Leveraged Buyouts

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(Table of Contents) 1. 2. 3.LBO 4.TXU 5. LBO 6. (Overview of Leveraged Buyouts) (Mechanics of an LBO Analysis) (LBO Best Practices) (TXU Case Study) (LBO Modeling) (Homework Assignment) (Appendix)

1.

Overview of Leveraged Buyouts

(LBO)

Overview of Leveraged Buyouts

An LBO is the acquisition of a company or division of a company using debt for a majority of the purchase price and equity for the remainder.

The buyer (the LBO Sponsor or Equity Sponsor) borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company, and contributes the equity portion typically through a private fund Debt is serviced and repaid with the company’s operating cash flows a b The …show more content…

2007 1,038 2006 •2007 YTD institutional volume of $303 billion is up 50% over last year. 2007 3,030 50% •The number of active investors in the institutional market continues to grow with 245 active investors during Q2 2007, up from 233 during Q1 and 218 at year-end 2006. Accounts continue to have excess levels of cash to invest; CLO volume for the first 6 months of 2007 increased by $29 billion during Q2 to a new record of $54 billion year to date. 2006 218 2007 233 245 2007 6 290 540

Institutional Term Loan Market

What Does This All Mean?
The environment for leveraged transactions has materially shifted.

•Investors have become more risk-averse than in recent history Likely have seen the end of deals utilizing toggle notes or covenant lite structures toggle notes( ) Underlying company fundamentals and competitive advantage will be much more scrutinized by investors •Debt/EBITDA levels likely to return to historical norms 5.0-6.0x total leverage vs. 9.0-10.0x in recent deals(FDC, ADS,AT,HET) 5-6x 9-10x Likely to see 2.0x minimum coverage ratios 2x •Debt financing may continue to revert to more historic(and expensive) levels •All of the above implies fewer LBO targets will meet sponsor return threshold •However, YTD, sponsors have raised more in new funding than the same period in 2006 06 Blackstone, KKR,Apax have just closed new funds KKR Apax •Sponsors will be more creative and

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