Professional Documents
Culture Documents
Financing
Strategies in
Difficult times
Nikhil Atale
Applicable regulations
Shareholders right
Average Deal
Size (millions) $321.2 $491.7 $418.1 $548.2 $1,289.3 $522.2 $464.4 $268.5
Global IPOs include all with deal size greater than US$100mm.
Warrants Conver-
tibles
Equity
ADRs Common
Private Equity
Large source of Capital
The US private equity market exceeded $300b in the US market for 1H 2007 – the last time the markets
had ample liquidity.
In the transportation sector, particularly aviation, private equity has been a large participant through the
funding of equity and the purchase of secured/unsecured debt. Since 2001, it has been a significant
player in the restructuring and mergers of several legacy airlines.
Cons Possible antitrust or Difficult to find deep Complicated if majority of Negotiation process can
regulatory issues pocketed investor claims are held by non- be complicated
public bond holders and/or
Possible strategic Likely to require lower estimation of substantial Will still entail a “private
investor conflicts on initial valuation portion of claims can’t be equity” discount, albeit
business plan completed prior to equity less than single investor
Size likely requires
greater depth of due raise
diligence by prospects May require cash
component option for non-
traditional investors (e.g.,
labor, trade creditors, etc.)
US Airways
US Airways’ equity raise was also a unique challenge – raising substantial equity
capital to acquire a publicly traded company
Publicly pursued “standalone plan” for $250-350mm Private Equity, while privately
Feb-Mar ‘05 secured preliminary merger agreement and quietly sought equity to fund merger
Merger with AWA used to build new business plan upon which equity was raised
June ‘05 $565mm Private Equity, potential Rights Offering considered Stock Price of LCC 12 Months Pre-
and discarded and 10 Months Post Emergence 1
$6 0
Overcame Katrina, oil price shock and built investor demand $50
May 17, 2005 merger announcement
September 27, 2005 emergence from Ch. 11 and
acquisition of AWA
$4 0
Final Structure $3 0
Sept ‘05 $678mm Private Equity $2 0
$188mm Public Equity $10
Asset-backed securitization
Corporate financial
restructuring
Structured financing
techniques
Why Use a Hybrid?
Linked to business
Driven by investor needs
risk
Linked to Company
hedges Company does
market risk
not hedge
Assets Liabilities
Debt
Contractual
Contractualint.
int.&&principal
principal
Value
Value No
Noupside
upside
of
offuture
future Senior
Seniorclaims
claims
Control
Controlvia
viarestrictions
restrictions
cash
cashflows
flows
Equity
Residual
Residualpayments
payments
Upside
Upsideand
anddownside
downside
Residual
Residualclaims
claims
Voting
Votingcontrol
controlrights
rights
When Debt and Equity are
Not Enough
Alternatives
Assets Liabilities
Collateralized
Debt Asset-securitized
Project financing
Contractual
Contractualint.
int.&&principal
principal
Value
Value No
Noupside
upside
of
offuture
future Senior
Seniorclaims
claims
Control
Controlvia
viarestrictions
restrictions
cash
cashflows
flows Preferred
Equity Warrants
Convertible
Residual
Residualpayments
payments
Upside
Upsideand
anddownside
downside
Residual
Residualclaims
claims
Voting
Votingcontrol
controlrights
rights
Equity-Linked Bonds
Bonds with warrants
Convertible Bonds
Index-linked Bonds
securities exchanges
Exercise price
or less
+
Privilege of Exchanging it for Stock
(at the holder’s option)
Accounting for Hybrid
Bonds
At Time of Issuance
At Time of Conversion
When the debt holder converts the debt to equity, the issuing
company recognizes no gain or loss upon conversion.
Induced Conversion
Issuer wishes to encourage prompt conversion.