A few questions... you have a start-up...
1-- Goodwill=0 ? 2-- Deal is funded with PE investment and modest leverage... assets 3.8bln, debt 3.0 bln, Eqty .8bln. Of that 3.8 assets, .8 is cash, rest is PP&E. Most of this cash is used for an early return on equity for the sponsor.My question is, if (total dividend) > (Net Income), the difference should be decreasing book equity to balance the BS, correct? Will most lenders build-in covenants to prevent dividend payouts in excess of NI?
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A lot of lenders, esp now, would build in dividend stoppers at the various entity levels to prevent early distribution
no... First, you won't see dividends, not anytime soon... Second, if they do see some early payout it won't be small, it will be a recap to swap the equity for debt... This will yield the nicest irr...
Third and most important, PE doesn't track net income, and coming from the debt side, we never look at ni, to far down the income statement... What you do see is specifically and narrowly defined ebitda definitions in the legal documentation, but as nothing is measured off of NI it's not looked at... It's levered and too much accountin mumbog jumbo goes into calculatig it... I've seen deals where book value of equity is negative and no one cared, the company generated ridiculous returns...
Also, remember these are private companies, the P/e ratio is non existent, therefore irrelevant
Yes, startups have 0 goodwill...
Its a start-up which already has government contracts, company will be throwing off positive CF from Year 0.
So the best way to maximize IRR is to bring on debt at the time of the early rtn of capital?
I figured the sources would include a cushion to fund the early rtn of capital and it would be distributed the first few years.... seems like you're saying borrow when its time to payout?
So how do you come up with your dividend payout figure? Just sweep all cash less minimum cash balance? I'm assuming all the debt is amortized only when required?
The u&s is built to withstand a potential downturn, and not breach covenants... That's why the equity cushion exists at certain levels... Senior debt usually builds in mandatory % repayments and then mandatory cash sweeps... This causes rapid deleveraging in an ideal situation.
2 or 3 years out, the capital structure and leverage multiple will allow you to reborrow and wipe out the equity... But this still keeps your ownership percentage the same... If you model an early recap at yr 2 or 3 then a final exit at yr 5, your irr will be better (time value of money)...
Now dividends are highly regulated by the debt documents and are done on a % cash sweep basis after all mandatory senior security payments...
Realistically, the dividend recap as it's called won't be done anytime soon but the idea is to boost irr by making early distributions and a final exit later on...
Read the credit agreement or indenture, it will describe what sort of payments are allowed. Look specifically under Restricted Payments.
Yea, you find it under the negative covenant section... Just a closing remark: As a borrower, you typically don't want to see large dividends as the sooner they recoup their money, the higher the IRR and it disincentivises both management and the sponsor as they have achieved a sufficient IRR and multiple and are focusing efforts elsewhere...
Ridiculous 1 Time Special Dividends... (Originally Posted: 12/10/2012)
Soo companies like Costco, Walmart etc are issuing 1 time special dividends this quarter before January 1st at like 7%...
discussion 1: is this just a way for management with holdings to make $ while the tax rate is at 15% and not 40% in-case we go over the fiscal cliff? a way to give back to shareholders and allow them to take in CFs while its still at 15%? Easy to do since its debt financed and treasury rates are so low that they can issue low interest rate on debt? whats the real rationale you guys think? shouldnt this help the future valuation of the stock? ex- current price is just PV of all implied predicted future CFs of the stock (both share price and dividend related increase)...this includes dividends ?
discussion 2: what banks are on these types of deals? what roles to these ibanks play? is it just DCM issuing and selling the debt for them? hedge funds? just curious to see who's on these deals and what they actually do..
thanks :)
and before you say google it etc, i have but the answers seem very textbook and not in depth
hope this can start a good discussion on corporate strategy, tax implications etc.
thanks!
I think the rationale is fairly simple: companies have a ton of cash sitting on their books and they want to give it back to shareholders before a tax hike. It has a slightly positive benefit to valuation short-term, as (1) you bring forward the expected payout of cash and (2) there's certainty of a payout, vs. if cash is just sitting on the balance sheet unused, you have no idea when you'll receive it. Most companies aren't issuing debt to get these special dividends done, hence no need for bankers.
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