From a financing point of view, the sources of funds is one of the most important set of assumptions in a transaction model. The sources of funds will equal the uses of funds, but within the sources of funds there will be detail of each individual tranche of the financing. Usually the way the sources of funds is structured is that the most senior financing, in other words the financing which is paid back first will be at the top and the most junior financing, usually the equity tranche will be at the very bottom. So if we start with the first lien financing, or sometimes if it's bank debt known as term loans. And if it's bank debt, traditionally there were three types of first lien financing, term A, term B, and term C, and this was the standard structure of bank loans. Now, you may see this first lien financing called first lien rather than term A, or term B, or term C. And traditionally term A was provided by commercial banks, and then term B and term C was sold to investors. With the increasing sophistication and complexity, investors are now so keen to invest in a number of these deals. In recent times, we're seeing a lot less of term A and in many transactions, term B and potentially term C financing. And as I mentioned before, you may see this call first lien. And this first lien or term loans is the senior, most senior part of the financial structure. After the first lien or the term loans, then we ought to have a charge which we call second lien. In other words, it has a second claim on the security. So if the firm goes bankrupt after the term loans or the first liens, and let me make that clear these are first, this is the first lien, which is these three items here. The second lien has second claim against the security. Lien actually is just the French for security. Then potentially, not in every transaction, but in some transactions you may have a tranche which we call mezzanine. And what mezzanine is, it kind of sits in between the debt financing, the first lien and the second lien financing, and the equity financing. And it will have characteristics sometimes of both types of financing. It will normally have interest charged on it and that interest may be what we call paid-in-kind or it may be cash interest. And in some cases the mezzanine may have options or what we call warrants which are able to be converted into shares. So actually, mezzanine holders can get a blended return from the interest and the warrants which convert into shares. Then after mezzanine, we have the equity section, and the equity section may be split into two tranches. The first tranche or the more senior tranche being known as preferred equity. It's preferred because it's paid off first in the event of bankruptcy, and it will get its dividends before the common shareholders. Then lastly, we will have the common equity, and this represents the final tranche of the sources of funds. And it's this common equity which will have voting rights, and they will control the board of directors. And as long as the business makes all the interest and repayments for the first and second lien financing, and the mezzanine, and the preferred equity, no problem. If they don't make interest or repayments on time, then potentially the debt holders can take control of the business. So I've laid it out like this to reflect the seniority. So this is the least senior, in other words, at the bottom, if the business goes bankrupt to get paid, and at the very top, this is the most senior. Now, what will also happen is because the least senior financing, the common equity is taking the most risk because they are paid out last, this means that generally speaking, the least senior will get the highest return, whereas the most senior will get the lowest return.

Now, in reality, in highly leveraged transactions or special situations, the debt structures can be complex.

Many debt structures will be different, and they will typically be driven by the market practice or the demands of investors when the transaction was structured.

And one particular tranche may be in one transaction and may be absent in another transaction. For example, many transactions will have term B financing but will have no term A or term C financing. And many transactions may not have mezzanine financing. And remember, the structure of each individual tranche, it's maturity, or what we also call term structure, it's pricing what interest rate is charged. And the amount that you can finance all are going to depend on both the marketplace at the time and investor's risk appetite, as well as the cashflow forecast of the business. Leveraged deals or highly leveraged deals which include a lot of debt financing are much more likely to have complex structures and complex sources of funds.