Hi, I have been given a take home case study to prepare. The case study asks us to recommend different types of debt products - loans, bonds and private placement. I have been given very basic company financials (EBITDA, and peers financials. Could anyone give me some advice on how to approach this? Thank you very much for your advice!
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There are really a million things that could go into selecting the appropriate debt product.
As a general rule of thumb, the higher up in the capital structure, the cheaper the interest rate/lower risk, but also the less say a company has (the bank/financing co. would have put in place covenants and rules potentially restricting what the company could actually do with their own money. consequently the lower on the capital structure/less secured, the higher the risk and therefore the higher the interest rate/expected return on the debt product.
Another thing to consider is if the company is large enough to actually have direct access to the capital markets. Which is to really ask, would anyone actually be willing to buy bonds priced within a range that didn't blow up the company's cap structure. It would also depend on what was trying to be financed, if you're looking to buy a building/factory you're going to look more in the loan area (1st lien secured debt tied to the asset being purchased).
All of this also depends on how leveraged the company already is, since you mentioned EBITDA i would look at the EBITDA/Debt multiple the company already has, V.s. what it would potentially look like after you add your mystery debt product.
Thank you so much for your advice. The debt is actually to fund a tech company's expansion of markets in a different country. I am considering between 80%private placement and 20% loan or all bond. I have considered the factors you mentioned here but not quite sure how to use the data and financials to support it. May I know can you use the (new net debt in2017)/(EBITDA in 2015) or do I have to make assumption for the growth?
You would look at it from both a most recent fiscal period and on a pro-forma basis. If you have most recent year end financials then use those to see where your company stands as of that moment, then create a case with either your Option A or Option B, over a pro forma EBITDA figure.
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