Courses / Capital Structure

Capital Structure

31 Lessons

Capital structure refers to the composition of debt and equity in a company. Debt and equity are forms of capital that finance every company and the make-up these sources of capital is important to understand because it affects the company’s future cash flow, risk profile, and valuation. In particular, we need to understand the terms surrounding each tranche of capital because these terms determine the value different investors in the company will receive.

Key Takeaways:

  • Capital structure seniority and risk
  • Characteristics of different debt tranches
  • Leverage and coverage multiples

Lessons

1. What is Capital Structure

3:40

To exist, a company must be funded with capital and that capital must come from either debt or equity.

2. Capital Structure Seniority

4:13

There's a ranking of seniority among the different tranches of capital.

3. Debt Tranche Name

5:13

In corporate finance, you'll come across certain names of debt tranches repeatedly.

4. Pari-Passu

2:19

Pari-Passu is a Latin term that has important meaning in the context of capital structure.

5. Senior Debt vs. Junior Debt

3:11

Senior Debt ranks relatively high in the debt component of the capital structure while Junior Debt ranks relatively low.

6. Contractual Subordination

3:18

Contractual Subordination establishes seniority among different tranches of debt through written contracts.

7. Collateral Subordination

3:47

Collateral Subordination establishes seniority among different tranches of debt through access to collateral.

8. First Lien vs. Second Lien

2:35

First Lien represents first claim to collateralized assets while Second Lien represents second claim.

9. Structural Subordination

5:49

Structural Subordination establishes seniority among different tranches of debt through the legal entity structure.

10. Seniority and Cost of Capital

1:11

The seniority of a tranche of capital affects the terms of investment for that tranche, which affects cost of capital.

11. Key Takeaways on Seniority

3:56

In this lesson, we'll review what we've learned so far about capital structure seniority and recap the key takeaways.

12. Coupon

3:31

Coupon is a finance vocabulary for interest rate.

13. Floating Interest Rate

4:52

Floating Interest Rate is an interest rate tied to a benchmark rate that changes over time.

14. Tax Shield on Interest Expense

3:17

In many countries, interest expense is tax-deductible. However, there's no law of physics that says interest must be tax-deductible.

15. Tenor

1:52

Tenor is a finance vocabulary for the length of time left before the debt has to be repaid. Tenor is usually expressed in number of years.

16. Mandatory Amortization

2:02

Mandatory Amortization is the required repayment of debt principal on a regular basis before the maturity date.

17. Optional Repayment

3:32

Optional Repayment is the option for the borrower to repay debt principal in excess of Mandatory Amortization before the maturity date.

18. Refinancing Risk

2:21

Interest rate in the global markets change over time, which presents a unique refinancing risk to credit investors.

19. Bullet Repayment

1:12

Bullet Repayment describes a debt repayment methodology whereby the borrower repays the entire debt principal in a single payment.

20. Leverage Multiples

2:01

Leverage Multiples measure financial risk based on the amount of debt a company has in relation to its earnings power.

21. Capital Structure Risk is Cumulative

4:38

Risk of each tranche of capital includes not only the risk imposed by the given tranche but also all those ranked senior to it.

22. Coverage Multiples

1:20

Coverage Multiples measure financial risk based on the company's ability to meet interest obligations given its earnings power.

23. Three Types of Covenants

3:13

In this lesson, we'll learn what a covenant is and the three common types of covenants.

24. Maintenance Covenants vs. Incurrence Covenants

2:22

In this lesson, we'll learn about the difference between Maintenance Covenants and Incurrence Covenants.

25. Revolving Credit Facility (RCF)

5:30

Revolving Credit Facility (RCF) is a common type of debt. It's also known as the Revolver.

26. Revolver Interest Rate

4:17

Due to its unique dynamics, Revolver requires a special way to calculate its interest expense.

27. Loan

2:38

Loan is a common type of debt. We'll learn the common characteristics associated with this tranche of debt.

28. Bond

1:39

Bond is a common type of debt. We'll learn the common characteristics associated with this tranche of debt.

29. Mezzanine

5:49

Mezzanine is a common type of debt. We'll learn the common characteristics associated with this tranche of debt.

30. Equity

3:15

Equity means ownership. We'll review the characteristics and some intricacies we might see in the equity tranche of different companies.

31. Connecting Dots

3:07

Now that we learned the different tranches of capital and the resulting dynamics, we'll tie everything together and connect the dots.