Raising Capital through a Hybrid Instrumentadmin
RAISING CAPITAL THROUGH A HYBRID INSTRUMENT
Raising capital through a hybrid instrument combines the challenges of raising both equity and debt, while providing the benefits of tailoring the cost of capital to the underlying risks of the activities being financed.
- What is the current and future nature of the company’s business? At the strategic, operational, legal and financial level?
- How much capital is needed? Why? How will it be used?
- What are the uses of funds and over what time period will the funds be spent?
- Is the company’s project fixed and stable? Are there elements of it which may change in the future?
- What are the key risks that could have a significant impact on the company and its project? Do these impact the company’s financial forecasts? Do they impact the cash flow forecasts?
INVESTORS / LENDERS
- On the basis of the expected returns, what are the investors that could be interested in participating in the proposed transaction? (Our book running searches typically generate 20-50 potential investors.)
- Within this group of potential investors, which investors are most aligned with the objectives of the company? Of its shareholders?
- Which investors can best contribute to the growth and development of the company? For example, by contributing know-how, industry contacts, technical knowledge, human resources, etc.
- Is it better to seek two different types of investors (one for each financial instrument) or a “unitranche” investor?
WHAT IS THE SELLER ASKING AND OFFERING IN CAPITAL?
- On the basis of the Uses of Funds, which part of the amount to be raised can be financed through debt and which part in capital?
- What percentage of the share capital is being offered in consideration for the equity investment that is being asked?
- On the basis of this “offer”, what are the expected returns of the equity component of the investment?
- How does this expected return change when the operating assumptions change from “optimistic”, to “conservative” or to “pessimistic”?
WHAT IS THE SELLER ASKING AND OFFERING IN DEBT?
- For the part of the transaction that can be financed with a debt instrument, what is the proposed debt structure in terms of amortization and interest rate?
- Can the future cash flows of the business withstand the monthly, quarterly or annual financial charge of the proposed debt instrument?
- If the business were to fail to comply with the debt payments, what guarantees can be proposed to the investor / lender in order to protect him? E.g. company shares, real estate assets, financial assets, intangible assets, etc.?
- What is the best way of structuring a process to identify the best investor both for the company?
- What is the dynamic of the agreement that the company and its shareholders must reach in order to protect its interests / optimize the returns of the capital to be raised?
- What documentation needs to be provided when, in which part of the process and how can confidential information best be protected?
- At what point in the process should an investor be given exclusivity and how?