Structuring a Leveraged Buy-out Using A Mortgage Instrument

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Structuring a Leveraged Buy-out Using A Mortgage
Instrument
Presentation to the Southern Africa Round
Table May 7-9 2007, Zambezi Sun Livingstone
Zambia
Aubrey K. Mutale, CEO www.unicapitalsa.com
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Leveraged Buy-out

• Equity like Investments in public or privately
  owned companies utilizing leverage or borrowed
  funds to purchase a significant portion or
  majority control of their ownership.

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Mortgage

• Method of using property as security for the
  payment of a debt.
• Refers to a legal device used in securing the
  property
• Commonly used to refer to debt secured by the
  mortgage.

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Fundamentals of a Mortgage

• LEGAL ASPECTS
• There are essentially two types of legal
  mortgage.
• Mortgage by Demise
• Creditor becomes the owner of the mortgaged
  property until the loan is repaid in full (Known
  as redemption).

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Fundamentals Of A Mortgage Cont..

• Mortgage by Legal Charge
• Debtor remains the legal owner of the property,
  but the creditor gains sufficient rights over it
  to enable them to enforce their security, such as
  a right to take possession of the property or
  sell it.

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Transaction Unicapital S.A.

• Unicapital secured financing from three
  international banks who had agreed to provide
  financing subject to company B providing a
  warranty against any liability arising from
  financing asbestos related transactions.
• Although the target company was profitable the
  banks felt that it was risky to provide
  acquisition finance and end up with undefined
  environmental liabilities

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Mortgage Financing Structure
Loan/Cash
Bank
Sale/Purchase Agreement (SPA)
Acquiring Company A
Target Company B
Shares
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Transaction

• Creditor
• Company B had legal rights to the debt secured by
  the mortgage and made a loan of 30 to company A,
  the debtor, of the purchase money for the company
• Typically creditors are banks, insurers or other
  financial institutions who are sometimes referred
  to as mortgagee or lender

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Transaction

• Debtor
• Company A as a debtor was required to meet its
  obligations under SPA imposed by the creditor in
  order to avoid the creditor (Company B) enacting
  provisions of the mortgage to recover the debt.
• Typically debtors will be individual home owners,
  landlords or businesses who are purchasing
  property by way of loan.
• Sometimes referred to as mortgagor, borrower or
  obligor

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Amortization of Capital Interest

• In the case of company A, mortgage repayments
  were monthly payments containing a capital
  element and an interest element. Target company
  was valued at US30m in form of stocks and
  debtors of stock
• Proceeds for the ring fenced debtors and stocks
  were used to pay the creditor
• In the event that company A did not make good on
  its obligations, the creditor would reposes the
  shares

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CHALLENGES OF STRUCTURING AN LBO/MORTGAGE
INSTRUMENT

• Financial illiteracy
• Limited access to finance
• Lack of trust among participants
• Political interference in some African Countries
• Lack of origination

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Conclusion

• The rights and obligations of company A (The
  Acquiring Company) are not in any way different
  from the rights and obligations of a homeowner
  under a simple mortgage structure.
• African governments must encourage or empower
  locals to participate in investment through
  deliberate polices i.e.
• BEE or AA in RSA
• X amount shares be accrued to locals
• Financial institutions should invest in staff
  training in Corporate Finance
• Financial institutions should come with more
  innovative transactions than generic ones
• The secret about wealth creation lies in
  originating