Daily Logs

Distribution Waterfall

It is a structure that defines how the profits is shared between LPs and GPs in a funds such as in what order and with which rules.

Four tiers

1. Return of capital: The capital of LPs is returned with additional fees takes in the beginning of the fund.

2. Preferred Return: the money calculated with hurdle rate is also given to LPs

3. Catch-up: It is calculated with "catch-up = (hurdle + catch-up) x carried interest"

4. Carried Interest: Everything else is then divided with a fixed ratio (usually 80% for LPs and 20% for GPs)

Debt Sizing

It is the process of understanding how much debt a company/project can pay for in a specified term. A simple can be like "What is maximum amount of USD we can borrow with our projected cash flow?"

Debt Sculpting

It is the designing of debt amortization schedule based on projected cash flow after debt sizing. A simple question can be like "Which amortization schedule should we use so that DSCR (Debt Service Coverage Ratio) remains optimal in each period?"

What is Arm's Length Transaction?

A transaction where independent parties with each other is making. There is no relation between parties like family or association. Two side of the transaction have free will and don't have to make a deal.

Maintenance vs. Incurrence Covenants & Cov-Lite Loans

Maintenance Covenant

Covenant item type that require the company to meet financial ratio conditions at the end of each period. If conditions is not met, it is counted as default even if company pays for debt on time.

Incurrence Covenant

Covenant item type that tests the company when the company takes a specific actions to do something (e.g. dividend, acquisition, debt or equity issuance). If the company does not take the specific action mentioned, no violation occurs.

Cov-Lite Credit

Cov-lite credit is a type of leveraged loan that includes incurrence covenant instead of maintenance covenant. It is secured like a traditional loan (first lien), but its covenants are as loose as a bond's.

Asset-Based Revolver vs. Cash Flow Revolver

Asset-Based Revolver (ABL)

Borrowing base is calculated over borrower's A/R and inventory, and collateralized with first lien. It's dynamic and recalculated at the end of each period. ABL is limited with its borrowing base. It is getting popular with its low interest rates.

Cash Flow Revolver

Limit is decided based on past cash flow of the firm. No need to monitor borrower's assets and liabilities. It is easy and cost effective for lenders, but covenants is tighter than ABL.

Loan & Debt Financing Terms

Accrued interest or pay-in-kind interest

It is the opposite of regular interest. Interest payments accumulate over the term and paid at the end of the term.

Breakage cost or steep cash cost

If interest rates falls, fixed rate loans is locked at a specific rate. In that case, if you want repay fixed-rate loan with a cheaper loan, breakage costs incur for you.

Bullet payment

Repayment of principal amount of the loan is made at the end of the term. This is called "bullet payment" and only valid for non-amortizing loans.

General security aggrement

It is used by lenders to register floating charge over borrower's assets. It is almost impossible to see truly unsecured debt, there is always at least one general security aggrement.

Irrevocable Trust

Irrevocable trust: underlying asset is given to other-party trustee and the issuer cannot use underlying collateral for its own interests.

But, this does not mean the issuer released the liability and is not legally binding.

After using irrevocable trust, issuer still must show this liability in the balance sheet.

Types of Bonds — In Terms of Guarantee

Secured bonds: has a guarantee behind his back. If issuer cannot repay its debt, you can seize the property assured as guarantee. Debenture bonds: has no guarantee for getting your money back. It is unsecured and it is called junk bond for that of high risk + high interest.

Types of Bonds — In Terms of Term

Term bonds: All bonds issued at the same time has same maturity date. Serial bonds: gradual maturity for bonds. Different bonds issued at the same time has different maturity date.

Debt Investment Classification

Held-to-Maturity

They are hold until its maturity and reported at amortized cost.

Trading Securities

They are bought for the purpose of selling in near term and reported at fair value. Unrealized gains/losses is included in net income.

Available for Sale Securities

The intend is ambiguous. They can be sold in near term or maturity and this information is not clear. Unrealized gain/losses reported at Other Comprehensive Income.

Cost vs. Fair Value

The value of assets can be written in two ways:

1. Cost: You can write asset's value based on the value you bought it

2. Fair value: You can write asset's value based on the today's actual value

The one simple handicap with fair value is how you are gonna measure asset's today value.

The Three Levels of Fair Value

Level 1: The price you see on the exchange

Level 2: The price you observe through data such as yield curves, forex etc.

Level 3: The price you cannot observe because such data does not exist and to set a price you need a lot of assumptions

Financing Commitment in an LBO

A financing commitment from the investment banks to a financial sponsor includes three documents: a commitment letter, which covers the bank debt and the bridge facility; an engagement letter, in which the sponsor engages the investment banks to underwrite the bonds on behalf of the issuer; and a fee letter, which sets out the fees paid to the banks and is kept confidential.

Traditionally, the sponsor must provide certainty of financing to the seller, so it pays for the bridge commitment even if the bridge is unlikely to be funded at close.

Private Placement

A private placement involves selling stock shares directly to chosen investors and institutions instead of the open market. It is an alternative to an initial public offering (IPO) for a young company seeking to raise money to expand.

Private Placement Memorandum

Private Placement Memorandum (PPM) is a legal disclosure document provided to prospective investors when a company or fund raises capital through an unregistered, private securities offering.

Cash Runway

A cash runway is the number of months a company can continue operating before it runs out of money, assuming current spending levels and revenue streams remain constant. Formula: Cash Runway = Cash on Hand ÷ Monthly Burn Rate. For example, if a startup has $1,200,000 in the bank and spends $100,000 per month, its cash runway is 12 months. Investors and founders use this metric to determine how much time they have before needing to raise more capital, cut costs, or reach profitability.

Earnings Call Jargon

• Backlog: Orders received but not yet fulfilled or delivered.
• Comparable Store Sales (Comps): Measures current store sales revenue against the revenue from the same period in the past. It excludes new openings or closings which focuses on only the current stores growth or decline.
• Whisper Number: The unofficial earnings figure that analysts or investors expect, which may differ from the company's official guidance.
• Guidance: Management's official forecast or projection of future performance.
• Double Click: It is used by executives to indicate they are going to elaborate further on a specific topic.
• Lumpiness: It is used to explain uneven or unpredictable revenue across different quarters.

S-1 Filing

S-1 is the required registration statement filed before a company's IPO. It includes key sections for valuation: Financial statements, MD&A where management breaks down revenue by segments and explains margin trends, operating metrics, cap table which is required for equity value calculations. S-1 documents provide transparency between the company and SEC.

S-3 Filing

S-3 is simplified S-1 filing which company files after its IPO to issue new shares to the public. It is simple because the company already publishes 10-K and 10-Q reports regularly. So, no need to repeat same things over and over again. Investment banks act as underwriters in both S-1 and S-3 transactions.

Comprehensive Income

Comprehensive Income = Net Income + Other Comprehensive Income (OCI). OCI shows changes that comes from unrealized gains/losses like currency translation changes, investments, and pension and postretirement medical plan adjustments. These changes go directly to equity and don’t affect earnings per share.

Predicted Beta

Predicted Beta shows how sensitive a stock is to market movements. Historical beta looks at the past. Predicted beta adjusts it toward 1.0, because betas tend to move closer to 1.0 over time. Formula: Adjusted Beta = (2/3 × Historical Beta) + (1/3 × 1.0). It is used in CAPM when calculing cost of equity for WACC. Don’t use historical beta when you calculate WACC, always use predicted beta.