Students’ area

This page shall serve as a collective “office hour” for students. When you have a doubt, the answer might be useful to your fellows. So, why don’t you ask it through the form at the bottom of this page?

[December 13, 2014] Although the course is over and you have received your final marks, please do not hesitate to ask your questions!

Answered questions:

Question by Alena [December 8, 2014 at 10:27 pm]: What is recapitalisation? And slice and sell unwanted target assets?

→ Answer: Hi Alena. Generally speaking, to recapitalise a a company means to increase the capital of the company. That makes hostile takeovers more difficult to happen as the acquirer has to buy a higher value of shares. More in particular, a recapitalisation may be leveraged. In which case the target company becomes less appealing since its capital structure is far from optimal.

Sometimes you buy a target company but you are interested in only some of its assets. In that case you prefer to slice the company (i.e. to separate some of its assets from the overall target company) and sell those you are not interested in.

Question by Stefania [December 8, 2014 at 2:30 pm]: Could you explain the difference between a participation fee, fixed commitment fee and a fixed agent’s fee?

→ Answer: Hi Stefania. These are mainly definitions. Here I rephrase what the textbook says, adding some intuition to it.

The participation fee is a percentage of each bank’s participation to the loan – i.e. a percentage of the money that bank is providing. As we saw in an exercise, the value of such percentage may differ among different participating banks depending on how important their contribution is for the success of the syndication.

The commitment fee applies when part of the loan is not drawn immediately (we saw that happened in our case study on the Walt Disney amusement park in Hong Kong). The idea is that banks shall not be remunerated only for the money they lent, but also for the amount of cash they keep available for the borrower to draw. [You may notice that there is no counterparty risk involved until that money is not drawn. Thus banks are paid on the undrawn part a low percentage fee that has to do with the cost of illiquidity].

Finally, the agent’s fee is an additional fee the bank acting as agent earns for its responsibility in arranging the loan.

Question by Stefanie [December 6, 2014 at 4:36 pm]: What do we mean by “rollover”? And how does it apply to loan syndication?

→ Answer: Hi Stefanie. Rollover is the extension of any financial arrangement. As you probably remember from previous courses in Finance, borrowers are required to repay their loans at some prearranged maturity date. The repayment amounts to the money they borrowed (principal) plus some remuneration for illiquidity/risk (interests). When a loan is rolled over, its repayment date is simply postponed.

To understand the implications of rollover, you can think of it as follows. When the initial loan matures and there is agreement on a rollover, the lender grants a new loan to his/her borrower. Now we shall not call that date “maturity” anymore, call it “rollover” date. The new loan amounts to the sum of money the borrower shall repay for the initial loan (initial principal + interests on it), and it is immediately used to repay that initial loan. [In reality, there is no exchange of money at rollover date. Lender and borrower just agree on postponing loan repayment at a new maturity date.] The amount of money paid at the new maturity date is going to different from what the borrower would have paid with no rollover. In fact, the borrower is going to pay interests also on the interest payments he/she owed on the initial loan.

How does that apply to syndicated loans? Syndicated loans can simply be rolled over like any other of loan. Of course, the lead manager(s) shall take care of that.

Question by Sara [December 6, 2014 at 1:26 pm]: Why are hedge funds open only to institutional or wealthy investors?

→ Answer: Hi Sara. The reason for that is investors’ protection. Differently from mutual funds, hedge funds are largely exempted from regulation on leverage and are not required to disclose some specific information to their investors. This freedom may be benefit the performance of a hedge fund. However, its investors bear the risk of larger losses and cannot easily track the performance of their investment. For this reason, regulators do not want “unsophisticated” investors to put their savings at risk in a hedge fund. Institutional and wealthy investors may have the skills needed to understand how their investment in a hedge fund is going, and in case of losses they are unlikely to become destitute. That is why those classes of investors are allowed to participate to hedge funds.

Question by Anonymous [November 28, 2014 at 11:42 am]: In terms of regulations of mergers and acquisitions, what is the difference between British model and German model?

→ Answer: The main difference between the British model and the German one concerns the protection of different categories of shareholders.

Under the British approach, minority shareholders are much protected from terms of M&A deals that may harm them. How can small shareholders be harmed?

1) They decided to buy shares of a company under a previous top-management, and they might be unhappy with the vision and strategy of the board of directors that a new “owner” (majority shareholder) is likely to appoint; 2) the difference between owning 0-49.9% of a company and owning 50.1% is huge in terms of decision power. Thus, when the previous majority shareholder sells his/her shares he/she enjoy a premium – the seller is willing to pay those shares more than in the case of a small stake. But small shareholders have their skin in the company as well, so they might want to share such premium.

Why would a regulator ever prefer to let small shareholders be harmed by an M&A and advantage majority shareholders, following the German model? Because some majority shareholders are supposed to act in the interest of the local community. Consider the example of a local bank whose governance is influenced by the local council/province/region. If the local bank owns a company, decisions taken by the latter will be indirectly biased by representatives of the citizens. [Let’s neglect the issue of possible inefficiencies that can be brought by politicians in a company!] One may say that when the paternalistic majority shareholder is free to deal with the company, disregarding the self-interested preferences of small shareholders, the whole community may benefit from that.

As we said during lectures, the dichotomy between British approach (broad participation of self-interested households to capital markets, and banks with a global business model) and the German one (paternalistic management and decisions biased towards the interests of the local community) shapes much of the European agenda on the reform of financial markets.

Question by Example [November 23, 2014 at 7:13 pm]: How much is 2+2?

→ Answer: I guess it is 4.