From Feast to Famine and Back Again: Credit Markets over the Past Decade
B Term Block Week
PROFESSORS
Margaret Cannella and Ellen Carr
Office Location: 218 Uris
Office Phone:
(212)-854-7903
Cell Phone: (973) 951-4051 (Margaret) (310) 497-9069 (Ellen)
Fax:
(212)-854-9895 (Adjunct Office)
E-mail: mmc99@columbia.edu (Margaret)
Office Hours:
ec2895@columbia.edu (Ellen)
Monday 09:00am-12:00pm and Tuesday 01:00pm-05:00pm
TEACHING ASSISTANTS
Stephanie Weichsel
SWeichsel14@gsb.columbia.edu
REQUIRED COURSE MATERIAL
Your reading assignments include five books; the first book is for reference and the following four will provide context to
the class. Of these four, pick at least two and read them prior to the start of the course, and submit a one-page summary
of your takeaways from each book prior to class via Canvas.
The first is “"Investment Banking: Valuation, Leveraged Buy-Outs and Merger &Acquisitions," J. Rosenbaum and J. Pearl,
John Wiley & Sons, New York, 2009, 247 pp. This is a technical book which is a review of fundamentals of corporate
finance and capital markets; read it prior to the course and refer to it as needed.
The second is “The King of Capital: the Remarkable Rise, Fall and Rise Again of Steve Schwartzman and Blackstone”,
David Carey and John E. Morris, Crown Business Press, 2010, 391 pp.
The third is “The Most Important Thing: Uncommon Sense for the Thoughtful Investor”, Howard Marks, Columbia
University Press, April 2011, 200 pp.
The fourth is “This Time is Different: Eight Centuries of Financial Folly” by Carmen Reinhart and Ken Rogoff, Princeton
University Press, September, 2009, 496 pp.
The fifth book is “All the Devils are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera,
Portfolio Penguin Press, 2010, 400 pp.
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REQUIRED PREREQUISITES AND CONNECTION TO THE CORE
The learning in this course will utilize, build on and extend concepts covered in the following core courses:
Core Course
Corporate Finance
Connection with Core
1. Opportunity cost of capital
2. Risk
3. Firm valuation model
Global Economic
1. Causes of business cycle
Environment I
2. Role of financial markets in the economy
Decision Models
1. Sensitivity Analysis
2. Decision making under uncertainty and risk
3. Use of analysis in decision making
Financial Accounting
1. The accounting model
2. Revenue and expense recognition
3. Resources and obligations-measurement and disclosure
Students will be expected to have mastered these concepts and be able to apply them in the course.
COURSE DESCRIPTION
In this course, we discuss the evolution of the bond and loan markets, and the behavior of market participants from
peak to trough and back again in the past decade.
COURSE OBJECTIVES
Through lectures, cases and guest speakers, we discuss through-cycle changes in valuation, structure, capital raising,
liquidity and other investor considerations.
ASSIGNMENTS
For team casework and the final project, form teams of three to five. Take advantage of your classmates’ different
backgrounds, experiences and interests. The questions for the cases and the final project can be found below. There will
be time at the end of each class day to work on your case write-ups with your teams. Note that we will also do a fourth
case, Realogy, which will not have an accompanying written assignment but will require discussion in your teams to
prepare for an in-class case debrief.
Three Graded Cases (Type A)
Please answer the questions below for the case part of the grade. We will select a few teams at random to present each
case in class, with the goal being that each team will present in class once, so come prepared with a brief (2-4 page)
Powerpoint presentation for each case.
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HCA and Toys R Us*
Please note that answers should never more than one half page.
1. For the financial sponsor, what price paid represents good value? Substantiate your recommendation using the
appropriate valuation technique.
2. Does the financial sponsor have a viable investment rationale? Articulate it and relate it to the exit analysis.
3. What do the total enterprise valuation, LTV, and financing terms and rates imply about credit market conditions
at that time?
4. Is the company a good candidate for leverage? Validate your recommendation.
5. What are potential exit strategies? IRR/cash-on-cash returns?
Caesars
To complete the exercises 1 and 2, please refer to the case. As shown in Exhibit 2B, Caesar’s Operating Company (Opco)
has an adjusted EBITDA of approximately $1,576.1billion. Exhibit 3b provides you the related capital structure. For the
purposes of this exercise, assume the collateral values are equal to the par value of the loan or bond. The only other
inputs you will need to complete these exercises are found in Exhibit 4, which lists peer company trading multiples.
1. Using the multiples provided in Exhibit 4, what is the range of the enterprise values for Caesar’s? Using these
comparable multiples, which company or companies are most similar to Caesar’s and thereby best support valuation for
the company?
2. Using that range of multiples, what are recovery rates on the bank debt, first-lien notes and second lien notes? How
does this impact the different classes of creditors?
To complete exercise 3, please refer to Exhibits 1b and 2a. For exercise 4, refer to Exhibit 3b.
3. Calculate the Levered Free Cash flow for the year 2011 (based on Adjusted EBITDA). How is this free cash flow
funded? If this trend continues, what are the likely alternative outcomes for Caesar’s?
4. Refer to the calculation of the 1st lien maintenance covenant. What are the carve outs for this covenant? Why were
these carve outs likely negotiated? Why are there no more financial covenants on the bank debt? Are there other
maintenance covenants other than the 1st lien maintenance test? Other incurrence covenants?
5. As of Q1 2012, calculate the relevant key credit ratios and determine the amount of liquidity available to the
company. Under what conditions would the available liquidity dry up?
Fourth Case: Realogy (ungraded but will count towards class participation grade)
You will be assigned the Realogy case to discuss in class. There is no written assignment for this case, but come
prepared to discuss the following questions.
1. How did the easy financing conditions of 2007 contribute to Apollo’s success with this investment?
2. Imagine yourself in the role of the Apollo partner at the end of 2008, evaluating the decision to purchase RLGY
bonds in the open market. What pieces of data and/or analysis would you have weighted most heavily in your
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decision? Do you think Apollo’s decision to “double down” on its RLGY investment in 2009 by buying bonds was
economically rational? Why or why not?
Final Project*
For the final project, you will act as market practitioners and evaluate the securities in the capital structures of the 4
cases (HCA, Toys R Us, Realogy, and Caesars) to construct an optimal high yield credit portfolio. You are also permitted
to include cash and the high yield index as investments in your optimal portfolio. You should use the following questions
to frame your analysis.

Which security/investment is the best risk-reward in each capital structure?

Which security/investment offers the most upside potential in each capital structure?

What operational/industry considerations went into your analysis? (Sample answer: “Retailers have more seasonal
cyclicality and operating leverage than average, so I’m less comfortable with the most subordinated parts of their
capital structures.”)

If you chose not to invest in one or more of the companies, why? What would make you comfortable investing in
that company, and which part of the capital structure would you be most interested in?

What are the biggest valuations discrepancies in current market pricing? (Sample answer: “Toys R Us bank debt
trades 200 bps rich to Caesars bank debt, but the collateral coverage at Caesars is actually better.”)

How did you evaluate the attractiveness of these investments relative to the HY index and cash? If you chose to
invest in either of the latter, why?
Extra credit: How does your portfolio’s yield, maturity, and average rating translate into a view of the high yield market?
(Sample answer: “My portfolio is lower-yielding and higher-rated than the high yield index, and includes some bank
debt, so I’m cautious about valuations today.”)
*Asterisk denotes assignment is Type A described in the chart below
In order to avoid ambiguity that may lead to unintentional violations of the Honor Code, the description types for
assignments have been standardized. They are specified in the table below.
Type
Designation
group / group
Discussion of
concepts
Permitted with
designated group*
Preparation of
submission
By the group
group / individual
Permitted
Individually
A
B
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Grade
Same grade for
each member of
the group
Individual
C
D
(No sharing of any
portion of the
submission)
Individually
individual /
None of any kind
Individual
individual
(An optional category to be defined in detail by the individual faculty member)
The designated group can be either an assigned study group or a self-selected one.
METHOD OF EVALUATION
Final grades will be based on the breakdown below.
Participation
3 Cases
Team Final
20%
45%
35%
Attendance, the quality of your class participation, and evidence of your extracurricular interest in the topic (e.g.
evidence of outside reading, 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.
CLASSROOM NORMS AND EXPECTATIONS
In-class, please demonstrate consideration for your classmates (and your instructors and guest speakers) by closing
laptops, posting nameplates, and being on time at the beginning of the class and at break. To ensure that we get to
know you quickly, please sit in the same place in each class.
Cases, readings and related materials will be made available via a casebook; we will post original documents.
We will provide hard copies of slide presentations; these will also be posted on angel after class.
Use canvas for all casework and for the final project; submit casework at least two hours prior to the start of class. The
final project is due by 5pm on the Monday the week after the class (January 27tht).
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