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BMO Capital Corporation Mezzanine Debt and Equity for Mid-Market Companies October 2008. Eric K. Ehgoetz, CFA Managing Director. BMO Capital Corporation Who are we?. BMO Capital is a well-established Canadian mid-market player:

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BMO Capital Corporation Mezzanine Debt and Equity for Mid-Market Companies October 2008

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Bmo capital corporation mezzanine debt and equity for mid market companies october 2008 l.jpg

BMO Capital CorporationMezzanine Debt and Equity for Mid-Market CompaniesOctober 2008

Eric K. Ehgoetz, CFAManaging Director


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BMO Capital Corporation Who are we?

BMO Capital is a well-established Canadian mid-market player:

  • Founded in 1996 with a national mandate and an exclusive focus on the mid-market (offices in Vancouver, Edmonton, Calgary, Toronto, and Montreal)

  • Committed evergreen fund of $400 million - currently $220+ million invested in 43 companies

  • Closed over 150 transaction and deployed nearly $500 million since inception

  • Investments include both Mezzanine/Subordinated Debt and Equity

    Our client approach brings unparalleled service:

  • Lower execution risk via working relationships with other BMO partners that we can introduce to you (senior debt, asset based lending, M&A, etc.)

  • Welcome opportunities to work with a client’s existing financial partners – no need to change established relationships


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Mezzanine and Equity CharacteristicsWhat does an “average” BMOCC deal look like?

Mezzanine Debt

  • Typically $2 to $15 million financing

  • Term typically up to 7 years

  • Secured by a second charge and subordinated to senior lender

  • Repayment is flexible, tied to cash flow and risk return of the instrument – today, typically a single bullet amount due at maturity

  • Pricing made up of a mix of (some or all) current interest, deferred interest, fees and equity participation where appropriate

    Equity

  • Ownership positions up to 49% (not controlling)

  • Exit mechanics are structured for maturity in 5 to 7 years


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MBO/MBI

Acquisition

Owner looking to leverage (pre or post) transaction

Typical Mezzanine/Equity OpportunityTransformational events often need junior capital …

Owner 55+ looking for liquidity options, diversifying net worth, dividend or equity strip

Succession

Shareholder Take-Out

Removing dissenting shareholder(s) or those with different focus.

Management wants to acquire part/all ownership of a subsidiary/entire company (mgmt can be from inside/outside)

Working capital needs that cannot be funded by senior debt

Growth

History of growth by acquisitions or contemplating first

Recapitalization


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Mezzanine and Equity InvestmentsWhere do they fit in the Capital Structure?

Equity

  • Minority

  • Control

Typical Balance Sheet

BMO Capital Corporation

  • Senior Debt

  • Operating Line

  • Senior Term Loan

  • Cashflow Loan

Traditional: up to 3x EBITDA

Expected Return: <10%

Secured

  • Mezzanine Debt

  • Straight sub debt

  • Sub with upside kicker

  • Convertible sub debt

Secured – but - subordinated security

Typically low asset coverage

Typical: up to 1 - 1.5x more

Cumulative: 3.0 - 4.0x EBITDA

Expected Return: 15% - 20%

Owner dilution

Expected Return: >20%


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Typical Company ProfileWhat type of Company are we looking for?

Yes

No

Manufacturing, Industrial, Distribution and Services

Industry

Consumer retail, fashion related, resource extraction, real estate

Established $10-15MM+

Early stage: R&D, starting-up operations, ramping-up sales, emerging profits

Revenues

Stable, sustainable or fast growth

EBITDA minimum $2 - $3MM

Profitability

Losses, Turnarounds (some exceptions), R&D companies


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StructureWhat we are looking for at a micro level

  • Depth and breadth of management – number one issue

    • Experience through a downcycle

    • Vision & strong understanding of the competitive landscape

    • Strong reporting & accounting controls and forecasting capabilities

    • History of operating in leveraged environment

  • Substantial sponsor/management investment – must have “skin in the game”

  • Ability to withstand margin compression – pricing flexibility or a cost reduction focus

  • Strong working capital and good operating flexibility

  • Established “brand name” operation – i.e., industry leadership

  • Cash flow predictability, sustainability, and quality – especially at the end of a long cycle


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The Business

The Opportunity

The Challenges

Corporate travel management and business meetings

Company had 7 shareholders from past mergers

Complex management and no consensus on future direction

To grow the business further, 2 partners wanted to buy-out 5 and re-invest in growth: organic and acquisitions

Limited senior debt borrowing capacity – receivables only

Funding gap – both at senior and mezzanine level

Alternative funding: lose control to an equity fund

Case Study: Project BlueSkiesThe Business Case


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$4,000,000

$1,500,000

Common Shares

August 2006

Subordinated Debt

August 2006

Solution - Buyout of PartnersVision 2000 Travel Group

Full Junior Capital Solution

Management Buy-Out of 5 of 7 business partners – One stop shop BMO Capital solution, no outside source of equity.

&


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The Business

The Opportunity

The Challenges

Assisted Living Facility

Established and proven acquisition team looking to acquire an existing operation

Proven track record of creating value in acquired businesses

Acquirer sought additional equity capital to complete the acquisition without losing control

Limits to traditional mortgage funding sources

Case Study: Project RetirementThe Business Case


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Solution - Equity InvestmentAgeCare Health Services

has been

acquired by

$2,300,000

$17,325,000

Financed

by

Mortgage

Equity

and

September 2007


Recent deals l.jpg

Ontario Based

Food Manufacturer

Western Canadian

Automotive Group

$8,500,000

$10,000,000

$8,360,000

$2,300,000

$9,000,000

$12,900,000

Acquisition Financing

Second Lien Loan

Acquisition Financing

Subordinated Debt & Equity

Acquisition Financing

Equity

Leveraged Recapitalization

Equity & Subordinated Debt

Acquisition & Growth Capital

Subordinated Debt

Recapitalization Financing of Bellshire Limited

and Van Wyck Packaging

with Mid Oaks Investments LLC

Subordinated Debt & Equity

BC Based Holding

Company

January 2008

March 2008

September 2007

December 2007

November 2007

July 2007

$5,000,000

$4,850,000

$5,500,000

Acquisition Financing

Subordinated Debt

Acquisition Financing

Mezzanine Debt & Debenture

$5,000,000

Management Buyout

Subordinated Debenture & Equity

$10,000,000

$8,000,000

Recapitalization Financing

Subordinated Debenture

Recapitalization Financing

Subordinated Debt & Equity

Acquisition Financing

Subordinated Debenture

April 2007

October & September 2006

May 2007

May 2007

June 2007

August 2006

Alberta Based Manufacturing

Company

Western Canadian Based Distribution

Company

$10,000,000

$5,540,000

$8,000,000

$3,000,000

$5,000,000

$10,000,000

$6,000,000

$4,000,000

$3,000,000

$4,750,000

$3,000,000

$10,000,000

$15,000,000

$7,500,000

$10,000,000

$3,000,000

$2,000,000

Special Purpose Financing

Subordinated Debenture

Acquisition Financing

Subordinated Debenture

Leveraged Recapitalization

Subordinated Debenture

Acquisition Financing

Subordinated Debenture & equity

Acquisition Financing

Subordinated Debenture

Acquisition Financing

Subordinated Debenture

Acquisition Financing

Subordinated Debenture

Growth Capital

Subordinated Debenture

Acquisition Financing

Subordinated Debenture & equity

Management Buyout

Subordinated Debenture & Equity

Acquisition Financing

Subordinated Debenture

Acquisition Financing

Subordinated Debt

Growth Capital

Subordinated Term Loan

Acquisition Financing

Subordinated Debenture

Acquisition Financing Subordinated Debenture

Recapitalization

Subordinated Debenture

Capital for Growth

Subordinated Debt

May 2007

April 2007

October 2006

June & October 2005

March 2006

April 2006

June 2006

August 2004

September 2006

October 2005

July 2005

June 2005 & February 2006

June 2006

October 2006

July 2007

June 2007

July 2007

$3,400,000

Acquisition Financing

Subordinated Debenture

Healthcare Company

May 2006

Recent Deals

September 2007


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Contact Information

Eric K. Ehgoetz, CFA

Managing Director

BMO Capital Corporation

Toronto

416-643-4388

[email protected]


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