Harvard Case - York Capital CLOs and WorldStrides International
"York Capital CLOs and WorldStrides International" Harvard business case study is written by Victoria Ivashina, William Vrattos. It deals with the challenges in the field of Finance. The case study is 24 page(s) long and it was first published on : Sep 26, 2022
At Fern Fort University, we recommend that WorldStrides International (WSI) pursue a strategic partnership with York Capital Management (YCM) to structure and issue a Collateralized Loan Obligation (CLO) to finance its acquisition of EF Education First's (EF) student travel business. This partnership will leverage YCM's expertise in CLO structuring and WSI's strong track record in the student travel market, enabling the acquisition and providing WSI with a stable and cost-effective source of financing.
2. Background
This case study focuses on WorldStrides International (WSI), a leading provider of educational travel experiences for students, and its potential acquisition of EF Education First's (EF) student travel business. WSI faces a significant financial hurdle in financing the acquisition, as it requires a large capital outlay. York Capital Management (YCM) is a prominent investment firm specializing in structured finance, particularly in the creation of Collateralized Loan Obligations (CLOs).
The main protagonists of this case are:
- WorldStrides International (WSI): A leading student travel company seeking to expand its market share through the acquisition of EF's student travel business.
- York Capital Management (YCM): A specialized investment firm with expertise in structuring and issuing CLOs, offering a potential financing solution for WSI.
- EF Education First (EF): A global education company looking to divest its student travel business, presenting an opportunity for WSI.
3. Analysis of the Case Study
This case study can be analyzed through the lens of Financial Strategy, Mergers and Acquisitions, and Investment Management.
Financial Strategy:
- Financing Needs: WSI requires significant capital to finance the acquisition of EF's student travel business. Traditional bank loans may not be sufficient, and equity financing could dilute ownership. A CLO structure offers a potential solution by securitizing a pool of assets, allowing WSI to access a larger pool of capital at a lower cost.
- Debt Management: A CLO structure allows WSI to manage its debt effectively by diversifying its funding sources and potentially reducing interest rate risk.
- Capital Structure: By utilizing a CLO, WSI can optimize its capital structure by balancing debt and equity financing, ensuring financial stability and flexibility.
Mergers and Acquisitions:
- Strategic Fit: The acquisition of EF's student travel business aligns with WSI's growth strategy, expanding its market reach and diversifying its product offerings.
- Valuation Methods: WSI needs to carefully assess the value of EF's student travel business using appropriate valuation methods, such as discounted cash flow analysis or comparable company analysis, to determine the fair acquisition price.
- Integration Strategy: WSI must develop a comprehensive integration plan to seamlessly merge EF's operations into its existing business, minimizing disruption and maximizing value creation.
Investment Management:
- Risk Management: YCM's expertise in structuring CLOs allows WSI to mitigate financial risks associated with the acquisition by diversifying the underlying assets and managing the associated credit risk.
- Portfolio Management: WSI can leverage YCM's experience in portfolio management to optimize the asset allocation within the CLO structure, ensuring a balanced and diversified portfolio.
- Investment Strategy: YCM's investment strategy will be crucial in determining the structure and terms of the CLO, ensuring that it meets WSI's specific financing needs and risk appetite.
4. Recommendations
WSI should pursue a strategic partnership with YCM to structure and issue a CLO to finance the acquisition of EF's student travel business. This partnership should involve the following steps:
- Negotiate a Partnership Agreement: WSI and YCM should negotiate a comprehensive partnership agreement outlining the terms of the CLO structure, including the size of the issuance, the asset pool, the tranches of debt, and the fees and expenses associated with the transaction.
- Due Diligence and Valuation: WSI should conduct thorough due diligence on EF's student travel business, including financial analysis, market research, and competitive analysis, to determine the fair acquisition price and the potential for future growth.
- CLO Structuring: YCM should structure the CLO based on WSI's specific financial needs and risk appetite, ensuring a balanced and diversified asset pool that minimizes credit risk.
- Issuance and Marketing: YCM should assist WSI in issuing and marketing the CLO to institutional investors, leveraging its strong network and expertise in the structured finance market.
5. Basis of Recommendations
This recommendation considers the following factors:
- Core Competencies and Consistency with Mission: The partnership with YCM aligns with WSI's core competencies in student travel and its mission to provide high-quality educational experiences. The CLO structure provides a cost-effective financing solution that supports WSI's growth strategy.
- External Customers and Internal Clients: The acquisition of EF's student travel business will expand WSI's offerings, providing greater value to its external customers and internal clients. The CLO structure will not impact WSI's day-to-day operations or its relationships with its stakeholders.
- Competitors: The acquisition will strengthen WSI's position in the student travel market, enabling it to compete more effectively with other major players. The CLO structure will provide WSI with a financial advantage in the competitive landscape.
- Attractiveness ' Quantitative Measures: The CLO structure offers a potentially lower cost of capital compared to traditional bank loans or equity financing, improving WSI's profitability and return on investment.
6. Conclusion
A strategic partnership with YCM to structure and issue a CLO is the most viable financing solution for WSI to acquire EF's student travel business. This partnership will leverage YCM's expertise in structured finance and provide WSI with a stable and cost-effective source of financing, enabling the acquisition and supporting WSI's continued growth.
7. Discussion
Alternative financing options for the acquisition include:
- Traditional Bank Loans: This option may be less flexible and more expensive than a CLO structure, potentially limiting WSI's financial flexibility.
- Equity Financing: This option could dilute WSI's ownership and potentially impact its control over the business.
- Private Equity Financing: This option may involve significant equity dilution and potentially lead to conflicts of interest.
Risks and Key Assumptions:
- Market Risk: The CLO market is subject to market volatility, which could impact the pricing and liquidity of the CLO.
- Credit Risk: The underlying assets within the CLO structure carry credit risk, which could impact the value of the CLO.
- Regulatory Risk: Changes in regulations governing the CLO market could impact the structure and issuance of the CLO.
8. Next Steps
To implement this recommendation, WSI should:
Timeline:
- Month 1: Initiate discussions with YCM and negotiate a partnership agreement.
- Month 2: Conduct due diligence on EF's student travel business and finalize the acquisition price.
- Month 3: Structure the CLO with YCM and secure investor commitments.
- Month 4: Issue the CLO and finalize the acquisition of EF's student travel business.
- Month 5: Integrate EF's operations into WSI's existing business and begin marketing the expanded product offerings.
Key Milestones:
- Secure a partnership agreement with YCM.
- Complete due diligence on EF's student travel business.
- Structure and issue the CLO.
- Finalize the acquisition of EF's student travel business.
- Successfully integrate EF's operations into WSI.
This strategic partnership with YCM will enable WSI to successfully acquire EF's student travel business, expand its market reach, and continue its growth trajectory in the global student travel market.
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Case Description
The case follows the debt restructuring of WorldStrides International, a travel program provider in the education market, after the onset of COVID-19. The pandemic severely impacted the travel industry, creating challenges for many companies like WorldStrides, which were highly-levered and whose debt was held by a wide range of institutional investors, including collateralized loan obligations (CLOs). By May 2020, WorldStrides needed to restructure its debt, and there are two proposals that are being circulated, one from the company's private equity sponsor and the other from a hedge fund holding some senior secured debt. This case takes the perspective of York Capital Management, a CLO manager that also holds WorldStrides's senior secured debt. Both existing proposals had aspects that would have put stress on the structure of York's CLOs at the time. This case takes a deep dive into the economics of CLOs and their internal compliance processes. With this information York's CLO team needs to suggest to their lending group whether to accept either proposal, look for other options, or sell the loans at a loss and redeploy the capital. This case can be used as a background for teaching corporate debt securitization, corporate debt restructuring, and the role of creditors that face different institutional constraints.
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