day running of the loan facility

Post Closure Phase

• Agent now handles day to day running of the loan facility





Characteristics of Syndicated Loans

Bilateral Loans Syndicated Loans Bond Markets

Loan Size Lowest Large Large

Public Disclosure Lowest Medium Highest

Driving Factor Relationship Relationship/ Transaction

Transaction

Covenants Extensive and Frequently Negotiated

Extensive but less frequently negotiated

Rarely negotiated

Borrowing Rate Floating Rate Floating Rate Fixed Rate

Funding Revolving Credit or Fully Funded Term Loan

Revolving Credit or Fully Funded Term Loan

Fully Funded





BENEFITS OF LOAN SYNDICATION FOR BORROWERS

13.





Benefits of Loan Syndication for borrowers

Complete menu of financing options

Can raise large amount of money quickly and conveniently

Allows company to raise funds from a diverse group of financial institutions

Managing multiple banking relationships is not easy

Negotiations can take a long time

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CAIIB – Super-Notes © M S Ahluwalia Sirf Business For more Super-Notes: Click Here

M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

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Documents

CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Corporate Advisory Services