hello everyone hi welcome to the channel
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topic with us is leveraged finance when we talk about leveraged leverages risk
risk means debt so this doesn’t mean that I mean it’s part of that is a part
of this so well leveraged finance is basically when you finance you leverage
so what leveraged finance is all about we’ll try and discuss that the first and
the foremost thing that we are going to discuss is what is the leveraged finance
see leveraged finance is described as funding funding a company or a business
with more than normal proportion of the debt instead of equity or cash so higher
debt means higher financial obligation in the form of interest or the what we
call as fixed interest and principal repayment and corporates have to fulfill
their obligation irrespective of the profits to maintain its long term
solvency so leverage Finance directly impacts the cash flows and the net
profit of the company and may lead to lower EPS also okay dividend in the
hands of the dividend per share in the hands of the shareholders so higher the
financial fixed cost that is what we are talking about here the interests are
used to maximize the impact of the profit after tax for a given change in
the effort earning before interest and tax using more financial leverage okay
with within a capital structure may enhance some financial ratios of the
company like our ROE return on equity okay now second that is what we are
going to discuss is the leveraged finance examples let’s take a basic
example to understand the concept of leveraged finance okay I’m gonna take
over here scenario one scenario one over here is you buy a company for let’s say
100 million you buy a company for 100 million for cash so suppose
there is an investment opportunity where you can buy the company 400 million in
cash and you your analysis shows that you can sell the company after 5
years for let’s say $200 million and thereby you’re you’re making a
handsome return of 2x because from $100 to $200 it’s it’s more 2x right in 5
years so if you if you go and and then calculate your IR are somewhere between
in 15% closely around or 14% because your purchase let’s say your purchase
value is $100 hundred million right in year 1 let’s say you receive
nothing zero same with year 2,3 RND let me just write 0 0 0 and 0 this
is 1 2 and 3rd year and I’m gonna take it to the 4th year and in the final exit
stage you get $200 so our return multiple X is 2 this is gonna be
negative so finally over here let’s calculate ir a– over ir r just try and
values over here so it’s 15% so you see I was close to that so 15% is our IRR
over here right now I’m gonna take second scenario scenario number 2
now over here let’s say you take 50% in cash and 50% in B that has debt
financing so let us now change the scenario and assume that the deal is
financed by 5% cash in 50% debts and selling price a selling price
after 5 years is still 200 million so here we will assume that the total
payment that the total payment of 5 million is made each year and this 5
million consists of interest payments as well as principal payments repayment
so at the end of the 5th year or 5 years the total debt remaining is 39
million here and when you sell the company at 200 million the net amount
that you may make is 200 million minus total debt remaining 39161 is what you
make so in the case of the IRR comes out to be closely closely to because it’s
gonna be 50 debt and yeah so it’s gonna be closely to 20 or 19% okay so
one thing you might remember is that you know in order to go for leverage finance
the predictable cash flows are very essentially you see use over here right
and this is the reason why target companies are usually mature business
that has pros is through one themselves in the over the last years now I’ll make
you understand what is the impact of the LF using high financial leverage in
the capital structural company into the higher debt to equity ratio and if in
case a company is unable to generate that adequate cash from its operating
activities right then it might default it might default and in repayment of its
interest or principal amount that is do you know it will further dissolve the
financial liquidity of the company in the run and raise in the short run and
raise a question about its long term financial solvency before these
stakeholders the bankruptcy of the company may come very soon without a
chance and may occur in a difficult scenario and the macro economic factors
will also make this substantial impact on the leverage finance companies and it
may increase the chances of default just like the recession in an economic will
cut down the operation of the organization and which leads to lesser
income from the operation and hence defaults and repayment of loans will
have and it will start there were many corporate who defaulted worldwide in
closely 2008 and everyone remembers that of the financial crisis and many of them
declared as insolvent right we have Lehman Brothers as one big example so
what is the importance of leveraged finance in investment banking
well leveraged finance is one of the essential Department of inversing
banking firms who helped the corporate lands to provide leveraged loans for
taking strategic decisions like acquiring company refinancing of its debt expansion of the business
operations okay leveraged finance department is also responsible for
planning managing structuring and advising on the entire debt finance of
the sole the private equity form the PE forms and the forms the aggressively
financed their customized project with the use of the high level or the high
leverage in their portfolio and enhance their returns what are the leveraged
finance products I’ll quickly run you through that we have first as leveraged
loans we all know what is loans right then there is a high-yield bonds you can
buy bonds then you have mezzanine financing it is a short way of a know enhancing
the companies with which our urgent need of money just to seize the best business
fortunately so it is a bridge between the short term financing and the long
term financing and it is mostly used by the SMEs company to easy to finance a
project in the cost-effective okay so based on this let me make my
conclusions while analyzing a company you know leverage finance analyst needs
to understand our company’s use of leverage to evaluate its returns okay in
average friends will help to measure the risk appetite and also estimate the
projected future cash flows and earning after tax so earning per share EPS
returns on investments leverages directly related to the financial risk
BETA cost of equity and which can be used to estimate the appropriate
discount rate which is known as your VAT for measuring the present value of the
company so using too much leverage finance can be dangerous for the funds
unless it is properly planned and managing the most effectively so the
amount of differencing leverage is usually usually it is deliberate choice
of the management of the company whereas the amount of the operating leverage it
is driven by the prevalent business model in each industries so hence the
corporate should set a limit on the use of the leverage in its capital structure
as a part of the risk management activity okay
so that the stakeholders will not lose trust on the solvency of the company
however the business with the means that can be used to color or collateralized
borrowing may be able to use more financial leverage than a business that
does not have any such characteristic so that’s it for this particular topic
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