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Study, Case

string(129) ‘ comes the book building process which can be one of the most significant tasks that consists of taking orders in the investors\. ‘

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Belgacom Case Question 1 a) Why did the talk about price of Belgacom boost following the story of the obtain? b) How come did the ratings of Belgacom drop (S&P) or perhaps put on negative watch (Moody’s)? a) Because Belgacom anchored the getting the remaining 25% share of Proximus that did not personal yet, the share price of the Belgian company improved by 0. 92 % the same time and 9. 8% in the following month.

An announcement can lead to pre-event abnormal returns as markets react to this info to get a high grade.

Investors will attempt to assess the increase in anticipated earnings and dividends. The impact of this assessment will depend on the way the merger is done, how the purchase is paid, the sector it issues, etc . However , according to market efficiency hypotheses, overreaction about stock prices tend to disappear in the long-run and the cost reflects this current value of expected results. (FAMA, 1998) That being said, a number of reasons might explain this jump.

Initial, we can underline the fact that operation enables Belgacom to gather all the great things about Proximus. Prior to purchase, 25% of the income of Proximus were put into minority passions, these were payable to Vodafone. After the procedure, Belgacom possesses 100% from the shares and may enter all of the cash of its part in its accounts. It symbolizes an increase for the future cash flow not simply for the firm but in addition for its current shareholders, which is comforted to obtain more in the foreseeable future or that their stocks and shares represent more cash.

This is due to the decision of Belgacom to financial its acquisition by personal debt which does not give ownership rights towards the bond owners. Fig. you: Evolution of Belgacom Share Price (2005-2008) Second, Belgacom was knowledgeable about Proximus business as Belgacom (75%) founded the company with Airtouch (25%) in year 1994, creating by this way the first mobile phone operator in Belgium. b) Unlike the market, rating agencies did not pleasant positively this kind of transaction: Moody’s changed their outlook to negative and Standard&Poors reduced Belgacom rating to A from A+. Moody’s xplained that it keeps Belgacom’s rating the same because relating its strategy designed for GRI (Government-Related Issues), there is no difference in Belgacom solvability. Moody’s GRI methodology use three advices: the rating and the perspective of Athens, the low degree of default dependence and the method level of support from the Belgian government. During your time on st. kitts is no difference in those advices, there should be not any change in Belgacom rating. That said, several indicators lead the agency to wonder about the capability of the The belgian company to cope with its lenders.

First, Belgacom announced a bunch of outflows pertaining to the weeks to arrive: just simultaneously, Belgacom chosen to sell it is 5, 8% stake in Neuf Cegestel to SFR: the outcome of the operation was EUR 187 million and also a share buyback (maximum 200 million) and a gross in 2006 to get EUR 90 million. What is more, Belgacom decision to use its current financial stability and thus weaken the debt proportions. As for Standard&Poors, the firm decided to limit the rating of the Belgian firm via A+ into a.

S&P stated this decision lies on the truth that the Belgacom debt is going to rise of approximately EUR two billion, making notably increase the debt/Ebitda rate from 0, 8 to at least one, 9. Additionally, its organization in a competitive and liberalized market, plus the decline of fixed lines market help to make fear intended for future results of the firm. However , the outlook remains stable, that may be explained by the strong situation of the organization on the The belgian telecom market and its big ability to make cash. Problem 2 a) Why was your acquisition borrowed by a connect loan? ) What were the alternative auto financing sources? a) Bridge loans are initial financial tools usually utilized to lock-in a settled price( (frequent in Real Estate Market). This practice buys moment for the deal manufacturer to sort things away and to better structure its financing system. This appears to be the main rationale for Belgacom in this case. The management planned to lock-in the price agreed on with Vodafone and as the deal was subordinated towards the Belgian Government bodies approval, it had been more careful to make that happen immediately.

Yet there is certainly another way to see a bridge financial loan as a short-term expensive financial loan serving the purpose of being an intermediate financing mean for the business that advantages from it (Fabozzi, 1991). Down the road, this connection loan can be reimbursed with additional advantageous types of loans. was in fact a syndicated loan underwritten in order to finance an purchase. As a couple of facts, the money was made simply by several lending institutions called the mandated lead arrangers we. In the case of Belgacom, the company got a connect loan for a number of reasons which might be detailed beneath.

The connection loan at the. BNP Paribas, Citi, Fortis, ING and JP Morgan. For the investment financial institutions that underwrite the syndicated loan, the key interest lives in the fact that they can gain a fee. In this certain case, the bridge financial loan was established as a revolving credit instrument type. This kind of meant Belgacom had to spend a fee additionally interest expenses and can draw-repay-redraw as many times since needed. Because said just before, a first justification would be that the cash was needed quickly (maybe) and bridge loans are established more quickly.

In fact it is ideal of the company (Belgacom here) to pay the connection loan as quickly as possible because it is very expensive and the rate of interest generally boosts with the maturity. Moreover giving corporate you possess takes time. In fact , there are four main procedure for issue a bond inside the bond market. First, you will find the pre-mandate period which should determine the funding needs or unique the right time to tap the bond industry. Additionally , the currency should be determined, the marketplace as well as well as the targeted buyers.

After that, comes the book building procedure which is probably the most important jobs that consists of taking the orders from the traders.

You browse ‘Belgacom Circumstance Study’ in category ‘Free Case study samples’ Then, a number for the coupon level has to be determined and the quantities have to be allocated to the traders. Those measures could commonly take several weeks. Helping firms with short term funding can be thus a major need for the client. Another reason can be that it offers Belgacom time for you to wait for even more favourable economic conditions for issuing the bonds. According to investor’s appetite, timing is actually crucial in such offers.

Now, from your investment bank’s perspective, there is certainly possibly a conflict of interest since the expenditure bank reaches the same time lender (through the bridge loan) and the enterprise that prices the securities that will be utilized to reimburse this loan. One could argue the investment bank could lack objectivity (Glazer, 1989). However , this makes up an additional motivation for the book sportsmen to effectively carry the package to its end. Additionally , four from the five financial institutions that awarded the connection loan became the joint book athletes. To that extent, there are obviously business passions which are included.

This can be interesting for the investment traditional bank in order to get nearer to the client. Additionally, this form of short term auto financing is more high-priced for the business because it holds higher hazards. Alternatively, this means that it is more profitable for the investment bank as well. In conclusion, bridge loans seem to be a lucrative method to obtain profits pertaining to investment banking institutions. First, that they place themselves in a cozy position to issue you possess for the company later on. Second, they can shift their income and be a fantastic candidate to get the relationship issuance.

Like a matter of information, four from the five financial institutions providing the bridge loan took care of connection issuance. b) Alternatives to bridge financial loans were customarily letters of comfort written by the purchase bank declaring that the traditional bank was ‘highly confident’ the fact that additional financing needed by the company could possibly be obtained. It indicates no link funding at all. Hence the alternative would be to wait for an bonds being issued. The risk here on the other hand would contain being in its final stages for buying the target. One more alternative is always to use your own capital to fund the acquisition in the short run.

This kind of depends, of course , on the potential of Belgacom to generate these kinds of a large amount of money. Yet another option would have gone to raise more capital by issuing shares with the arrangement of its existing investors. However , this option could have been detrimental to existing investors: the Belgian state which had a main stake in Belgacom with 50. 1% of the shares. Here is a overview of all the plausible alternatives: 5. Pay with retained money: Belgacom may put 2Bn¬ on the table pertaining to Vodafone’s share (assuming which the amount was available at the time).

Although, this is referred to as worst case scenario to get current investors. Putting the amount in an acquisition would also provide constrained Belgacom to lower (even cancel) its expansion opportunities. * Go straight to the Market: Belgacom could issue the a genuine without taking the bridge loan but since the company got no prior bonds exceptional in the second market, the pricing would have been required anyway and it takes time and money to process it. The chance in that case is the agreement with Vodafone, other players could profit from the info and buy the stake to be able to sell it to Belgacom in a premium.

Query 3 If, perhaps the 5-year swap rate was 3. 922% plus the 10-year swap rate was 3. 977% at the time of charges the deal (primary market), would you calculate: a) The yield for investors The deliver is composed of the risk-free interest rate and the risk premium. The risk-free level is usually defined as the rate of a government connect or the interbank rates (ex: Euribor) for the similar maturity. However , the swap rate is employed for maturities beyond 12 months. Here, the explanatory affirmation assumes the 5-year and the 10-year exchange rate were respectively a few, 922% and 3, 977%.

The credit rating spread or perhaps risk superior depends on the maturity and the top quality of the issuer. After contrasting the discount offered by corporations with the same risk account from the phone system peer group in the supplementary market, the explanatory notice explains banks’ position which will suggested to issue the 5Y connect and the 15 Y bond with a distributed guidance of respectively 30-35 bp and 60-65 bp. Bonds your five and 10 years| Years to| 2006| | | Maturity| five years| 10 years| | | Change Rate (rf)| 3, 92%| 3, 98%| | | | Min| Max| Min| Max| | | Risk Premium| zero, 30%| 0, 35%| zero, 60%| 0, 65%| | |

Deal with Value| ¬ -100, 00| ¬ -100, 00| ¬ -100, 00| ¬ -100, 00| | | Produce to Maturity| 4, 222%| 4, 272%| 4, 577%| 4, 627%| | | Coupon Rate| 4, 125%| 4, 250%| 4, 500%| 4, 625%| | | Price ¬| ¬ 99, 57| ¬ 99, 90| ¬ 99, 39| ¬ 99, 98| | | Price %| 99, 57%| 99, 90%| 99, 39%| 99, 98%| | | Fees| 0, 15%| 0, 15%| 0, 25%| 0, 25%| | | Proceeds| 99, 42%| 99, 75%| 99, 14%| 99, 73%| | | Cost %| 4, 256%| 4, 306%| 4, 609%| 4, 659%| | | Table one particular: Results intended for the Connect Issuance Hence, the yield for traders should be the amount of the risk-free and the risk premium rate: * Minutes. 4, 222% and utmost. 4, 272% for the 5-year connection * Minutes. 4, 577% and utmost. 4, 627% for the 10-year connection ) The coupon price The promotion rate is the amount of interest payable on the bond. It is important to bear in mind that the industry practices desire the produce to vary simply by steps of 0, 125%. Therefore , relating to desk 1, the yield pertaining to the trader varies among 4, 125 and four, 250 for a 5-year maturity bond and 4, 5% and 5, 625% for any 10-year maturity bond. c) The issue selling price The issue cost is the price from which investors buy the bonds in the primary market. The connection issue price is the present benefit of the bond’s cash flow. To acquire this cost, we have to utilize the coupon charge, the face value and the produce for trader as described in this formulation:

Issue Value = Discount 1(1+y)+ Promotion 2(1+y)? +¦ +Coupon n1+yn+ Face value1+yn At issuance, the subscriber will pay: 2. Min. 99, 57%, Max 99, 90% for a maturity of 5-year * Min. 99, 39%, Max 99, 98% for any maturity of 10-year d) The cost pertaining to Belgacom The fee to maturity for the issuer y is defined as: Issue Price ” Fees with the bookrunners = Coupon 1(1+y)+ Coupon 2(1+y)? +¦ +Coupon n1+yn+ Encounter value1+yn The speed y resolving (cost to maturity) this kind of equation can be: * Minutes. 4, 256%, Max four, 306% for a maturity of 5-year 2. Min. some, 609%, Max 4, 659% for a maturity of 10-year e) Money Flows Allow me to share the cash runs for the issuer. For any maturity of 5 years: At invention (time 0), the company receives (99, 57%-0, 15%)=99, 42% increased by the total face worth. Every year for 5 years, the company pays the coupons of 4, 125% * confront value from the bonds At maturity, the issuer must repay the whole face value plus the previous coupon. | | | | | | | | | | | | Funds Flows since % of Face Value| 5y-Bond| 0| 1| 2| 3| 4| 5| | | | | | Bottom| 99, 42| -4, 125| -4, 125| -4, 125| -4, 125| -104, 125| | | | | | Up| 99, 75| -4, 25| -4, 25| -4, 25| -4, 25| -104, 25| | | | | | | | | | | | | | | | | | 10y-Bond| 0| 1| 2| 3| 4| 5| 6| 7| 8| 9| 10|

Bottom| 99, 14| -4, 50| -4, 50| -4, 50| -4, 50| -4, 50| -4, 50| -4, 50| -4, 50| -4, 50| -104, 50| Up| 99, 73| -4, 63| -4, 63| -4, 63| -4, 63| -4, 63| -4, 63| -4, 63| -4, 63| -4, 63| -104, 63| | | | | | | | | | | | | Question 4 Consider an exceptional corporate connect in the supplementary market (issued a few a few months ago). Everything else being the same, the market all of a sudden perceives an even more important credit risk linked to the considered company. What effect should it have got on: a) The credit rating spread The credit risk is the risk that the issuer may standard and not payback the full sum he owes to bondholders (the total face benefit of the bonds).

The credit rating spread converts the uncertainty about potential future stock price movements. (Berk, 2011) If the marketplace suddenly interprets more important credit rating risk associated with the issuer, the credit spread will widen as the industry is recognized has getting relatively safer. The payoff associated to extra credit risk can be described as higher produce. Therefore , the credit distributed represents a benefit for investors when assisting extra hazards. Fig two: Yield curves Source: CFA b) The yield You will find two parts in the yield: the risk totally free rate plus the credit spread. All else being equal, if the credit propagate widens, the yield boosts. ) The purchase price Investors want to pay less to get a risky bond having the same pay-offs being a risk-free connection. By taking more risk, the final amount the investor desires to receive might be less than what he will get as there exists a credit default risk. (Berk et ing., 2011) The variable which the market has a direct impact on in order to adjust to get a higher yield is the selling price. Due to the bad relation between yield as well as the price of course, if the promotion payments plus the principal repayment remain unrevised, the price need to decrease in order to translate the surge inside the yield.

This can be particularly relevant when the company is the focus on of a leveraged buyout, which in turn, in most cases, is leveraged by the issuance of recent bonds. The increased debts used in in an attempt to make this kind of financial actions often decrease the totality with the bonds from the issuer to a status of junk bonds. Question 5 How would you assess Belgacom’s position with regard to the qualitative factors listed to assess the pricing? 2. Issue premia for new transaction To start with, this is the initial bond supplying issued simply by Belgacom.

Consequently , it cannot be referred to my old premium offered in its own recent transactions. Consequently , the guide will be the telecom peer group having the same risk account. * Following market performance of lately launched deals The issue premia have widened for two major reasons. First, a trend towards more acquisition in the Telecom sector seeing that 2005. Second, the Telecommunications sector is experiencing the fact it is services are usually more and more commoditized which in turn may well hurt the profitability of a Phone system company. At that time it was anticipated the connect could be divided in 3 types.

A floating price note and two set rate remarks. It was expected the 3-year FRN a new spread of 15bp to 20bp although the set 5-year notice would have a 30bp to 35bp distributed. Finally the 10-year note would have had a spread of 60bp to 65bp. With regards to recent deals, Deutsche Telekom was offered a spread of 20bp for any 3-year flying note. 15-20bp is therefore potentially better for Belgacom. As far as the fixed paperwork are concerned, Belgacom seems to profit for a slightly better pass on for 10-year notes but not for the 5-year types as the one of Deutsche Telekom was only of 17bp in April 06\. Date| Exchange 5-y| Swap 10-y| Coupon| Spread(bp)| Currency| Amount| Krauts (umgangssprachlich) T| 04 2006| a few. 83%| | 4%| 17| EUR| 750m| Deutsche T| May 2006| | four. 13%| four. 75%| 62| EUR| 500m| Telefonica| Feb 2006| a few. 42%| | 3. 75%| 33| EUR| 2250m| Telefonica| Feb 2006| | a few. 68%| 5. 37%| 69| EUR| 1750m| Vodafone| Jun 2006| | 4. 07%| 4. 75%| 68| EUR| 300m| 5. Are traders liquid? (hedge funds) Nevertheless , according to the circumstance, investor’s appetite remained high at that time. Actually bond issuances remained low because corporates generated a lot more cash flows and made utilization of cheaper techniques for funding. Marketplace sentiment? (world, Belgium, politics) There has been a lot of deleveraging followed by acquisitions in the past years. Moody’s says the economy of Belgium is merely weakly linked to Belgacom’s credit quality. However , for businesses that are partially owned by state, the credit top quality of the Sovereign may play a greater role. At that time however , there was simply no political issues in Athens yet. In 2006, the subprime crisis hadn’t begun however either. Consequently one could argue the personal setting was relatively clear.

Moreover, there are strong liberalization policies moved by the EC and investors were frightened that the Belgian state will disinvest in Belgacom following the following polls. The Belgian state experienced already to divest, keeping 50, 1% of the reveal. Therefore , buyers wanted an insurance against a change of control in the event the Belgian State distributed his participations but also to cover raise the risk against a great LBO. While Belgacom cannot introduce a step-up language, it could experienced an impact within the credit pass on by elevating it. 2. Credit Spread volatility Credit spread flower significantly more to get telecom businesses in 2005-2006.

This was because of the fact the phone system companies ventured more in acquisition actions during that period. 5-year and 10-year credit rating spread intended for A-rated telecom companies respectively rose 10bp and 20bp during that period. * Vividness effect in investors stock portfolio? Are buyers sick of telecommunications bond issuances? In principle, investors are not sick of telecom bond issuances as one of Belgacom would add diversification for their portfolio. What is more, Belgacom was seen as a secure and relatively liquid business as they were previously weakly leveraged. * Amount brought up in the past

So far as Belgacom is involved, the company has not issued any kind of bond. Hence this was a premiere intended for the company. Whenever we look at the issue amount of comparable deals in the expert group of a similar year, telecom issuers include issued in 2006 from 3 to 5 occasions with a problem amount by 500 mil. For example , Telefonica issued 5 years ago a total of 11. 750 million ¬ * Credit quality of issuer and peers When it comes to credit quality, Belgacom is superior to most competitors. This is generally due to the fact that Belgacom was weakly leveraged before the issuance.

As an example, EBITDA/Interest bills of France Telecom, Telecommunications Italia and KPN was between 2 . 4x and 7. 2% while Belgacom’s was 93x. However , Belgacom wasn’t the very best according to credit rating firms. The considered peer group is made of Italy Telecom, Phone system Italia, KPN and Belgacom. Moreover, Moody’s seems to share with Belgacom a better rating that Fitch. Consequently , we may suppose that Belgacom’s cost of issuance can be slightly less than those of his peer group. Question 6th What is a transform of control put dotacion? How would it not have protected investors?

How come did a lot of investors think the step-up language will not be valuable? Looking at the step-up language, what would be the coupon level if the score of Belgacom was downgraded a) to BBB- (S&P)/Ba1 (Moody’s)? b) to BB+ (S, P)/Ba1 (Moody’s)? A big change of control put provision is an alternative given to the bondholder to get it is bond paid back before maturity at equiparable or above, in the event of change of control followed by a rating limit (e. g. after an LBO). Corporations may be hesitant to concern bonds which include this terms, because it may place more constraints prove finances because investors have power to control repayments.

Besides, it protects investors so they can have the opportunity to alter their financial commitment strategy in the event the issuer happens to change the ownership. In case there is a LBO, for example , the ownership from the company is definitely transferred by making use of debt depending upon the future cash flows of the company. Relating to (Rosenbaum et ‘s., 2007), “a target simply represents a nice-looking LBO chance if it can be purchased at a cost and using a financing composition that provides sufficient returns which has a viable get out of strategy. In such a case, a former bondholder would view the credit risk he encounters considerably enhance, given the amount of additional debts supported by the company. This terms should after that enable a bond entrepreneur to exit his position with out bearing that increased risk because firstly, the alter of control was probably, since the The belgian government was seeking to sell off its stake in Belgacom and second of all because several argued the inclusion of the step-up language taking the kind of a +50bp in fascination payment per downgrade below investment grade would be definately not compensating the additional risk they would be bearing.

In the case of Belgacom, there were a lot of concerns relating to this possible drawback of Belgian state from the majority risk, intensified by fact that the corporation could also be the point of a potential LBO operation as described above. To be able to reassure possible investors and consequently lower interest levels for long-term bonds (10 years), it has been considered to include such a clause in the deal. Consequently , Belgacom finally decided to add a step-up terminology despite the worries emitted by some shareholders.

The main benefit of the step-up language is that investors will usually find the initial discount above the market and will also know what is to expect from their bond(s) over a longer-term period. However , bonds together with a step-up vocabulary present drawback of being callable by the company in order to concern it by lower price to reduce their expense of borrowing which can be the reason why a lot of investors had been reluctant regarding the step-up. In the matter of Belgacom, a downgrade inside the rating might have had the subsequent impact on the coupon rate: ) In case the rating of Belgacom would have been reduced to BBB- (S&P) / Ba1 (Moody’s) and if the minimum rating is usually taken into account which can be Ba1 (one grade beneath investment grade), the interest paid (coupon rate) would have increased by +50bp. b) With this scenario, the two rating companies consider a a single notch downgrade below expense grade leading therefore to a +50bp increase in the interest charge paid. Bibliography BERK M., DeMARZO G. (2011) “Corporate Finance ” Global edition Second release, Pearson release, pp. 001 FABOZZI N. (1991) “The handbook of Fixed Cash flow Securities, Mc Graw-Hill copy, Third model, p. 224 FAMA Elizabeth. (1998) “Market efficiency, long-term returns, and behavioral finance Journal of Financial Economics, 49, pp. 283-306 GLAZER A. (1989) “Acquisition bridge funding by investment banks , bridge auto financing, as source of revenue intended for investment brokers, poses risk and discord of interest Business Course magazine, Sep-Oc 1989, Site: http://findarticles. om/p/articles/mi_m1038/is_n5_v32/ai_8120675/ (Seen in April 2012) ROSENBAUM M., PEARL T. (2009) Investment Banking Value, Leveraged Buyouts and Mergers, Acquisitions Wiley finance Vodafone Non Established Website www. vodafonews. com/belgique. html (Seen in April 2012) , , , , , , , , , , , , , , , [ 1 ]. www. vodafonews. com/belgique. code [ 2 ]. Exhibit 13

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