FInancial Reconstruction

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  • Avatar of Deep
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    I have written down an extract from BPP. I am confused with one aspect. I will first write down the question.

    The directors of ER have decided to concentrate the company’s activities on three core areas, bus services, road freight and taxis. As a result the company has offered for sale a regional airport that it owns. The airport handles a mixture of short-haul scheduled services, holiday charter flights and air freight, but does not have a long runway for long-haul international operations.
    The existing managers of the airport, along with some employees, are attempting to purchase the airport through a leveraged management buy-out and would form a new unquoted company, AIR, The total value of the airport (free of any debt) has been independently assessed at $35 million. The managers and employees can raise a maximum of $4 million towards this cost This would be invested in new ordinary shares issued at the par value of 50c per share. ER, as a condition of the sale. proposes to subscribe to an initial 20% equity holding in the company, and would repay an debt of the airport prior to the sale.
    EPP Bank is prepared to offer a floating rate loan of $20 million to the management team, at an initial interest rate of LIBOR plus 3%. LIBOR is currently at 10%, This loan ‘would be for a period of seven years. repayable upon maturity, and would be secured against the airport’s land and buildings, A condition of the loan is that gearing, measured by the book value of total loans to equity, is no more than 100% at the end of four years. If this condition is not met the bank has the tight to call in Its loan at one month’s notice AIR would be able to purchase a tour year interest rate cap at 15% tor its loan from EPP Bank for an up-front premium of $800,000.
    A venture capital company. AV, is willing to provide up to $15 million in the form of unsecured mezzanine debt with attached warrants. This loan would be for a five year period with principal repayable in equal annual installments, and have a fixed interest rate of 18% per year The warrants would allow AV to purchase 10 AIR shares at a price of 100 cents each for every $100 of initial debt Provided at any time after two years from the date the loan IS agreed, The warrants would expire after five years.

    The Answer to this (JUST A PART) as per BPP:
    FInancial Mix
    1. 8 million purchased from managers & Shareholders $ 4 M
    2. 2 million purchased by ER $ 1 M
    3. EPP bank $ 20 M
    4. AV (Balance fig) $ 10 M



    • Topics: 3
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    ER, as a condition of the sale. proposes to subscribe to an initial 20% equity holding in the company,

    So MBO- 8 m
    ER – 2m
    so total 10 m,
    ER- 20%

    • Topics: 2
    • Replies: 6

    Hi Deep,
    The Question states:
    1. Directors & Employees contribute $4 million
    2. ER will contribute Initial 20% of shareholding.
    3. The bank will provide a loan with covenants of $ 20 million.
    4. Venture capitalist will provide finance UP TO $ 15 million.

    First we need to calculate the TOTAL SHAREHOLDING. In this question there are 4 sources of finance: 2 Equity (ER & Staff) & 2 Debt ( Bank & Venture)

    For total shareholding, we are aware that $ 4 million (By staff) is already given. We need to find the equity source from ER
    STAFF – $ 4 million (therefore, total shares issues 4/0.5 = 8 million shares)
    ER – There are only 2 sources of equity finance of which one is given. ER
    contributes 20%. Therefore the staff has contributed 80% of total shares.
    Total Share = 8 million 80%
    x 100%
    hence, x = 80*8 / 100 = 10 million
    , ER contribution = 10 * 20% = 2 million shares

    Total financing mix
    1. Staff $ 4 Million (8/.5)
    2. ER $ 1 Million (2/.5)
    3. Bank $ 20 M
    4. Venture $ 10 M
    (Venture capital is balancing figure as total finance required is $35 M)

    Hope this helps

    Avatar of Deep
    • Topics: 5
    • Replies: 5

    thanks a bunch u 2

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