Betancourt

Betancourt group has been carried out by Alfredo Betancourt from 1950 when it was founded. The group can be divided into three businesses: the hotel business, the property development business and the airline part (from 90s). In the 2003, Carlos Betancourt take over the management and after a modernizing period, decided to sell part of the company. The proposed transaction was a leveraged buyout (LBO) to the hotel and airline business (both with capacity for leveraging) which were valued at €288 million. The two venture capital firms, 9xi and FMG, would take control of the group by creating an SPV which will buy 85% the shares of BG. According with its plan, Betancourt family would hold a 15% of the company shares as investment and Carlos would stay on as general manager. Nevertheless, a merger between BG and the SPV is expected in a year time. Both private equity firms have a well-know reputation on improving the internal functioning of the companies that they acquired. 85% of the total outstanding shares will give to the SPV the control of the group. The future strategy seems to be achievable in order to produce large capital gains on the investment made. Progressive opening of new hotels, renting of new aircraft (private jet business), new cost control systems, strategic alliances are the main actions to be taken. Taking a closer look to the terms and conditions of the loan, Bank London Investment is required to grant 165 million on the following conditions: 1. Acquisition loan of €110 million undertaken by SPV (amortizing on 8 yrs). 2. Refinancing loan of €25 million undertaken by Betancourt (Bullet on 8 yrs). 3. Credit account of €30 million will fund the operational needs (bullet on 8 yrs). Under the contract conditions, SPV will be liable, jointly and severally, for all obligations of the borrowers arising out of the financing arrangement. Betancourt SL will be liable for the obligations from the refinancing and revolving credit. However, beside the contract some covenants has been determined in order to ensure the SPV behave correctly. Some of these covenants are the obligations of borrowers or the partial or full obligatory early repayment of the acquisition and refinancing loan under some circumstances. In the other hand, we have to take into consideration that due to the acquisition is highly leveraged, under the worst scenario (revenues or the average level of occupancy lower than expected) the exposure of both equity firms is limited to the 41% (equity and subordinated debt, less the amount recovered through dividend payments) and we cannot expect further financial support. Finally, the SPV 1. Participative loan of 76, 9 million, interest capitalized on a 30%. (bullet until 2017) 2. Mezzanine of 15 million fully capitalized. (bullet of 10 years) Group Effect: Does borrower belong to a strong group' ƒ Shareholders: are they professional with a recognized prestige in the business environment' Have the shareholder offered adequate collaterals' ƒ Would the borrower receive financial support from the shareholders in case its performance came too poor' Does the company have a clear business plan and strategy' ƒ Are the management enough prepared to develop the strategy of the borrower successfully' Have the shareholder offered adequate collaterals' ƒ Would the borrower receive financial support from the shareholders in case its performance came too poor' Does the company have a clear business plan and strategy' ƒ Are the management enough prepared to develop the strategy of the borrower successfully' ACCESS TO CAPITAL MARKETS It is the ability of the client to obtain funds in the capital market thanks to its own performance How is its banking pool' Does the client work with many banks' (How is the outstanding the of its facilities (the borrower has used 50% of total limit, 75%...)' If we cancel its exposure, can the client obtain easily facilities in others banks' Does it have additional collaterals with the others banks' ƒ Does it have access to sophisticated financing products (bonds, preference ƒ shares, hybrids…)' Betancourt acquisition is a typical case of leverage buy out (LBO) where a limited number of the financial sponsors, 9xi and FMG, have financed the purchase of a company shares (85% of Betancourt) through leverage. The main features that may allow an LBO are: 1. Target Company has a low level of leverage. 2. A multi-year history of stable and recurring cash flows that allow the repayment of a high debt service. 3. Good collaterals: assets of the group (fixed assets valued at €142 million and receivables at €77) may be used as collateral for lower cost secured debt. However, this kind of acquisition brings some extra benefits to the financial sponsors in two ways: 1. 9xi and FMEG only need to provide a fraction of the capital for the acquisition (41%) 2. If the economic internal rate of return on the investment is higher than the weighted average interest rate on the acquisition debt, returns to the both private sponsors will be significantly enhanced. 3. Acquisition debt in an LBO is therefore non-recourse to the equity firms. Nevertheless, both firms may also get slightly the same results through issuance of high yield bonds (fixed rate) or secured notes. although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including: * Low existing debt loads; * A multi-year history of stable and recurring cash flows; * Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt; * The potential for new management to make operational or other improvements to the firm to boost cash flows; * Market conditions and perceptions that depress the valuation or stock price. to the 9xi and FMG and to the equity fund that the financial sponsor manages. In other words, the acquisition debt in that case is recourse only to SPV. Therefore, the financial structure of the transaction allows 9xi and FMG to achieve the benefits of leverage but. . As transaction sizes grow, the equity component of the purchase price can be provided by multiple financial sponsors "co-investing" to come up with the needed equity for a purchase. Likewise, multiple lenders may band together in a "syndicate" to jointly provide the debt required to fund the transaction. Today, larger transactions are dominated by dedicated private equity firms and a limited number of large banks with "financial sponsors" groups. As a percentage of the purchase price for a leverage buyout target, the amount of debt used to finance a transaction varies according to the financial condition and history of the acquisition target, market conditions, the willingness of lenders to extend credit (both to the LBO's financial sponsors and the company to be acquired) as well as the interest costs and the ability of the company to coverthose costs. Typically the debt portion of a LBO ranges from 50%-85% of the purchase price, but in some cases debt may represent upwards of 95% of purchase price. Between 2000-2005 debt averaged between 59.4% and 67.9% of total purchase price for LBOs in the United States.[2] To finance LBO's, private-equity firms usually issue some combination of syndicated loans and high-yield bonds. Smaller transactions may also be financed with mezzanine debt from insurance companies or specialty lenders. Syndicated loans are typically arranged by investment banks and financed by commercial banks and loan fund managers, such as mutual funds, hedge funds, credit opportunity investors and structured finance vehicles. The commercial banks typically provide revolving credits that provide issuers with liquidity and cash flow while fund managers generally provided funded term loans that are used to finance the LBO. These loans tend to be senior secured, floating-rate instruments pegged to the London Interbank Offered Rate (LIBOR). They are typically pre-payable at the option of the issuer, though in some cases modest prepayment fees apply.[3] High-yield bonds, meanwhile, are also underwritten by investment banks but are financed by a combination of retail and institutional credit investors, including high-yield mutual funds, hedge funds, credit opportunities and other institutional accounts. High-yield bonds tend to be fixed-rate instruments. Most are unsecured, though in some cases issuers will sell senior secured notes. The bonds usually have no-call periods of 3–5 years and then high prepayment fees thereafter. Issuers, however, will in many cases have a "claw-back option" that allows them to repay some percentage during the no-call period (usually 35%) with equity proceeds. Another source of financing for LBO's is seller's notes, which are provided in some cases by the entity as a way to facilitate the transaction. The inability to repay debt in an LBO can cause by initial overpricing of the target firm and/or its assets. Because LBO funds often attempt to increase the value of an acquired company by liquidating certain assets or selling underperforming business units, the bought-out firm may face insolvency as depleted operating revenues become insufficient to repay the debt. Over-optimistic forecasts of the revenues of the target company may also lead to financial distress after acquisition. Some courts have found that LBO debt constitutes a fraudulent transfer under U.S. insolvency law if it is determined to be the cause of the acquired firm's failure 1. the tax reduction on the P&L statement, 2. non-recourse of the loan if performing go bad, 3. A proof of other banks may be interested is that Calaveras´ loan proposal, it is that the proposal was made by Tom Howell, a reputed managing director at the National Bank´s investment-banking group ( the third largest financial institution in the United States), on a very tight schedule. Even though Calaveras is free of other bank obligations and its new strategy has reached good figures, following the Calaveras´ forecast performance, the company might not be to generate enough cash to cover the whole loan. Looking at the forecast cash flows statement, the operating cash flow is unable to repay the debt service and therefore the revolving line credit will be used to cover it for some years. In this manner, about 80% of the revolve loan over the total limit is used until 1996. Other options are to reach the money through: 1. Issuance of Bonds: Calaveras may issue bonds for the total amount of the term bond at 9,35%. This option may take some difficulties in terms of placing but similar to the baking loan, will allow Calaveras to get some tax reduction. 2. Stock markets: if the managers look forward to issue shares at the stock market, they could obtain part of the funds needed. This possibility could be the last resort for the managers due to the following implications: difficulties for achieve the amount required, losing political control through releasing of voting rights, very high return for stock holders through dividends (premium of 12,4 %) and finally there is no tax reduction on P&L statement. Due to the small size of the company, more sophisticated financial products may be hard to place. Pros: there is no previous debt, more banks may be interested, bonds are available Cons: op. cash flow is not able to pay the debt service without the aid of the recover credit line, going to the stock markets is not a good strategy Grade: 5