What Investment Bank Do?

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- Process:

Mandate

Due diligence → IB reputation

Documents: wait SEC approve it to issue security. SEC make sure the Accurate and Complete Information.

Road show (need file in SEC): in order to sell the deal to investors, sells people from IB get investors in a room. Company top management make presentation; junior person and senior person from IB would be there (inside in the wall). Sells people in IB(outside the wall) (information wall: unequal information in two sides, information barrel). Book runner: collecting expression from investors. -→ bridge the demand and bring the demand up.

Price meeting: Tell the company how much they should make the price of bond. If the company decide the lower price of the bank give, then risk is on company; but if the company agree with the IB’s price, the risk is on IB.(misprice: the bonds is still hold by the bank).

- Loan market

- Small loan: bi-lateral loan

In between (two or three banks): Club deal

Big loan: syndicate loan

- Process (not security don’t need deal with SEC)

Mandate -> due diligence -> term sheet (CIM: confidential information, non-public information and public information)

Bank review the CIM

Sells person do a marketing

Pre bank meeting (like road show; public part meeting and non-public part meeting)

Build Book

- Investment Grade Company can get to market faster by Shelf Registration:

- WKSI: SEC approved the registration before; usually don’t need roadshow since its well know company

- “Drive by” bond: conference call (like road show) → discuss Price

- Non-Investment Graded Company

- Private placement (security without SEC registration)

- Under Reg D: Private placement: can only sold to accredited investors (they gonna hold it until mature) → issuance company/ pension fund. Usually have high yield. Bonds=Notes

- Under 144A: 144A Bonds: only sell to QIBs qualified institutional buyers. QIBs can sell to other QIBs. (most common) (still need roadshow)

- Will register later

- Never register

**144A most likely non-investment Graded company, otherwise, Investment graded company would do shelf registration first.

Terms related to Debt

- Collateral

- If the company file bankruptcy, prevent collateral.

- Help to get money before other creditor during the bankruptcy process. Owners’ interest is ahead of other creditors.

Bankruptcy process is to help company re structure the capital investment to fit with business.

Secured creditor > unsecured creditor > equity

Company give out some new debt and new equity (not in cash), which amount equal to what they owe. The left amount of new debt and new equity goes to unsecured.

For non-investment grade company, loans are secured debt, bonds are non-secured. Loans are cheaper than bonds.

For investment Graded Company, bonds are secured debt, loans are non-secured.

- Borrowing Base

A/R * 80% (advanced rate) = X

Inv * 50% (advanced rate) = y

X + y = z the amount you would borrow = borrowing base.

If the value goes down, need pay back the revolver. Because the revolver outstanding may not exceed the borrowing base.

- Second Lien Loan Terms (high yield bond for small company)

Small company need small amount money → no market, investors wont buy, low liquidation.

- Contractual Subordination

Agreement between creditors who get first, who get second. (senior, subordinator..)

Why would subordinator do: high return.

Why senior do: get pay first

Why company: need money not enough just from senior who is cheaper.

- Structural Subordination

Bond B gets paid first before bond A.

When subsidiary bankruptcy, cash come in to subsidiary company so the Bond B gets first because they are creditors. Parents Company gets leftover because they are equity holder.

- Mezzanine

Really expensive, for company can’t issue high yield company, too small company

- Loan covenants

Levered factor: Debt/EBITDA won’t allowed to over X.

Bonds does not really have covenants, TLB usually light covenant

- Issue rating: bond rating. ( bond rating could be higher than its company rating)

Company rating = senior unsecured rating

Notching: bond rating start with company rating

PWM: Private wealth management

Major element: issuer clients, investor and intermediaries

Issuers:

- Business:

- Entity that need money

- May be corporation, MLP: mass limited partnership

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