Tag Archives: debt

Use of Debt by Government Contractors

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Debt-payment-strategy-Barbara-Delinsky-guest-post-Project-Done-Lifestyle-FinancesExecutives and business owners of government contractors are constantly evaluating new opportunities that can grow their business and add value to shareholders. To finance these opportunities, business owners have two primary funding options: equity or debt. Each option has different characteristics and a unique impact on the Company’s earnings, taxes, and financial strength. Equity capital is typically a more time consuming and expensive source of funding for smaller private companies. Debt capital is generally the optimal source of funding for future expansion. Debt is a quicker and less expensive option, provides significant tax advantages, and allows shareholders to maintain their ownership levels.

There are two main types of debt: senior debt and mezzanine. Senior debt is the less expensive and more common form of borrowing. Most senior debt lenders expect a company to have the debt collateralized by assets; therefore, a company’s balance sheet capacity typically determines the funding level they can raise. Sometimes, a private

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2014 Capital Deployment Strategies for Government Contractors

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Executives and boards of directors of publicly traded government contractors are constantly evaluating capital deployment alternatives in an attempt to balance growth with providing returns to investors. In general, companies have four primary alternatives, including (i) pay down debt; (ii) make acquisitions; (iii) buy back previously issued shares; and (iv) pay dividends. Unless the company is overleveraged, equity research analysts and the investment community view the later three alternatives as the more attractive capital deployment strategies since the current cost of debt is relatively inexpensive. The variety of capital deployment strategies in the industry illustrates several interesting trends in today’s government services M&A market. The exhibits below track historical capital deployment activity across government contracting sub segments over the past five years.

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The Tier 1 Contractors on average generated $2.4B of leveraged free cash flow in 2013, but cumulatively only

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