Building Confidence through Skill Acquisition
by Chelsea Turner, MBA ’18 (5/9/17)
In the Investment Banking Immersion, the training wheels have officially come off. Professor Drew Pascarella told us to grab a pen and delivered this week’s assignment verbally, replicating experiences we can expect to have with managing directors this summer. The bottom line: Pitch me a deal.
Our team met and vetted the top two pitches. We discussed a leveraged buyout (“LBO”) of Urban Outfitters by a financial sponsor. We also considered a real estate investment trust development initiative funded by green bonds, a relatively new financial vehicle. Both deals were solid, creative, and challenging. We took a vote and the Urban Outfitters LBO prevailed.
We encountered several challenging components while building the deck for the Urban Outfitters LBO. In recent years, financial sponsors have grown timid in the retail space as investors have found themselves burned by brick-and-mortar business struggles. With the rise of online retailers, pitching traditional retail seemed dangerous. Regardless, we believed in the deal and were up for the challenge of pitching its success.
After selecting our target, we needed to be strategic in our deal structure. We wanted to take on traditional bank debt and finance the transaction with bonds. Ideally in these credit-pricing scenarios, one simply pulls the company’s credit rating. Unfortunately for us, Urban Outfitters doesn’t have any debt, which means they don’t have a credit rating. Although this supported our argument that Urban Outfitters is a good LBO candidate, it doesn’t make pricing their bonds or calculating their cost of debt any easier. We opted to calculate a synthetic credit rating. We pulled precedent transactions to get data points on what the credit ratings were of firms that had minimal to low debt before an LBO and observed where their ratings landed thereafter. We researched comparable companies that had debt to get a benchmark for a potential credit rating. Through our analysis, we concluded Urban Outfitters’ rating fell in the high-yield range.
Next, we needed to price and select tenors for the high-yield bonds and debt. We began by looking at our comparable-companies analysis and then broadened our data collection to the greater retail industry. We deemed a ten-year tenor most appropriate for the high-yield bonds. We selected a seven-year tenor Term Loan B because with Urban Outfitters’ cash flows, we could ensure full debt repayment within seven years, abiding by OCC guidelines.
Finally, we began reviewing operational assumptions and adjusting the financial model to ensure an attractive internal rate of return for the investor. We placed a heavy emphasis on: (1) sales growth due to an increased focus in online sales; (2) margin improvement through increased efficiencies and centralized distribution; (3) footprint and capex reduction; and (4) improved inventory management. We also performed a premium sensitivity analysis to figure out how much wiggle room we had to get the deal done and negotiate with Urban Outfitters’ management.
This week served as yet another benchmark in demonstrating how far we have come. Given very little direction, our entire class excelled. Watching my classmates present polished pitches and slide decks, I reflected on how quickly we have grasped concepts that were recently quite foreign. When I started the Investment Banking Immersion, I wouldn’t have known how to approach this type of assignment, but this week we hit the ground running and churned out impressive products. Throughout this program, I have built tangible skills and developed confidence in my ability to get the job done. I recognize I have much more to learn, but I feel fully equipped to add value when I hit the desk this summer.