2015 IHF Investment Conference
Structuring the deal
David O’Kelly
KPMG Corporate Finance
MACRO TRENDS
 Transition from a market focused on balance sheet restructuring to a
growth agenda
 Increasing amounts of private equity dry powder seeking deals $1.16 trillion at July 14 (Prequin)
 Innovation in the debt markets leading to new entrants and deal
structures
 Strong growth in asset backed lending appetite
TRENDS IN BANK FINANCE
 Strong competition from domestic and international banks
 Banks appear to have less flexibility on smaller credits but SBCI is
expected to have an effect
 Margins are tightening
 Careful consideration of diligence risk
 Covenant setting is rigid (particularly for new relationships)
STRUCTURING BANK FINANCE
 Much greater focus on debt service capacity (cashflow) rather than
asset backing
 Demonstration of sustainable profitability
 Mix of revenue
 Capital expenditure requirements
 Valuation
NON-BANK LENDING & MEZZANINE
 Growth in availability - $500billion AUM (Prequin)
 Private equity approach
 Funded by government, pension funds & high net worth individuals
 Provide senior debt, mezzanine & stretch debt
Mezzanine should increase leverage by 1 – 2 x EBITDA
Mezzanine has double digit pricing (may seek warrants)
Stretch debt is typically priced at 7 – 10%
 High street banks are evaluating the opportunity
STRUCTURING MEZZANINE
 Tailored to the situation
 Balance risk & return
 Relationship with other funders
 Route to exit
 Restrictions on early repayment
 Interest is often partially or fully rolled up (PIK)
TRENDS IN EQUITY
 Increased liquidity in the market across all asset classes
 Model being adapted to the market with focus on:
• Development / expansionary capital
• M&A
• Minority shareholder exit
 Return requirements of high teens or more
 Will seek shareholder rights, certainty on exit, representation, etc.
KEY DILIGENCE ISSUES
 Quality of management
 Underlying profitability & quality of earnings
 RevPar growth
 Capex backlog
 Conversion of profits to cash
 Sustainability of management fee income
A FEW POINTERS
 Focus on cash flow and debt service
 Preparation is critical – initial and for diligence
 Manage your business and dedicate resource to
the transaction
 Loan sale scenarios
 Capital is available
Thank you
David O’Kelly
KPMG Corporate Finance
[email protected]
01 410 160