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David Nakhla

Interview an expert Assignment


Due: June 14, 2016

Expert name: Fady Nakhla


Executive Director
Deloitte Corporate Finance Inc.
Email: Nakhla.fady@gmail.com
The Expert and what they do

Fady Nakhla is an Executive Director at Deloitte Corporate Finance Inc. Fady has a deep
background in both equity and debt capital markets. Fady’s main focus is on structuring and
pricing of equities and equity related securities issuance, debt issuance (both public and private),
company valuations and deal modeling. Fady is also a CFA charter holder. Fady has extensive
modeling experience with over seven years developing relative value and equity pricing models
for common and preferred shares and convertible debentures.

Fady Nakhla began his career after graduating McMaster University Honours commerce,
Finance in 2008. He started as a Fund Accountant at RBC Dexia Investor services where he
developed an understanding of several different types of funds to calculate the net asset values
while still insuring he was meeting strict financial practices to ensure accuracy and
accountability. Fady quickly moved on from RBC working for Thomason Reuters in march 2009-
2011 where he was promoted from client training executive to the Financial modeling consultant,
where he was managing the design and development of financial models including those for
equity valuations and portfolio risk and return presentation. He was able to successfully grow
monthly recurring revenue by $120k and migrate approximately 5,000 users to new subscription-
based tools. From 2011-2013 Fady started working at National Bank Financial as an analyst
where he focused on real estate and diversified spaces allowing him to develop a deep
understanding for different structures and how investors perceive value. He designed and updates
pricing comp tables for convertible debentures and common share offerings, allowing his team to
properly gauge market trends.

In the year-end of 2013 Fady took on a new role at Deloitte as a vice-president in the corporate
finance practise. Fady’s role is to look to identify capital needs as they relate to the client base
and work with the client to facilitate new financings, refinancings vis-à-vis equity, debt and
hybrid securities. As part of the corporate finance practise Fady has also done a number of
transactions in the M&A (mergers and acquisitions) space including the sale of Williams Fresh
Café to Druxy’s and the sale of Voortman Cookies to PSA (Private equity group). During 2015,
Fady was promoted to executive director with a mandate to engage in more public company and
IPO related advisory and to add additional focus on real estate, technology media and telecom
(TMT). Fady has a number of publications as they relate to venture debt and convertible
debentures. Fady is one of Canada’s leading experts in convertible debenture financings having
successfully distributed over $25 billion in product.

Fady says that the most exciting and rewarding part of his career is the diverse client base
and working with many different entrepreneurs, CEOS, CFOS etc., really understanding their
needs/concerns as they relate to growth, dilution, and succession planning. He is able to help
them implement a solution that only address short-term goals but also flexible enough to meet
long-term objectives.

Fady plans to make partner within the organization of Deloitte by continuing to originate
opportunities within the real estate and TMT sectors as well as continue to refine his brand as an
expert in structured finance. Fady suggests that people looking to enter the field you need to have
some co-op/internship experience prior to graduation. He also suggests working on the your CFA
designation as soon as possible as it will open up a lot more opportunities for you in the financial
district. Finally a clear interest in finance is needed and the ability to maintain up to date
information on world events and how they inter relate on their affects on capital markets and the
general economy
Financial Products

Fady specializes in convertible debentures. A convertible is a hybrid security, which


became popular in the last ten years, as it was a new way to create growth in non-traditional
financing. Companies leverage convertible debentures as an effective tool to meet the demands
of investors who want yield and also keep up with the rising equity markets.

Convertibles became popular amongst investors because they provided a fixed income
through interest, offered a degree of downside protection not found in equity and offered an
upside for capital appreciation in rising equity markets.

A Convertible is composed of two components (debt and equity), both of which have a
risk and reward profile. The debenture provides for the conversion of equity by the investor,
usually at their option. By adding the conversion option the issuer pays a lower interest, or
coupon rate on the debenture as compared to traditional debenture.

Convertibles are priced based on their coupon rate (internal interest rate) and the
conversion price (price at which debt is convertible into equity at any time before maturity).
Conversion prices are typically set at a 20 to 40 per cent premium to 30 day trailing average stock
prices at the time of issuance.

Convertibles present both costs and benefits for both the issuer and for the investor.

Investors gain exposure to an issuing company’s credit with an equity risk profile;
however, downside risk is limited by separating the security from a full decline in the stock price.
On the contrary, investors face subordination to senior secured debt tranches and a loss of the
inherent value associated with the convertible feature if the issuing company’s share price erodes
below the securities conversion price.

Advantages to issuers include the ability to increase financial leverage without the cash
burden of traditional secured debt and without pledging assets as security. Despite the benefit of
flexibility inherent in the conversion feature of the securities, issuers may face difficulty in
restructuring the securities at maturity if share prices at maturity are below the conversion price,
and may have to trigger a process leading to a substantial dilution of their existing equity base.

When it comes to convertible debentures, many investment banks are generally offering
similar terms and conditions to issuers. In Fady’s view, to be successful selling this product and
what differentiates him for other competitors is his expertise on the product and educating the
issuer. Great distribution capability allows for more competitive /favourable pricing to the issuer.
A lot of experience with the different kinds of convertible debenture allows him to assess the
issuer’s needs more accurately and therefore providing a better investment in comparison to other
investment banks, outlining the interest rates, maturity rates and risk involved with the
convertible debenture.

New Language and how it connects with financial concepts.


Having many years of experience in the finance field. Fady has been exposed to a lot of
new finance language and concepts, which may not be known to the public who aren’t in the
industry. I have been exposed to some of the words in which he uses everyday such as valuation
multiples and flipping.

Valuation multiples are an approach of valuing companies that rely on comparing a


company’s stock price to its income from operations, cash flow from operations, or earnings per
share. The higher the multiple, the more richly valued the company is. Underwriters use valuation
multiples of an IPO’s peers, or comparable, to determine the appropriate level at which the IPO
should be priced.

There are a couple of approaches when valuating a company and the value of it. One of
the approaches in the relative approach in which you observe transactions, this approach factors
market movement, public information and emotions which is tied to the effective market
hypothesis concept, in which weak and semi strong are used.

Discounted cash flow forecast or Absolute valuation involves forecasting out all the cash
flows for a period of three-to-five years in an unlevered basis, then discounting those cash flows
by the weighted average cost of capital. This determines the value of the firm on an intrinsic
value basis.

Typically both approach are used and they take the median of both approach to establish
what they call in the industry as the goal post, which means that the value of the firm is between
the two posts.

Flipping or IPO flipping is another word to describe arbitrage opportunities that present
themselves during secondary issuances or IPOs. Flipping is essentially the difference between the
current market price and the issue price less selling commissions paid to the broker. If the current
market price is higher, the broker will short the stock, and enter into an agreement to buy the new
issue at a cheaper price. This inconsistency is often corrected very quickly as the dealers will stop
filling brokers orders and the current market price will increase. This type of practise is consistent
with the definition of arbitrage learned in class.

The arbitrage concept learned in class is closely related to flipping as it also involves the
purchase and selling of asset in order to profit from the difference in the market prices in which
they were purchased and sold. Arbitrage is one of the factors also used in the arbitrage pricing
theory (APT), which helps you show the expected return on any risky asset.

With the exposure to finance, the amount of knowledge learned is priceless; you have a
better understanding of how some of the concepts we learned in class (financing, interest
payments, loans, and investment opportunities work in the “real world”. Using the new found
knowledge you are less likely to get yourself into a situation in which you do not understand
some of the vocabulary that used by the industry whether its to convert APR to EAR when
purchasing a vehicle or figuring out the NPV of a future investment.