Re: Distressed Credit Overview - Valuation questions
Thanks. Further clarification on 1 (a) and (b): 1- So to clarify, the Green box can include secured and unsecured debt? What classifies a piece of debt in the Blue box (Senior Secured Debt) and not the Green Box (Senior Debt) – can you give an example please? Are securitizations excluded from ... Thanks.

Further clarification on 1 (a) and (b):

1- So to clarify, the Green box can include secured and unsecured debt? What classifies a piece of debt in the Blue box (Senior Secured Debt) and not the Green Box (Senior Debt) – can you give an example please? Are securitizations excluded from this slide's capital structure?

2- Two examples that make the differentiation confusing to me:
1. Asset-backed revolvers – fall under which category? If asset-backed revolvers are secured by specific assets, would it be in the Blue Box? But since it’s a bank revolver, would that put it in the Green box?
2. 1st / 2nd lien loans – since it’s not secured by any specific asset but is a general 1st or 2nd lien against all company assets, this would be in the Green Box?


3- Question on slide 46 – trying to understanding bullet point 1, 4, and 6 together since it sounds confusing to me. As I understand it: only one class needs to accept a plan for it to be passed on to the court. Court can then confirm the plan. If confirmed by the court, under that specific plan, all impaired classes that are entitled to vote (meaning, they would receive at least some recovery value under that plan) MUST accept the plan for it to be implemented, while, other impaired classes (that would receive no recovery under that plan) don’t need to vote at all (ie their vote doesn’t matter for the plan to be implemented). Is that a correct understanding? Read More

Re: adv lbo model questions
Sources & Uses: - from the Merger courses, the legal structure can be stock or asset (most likely stock for an LBO, but not necessarily) - regardless of stock vs asset deal, debt refi'ed, etc is same treatment: you are buying the entire company - equity premium: based on appropriate valuation of... Sources & Uses:
- from the Merger courses, the legal structure can be stock or asset (most likely stock for an LBO, but not necessarily)
- regardless of stock vs asset deal, debt refi'ed, etc is same treatment: you are buying the entire company
- equity premium: based on appropriate valuation of the company
- excess cash: really means lower net debt (covered in our LBO Overview class) will make the equity injection less and thus, more attractive, correct
- various fees: again, please refer to LBO Overview course where there are several slides on various fees

Sources:
- cash: correct. usually a bridge loan is required since you don't have access to the cash

Valuation:
- TEV multiples: yes, after you do your valuation (and know how much to pay); also, this is quite often sensitized

P&L:
- D&A: doesn't usually include amortization of debt financing fees as the fees are capital structure related and technically go into Interest Expense; thus, it's not considered when calculating EBITDA
- Pro Forma: interest set to Year 1 primarily for smoothened leverage ratios (Interest coverage in particular); since the entire cap structure is altered, the last historical year of interest is irrelevant

PPA:
- correct to all of the above. Goodwill is still important - in this case, we assumed that the goodwill is re-allocated at the current cost basis, which is the implicit assumption when you don't do the full PPA as discussed in Merger courses

CF:
- debt financing fees: correct, non-cash expense in projection years as it was paid in cash during the deal; this is capitalized and amortized; hence the BS item change

Ratios:
- Cum. Debt Paydown: this is covered in the videos: just take Year 0 Pro Forma debt balance (fully anchored) and subtract the new Total Debt balance
- % Paid: take the Cum. Debt Paydown and divided by the Year 0 Pro Forma debt balance (fully anchored) and you'll have it
- your method is too complicated follow the videos! we show you the fastest and most efficient way to calculate! Read More

Calculating Equity and Debt base for WACC
There are two ways to calculate your equity and debt base that go into your WACC calculation. On one side you use book value (shareholders’ equity and total debt). This seems intuitive because it reflects the actual capital structure of the company. On the other side you use market values (mark... There are two ways to calculate your equity and debt base that go into your WACC calculation.

On one side you use book value (shareholders’ equity and total debt). This seems intuitive because it reflects the actual capital structure of the company.

On the other side you use market values (market cap for equity value and market value of debt for debt value). This seems to be what a lot of sell siders use, but there is one theoretical issue. If, for example, share price takes a huge hit, the proportion of equity to total capitalization decreases. Since equity is a more expensive form of capital, your WACC then decreases. Carry that through to your DCF and you actually get a (potentially large) bump to your calculated share price.

How do you reconcile the two or when do you use one versus the other? Read More

Valuation Question
We are helping our client reduce inventory. We are trying to make the case that capital tied to inventory has a cost - inventory cost + cost of capital. In my view, it is WACC. Our client thinks it is interest rate of revolving credit. Your thoughts?

Convertible Debt Adjustment
In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for ... In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for a possible conversion, Hamilton instructs us to reduce the debt by its book value and increase the O/S by 9.4M. I don't understand why you would increase the O/S by the max 9.4M when there already has been a prior partial conversion - shouldn't the O/S increase by less than the max 9.4M?

A couple of other related questions:

(2) Would you take the same approach for convertible preferreds? (I know he said Warrants are treated as options)

(3) Since the 10Q stub period doesn't breakdown the capital leases for us to exclude from debt, and Hamilton discourages pulling cap lease figures from the most recent available disclosure, how do you rationalize comparing apples to oranges effectively with the other comps?

Thanks for all the help guys. Happy early Thanksgiving! Read More