Welcome, welcome.

My name's Gerard Kelly. Welcome to this session, brought to you by Financial Edge Training.

In today's session, we're going to be looking at PE financing.

We're going to cover the things that you can see on screen here.

We're going to be looking at financing instruments. We'll look at debt equity covenants, collateral fees, but also then very briefly, the financing process at the end, like the steps you would take.

Just very quickly, my email address is on screen, so if you have any questions after the session, please don't hesitate to get in contact with me.

So that's Gerard Kelly at FE training.

gerard.kelly@fe.training. Great.

There's no excels to download in this session, so let's get straight into it.

Okay, so we start off by looking at debts, different types of debts, and the debt that's used by private equity equity.

I'm going to split them into three different types.

I've got my pro-rata, now pro-rata, that is debt provided by banks.

Okay, we'll come back, we'll talk much more about that, quite a, quite a lot more about that. In fact, your second type seller and seller loans, we'll talk a little bit more about that.

And then the third type is from institutions.

Now it says here, distributed amongst institutional investors arranged by investment banks. As the underwriters, we're basically talking about insurance firms, pension firms, and hedge funds.

Okay, so there are three big ones in the institutions.

What debt products do we get from each? Well, let's ping them up on the screen.

For our banks, they're going to be providing us with a revolving credit facility and term loan A.

Now, not every LBO deal has term loan A. In fact, I'd say the vast majority probably don't have term loan A anymore.

But they what? They certainly were important.

And to some deals they are important.

So we're going to include them here today. Okay? Now it's not just one bank that's providing those items, the revolver and the term loan A, you'll have a lead bank, but underneath that lead bank, they will have a syndicate of banks that they can share the debt out to.

If I make up an example, if we said that this debt was shared between three different banks, you would have a slight majority going to the lead bank, and then the rest shared out between the others.

So I'm going to share it out. 40%. Oops, 30%, 30%, great.

Now the seller can provide a seller loan.

They'll, we'll come back to that.

We are going to talk about that more, I promise.

And then lastly, the institutions, they provide the rest.

Now, very quickly, very quickly, very quickly, where am I getting the bulk, the bulk of my debt from? I'm going to be getting the bulk of it for my term loan A, if I have a term loan.

And the next biggest will be the term loan B.

If there is no term loan A, then certainly term loan B will be the biggest.

But we want to try and layer as much debt as we can into our deal.

So let's say I'm a private equity firm.

I'm looking to buy a company. I like golf.

Let's say I'm buying a golf company.

I don't have enough equity to do it. I want to use lots of debt.

So I'll go get myself some term loan A.

Then I'll get some term loan B.

But I'd still like to have more debt if possible.

In which case, we then move on to senior notes, subordinated notes, the mezzanine, the prefs as well, senior notes and subordinated notes.

These are examples of bonds.

These bonds can be sold onto other people the same way that any bonds could be sold.

The mezzanine debt is very likely to be a pick note, a paid in kind note.

Now, paid in kind notes means yes, we have to pay them back in 8, 9, 10, 11 years time.

But we don't pay any interest up to that point.

We certainly will pay them a whole load of interest at the end, but paid in kind means it's all paid at the end.

Now this is great. I'm telling you, we've got these debt providers, we've got the debt products, but what would it actually look like? So I just want to to spend a moment.

I want to go to a blank piece of paper and just show you what it would kind of look like.

So I want to imagine, again, I'm going to buy my golf company.

I really want to get myself some debt.

I'll start by going to a bank.

I'll get term loan A, and the bank says, we'd really like to lend you over six years.

Great. That suits me perfectly.

So for the first six years, so year one to year six, I'll have some debt with the bank.

That debt is going to be amortizing.

That means it's gradually paid off over the six years.

It's not all paid off at the end.

Fantastic. So we've got that.

The kind of interest rate we might be charged here, I'm going to make this up.

Let's say 6%. Okay? But that's not going to give me enough debt to buy the company.

I really want some more debts.

So I go to another institution, I'm going to get myself a senior note.

Now, that institution, they're going to say to me, oh, we'd, we'd love, love to give you a note.

Repaid. In year five, we're going to have to say, I'm really sorry.

Oh, my year five cash flow was going to, the bank institution would say, what about year six? Well, a year six, we'll, we'll be repaid in year six.

Sorry, that's going to the bank as well.

So the institution says, what about year seven? Have you got any cash flows in year seven? And I say, yes, absolutely.

In year seven, we've got loads of cash available.

So we're going to take on some debt.

Now that will be repaid as a bullet repayment in year seven.

Along the way, you'll be paying interest.

That interest, again, I'm making this up, let's go with 8% interest.

Great. But I'd love some more debt.

Oh, where else can I get more debt from? I'll tell you what, I'll get some mezzanine debts this time.

Let's say I go to a different institution, I go, I go to a pension fund or some, someone like that.

Hey, can I get some mezzanine debt, please? Yep, absolutely. We'll give you a bullet repayment year five.

Sorry, that's going to the bank.

What about a bullet repayment year seven? Sorry, that's a senior note.

Have you got any cash available in year eight? Yes, I do.

So by year eight, you'll take, you'll have another repayment, but now of debt type three.

And that will be another bullet repayment.

Now, this one's really getting quite, quite long.

This is now eight years.

They're going to charge you 10% interest, but this is going to be the pik note.

So interest won't be paid until the end, but that 10% will be added 10%, 10%, 10%, 10%.

So that mezzanine debt is growing all of those eight years.

Now that's just an example, capital structure there. And I haven't even got into any preference share or equity, but you, you can see how we layer the debt on.

We gradually add more and more and more.

We don't want our credit rating to be hit too hard.

We can't take endless amounts of debt.

And that's a really good example of how you might see it.

You add an extra year, it goes from amortizing to bullets and the interest rates go up.

Okay? So we've introduced you to the different types of debts.

We've introduced you to who the debt lenders might be.

I want to give you some more detail.

Now, this next slide is one of my favorites, but it is a bit crazy busy.

And I understand if you, you guys are going to look at it and you're going to be, oh my God, this is so much detail here.

Let's have a quick look at it. But I'll help you understand.

I'll give you a way to understand this slide.

Okay, so let me skip through that.

Oh my God, what a crazy busy slide. But let me help you out. Across the top, we've got our various debts products, okay? And we might notice that the most senior of them are on the left hand side.

You've got your evolving credit facility and your term loads.

I'll come back and talk about seniority in a sec.

On the right hand side, I've got the more junior debt types, subordinated notes, mezzanine debt.

Everything else on this screen, again goes from left to right and it follows this seniority.

If something's more senior, it'll have a certain characteristic. If it's more junior, it'll have another characteristic.

So for instance, let's look at the interest rates.

The interest rates for the most senior items will have the lowest interest rates.

Whereas my more junior items on the right hand side have the highest interest rates.

The fixed or floating, when we're looking at banks, so term loan A, et cetera, they like floating interest rates, whereas bonds and mezzanine prefer fixed.

What makes it more senior though? I don't understand why these items are senior.

Well, there's a couple of reasons. Firstly, the tenor, the more senior debt will be repaid earliest.

So we've got early repayment here, whereas our mezzanine debt, oh dear, repaid in year eight to 12.

These are much later repayments.

What else makes the senior debt senior? Well, we've got some amortization happening as well.

Term loan A.

So this one here that gets straight line amortization.

This means it's being repaid by year one. Sorry, partly it starts to be repaid in year one and two and three, et cetera.

The more junior items, hmm, bullet repayments, we have to wait a long time for that.

What happens in a liquidation bankruptcy, everything goes wrong.

Ah, my senior debts, they get paid first.

Ah, mezzanine debt subordinated, they rank much lower.

They're probably not going to get repaid at all.

And my senior debt is secured on company assets.

Now we're going to come back, we're going to talk about security and collateral, but we're thinking here about a blanket lien.

It could be secured on property.

We'll look at some other examples too.

My junior debts sadly unsecured.

So although this is a crazy busy slide, it actually gives you loads of really good detail.

And as long as you know how to read it, senior to junior, you can actually work out what the item in the middle, a term loan B or a senior note, you can kind of work out what those figures would be.

Okay, so we've got lots of debt product information here.

Ah, I've got a question, question in the chat. Thank you very much. Is this PowerPoint available online after the call? I'm afraid it's not. I'm so sorry. It's not.

However, this is being recorded, number one, so you can go back and watch it again.

Number two, this is all available in Felix.

If you were to go look at private equity financing consideration pardon me, financing instruments.

So it's available here, this recording, and it's available in that recording.

But an actual printout we don't make available. No problem. Thanks a lot. That's cool.

Alright, so the debt, the debts, products, wow, we've got loads of information, but who are these various institutions that are providing us with this stuff? Let's have a look at that on the next slide.

I've split this into lenders and investors.

Let's have a look at who our lenders are.

They're going to be banks and institutions and we've split them into hedge funds and insurance or pension funds.

My investors, they're going to include a couple of acronyms, we'll talk about them.

We've got CLOs, collateralized lending obligations.

So those of you old enough to remember 2008 and the great financial crisis, CLOs or CDOs were a a really big deal. Then come back, we'll talk about they, they very much researched, but we'll come back. We'll talk about, and we've got business development companies and PE sponsors.

So which products do these guys each invest in? Well, on the left hand side, I've got my type of facility and we'll start with the lenders in blue.

My banks, they very much focus on the revolvers and term loan A, although remember an investment bank will help do the underwriting and the organization for lots of this.

Our hedge funds, they aim much.

Lower ranked debt, the higher yield stuff that something gives you much higher return.

And pension funds and insurance firms are focusing much more towards the term loan.

B, C, and D markets.

Those guys, ooh, date, let's try that again.

They are our institutions.

So what's about these investors? This other part of the market? Well, CLOs, they were collateralized lending obligations.

Collateralized realized, I have misspelled that.

I knew I could feel it as I was doing it.

Collateralized. There we go.

Collateralized lending obligations.

I can see there's a hand up guys, if you want to ask a question if you can, do you wanna try and put it into the q and a? But do you, the person who's put their hand up, do you wanna ask me? Go for it. You can unmute if you can or the Q&A might be best.

Do the Q&A.

So my collateralized lending obligations, what the hell are these guys? These guys are a special purpose vehicle, an SPV or special purpose vehicle.

And what they are, they're set up to manage a pool of loans.

What we do is you put maybe some loans from my gold company, put that in there.

Then you might put a loan in from an to another private equity firm and another loan to another private firm and another loan to a private equity fund.

And you group them all together and you create this debt product and then other people can invest in them.

But instead of just lending to Gerard Private Equity fund and his golf company, you can invest, you are basically lending to a whole pool of different people.

And the idea is that you diversify your risk.

So collateralized lending obligation, what impact have they had on the market? Well, they've really researched, really come back in recent years and the increase of collateralized lending obligations, these special purpose vehicles that like to buy up lots of debts, it means that we've got an increase in deal volume because there's more money available for leveraged buyouts.

That's fantastic, really helping the market out.

And they're focusing on the A and B.

There's lots of investors in there, pardon me.

The majority of debt in a deal is going to be in the A and B market.

If we can provide more to it, make more deals. Great.

Okay. What about BDCs? What does BDC stands like? Now? BDC is a business development company.

A business development company.

Just really quickly, guys, I can still see someone with their hand up. That's absolutely fine. If you wanna have your hand up, if you can unmute and if you wanna ask a question, please do or put it into the, the Q&A or the web chat really doesn't matter which one.

Okay, no worries, no worries.

Let's go back to BDC business development companies.

Now, a business development company is a publicly traded fund, and that means retail investors like you and me, we could buy shares in this company, a business development company, and they pull all of our funds and then they decide, hey, we're going to go invest that in private equity.

They, they often act as kind of venture capital.

So they also look towards startup companies or like high growth companies.

They're particularly focused on small and medium sized enterprises and they lend term B and mezzanine.

Lastly, we have a, what I always think of as an unusual one here, private equity PEs. There it is there. Private equity.

They don't just provide their equity, they can themselves provide debt as well.

So the term private equity in this case could be changed to private equity and private debt.

So what happens here, well, private equity, they have within them a credit investment fund and that credit investment fund will buy up some of the debt issued by the, the golf company in my example.

Now the great thing about this is that the increase in PE sponsor buying debt means that there's a decrease reliance on banks and institutions decrease reliance on others.

But it does mean that there's an increased risk to the private equity firm themselves because now they could lose their equity and they could lose their debt.

However, it means they've got more control.

So there are pros and cons to this. Awesome.

So we've got ourselves, the debt providers and what they invest in.

There's just one more big debt product I want to talk about and it's called unitranche and financing.

Tranche financing is very similar to what we've seen.

If you think what we've seen might include a separate, a group of separate lenders.

You've got your senior secure debt, so that would be the bank.

You've then got your senior unsecured debt, might be a hedge fund.

You've then got your subordinated debts. That might be your pension fund or those would be the other way around.

They were always separated.

But a unitranche, what it does it, it merges the senior and junior subordinated debt into just one tranche.

And there's a couple of benefits to doing this.

First of all, you, you end up with just one interest rates and the PE firm that you are lending to Gerard's golf company.

The one interest rate that I see, that's all I experience.

I don't see a, an interest rate for the term loan A and an interest rate for the term loan B and an interest rate for the sub debt and the mezzanine and the whatever.

It's just one interest rate that is blended, number one.

Number two, they tend to be lacking in amortization.

So instead of paying off some debt in year one, amortization means you need to pay some off in year one, some off in year two, we won't have any of that.

We'll try and pay it all off some, pardon me, pay some of it off in year five and then year six and then year seven, then year eight.

So it'll just be, be a series of bullets. Ah, okay.

But it gives you some breathing room for the first couple of years.

Unitranche also usually are something called covenants lite.

Now we'll come back, we'll talk about covenants and what cov lite means later on.

But basically there are less restrictions on the company.

So hang on, hang on, hang on, hang on, hang on, Gerald.

Before we had these kind of senior debts and then we had very junior or subordinated debt and they were different people and they had different characteristics and different interest rates.

And how is the unitranche, how is the unitranche going to kind of recreate that? Well, what they do, they have something called an agreement among lenders, agreement among lenders.

And what that does, it says you have, you group some of them together and you call them first out investors.

They are the seniors and you have some last out investors.

They are the juniors and this recreates the separate lenders that we always had before.

But the private equity firm you're lending to, they don't see any of it.

This is all hidden away. The admin is hidden away. It makes it much, much easier for the private equity firm.

So again, why, what other benefits might we have? Well, this means we have much lower admin for the private equity firm.

They deal with one lender and there's one interest rate makes it much easier for them.

This means negotiation can be spared right up.

I can buy my target company, my golf company, I can buy that and I can negotiate with them.

I get all the financing sorted out much quicker.

This also leads to the third benefit, which is an increase in execution ability.

We're not going to be waiting around for one particular debt product to be sorted out.

It's just all done. Any downsides.

The downside is you're going to pay a higher interest rates, but higher ir, higher interest rate.

But think of all the reduced admin that you've, that you've benefited from.

There is one exception to the unitranche, okay? And it's the revolver, okay? Your revolver is still going to be bank provided. That's going to be separate to the unitranche and it is super senior to all the other different types of dents.

Cool. So guys, that's got us through the debt.

I now want to talk to you about equity for a bit Here.

We've got a hypothetical capital structure.

It's got lots of debts. Let's have a quick look. We've got our revolver terminal loan Ave got terminal loan B, we've got subordinated notes.

We've, we've covered all that stuff, but we've also got two equity items in this box that I've just drawn.

So what's going on there? Well, debt holders are not going to provide all of the funding.

The kind of funding that you get from debt is going to be somewhere between 50 to to maybe 70, 75%. Maybe that means your equity is going to be the remaining 25 to 50%.

So we need to go and find that equity as well.

And that's luckily us. That's private equity. That's me.

I'm a private equity firm.

I'm going to buy this golf company of mine, okay? But there's another group that I'd really, really like to add some equity to this deal.

And it's the management.

We'd like some management equity as well.

Now the benefits of this, firstly it reduces the cash investment from the financial sponsor, financial sponsors, private equity, that's me.

The management equity is normally tiny.

So this isn't an enormous benefit here, but what it does do is it aligns the incentives between the financial sponsors and management.

So how does it work? Well, what you're going to have is the management.

This is the old management.

I keep saying golf companies are let, let's say I'm going to buy a mobile phone company just just to shake things up.

The mobile phone company that I'm looking to buy, they had some old management, old management, they had some shares in the company.

I'm just about to buy out all their shares and they're rubbing their hands together.

Oh, this is great. We get to exit.

Yes, Gerard, private equity company's going to buy us and, and we get to leave and sell and make loads of money.

And I realized that that management, that they are integral to the success of the company.

They've got great supplier relationships, great customer relationships.

They know the staff, they know the products.

They are really important. I want to keep them in the company.

So what I say is, look guys, I'll pay for some of your shares, okay? We, we've got to give you some kind of reward, but I'd love you to just roll some of your old shares into my new company.

Yeah. And what we'll do is I'll give you 5% and we'll invest the other 95%.

And what we're going to do in the next couple of years, guys, is we're going to grow the company.

It's going to multiply 2, 3, 4 times and your shareholding will double in value trip and value quadruple inbound.

Will you come with me and say yes.

So the management decided to keep their stake in the transaction, and that's called rollover equity, okay? And that's an important part of many LBO deals.

Now, another reason why management might decide to take it is that there may also be, there may, pardon me, there may also be a tax, there may also be a tax benefit. That's what I'm trying to say. There may also be a tax benefit to management from rolling over their equity.

The idea is, is that instead of crystallizing their gain now, now to pay tax, now they could roll that forward. They could defer it into the future, okay? And that can give a tax benefit in some jurisdictions.

Not all, but some. Okay, so we've got our debt, we've got our equity all sorted out.

What other characteristics do we need to be aware of? And debt. Debt comes with a lot of covenants or at least potentially it comes with a lot of covenants.

So let's talk about covenants and then we might say why it's not such a big deal.

So what are covenants? Well firstly we've got affirmative covenants.

These are promises by the borrower. We promise to do this and we promise to do that.

Then we've got negative covenants, prohibitions on the borrower.

The borrower will not do this, the borrower will not do that.

And then we've got some financial covenants.

So basically ratios that you have to pass the test on.

So let's have a look at some examples. What kind of affirmative covenants might we see? Well, firstly, you've got to file your annual statements.

You've got to have insurance for the issuer's, assets, property, the land, the bill, the machinery, and also what other affirmative covenants might you have.

You might it, you might write that you want to obligate the issuer to repay the loans at maturity.

They all sound perfectly reasonable, don't they? What's about the negative covenants? Well, we promise not to restrict asset disposals.

We will not distribute to shareholders.

We will not engage in risky investments.

So no acquisitions unless the debt holder agrees to it.

You'll not pay dividends, you'll not issue additional debt.

Well this sounds all very good.

What about maintenance financial covenants? These are just a series of financial metrics, e.g. leverage ratios such as debt to EBITDA ratio less than five. That's a very common one.

So you've got to make sure that you don't operate the company too risk, you don't take on too much debt, you don't reduce your EBITDA that kind of thing.

But this is all sounding very restrictive.

This is all sounding like, hang on, I, I want to run my company.

I want to buy this mobile phone company, I want to run it. I wanna have some fun, I want, I make some money and I can't do that. If there's all this restrictions.

So an incurrence financial covenant, slightly different.

This says the borrower must not incur new additional debt.

But here's the important word, unless a particular test is met.

And if that particular test is met, then you are allowed to do things.

You are allowed to take on extra debt, you are allowed to make some investments, you are allowed to make some acquisitions. You're allowed to spend some money.

And as long as you are passing those tests, the kind of thing you might be allowed to do to eeg, you might be allowed to invest a certain percentage of your free cash flow.

Excuse me for a minute.

Now This is all a little bit academic, okay? Covenants, they do exist, but they're not included in all deals in this manner.

The world of LBOs has moved more towards a covenant light approach.

So what does that mean? Well, covenant like debt, light debt.

This says any facilities that do not require borrowers to comply with financial maintenance covenants.

Basically we're going to write off most of these covenants that we've been restricting you with over in these deals.

Are there any upsides or downsides? There's definitely a downside to this.

The downside that I see is that it means less investor protections.

So why on earth would the investors allow this? And there's actually a pretty good reason.

Let's look at this graph on the right hand side at the bottom.

We've got time going forward and on the left hand side we can see that we've got covenant light share of US leveraged loans.

And if we look at 2008, the global financial crisis of 2008, this was relatively low.

Only 20% of loans were covenant lights.

Now there's an argument that in 2008 and things started to go wrong because the covenants were so restrictive and because the tests and the ratios and companies were so strict that the companies started to breach their covenants really quickly and it was actually difficult not to.

Let me put it another way. It was really easy to breach their covenants and lots of companies went bankrupt.

Now of course there were many other reasons for the bankruptcies, but what we see, well this certainly isn't today, but certainly much further into the future.

So 2020, it says here the world had moved more towards covenant lights and 80% of leveraged loans, 80% are now covenant lines.

So what does this mean? Well, on the left hand side here, it says those loans help borrower companies help borrower companies to avoid bankruptcy in times of financial stress.

It basically says the debt holders might give me a bit of breathing room, might is the big word there, which means I can carry on, get the company a bit healthier and actually repay those debt holders.

So covenant lights very much the modern version of covenants.

So what else do we need to talk about guys? I've got two more things I want to talk to you about.

I wanna talk to you about financing fees and then we'll just talk to you about the capital tructure, how it's set up.

So let's talk about or beg your pardon, three things we need to talk about collateral as well.

So collateral rule collateral helps your debt holders, helps your debt holders quite a lot, okay? It is collateral is an asset or property that's an individual or entity offers to lenders as security.

Now the kind of things we might look at, you might see this as property, real estate land machinery, et cetera.

Inventory and accounts receivable.

Now the one that I missed out here was a blanket lien or lean end depending on where you are in the world.

Now a lien means that a debt holder has a right of ownership.

A debt holder has a right of ownership over Gerard's assets.

Gerard's mobile phone company's assets.

While I have an underlying obligation to the debt holder, I owe them money while I have that obligation to owe them money.

They have a right of ownership over my assets, but as soon as I pay it all off, the lien falls away.

They don't own my assets anymore.

Now the classic lien would be the mortgage on my house.

I owe lots of money to my bank to buy my house, make my house right now when I pay off that mortgage, they won't have a lien on my Now a blanket lien covers all of the assets of a company, whereas secured would be secured on a particular item.

The kind of debt products and the collateral they ask for, well the debt products of revolving credit facility and term loan A, they are secured with a first lien. They are first in line for those assets.

You may have, it's not extremely common, but you may well have on your term loan B and your senior notes, you may have them secured with a second lien.

Now a second lien means all the, the company goes bust, my company goes bust, all the assets in my company are sold off.

They pay off the first lien creditor first.

They pay off the first lien creditor first and if there's any money left over, it goes to the secondly creditors.

Okay, The guys at the bottom generally unsecured are very risky.

Why do they lend to us at the higher interest rates? They're going to charge us a higher interest rate because of that.

So let's have a think quickly about what me, private equity, what I need to pay the debt holders.

Well I need to pay them their money back.

I need to pay them interest or coupon.

There's also something else we need to pay them and that's fees.

Let's have a quick look at these fees. These fees are one-off fees and we've got quite a few of them.

We'll go through them quite quickly.

First, we've got the upfront fee that is paid to the banks and it's actually paid to all of the banks providing you with debts.

And then there's an administrative agent fee that is paid to your lead bank.

The lead bank only banking them for organizing everything for you.

You've then got a commitment fee and a facility fee. Now a commitment fee is paid to lenders on the undrawn portion of a revolver.

Revolvers are like a credit card.

You don't have to use them, but if you do use them, got to pay some interest.

But the undrawn part also has to have a fee paid, whereas a facility fee that is paid on the entire committed amount regardless of usage.

And then lastly, a prepayment fee.

If you pay off your debt early, there'll be probably a prepayment fee or a call. Premium fees associated with prepayments.

And then you've got fees for bonds.

Now registration fee is paid to the regulatory authorities or registering your bonds and an underwriting fee paid to investment banks.

Let's imagine I want to issue a bond.

Maybe no one will buy the bond.

So I say to an investment bank, investment bank, will you help me sell this bond? And they say, yes, absolutely.

And then I say, what if no one buys my bond? Investment bank says we will buy it if no one else does, but I have to pay them a fee for that.

Here's an example. And we look here at some actual numbers.

You can see our term loan A, we've got 360 million and the fee it is half a percent.

Getting us to this, let's do an arrow.

1.8 million term loan B is 240 multiplied by 1.25%, getting us to three.

And you can see for the sub debt, 180 times 2.5, 4.1.

There is a bit of a weird one for me, bit of a weird one here.

Gerard, there's no revolver.

There is a fee, but hang on, we've got, we've got a fee.

How does that work out? Okay, well what happens here is we have further down the page we have this revolver commitment of 150 and that 150, even though you don't use it, would be placed up here multiplied by 0.5% equals 0.8.

Even though you haven't used the revolver, of course you have to be paying this commitment fee over here on the left.

Great. Now just one more thing I want to talk about with you guys.

It's really the, the kind of financing process.

Now that process, ah, give me two sec.

Got an awesome slide I want to show you guys.

It's really useful.

Okay, here we are. The financing process is you start off with addressing existing debt.

Now that existing debt, I'm going to buy my golf company, mobile phone company, Any existing debt they have nearly always has to be paid off.

It's got old covenants which we will breach.

It's got a lender who lent to the golf company when it had very little debt and it is charged very low interest rates.

I'm going to put tons of debt into this company and I should be charged a much higher interest rate.

Excuse me just a moment. I'm very itchy.

So the covenants, oh, we don't want all those covenants.

The lender also didn't lend to me private equity.

They lent to the golf company.

So they may invoke their change of control clause.

They don't want to be lending to me.

However, they may well know the company really well.

They know it's credit history, it's rating, its projections, I might want to engage them.

But anyway, we need to address the existing debts by paying it off.

Get rid of the existing debts.

Then we'll evaluate the debt capacity of the company.

We'll take our new company's ebitda, it's proforma EBITDA and we'll multiply it by some multiples.

If we were looking at term a debt, so a debt, so multiple question mark for term loan A, you'd be looking at a multiple here of 2.5 to maybe 3.5.

If you are looking at B debt, which is on top of the A debt has a hesitate to say.

So that would probably be another two to 2.5 times.

Okay? You then analyze the collateral base. Have you got inventory? Have you got accounts receivable? Maybe go find some particular asset based lenders who love this kind of stuff.

They love lending for this stuff.

Commercial mortgage backed securities lenders.

They would love these kind of deals. They'd love to lend to us.

And then you work out the minimum equity contribution.

Now that minimum equity contribution, this is the last thing I want to talk to you guys about. So it's just going to take a quick minute here.

We're going to look at our uses of funds and our sources of funds.

One of our sources of funds is going to be the equity.

So let me write that in really quickly. Put it down here.

But how much equity should I put in? Well, to work this out, I firstly need to work out the equity purchase price.

I'm going to buy the target company.

How much am I going to pay them? I'm going to pay them 10 million.

I also need to repay the target's debt.

So the existing debt with the existing banker, with the existing covenants.

Get rid of all that. That's another two.

And another use of my funding is to pay fees.

Oh, I need to find 13 million.

Oh, where am I going to get 13 million from? Well, I start off with debt and I might do some term loan A, I might do some term loan B, I might do some sub debt.

So I'm entirely going to make all this stuff up. Now let's say that all comes to eight.

Make that up. So I've got 8 million from debt.

My equity is the remainder.

So my equity works out as a plug.

Now, private equity, they need to work out if we invest five in this company, are we? So we're putting five in.

What can we get out when we leave the company in five years time or three years time or whatever.

And then they'll work out.

Does that equity level, is it too much, is it too little? And they'll do the crunch, the numbers and they'll decide whether the deal is doable or not.

And that gets us through private equity financing.

Guys, I hope you have found that really useful. Thanks a lot for coming along. That's 50 minutes.

We will of course be doing something similar next week.

Next week is I believe intro to LBOs.

So she thought this was all really good, really good introduction.

Next week we'll be doing the actual kind of LBO deals, the and how they happen intro to it.

I hope you guys found that useful.

Do come back next week and see us on another Felix Live.

All the best. Enjoy the rest of your day. Bye-bye.