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.

THE BUSINESS

  • 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.?

THE PROCESS

  • 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?