Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
1. What is the peck- Senior Secured Credit Facility / Bank Debt
ing order of a Senior Secured Debt / Second Lien Financing
capital structure? Capital Lease Obligations
Senior Notes
Senior Subordinated Notes
Discount Notes
Convertible Debentures
Preferred Stock
Convertible Preferred Stock
Common Stock (Voting)
Common Stock (Non-Voting)
2. What are the 1. Intrinsic Value = DCF
three most com- 2. Relative Valuation =Precedent Transactions (Transaction Comps) & Comparable
mon ways to val- Companies (Market Comps)
ue a company?
Which is best? - All produce an estimate for Enterprise Value
Which will pro-
No one is best; it depends upon quality of inputs and comparables; the best way
duce the highest
to find value is to come up with a range for each method, and then use your
valuation?
judgement to weight them in "triangulating" a conclusive valuation range
It can vary, but generally, transaction comps will produce a higher valuation than
market comps because the transactions include a control premium and, whereas
public company comparables measure value based on minority interest, [and are
not capital-structure neutral]
DCF will often produce a high valuation (though not necessarily higher than
transactions), as it also assumes a controlling interest. Additionally, projections
are often optimistic, [the analysis is based upon a debt-free capital structure],
and the DCF is highly dependent upon a number of variables
3. They aren't reflective of current market trends
, Restructuring IBanking Interview
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What are the
problems with
using compara-
ble transactions
from 10 years
ago?
4. What is Enter- EV = the value of Operating Assets minus Operating Liabilities
prise Value &
how is it calculat- EV = Market Value of Common Equity + Preferred Equity + Total Debt + Minority
ed? Interest - Excess Cash
Cash is often treated as a Non-Operating Asset in the valuation context, and is
netted against debt
Balance sheet cash is usually assumed as excess cash
5. How do you get Unlevered FCF = [EBIT * (1 - Tax Rate)] + Depreciation + Amortization - Capital
a proxy for Free Expenditures + Change in Working Capital
Cash Flow?
OR = EBITDA - Taxes + Depreciation + Amortization - Capital Expenditures +
Change in Working Capital
6. Describe an in- Legends
teresting finan- - Middle market regional gaming operations, DBA DiamondJacks brand
cial model you - Formed in 2004 to acquire Isle of Capri in Vicksburg and Bossier City
worked on: what - Damages and lost revenues due to Vicksburg flood; new and renovated compe-
were the as- tition posed threat
sumptions, valu- - Purpose of leverage = acquisitions
ation techniques, - Second lien term loan of $65
etc? - Bossier was doing well, esp due to fact that 70% of revenues from DFW, which
was benefitting from oil prices, but approval of Texas gaming would be harmful
- Filed March 2008; Emerged September 2009 with 2014 maturities, First Lien TL
,Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
$162 @ 8.75%, Second Lien TLA $48.7 @ 12.5%, Second Lien TLB $26.3 @ 17%
- Just got an email from one of the guys on the debtor's team telling me that he's
back in BC for round 2
Dynamic / HL Argument
- Represented First Lien SC, with TL of $142, revolver of $15, & swap claim $7.9
- Didn't want to get into a valuation fight; focus was on showing that even if their
valuation was right, they were still coming out with too much leverage
- Argued that recovery to First Lien under Ch.7 liquidation would be more valuable,
based on Debtor's liquidation analysis in disclosure statement [$139.1 = $153.2];
estimated value of new First Lien Note [$115 - $125] based on DCF of note w. 15%
discount rate
- Only financial covenant was Fixed Charge Coverage (FCCR) of 1:1, whereas
comps had 1.25:1
- Plan projected higher revenue growth over the next two years than Wall Street
Analysts were expecting for most peers
- MOR variance showed consistent inability to meet projections
- Had to argue that efficient market exists for bank loan trading due to 2004 Till
decision on appropriate rates for reinstated debt
** volume increase due largely to disintermediation & electronic trading plat-
forms
** Reuters Graph: before 2008, debt trading at $0.90 considered distressed, after
Q1, changed it to $0.80
Types of Analysis
- Expert Report
- Variance analysis and summary memos to lenders on MOR & TWCF
- Valuation using DCF, TC, & MC
- DCF used WACC, which used CAPM
- Debt Capacity using Total Leverage Approach & Interest Coverage Approach
- Debt Comps
- First Lien claim analysis modeling out higher of base / LIBOR
, Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
Important Metrics
- EBITDAM = EBITDA before management fees
- Average Daily Room Rate (ADR) = Room Revenue / # Rooms Earning Revenue
(excludes house use and complimentary)
- RevPAR = Revenue per Available Room = ADR * Occupancy
- % Revenues from Gaming = 81.4% (median)
- Positions per Room = 3.4 (low)
- Promotional Costs / GGR = 26% (high)
- Win / Position / Day = $186.4 (median)
Assumptions
- EBITDA Multiple for 2009 = 6.0x - 7.0x based on: markets, relative size, # of
properties (diversification), historical performance
- WACC = 12%
- Equity Risk Premium = 6%
- Used market cost of debt where possible
- 20 year Treasury
- Unlevered Beta = 0.71
- Levered Beta = 1.67
- Terminal Multiple = 7x
- Comps = Ameristar, Boyd, Isle, Monarch, Penn National, Pinnacle
Cap Structure @ Exit (Includes Accrued Interest & Default Fees)
- First Lien: $162
- Second Lien: $75
- Other Secured Claims: $3
- Unsecured Claims: $3
- Cash: $15
- Administrative Claims: $5
Valuation
Study online at https://quizlet.com/_9c0usb
1. What is the peck- Senior Secured Credit Facility / Bank Debt
ing order of a Senior Secured Debt / Second Lien Financing
capital structure? Capital Lease Obligations
Senior Notes
Senior Subordinated Notes
Discount Notes
Convertible Debentures
Preferred Stock
Convertible Preferred Stock
Common Stock (Voting)
Common Stock (Non-Voting)
2. What are the 1. Intrinsic Value = DCF
three most com- 2. Relative Valuation =Precedent Transactions (Transaction Comps) & Comparable
mon ways to val- Companies (Market Comps)
ue a company?
Which is best? - All produce an estimate for Enterprise Value
Which will pro-
No one is best; it depends upon quality of inputs and comparables; the best way
duce the highest
to find value is to come up with a range for each method, and then use your
valuation?
judgement to weight them in "triangulating" a conclusive valuation range
It can vary, but generally, transaction comps will produce a higher valuation than
market comps because the transactions include a control premium and, whereas
public company comparables measure value based on minority interest, [and are
not capital-structure neutral]
DCF will often produce a high valuation (though not necessarily higher than
transactions), as it also assumes a controlling interest. Additionally, projections
are often optimistic, [the analysis is based upon a debt-free capital structure],
and the DCF is highly dependent upon a number of variables
3. They aren't reflective of current market trends
, Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
What are the
problems with
using compara-
ble transactions
from 10 years
ago?
4. What is Enter- EV = the value of Operating Assets minus Operating Liabilities
prise Value &
how is it calculat- EV = Market Value of Common Equity + Preferred Equity + Total Debt + Minority
ed? Interest - Excess Cash
Cash is often treated as a Non-Operating Asset in the valuation context, and is
netted against debt
Balance sheet cash is usually assumed as excess cash
5. How do you get Unlevered FCF = [EBIT * (1 - Tax Rate)] + Depreciation + Amortization - Capital
a proxy for Free Expenditures + Change in Working Capital
Cash Flow?
OR = EBITDA - Taxes + Depreciation + Amortization - Capital Expenditures +
Change in Working Capital
6. Describe an in- Legends
teresting finan- - Middle market regional gaming operations, DBA DiamondJacks brand
cial model you - Formed in 2004 to acquire Isle of Capri in Vicksburg and Bossier City
worked on: what - Damages and lost revenues due to Vicksburg flood; new and renovated compe-
were the as- tition posed threat
sumptions, valu- - Purpose of leverage = acquisitions
ation techniques, - Second lien term loan of $65
etc? - Bossier was doing well, esp due to fact that 70% of revenues from DFW, which
was benefitting from oil prices, but approval of Texas gaming would be harmful
- Filed March 2008; Emerged September 2009 with 2014 maturities, First Lien TL
,Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
$162 @ 8.75%, Second Lien TLA $48.7 @ 12.5%, Second Lien TLB $26.3 @ 17%
- Just got an email from one of the guys on the debtor's team telling me that he's
back in BC for round 2
Dynamic / HL Argument
- Represented First Lien SC, with TL of $142, revolver of $15, & swap claim $7.9
- Didn't want to get into a valuation fight; focus was on showing that even if their
valuation was right, they were still coming out with too much leverage
- Argued that recovery to First Lien under Ch.7 liquidation would be more valuable,
based on Debtor's liquidation analysis in disclosure statement [$139.1 = $153.2];
estimated value of new First Lien Note [$115 - $125] based on DCF of note w. 15%
discount rate
- Only financial covenant was Fixed Charge Coverage (FCCR) of 1:1, whereas
comps had 1.25:1
- Plan projected higher revenue growth over the next two years than Wall Street
Analysts were expecting for most peers
- MOR variance showed consistent inability to meet projections
- Had to argue that efficient market exists for bank loan trading due to 2004 Till
decision on appropriate rates for reinstated debt
** volume increase due largely to disintermediation & electronic trading plat-
forms
** Reuters Graph: before 2008, debt trading at $0.90 considered distressed, after
Q1, changed it to $0.80
Types of Analysis
- Expert Report
- Variance analysis and summary memos to lenders on MOR & TWCF
- Valuation using DCF, TC, & MC
- DCF used WACC, which used CAPM
- Debt Capacity using Total Leverage Approach & Interest Coverage Approach
- Debt Comps
- First Lien claim analysis modeling out higher of base / LIBOR
, Restructuring IBanking Interview
Study online at https://quizlet.com/_9c0usb
Important Metrics
- EBITDAM = EBITDA before management fees
- Average Daily Room Rate (ADR) = Room Revenue / # Rooms Earning Revenue
(excludes house use and complimentary)
- RevPAR = Revenue per Available Room = ADR * Occupancy
- % Revenues from Gaming = 81.4% (median)
- Positions per Room = 3.4 (low)
- Promotional Costs / GGR = 26% (high)
- Win / Position / Day = $186.4 (median)
Assumptions
- EBITDA Multiple for 2009 = 6.0x - 7.0x based on: markets, relative size, # of
properties (diversification), historical performance
- WACC = 12%
- Equity Risk Premium = 6%
- Used market cost of debt where possible
- 20 year Treasury
- Unlevered Beta = 0.71
- Levered Beta = 1.67
- Terminal Multiple = 7x
- Comps = Ameristar, Boyd, Isle, Monarch, Penn National, Pinnacle
Cap Structure @ Exit (Includes Accrued Interest & Default Fees)
- First Lien: $162
- Second Lien: $75
- Other Secured Claims: $3
- Unsecured Claims: $3
- Cash: $15
- Administrative Claims: $5
Valuation
