Credit Markets and Leveraged Buy-Outs: The Good, The Bad and The Ugly
Spring 2015
B8329
(**All information below is subject to change**)
Professor: Margaret Cannella
Office Location: Adjunct Office, Uris 218
Cell Phone:
E-mail:
Office Hours:
TBD
Teaching Assistant: TBD
COURSE MATERIAL
All course material is available either on Canvas or in a Casebook provided to you at the outset of the semester. Books,
of course, are an exception and may be purchased or borrowed. They include:
“"Investment Banking: Valuation, Leveraged Buy-Outs and Merger &Acquisitions," J. Rosenbaum, J. Pearl, J. Perella and
J. Harris, John Wiley and Sons, New York, Second Edition, 2013, 417 pp.
"All the Devils are Here," by Bethany McLean and Joe Nocera, Penguin Group, 2010, 350 pp.
“The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor”, Howard Marks, Columbia
University Press, 2013, 248 pp.
REQUIRED PREREQUISITES AND CONNECTION TO THE CORE
Corporate Finance and Capital Markets are required prerequisites for the course.
The learning in this course will utilize, build on and extend concepts covered in the following core courses:
Core Course
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Connection with Core
Corporate Finance
Financial Accounting
Global Economic
Environment
Decision Models
1.
1.
2.
1.
Firm Valuation Model
The Accounting Model
Resources and Obligations
What are the role of financial markets in the economy
1. Models in Practice
Students will be expected to have mastered these concepts and be able to apply them in the course.
COURSE DESCRIPTION
The course looks at leveraged buy-outs from the vantage point of financial sponsors, the credit markets and fixed
income investors as it prepares you to play a role in any of these capacities upon graduation. It will enable you to
address – through casework and a final project - the fundamental question of how value is created in leveraged
transactions in different credit market conditions, using different financing structures that facilitate different investment
rationales.
The casework introduces a broad array of transactions, some of which have been highly remunerative to the buy-out
firms which invested ("the good"), while others may prove difficult to exit ("the bad") and still others might require
extraordinary financial or operational engineering to salvage ("the ugly). A final project enables you, playing the role of a
buy-out firm, to pitch for financing of the transaction.
COURSE OBJECTIVES
To provide students the tools to make decisions relating to LBO transactions:
1.
2.
3.
4.
5.
Identifying companies that make good LBO candidates;
Determining the appropriate price for an LBO transaction;
Structuring the LBO transaction;
Exiting the LBO transaction;
Investing in the LBO capital structure.
COURSE OUTLINE
See course roadmap.
CASE QUESTIONS
For JCrew, HCA, Dollar General, Toys - questions for other cases are within the case itself and on Canvas.
1. For the financial sponsor, what price paid represents good value? Substantiate your recommendation using the
alternative valuation techniques.
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2. Does the financial sponsor have a viable investment rationale? Articulate it and relate it to the exit analysis.
3. What are the transaction’s sources and uses of funds? Enterprise value? Leverage through the capital structure?
What are the risks and opportunities within this capital structure?
4. From the vantage point of the creditors, is the company a good candidate for leverage? Validate your
recommendation using the LBO model.
5. What are potential exit strategies? IRR/cash-on-cash returns?
METHOD OF EVALUATION
Final grades will be based on (1) the quality of your class participation (30%); (2) written responses to case questions
(25%); (3) a team cross evaluation (10%); a mid-term (15%) and a final project (20%). Please note that, on this basis,
65% of your grade will be based on your individual contribution; 35% of your grade will be based on team contribution.
For further detail, see below:
Participation
Case Questions
Cross Evaluation
Mid-term Exam
Final Project
40%
25%
10%
15%
20%
Individual
Team
55%
45%
(1) Class Participation. (30%) Attendance, the quality of your class participation in discussing readings and cases,
and evidence of your extracurricular interest in the topic (e.g. evidence of outside reading, extensive discussion
of recent transactions) will form the basis for your class participation grade. This is a highly interactive class and
your participation is critical to your success and the success of the course. You should not take the course
unless you recognize the need for participation. There will be substantial cold calling of both reading and case
assignments. For transparency, I will notify you of your preliminary class participation grade immediately
following the mid-term break and work closely with students who seek to improve their participation grade.
Class participation grades are individual.
(2) Written Responses to Case Questions. (25%) Case questions are assigned as your written responses, prepared
in teams, should never exceed one-half page per question, not including back-up spread sheets. Cases, including
questions to answer for each case, are assigned for most sessions. Grades for written responses to case
questions are provided by team and the grade is awarded to the entire team.
(3) Cross Evaluation. (10%) It is critical that your team has the time to complete their work. It is also critical that
team members share the work among themselves. To enforce these qualities, a cross-evaluation will be done at
mid-term and at semester end. This confidential survey will ask you to rate your team members. Cross
evaluation grades are individual.
(4) Mid-Term Examination and Final Projects. (35%) Your mid-term in-class, open-book and your final project will
be graded on with a maximum of fifteen and twenty points, respectively. The grading criteria for both will
include 1) quality of conclusions; 2) accuracy of analysis; 3) presentation quality. (D) In the final project, you play
the role of a PE firm pitching an idea for your investment and its financing to a debt capital markets team at a
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major firm; the final project is usually presented to the debt capital markets team at BofAMerrill in their offices.
The grade on the mid-term is individual and the grade on the final project is awarded to the entire team.
CLASSROOM NORMS AND EXPECTATIONS
For team casework, form teams in the number as directed the first day of class, usually no fewer than four and no more
than five students. Take advantage of your classmate’s different backgrounds, experiences and interests.
In-class, please demonstrate consideration for your classmates (and your instructors and guest speakers) by closing
laptops during lectures and guest appearances, posting nameplates, and by being on time at the beginning of the class
and at break. To ensure that I get to know you quickly, please sit in the same place in each class and use a nameplate.
Cases, readings and related materials will be made available via a casebook; we will post original documents and, after
the assignment is completed, sample answers to case questions.
We will provide hard copies of slide presentations; these will also be posted on angel to view during class.
Use the drop box for all casework, for the mid-term and for the final project; submit casework at least two hours prior to
the start of class.
Contact me or our teaching assistant in the event you have any questions and/or use our office hours to ask questions in
person.
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