CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Corporate Advisory Services
Module B: Investment Banking
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Corporate Banking: Corporate Advisory Services
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CORPORATE ADVISORY SERVICES
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Advisors in M&A Transactions
Financial Advisors Financial Advisors
Legal Advisors
Legal Advisors
Financiers Financiers
Independent Experts
Independent Experts
Other Advisors
Other Advisors
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
WHAT HAPPENED TO THE MERCHANT BANKS
2.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
THE IMPACT OF GLOBAL FINANCIAL CRISIS
3.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAPITAL RESTRUCTURING
4.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ADVANTAGES AND DISADVANTAGES OF FINANCING OPTIONS
5.
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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.
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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.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
PRIVATE EQUITY
7.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
PROJECT ADVISORY SERVICES
8.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
INTRODUCTION TO VENTURE CAPITAL
9.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
WHAT IS INVOLVED IN THE INVESTMENT PROCESS
10.
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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?
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
LOAN SYNDICATION
11.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
IMPORTANT ROLES IN SYNDICATED LOANS
12.
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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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
BENEFITS OF LOAN SYNDICATION FOR BORROWERS
13.
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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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M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida