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A Pragmatist's Guide to Leveraged Finance
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Table of Contents

Chapter 1 Introduction 1 Chapter 2 Common Leveraged Finance Terms 7

General Terms 7

Yield and Spread Definitions 11

Questions 14

Chapter 3 Defining the Market and the Ratings Agencies 17 Chapter 4 The Participants 21

The Issuers 21

The Sell Side 22

The Buy Side 23

Private Equity 25

Chapter 5 Why Is Leveraged Finance Analysis Unique? 27 Chapter 6 The Major Components of Analysis 31

The Components 32

A Pragmatic Point on the Various Aspects of Analysis 34

Chapter 7 Some Features of Bank Loans 35

Questions 40

Chapter 8 A Primer on Prices, Yields, and Spreads 41

The Basics 41

A Few Points on Yields 43

A Few Points on Spreads 43

Bank Loan Coupons 44

Duration 45

Total Returns 45

Deferred Payment Bonds: Prices and Yields 46

A Pragmatic Point on Terminology 48

Questions 49

Chapter 9 A Primer on Key Points of Financial

Statement Analysis 51

EBITDA 52

Capital Expenditures 57

Interest Expenses 58

Taxes 59

Changes in Working Capital 59

Free Cash Flow 61

The Balance Sheet 62

A Pragmatic Point on Financial Statements 64

Questions 65

Chapter 10 Credit Ratios 67

EBITDA/Interest Ratio 69

Debt/EBITDA 72

A Pragmatic Point on the Leverage Ratio 76

A Pragmatic Point on Valuations 77

Free Cash Flow Ratios 79

Changes in Working Capital 80

Dividends 80

Acquisitions 80

One-Time Charges 81

The FCF/Debt Ratio 82

A Pragmatic Point on Free Cash Flow 82

Questions 84

Chapter 11 Business Trend Analysis and Operational Ratios 85

Business Trends 86

Margins and Expenses 88

Capital Expenditures 91

Questions 93

Chapter 12 Expectations, Modeling, and Scenarios 95

Sales and Revenue 96

A Full Model 99

Scenarios 108

A Pragmatic Point on Bank Maintenance Covenants and Expectations 110

Questions 112

Chapter 13 Structural Issues: Coupons 113

Loan Coupons 113

Bond Coupons 115

Zero and Zero-Step Coupons 115

How the Coupon Is Determined 121

Modeling Changes in Coupons 122

Questions 123

Chapter 14 Structural Issues: Maturities, Calls, and Puts 125

Maturities 125

Calls 126

Clawback 129

10% Call 130

Cash Flow Sweeps 131

AHYDO 132

Other Bank Prepayments 132

Open-Market Repurchases 133

A Pragmatic Point on Early Refinancing of Debt 134

Questions 136

Chapter 15 Structural Issues: Ranking of Debt 137

Ranking 138

Structural Subordination 141

Subsidiary Guarantees 145

Questions 148

Chapter 16 Key Leveraged Finance Covenants 149

Debt Incurrence 151

Defined Terms and Carve-outs 153

Defined Term Examples 154

Carve-outs 155

Restricted Payments 156

Change of Control 158

Asset Sale 160

Reporting Requirements 161

Other Covenants 162

Affirmative/Maintenance Covenants 163

Restricted and Unrestricted Groups 165

Questions 167

Chapter 17 Amendments, Waivers, and Consents 169

Questions 177

Chapter 18 Making Money or Losing It Off of News Events 179

Scenario: An Issuer Makes an Acquisition 180

FastFoodCo (FFC) Facts 180

GoodFoodCo (GFC) Facts 181

Deal Facts 181

Scenario: The Issuer Gets Bought 185

Scenario: An Issuer Announces an IPO 189

Scenario: An Issuer Is Facing a Maturity 192

A Pragmatic Point on the Blended Price to Retire Debt 194

Questions 195

Chapter 19 Management and Ownership 197 Chapter 20 I'm Looking at Debt, So Why Does Equity Matter 201

Valuation 201

Monitoring Equities 206

Questions 208

Chapter 21 Value, Relative Value, and Comparable Analysis 209

Questions 216

Chapter 22 New Issuance 217 Chapter 23 Distressed Credits, Bankruptcy, and Distressed

Exchanges 221

Claims 224

Classes of Claims 226

Subordination 227

Claims Arising from Bankruptcy 229

Valuing the Enterprise 230

Sale or Restructuring 231

Restructuring Without Bankruptcy 234

A Few Pragmatic Points on Bankruptcy Reorganizations 236

Questions 238

Chapter 24 Preparing a Credit Snapshot 239 Chapter 25 The Investment Decision Process 243

A Sample Investment Process 244

Big-Picture Items 245

The Company 245

Credit Fundamentals 246

Event Analysis 246

Security Analysis 247

Relative Value and Return 247

The Decision 247

Some Investment Traps 248

Chapter 26 Closing Comments 251 Answers 253 Index 259

Promotional Information

The high-yield leveraged bond and loan market ("junk bonds") is now valued at $3+ trillion in North America, EURO1 trillion in Europe, and another $1 trillion in emerging markets. What's more, based on the maturity schedules of already issued debt, it's poised for massive growth. To successfully issue, evaluate, and invest in high-yield debt, however, financial professionals need credit and bond analysis skills specific to these instruments. Now, for the first time, there's a complete, practical, and expert tutorial and workbook covering all facets of modern leveraged finance analysis.

Credit Suisse managing director Bob Kricheff explains why conventional analysis techniques are inadequate for leveraged instruments, clearly defines the unique challenges sellers and buyers face, walks step-by-step through deriving essential data for pricing and decision-making, and demonstrates how to apply it. Using practical examples, sample documents, Excel worksheets, and intuitive graphs, Kricheff covers:

  • Yields, spreads, and total return
  • Ratio analysis of liquidity and asset value
  • Business trend analysis, modeling, and scenarios
  • Interest rate impacts
  • Evaluating and potentially escaping leveraged finance covenants
  • Assessing equity (and why it matters
  • Investing on news
  • Early stage credit
  • Creating accurate credit snapshots, and more

About the Author

Robert S. Kricheff, Managing Director and Head of the Americas High Yield Sector Strategy for Credit Suisse, has more than 20 years of experience in credit analysis. He has followed industries including media, cable, satellite, telecom, gaming, entertainment, healthcare, and energy; worked with emerging market corporates; and performed both strategy and portfolio analysis. His work has covered investment vehicles including bonds, converts, loans, preferred stocks, and credit default swaps. He holds a BA from New York University in Economics, and an MS c from the University of London SOAS in Financial Economics.

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