BUSINESS + FINANCE GLOSSARY
Traditional Financing. Bank loans backed by a first lien against the borrower’s pledged collateral / asset (equipment, real estate, vehicles…) create a senior (higher priority) secured debt to be paid off from the asset sales before subordinated / unsecured / junior debts in case of borrower’s insolvency/ bankruptcy. Senior debt holders may object to the borrower’s subordinated debt amounts (because in case of the company’s insolvency the business may not have enough funds to pay all of its creditors) and request the company owners (private equity sponsors) to come up with loan matching funds.
EPCM (Engineering, Procurement, Construction, Management) Contract: General Contractor is responsible for administering the construction contracts as the owner’s agent.
EPC (Engineering, Procurement, Construction) Contract: General Contractor is responsible for the project construction.
MTPA (Metric tonnes per annum): a bulk material production and facility capacity measurement, e.g. in liquefied natural gas (LNG), coal, copper and other mineral / metal material markets.
EBITDA (earnings before interest, tax, depreciation and amortization): a company's performance / profitability evaluation without the effects of financing and accounting decisions or tax environments. EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
Internal rate of return (IRR), a method of calculating the project’s expected rate of growth, is used to evaluate and compare a project / investment profitability versus the existing facilities or competing projects. Internal means that it does not include inflation, cost of capital or other external factors.
Mezzanine Loan / Debt is not collateralized by business assets, but made against the future cash flow (based on an EBITDA analysis). Mezzanine lenders charge higher interest for their second-lien (junior debt/ priority) loans and receive company warrants having a floating value related to the company’s future value. If the collateral value is equal to or lower than the senior loan, then junior debt holders may lose their investment as senior lenders would recover their investment in case of loan default or a foreclosure.
Non-recourse Loans. Nonrecourse debt/ loans for high capital expenditure projects have long loan periods to give time for project’ revenue production, high interest rates, and 50% or 60% loan-to-value ratios to assure loan "overcollateralization." Such loans are used for plaintiffs’ financial assistance in recovery-based lawsuits, securities-collateralized commercial real estate borrowing by partnerships receiving a tax-pass-through (no double taxation) benefits and investment-limited liability. Lenders can get only repayment from the revenue generated by the loan-funded project (and seize and sell the pledged property/ collateral purchased by the loan), but not the borrower’s personal or other assets / wages, if the borrower/ guarantor defaults on the loan. Non-recourse loan exceptions (bad boy guaranties): Bankruptcy filing, misrepresentation, failure to have required insurance, criminal acts, barring lender inspections and financial reviews, tax-nonpayment and environmental violations.
Ungeared: having no borrowings, debt-free.
Concession Agreement: a contract between a facility / asset operating company and a government giving the company the right to operate a specific business within the government's jurisdiction for a set period of time.
CAPEX: Capital expenditures on asset acquisition and development.
OPEX: Operating / ongoing business expenses results.
Foundation: a nonprofit corporation or charitable trust making grants / monetary awards to organizations or individuals for scientific, specific business, educational, religious, or humanitarian projects.
Nonprofit organization ("NPO"): charities, human service agencies, hospitals, universities, chambers of commerce, trade associations, and veteran's organizations distributing their funds for charitable purposes.
The International Centre for Settlement of Investment Disputes (ICSID): Facilities for international mediation and arbitration of investment disputes.
CAGR: A compound annual growth rate is a progression ratio / rate, at which an investment would have grown at a steady (not fluctuating actual annual value) rate showing an investment’s average year-to-year growth for investments' comparisons.
Monetization: Using non-performing intangible and tangible assets to increase business sale profits and value of the core business for mergers and acquisitions, insolvency and liquidation proceedings, insurance coverage, and risk management, generate income, comply with the federal law reporting regulations (mandating independent appraisals), obtain growth capital (loans) and develop new technologies.
Core Business Assets: equipment, tools, inventory, machinery, real property, precious metals, cash, gems, financial assets and businesses.
Valuation for Monetization: Independent appraisal firms assist the Intangible and Non-Performing Asset (Capital) owners (companies and sophisticated individuals located worldwide) to determine the value of their existing assets in order to monetize them. Practically every business has such unutilized assets, which could be turned into money.
Intangible Assets/ Intellectual Property: independent business assets including patent applications (filed in the U.S. Patent and Trademark Office or other national patent offices stake out the inventor’s rights and allow the inventor to mark the subject product with a “Patent Pending” notice), patents, trademarks, trade names, product trade dress, copyrights, trade secrets / know-how, and owner’s rights to do or use something. Even a single product may have many concomitant intangible assets or multiple IP protection. For example, a toy vehicle, may be protected by a design patent covering the overall appearance of a vehicle, utility patent covering a drivetrain structure and operation, copyright law since a toy is a “work of art”, and trademark law protecting a label identifying the manufacturer.
Federal Law Compliance by IP Owners: The Sarbanes-Oxley Act requires the financial report certification by the corporate management, as well as Financial Accounting Standards Board (FASB) 141 (requiring valuation of intellectual property) and 142 mandate require disclosure and accountability of intangible assets. The Securities and Exchange Commission’s (SEC) regulations and The Sarbanes–Oxley Act of 2002 require disclosure of nonfinancial information “material” to the company’s finances and certification of financial statements and asset tacking procedures (audits) for intangible and other assets. Such audits must be done for meeting the federal law requirements. IP Owners must conduct regular internal audits (ongoing due diligence) to identify, exploit, and protect IP so as to comply with the senior executives’ obligations to shareholders and under the Sarbanes Oxley Act (SOX) § 302 with regard to mandatory corporate financial reports, internal controls, to properly ascertain and utilize the corporate IP portfolio. The SEC (Division of Corporate Finance) monitors intellectual property explanations in corporate filings.
Mergers and Acquisitions (“M&A”): Monetization analysis is needed for company purchase and sale transactions. The due-diligence and implementation phases of mergers and acquisitions involve the target’s asset evaluation to see that they could generate revenue and tax benefits through donation or otherwise. An M&A target company’s IP portfolio and related agreements are evaluated to determine IP risks and benefits associated with integrating its IP with the buyer company. A well maintained IP portfolio systemized by regular IP audits facilitates such M&A transactions.
IP Holding Company: a stand-alone legal entity managing, protecting and exploiting the core business’ IP assets and giving non-exclusive licenses to the core business.
Patent holding companies: buy (monetize) the patent rights to obtain the royalty rights. Patent trolls, the patent holding companies, derived their revenue from infringement lawsuit recoveries and licensing. Examples: in 2005, Emory University sold its royalty rights in a HIV drug to Gilead Sciences and Royalty Pharma holding company for $525 million. Royalty Pharma purchased the rights to the drug HUMIRA® from AstraZeneca in 2006 for $700 million.
Patent Infringement: A patent gives “the right to exclude others from making, using, offering for sale, or selling” the invention in or “importing” the invention into the United States. Patent application publication gives an applicant provisional rights to obtain damages for pre-patent grant infringement from infringers of a published application claim if actual notice is given to the infringer by the applicant and a patent issues from that application. In case of patent infringement (the unauthorized making, using, offering for sale, or selling any patented invention within or importing into the United States during the life of the patent), the patentee may seek in federal court an injunction stopping the infringement and an award of damages. Marking of the articles with the patent number is needed in order to recover damages from infringers. The patent protection starts from the patent issuance date. The government may use any patented invention without the patentee’s consent but must pay to the patentee reasonable compensation for such use.
U.S. patents and U.S. registered IP can prevent domestic and foreign companies from making, using and selling the attendant goods and services only in the United States. The infringers may pay or be forced to pay a royalty on items sold in the USA (and pay damages for infringement) but not in other countries, unless the asset owners have corresponding IP registrations in those countries.
IP Licenses: Licensor’s IP based revenue depends on revenue generated by the goods or services using that IP. Licensees usually pay royalties to Licensor quarterly or annually and their sums depend on product or dollar amount sales. Licensees may pay a lump sum fee for the license based on projected sales of the product or service employing the IP over its life term, e.g. an upfront payment for past sales, and ongoing royalties for the life of IP (such as life of the patent or protectable trade secret) for as long as the licensed product or service brings revenue.
Licensor’s IP based revenue depends on revenue generated by the goods or services using that IP. U.S. patents and U.S. registered IP can prevent domestic and foreign companies from making, using and selling the attendant goods and services only in the United States. The infringers may pay or be forced to pay a royalty on items sold in the USA (and pay damages for infringement) but not in other countries, unless the asset owners have corresponding IP registrations in those countries.
IP Asset “Securitization”: Securitization is a method of structured financing where an owner of its asset producing or capable of producing a stream of cash flow converts the asset(s) or cash flow into marketable securities, such as bonds or notes. Such asset (mortgages, music and movie rights, IP and other intangible assets) backed securities were used to raise capital in sports, fast food, pharmaceutical, and other industries. The asset value rather than the asset owner’s creditworthiness is one of the main factors considered by credit analysts. IP backed securitizations generate additional capital, allow investors to participate in IP utilization but not in the IP owner’s business, facilitate faster liquidity than business’ sale, provide lesser risk than buying the whole company because cash flows are based only on patent, technology, trademark or other type of IP licensing. Examples: Singer David Bowie secured $55 million by selling bonds backed by his copyright royalties (receivables) from sales of his older songs (the 'Bowie Bonds'). “Marvel” pledged the movie rights to its famous characters to secure a $525 million non-recourse debt to finance the “Marvel” film production. Disney and “Dreamworks” studio got loans ($1 billion) using their securitized copyrights. Calvin Klein secured a $58 million bond. Royalties streaming from trademark licenses had backed the securities which allowed designer Bill Blass to raise $25 million; Gloria Vanderbilt - $30 million; Athlete’s Foot - $33 million.
IP Backed Collateralization: The term “collateralization” means that loans to an asset owner are collateralized by an asset title and value, i.e. without relying on the owner’s own creditworthiness or giving up the owner’s equity to angel investors, private equity firms or venture capitalists. Such IP backed loans usually have a loan to appraised value ratio of about 30% (i.e. to provide overcollateralization to lenders), and are insured by an IP value insurance company covering the risk of loan non-payment.
Concessionaire (a European civil law term): A company paying a concession fee to the asset owner for the right to use + operate + get consumer-generated revenue from + finance / invest in all project existing, new and rehabbed assets, which are reverted (including concessionaire-purchased assets) to the asset owner at the end of the 25 – 30-year concession period. Concessions are the government authority’s awards to be performed per agreed standards, regulations, and alternative cost recovery via subsidies or loans.
DEG (Deutsche Investitions und Entwicklungsgesellschaft): German Investment and Development Corporation, headquartered in Cologne, finances (long-term and mezzanine loans, guarantees, equity capital) by own funds private companies (agribusiness, banks, insurance companies, leasing companies, manufacturing industry, etc.) in Africa, Asia, Latin America, and Eastern Europe.
The European Bank for Reconstruction and Development (EBRD), a London-based investment bank (owned by 65 countries) "project financed" (loan, trade and equity finance, guarantees, leasing facilities) in more than 30 countries. It does not finance "defense-related activities, the tobacco industry, alcoholic products, substances banned by international law, stand-alone gambling facilities, and suspended new investment projects in Russia*. ERBD requires solid commercial projections and the project sponsor to contribute about 50% of equity in-cash or in-kind, benefit the local economy, and meet banking and environmental standards.
*(received 1.8 billion € for investments in 2013 from the EBRD and 1 billion € from the EIB to finance pipeline valves, property acquisitions, and a loan to a hypermarket chain)
The Bank for International Settlements (BIS) located in Basel, Switzerland, is owned by 60 member central banks of countries that together make up about 95% of world GDP. BIS serves as a bank / prime counterparty, an agent, asset manager, lender or trustee for central banks and international institutions in their financial transactions. It does not accept deposits from, or provide financial services to, private individuals or corporate entities. The BIS's unit of account is the IMF's Special Drawing Rights (SDR). It uses its huge reserves to buy back tradable instruments from central banks, determines daily the interest rate, the availability of credit, and the money supply of the banks in member countries. BIS acts as the main clearing house for European currencies and decides to devalue or defend currencies, fix the price of gold, regulate offshore banking, and to raise or lower short-term interest rates.
The European Investment Bank (EIB), owned by EU member states, finances mainly projects in EU member countries, but it also funds projects in about 150 other countries to encourage private sector development, infrastructure development, security of energy supply and environmental sustainability.
The Council of Europe Development Bank (CEB), Paris-situated independent entity (having assets valued 25.6 billion euros in 2016) assists disaster victims, acts as a development bank granting loans to member states, and co-finances projects by loaning of up to 40% of the project cost.
The Export-Import Bank of the United States (EXIM), an independent agency supports American jobs / businesses by financing the export of U.S. goods and services at no cost to taxpayers. EXIM Bank provides loan, guarantee, and insurance programs (when the private lenders refuse or give partial export financing) so that U.S. companies would not lose out on an export sale because of foreign-governments’ attractive financing to their countrymen.
The Overseas Private Investment Corporation (OPIC), a U.S. Government agency, helps American businesses with financing, political risk insurance, and partnering with private equity investment funds for new and expanding investments in more than 160 countries. OPIC charges fees for its products and analyzes potential projects so not to cause loss of U.S. jobs or taxpayers’ money, or oppose U.S. foreign policies. OPIC gives direct loans and guarantees up to $250 million for 20 years to projects for which American businesses that are unable to obtain sufficient private financing, have a strong business plan, a successful track record in the industry, and comply with social, worker and human rights, and environmental international laws. It insures political risk (if private political risk insurance is insufficient or unavailable) up to $250 million against losses caused by currency inconvertibility, adverse government actions, regulatory risk, and breach of contract. It partners with private investors in national infrastructure, power and water treatment plants, financial services, transportation, healthcare, etc. Eligible U.S. business must own at least 25 percent of the overseas project. OPIC will finance up to 65 percent of the total project cost.
The International Monetary Fund (IMF) headquartered in Washington, D.C., provides financing* for countries experiencing debt service and economy growth problems. The IMF extends credit in the form of Special Drawing Rights (SDRs). The Fund having about $668 billion / SDR 477 billion in 2016 is a pool of quota-based funds from 189 contributing countries. IMF may give concessional loans with no interest rates for a period of time to low-income and non-concessional loans bearing interest rates. The IMF sets conditions for its loans (the funds are withheld if these conditions are not fulfilled), such as collateral from the government seeking assistance, budget balancing austerity (cutting expenditures) measures, resource extraction increase, currency devaluation, removing import / export restrictions, price control and state subsidies, privatization of state-owned enterprises, anti-corruption and foreign investment attracting law implementation.
*For example, IMF agreed to provide Mongolia with a three-year $440 million loan package as part of a $5.5 billion bailout to pay the debt as Mongolia economic growth fell to 1 percent / year, commodity prices declined, and foreign investments stopped after a Rio Tinto and Khan Industries legal disputes.
The World Bank Group. The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA) loan to governments, The International Finance Corporation (IFC) loans to private enterprises, and The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance/ guarantee.
The World Bank: The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA) provide interest-free loans (credits) and grants to governments of middle and low income countries.
The International Finance Corporation (IFC) helps private companies in developing countries by financing investments, fetching capital in international financial markets, and advising businesses and governments.
The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance (guarantees) to investors and lenders so to facilitate foreign direct investment into and support economic growth of developing countries.