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Chapter 1: |
Introduction |
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- § 1:1 : What Is Corporate Finance, and Why This Book1
- § 1:2 : What This Book Covers3
- § 1:3 : What This Book Doesn’t Cover3
- § 1:4 : Caveat4
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Chapter 2: |
The Players |
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- § 2:1 : The Company Perspective8
- § 2:1.1 : Debt Versus Equity8
- § 2:1.2 : Short-Term or Long-Term Debt9
- § 2:1.3 : Illiquidity Versus Insolvency10
- § 2:1.4 : Matching Liabilities to Assets; Managing Maturities10
- § 2:1.5 : Market Conditions11
- § 2:1.6 : Fixed-Rate Financing and Call Protection12
- § 2:1.7 : Short-Term Pricing with Medium-Term Assurance of Access to Funds Through a Backstop13
- § 2:1.8 : Nature of the Business14
- § 2:1.9 : Maturity of the Business16
- § 2:1.10 : Where Does the Company’s Cash Come From?17
- § 2:1.11 : Implications for Lawyers18
- § 2:2 : Investors and Intermediaries19
- § 2:2.1 : Individual and Institutional Investors in the Public or Quasi-Public Markets; Underwriters and Placement Agents19
- § 2:2.2 : Banks and Other Lenders in the Bank Loan and Private Placement Markets21
- § 2:2.3 : Competition and Consolidation in the Banking Industry22
- § 2:2.4 : Implications for Lawyers23
- § 2:3 : Exchanges, Regulators and Industry Associations24
- § 2:3.1 : Another Kind of Liquidity; Trading and Exchanges24
- § 2:3.2 : Primary Regulators and Self-Regulatory Organizations26
- § 2:3.3 : Industry Associations26
- § 2:3.4 : Implications for Lawyers26
- § 2:4 : Ancillary Players27
- § 2:4.1 : Providers of Trustee and Administrative Services27
- § 2:4.2 : Rating Agencies28
- § 2:4.3 : Accountants29
- § 2:4.4 : Financial Printers30
- § 2:4.5 : Lawyers31
- § 2:5 : The Evolving Market; Hedge Funds and Private Equity; Derivatives31
- § 2:5.1 : The Status Quo Ante31
- § 2:5.2 : Change Happens32
- § 2:5.3 : Private Equity and Leveraged Buyouts33
- § 2:5.4 : Hedge Funds33
- § 2:5.5 : Derivatives, and Credit Derivatives in Particular34
- § 2:5.6 : Playing a Game of Catch-Up35
- § 2:6 : The M&A Connection36
- § 2:6.1 : Financial Engineering and Financial Buyers36
- § 2:6.2 : Assessment of the Target Company Debt37
- § 2:6.3 : The Acquisition Debt38
- § 2:6.4 : Bridge Loans, PIK, Staple or Stapled Financing . . . Innovation Is the Rule39
- § 2:6.5 : Implications for Lawyers41
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Chapter 3: |
The Instruments |
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- § 3:1 : Review of the Basic Terms43
- § 3:1.1 : Scheduled Maturity; Mandatory Repayment; Optional Repayment; and Call Versus Non-Call43
- § 3:1.2 : Yield and Coupon; Yield and Price; Accrual;Fixed Rate Versus Floating Rate; Margin and Spread45
- § 3:1.3 : Rating47
- § 3:2 : Plain Vanilla Finance48
- § 3:2.1 : Common Stock48
- § 3:2.2 : Preferred Stock48
- § 3:2.3 : Convertible Debt49
- § 3:2.4 : Commercial Paper49
- § 3:2.5 : Bank Debt—Revolving Credits51
- § 3:2.6 : Bank Debt—Letters of Credit52
- § 3:2.7 : Bank Debt—Term Loans55
- § 3:2.8 : Private Placement Debt55
- § 3:2.9 : Public or Rule 144A Debt55
- § 3:3 : Complex Finance56
- § 3:3.1 : Structured Finance56
- § 3:3.2 : Derivatives60
- § 3:3.3 : Financial Engineering and Rule Arbitrage; Issues for Lawyers61
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Chapter 4: |
Accounting Matters |
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- § 4:1 : Financial Statements63
- § 4:2 : The Balance Sheet and What’s Not on It65
- § 4:3 : The Income Statement; LIFO and FIFO71
- § 4:4 : EBITDA73
- § 4:5 : How the Financial Statements Fit Together74
- § 4:6 : Consolidation; Minority Interests; Equity Accounting75
- § 4:7 : Interplay of Consolidation Concerns and Off-Balance-Sheet Financing76
- § 4:8 : How Financial Statements and Financial Reality Can Diverge77
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Chapter 5: |
Bankruptcy--Rules of the Endgame |
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- § 5:1 : Priorities of Recovery81
- § 5:2 : Fraudulent Conveyance83
- § 5:3 : Preference85
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Chapter 6: |
The Issuer and the Obligation: Recourse, Ranking, Rights, and Remedies |
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- § 6:1 : Identify the Obligor90
- § 6:1.1 : Who’s on the Hook?90
- § 6:1.2 : What’s in a Name?90
- § 6:1.3 : What Type of Legal Entity?91
- § 6:1.4 : What Is Non-Recourse Financing?92
- § 6:2 : Debt or Equity or Something Else?92
- § 6:3 : Secured or Unsecured?93
- § 6:3.1 : Benefits of Security93
- § 6:3.2 : Terminology; Negative Pledges; Equitable or Constructive Liens94
- § 6:3.3 : Nothing Short of Perfection Will Do94
- § 6:3.4 : Types of Collateral95
- § 6:3.5 : Which Rules Apply?96
- § 6:3.6 : Need for Careful Review; Key Defined Terms96
- § 6:3.7 : A Note on Stock Pledges97
- § 6:3.8 : What About Proceeds?97
- § 6:3.9 : Preference Risk98
- § 6:3.10 : In a Troubled Credit Situation98
- § 6:3.11 : Roles of Collateral Trustee, Custodian, or Servicer99
- § 6:3.12 : Sharing Collateral99
- § 6:3.13 : Consistency with Debt Agreements; Release of Collateral100
- § 6:4 : Senior or Subordinated?101
- § 6:4.1 : Subordination Is Contractual, Not an Absolute Priority101
- § 6:4.2 : The Payover Provision; Obligations of the Issuer Unaffected102
- § 6:4.3 : Definition of Senior Debt; Tiers of Subordinated Debt103
- § 6:4.4 : The Credit Agreement Debt104
- § 6:4.5 : Designated Senior Debt, Payment Blockage and Delay on Acceleration105
- § 6:4.6 : Anti-Layering106
- § 6:4.7 : Terms That Can Frustrate Subordination106
- § 6:4.8 : Guarantees of Subordinated Debt107
- § 6:4.9 : When Subordinated Debt Is Secured;Second Lien Debt108
- § 6:4.10 : What Conclusions Can Be Drawn?110
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Chapter 7: |
Beyond the Issuer: Corporate Structure Issues |
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- § 7:1 : Structural Subordination and “Leakage”113
- § 7:1.1 : Structural Subordination113
- § 7:1.2 : Pledge of Intercompany Loans; Upstream Guarantees115
- § 7:1.3 : Stock and Debt of Subsidiaries116
- § 7:2 : Subsidiaries—Presumptively Within the Credit Group117
- § 7:2.1 : Wholly Owned Versus Non-Wholly Owned Subsidiaries; Preferred Stock117
- § 7:2.2 : Restricted Versus Unrestricted Subsidiaries118
- § 7:2.3 : U.S. Versus Non-U.S. Subsidiaries119
- § 7:2.4 : Material or Significant Subsidiaries120
- § 7:2.5 : Single-Purpose or Special-Purpose Subsidiaries120
- § 7:3 : Non-Subsidiary Affiliates—Presumptively Outside the Credit Group121
- § 7:3.1 : Upstream Affiliates121
- § 7:3.2 : Sisters122
- § 7:3.3 : Joint Ventures, Minority Interests, and the Like123
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Chapter 8: |
Commitments, Conditions, Pricing, and Risk; Liquidity Support and Credit Support; Credit Derivatives |
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- § 8:1 : Commitments, Conditions, Pricing, and Risk125
- § 8:2 : Beyond the Issuer: Analyzing Levels of Credit Support128
- § 8:3 : Liquidity Support129
- § 8:4 : Credit Support and Credit Substitution130
- § 8:4.1 : Guarantees130
- § 8:4.2 : Non-Guarantee Credit Support?130
- § 8:4.3 : Letters of Credit132
- § 8:4.4 : Bond Insurance132
- § 8:4.5 : Credit Derivatives?132
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Chapter 9: |
A Deal in Time |
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- § 9:1 : The Deal Life Cycle and the Role of the Lawyer134
- § 9:2 : Understanding the Company and Its Financing Needs134
- § 9:3 : Defining the Market and Instrument134
- § 9:4 : Locating and Using Forms and Precedents135
- § 9:5 : Preliminary Agreements—Term Sheets and Commitment Letters136
- § 9:6 : Due Diligence, Detail, and the Preliminary Agreement138
- § 9:7 : Drafting and Negotiation139
- § 9:7.1 : The Drafting Process139
- § 9:7.2 : Golden Rules of Document Drafting and Negotiation139
- § 9:7.3 : How to Read a Contract140
- § 9:7.4 : Negotiation and the Lawyer’s Role141
- § 9:7.5 : Common Errors in Decision-Making142
- § 9:8 : Closings145
- § 9:8.1 : Good Closings145
- § 9:8.2 : Typical Documentary Requirements147
- § 9:8.3 : Potential Documentation Problems148
- § 9:8.4 : Requirements in the International Context150
- § 9:8.5 : Related Transactions and Simultaneous Closings150
- § 9:9 : Opinions151
- § 9:9.1 : Opinions are Hard; Not Just a Word-Processing Exercise151
- § 9:9.2 : The Basic Opinion153
- § 9:9.3 : Conclusions About Legal Facts154
- § 9:9.4 : Security Interest Opinions155
- § 9:9.5 : True Sale and 10b-5 Opinions155
- § 9:9.6 : Rules to Opine By155
- § 9:10 : Post-Closing158
- § 9:10.1 : Final Documents and Closing Sets158
- § 9:10.2 : Post-Closing: Amendments, Waivers, and Questions of Interpretation(When to Call a Lawyer)158
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Chapter 10: |
Contract Structure and Key Elements |
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- § 10:1 : Overview162
- § 10:2 : Title, Date, and Parties; References to Other Contracts163
- § 10:3 : Successors and Assigns?164
- § 10:4 : Conditions Precedent165
- § 10:5 : The MAC Clause, Material Litigation, and Incipient Events of Default166
- § 10:6 : Representations and Warranties169
- § 10:6.1 : Representations as “Hidden Covenants”169
- § 10:6.2 : Representations About the Unknown:Who Bears the Risk?170
- § 10:6.3 : Misrepresentation Versus Inability to Make a Representation171
- § 10:7 : Covenants171
- § 10:7.1 : Affirmative Covenants, Negative Covenants, and Financial Covenants172
- § 10:7.2 : Maintenance Versus Incurrence Tests172
- § 10:7.3 : Principles of Covenant Design and Analysis173
- § 10:7.4 : Related Definitions: How Important Are They?173
- § 10:8 : Defaults174
- § 10:8.1 : Default Versus Event of Default174
- § 10:8.2 : Acceleration; The “Ipso Facto” Clause175
- § 10:8.3 : Cross-Defaults175
- § 10:8.4 : Judgment and Lien Defaults176
- § 10:9 : General or “Miscellaneous” Terms177
- § 10:10 : Definitions177
- § 10:11 : Who’s Covered?178
- § 10:12 : How Do the Provisions Work Together?179
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Chapter 11: |
Housekeeping, Insurance, and Information Covenants |
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- § 11:1 : Good Housekeeping181
- § 11:2 : Insurance Covenants182
- § 11:3 : Information Covenants183
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Chapter 12: |
Debt and Liens (Negative Pledges) |
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- § 12:1 : The Negative Pledge (Restriction on Liens)185
- § 12:2 : The Construction of Negative Covenants186
- § 12:3 : Equal and Ratable Clauses187
- § 12:4 : Restrictions on Sale-Leasebacks189
- § 12:5 : Restrictions on Negative Pledges190
- § 12:6 : Debt Covenants190
- § 12:7 : Restrictions on Debt of Subsidiaries191
- § 12:8 : The Priority Debt Package192
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Chapter 13: |
General Business Covenants |
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- § 13:1 : Purposes193
- § 13:1.1 : Preserving the Identity of the Obligor and the Source of Repayment194
- § 13:1.2 : Reducing Risk195
- § 13:1.3 : Controlling the Use of Cash195
- § 13:2 : By Type of Transaction or Activity196
- § 13:2.1 : Mergers and Asset Sales196
- § 13:2.2 : Restricted Payments198
- § 13:2.3 : Investments199
- § 13:2.4 : Line of Business200
- § 13:2.5 : Capital Expenditures200
- § 13:2.6 : Acquisitions?201
- § 13:2.7 : Leases202
- § 13:2.8 : Guarantees and Contingent Obligations202
- § 13:2.9 : Assignment of Receivables203
- § 13:2.10 : Transactions with Affiliates203
- § 13:2.11 : Other204
- § 13:3 : Constructing a Multi-Covenant Basket205
- § 13:4 : Cross-References to Ensure Consistent Treatment205
- § 13:5 : Change of Control Provisions and Definitions206
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Chapter 14: |
Financial Covenants |
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- § 14:1 : Lawyers Should Not Be Afraid of Financial Covenants207
- § 14:2 : Correcting Toward Cash and Fair Value208
- § 14:3 : Maintenance Versus Incurrence Tests (Again); Historical Versus Adjusted or Pro Forma208
- § 14:4 : Coverage Versus Balance Sheet Tests; Timing Questions209
- § 14:5 : Coverage Tests210
- § 14:5.1 : The Numerator210
- § 14:5.2 : EBIT and EBITDA211
- § 14:5.3 : The Denominator211
- § 14:5.4 : Depreciation and Capital Expenditures212
- § 14:6 : Leverage Ratio of Debt to Cash Flow213
- § 14:7 : Balance Sheet Tests214
- § 14:7.1 : Net Worth214
- § 14:7.2 : Balance Sheet Leverage Test215
- § 14:8 : Minimum Operating Results215
- § 14:9 : Liquidity and Working Capital Tests216
- § 14:10 : Excess Cash Flow Sweeps216
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Chapter 15: |
Amendments, Waivers, and Control Provisions |
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- § 15:1 : Amendments and Waivers217
- § 15:1.1 : Level of Consent Required217
- § 15:1.2 : Can the Obligor Vote?219
- § 15:1.3 : Multi-Series or Multi-Tranche Agreements219
- § 15:1.4 : Banks and Bondholders That Do Not Go Along221
- § 15:2 : Amendment Versus Waiver; Form of Amendment222
- § 15:3 : Shared Collateral; Intercreditor Agreements; Standstill Agreements224
- § 15:4 : Analyzing Control Provisions225
- § 15:4.1 : A Common Apparent Anomaly225
- § 15:4.2 : Trading of Loans and Bonds, and the Relevance to Control225
- § 15:4.3 : How to Review Control Provisions226
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Chapter 16: |
Risk-Based Review; Transactions Analysis |
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- § 16:1 : Spend Your Time Wisely230
- § 16:2 : How to Deal with Boilerplate and Other Standard Provisions231
- § 16:3 : Recommendations and Questions for Risk-Based Review232
- § 16:3.1 : Party and Client Identification232
- § 16:3.2 : Correspondence to Term Sheet233
- § 16:3.3 : Closing Documents; Disclosure Schedules;Side Agreements; the Closing Set233
- § 16:3.4 : Opinions234
- § 16:3.5 : Timing, Risk, Commitments, and Conditions; Continuing or Repeating Representations235
- § 16:3.6 : Complex Calculations and Tax Provisions235
- § 16:3.7 : Security235
- § 16:3.8 : Interrelatedness and Consistency Generally Within the Financing236
- § 16:3.9 : How Different Financings Work Together237
- § 16:3.10 : Credit Support or Liquidity Support?238
- § 16:3.11 : Covenants Dealing with Securitization and Derivatives238
- § 16:3.12 : Definition of the Corporate Group; Definitions of Affiliates and Control239
- § 16:3.13 : Adverse Developments—Stress Testing239
- § 16:3.14 : M&A Scenarios240
- § 16:3.15 : Maintaining Flexibility: Amendments, Waivers, and Refinancing Options240
- § 16:4 : Transactions Analysis at the Margin240
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Chapter 17: |
Best Practices |
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- § 17:1 : Drafting As a Professional Skill243
- § 17:1.1 : Cross-References244
- § 17:1.2 : Consequential and Conforming Changes244
- § 17:1.3 : Working with Precedent245
- § 17:1.4 : Excessive Generality and Too Much Specificity;Over-Engineering246
- § 17:1.5 : Identifying and Correcting Ambiguity; Vagueness247
- § 17:1.6 : Logical Completeness and Correctness; Speculative Worlds?248
- § 17:1.7 : Over-Drafting248
- § 17:1.8 : Too Many Words249
- § 17:1.9 : Good Definitions249
- § 17:1.10 : Provisions in Related Documents251
- § 17:1.11 : Lists251
- § 17:2 : Drafting Disclosure of Contract Terms251
- § 17:2.1 : Where the Contract Is Relevant but Is Not the Main Event251
- § 17:2.2 : For the Selling Document for the Debt252
- § 17:2.3 : In Regular Disclosure for Public Companies?252
- § 17:3 : Levering Technology—Possibilities and Pitfalls;Documents Handling and Retention252
- § 17:4 : Lessons of Enron254
- § 17:5 : Stay Informed, Be Engaged, Live Long, and Prosper257
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Chapter 18: |
Appendix A: Notes and Resources |
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Chapter 19: |
Appendix B: Technical Drafting Checklist |
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Chapter 20: |
Appendix C: Indicative Terms for Bank Debt and Public Debt, Investment Grade Versus Non-Investment Grade |
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Chapter 21: |
Appendix D: Newco Goes to Wall Street--8 1/2 Balance Sheets |
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Chapter 22: |
Appendix E: Diary of a Liquidity Crisis: Enron's Last Days |
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Chapter 23: |
Index to Drafting for Corporate Finance |
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