Amsterdam Institute of Finance
Joseph V. Rizzi
October, 2014
Rising purchase price multiples and ROE concerns drove acquirers
to seek ways to expand their debt capacity. Some of the most
common techniques are:



Adjusted (Increased) EBITDA
- Operating improvements
- Normalization
Asset Sales
- Bridges to asset sales
- Liquidity is key in case bridge cannot be taken out
Innovative Securities
- Defer interest
- Push out amortization
- Increase flexibility
Amsterdam Institute of Finance
October, 2014
2
Term
Amortization
Covenant
Call
Seniority
Secured
Revolver
5–7
Bullet
FULL
YES
YES
YES
Term Loan A
5–7
40% in first 5 years
FULL
YES
YES
YES
Institutional Term
Loans
7-8
1% per annum / bullet
FULL
YES
YES
YES
Covenant Lite
8 - 10
1% per annum / Bullet
LIGHT
PREMIUM
YES
YES
Mezzanine
10 +
Bullet
LIGHT
PREMIUM
NO
Depends
High Yield
10 +
Bullet
LIGHT
PREMIUM
NO
NO
Holding Company
PIK
10 +
Bullet
LIGHT
PREMIUM
NO
NO
Bridge Term Loans
1-3
Bullet
FULL
YES
YES
YES
Securitization
1-5
Revolver with
Borrowing Base
FULL
YES
YES
YES
Second Lien
8-9
Bullet
FULL
YES
YES
YES
Bifurcated Lien
(cross lien)
8-10
1% P.A./Bullet
Yes
Yes
Yes
Partial
Unsecured
1-10
1% P.A./Bullet
Yes
Yes
Yes
No
OPCO/PROPCO
10+
Bullet
Yes
Yes
Yes
Yes
The above table shows the features of different debt options available to issuers
The availability of the different options is subject to market conditions
Amsterdam Institute of Finance
October, 2014
3
Players
LBO funds (1)
Target company (2)
LBO financing package
Equity
30%
100%
= 30 (equity)
+ 70 (debt financing)
Debt financing
70%
Banks
Senior debt
60%
CLO
70%
Hedge funds
Second lien loans
5%
Mezzanine funds
Subordinated debt
5%
Public Markets
High Yield, PIK
Amsterdam Institute of Finance
October, 2014
Debt financing
Leverage effect
=debt/EBITDA
=70/12
=5.8
(EBITDA 12%)
4
Equity
Equity
#1
Equity
#2
European
Holding Company
United States
Holding Company
Preferred Stock
NEWCO
High Yield/Sub Notes
Bank Deal with Upstream Guarantee
Collapsed
After Closing
United States Target
Guarantee
Due to the structural nature of
Subordination in Europe, bank
Debt would be placed at the
Operating subsidiary level.
Domestic
Operating
Subsidiary
Domestic
Operating
Subsidiary
Domestic
Operating
Subsidiary
Foreign
Operating
Subsidiary*
* Tax limitations surrounding guarantees from foreign subs.
Amsterdam Institute of Finance
October, 2014
5





Innovative securities allow for the expansion of debt capacity by one or more of the
following mechanisms:
Reduce Annual Debt Service
- Reducing cash interest expense
- Lengthen duration (Reduce/Delay amortization)
Increasing Flexibility
- Covenants
- Cash flow control
- Bridging
- Public Disclosure
- Call Premium
- Partial/fully Unsecured
Tranching (sequential ordering of payment or priorities)
- Holding Company instruments
- Restricted Subsidiaries
- Second lien/bifurcated collateral-crossing liens
- Senior/Subordinated
Cost – Second Lien vs Mez
Amsterdam Institute of Finance
October, 2014
6
1H14
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Amsterdam Institute of Finance
October, 2014
Total
5
4.75
4.8
4.5
4.5
4
5.1
6
5.5
5.3
4.5
FL
4
3.9
3.6
3.8
3.5
3
3.6
4.5
4.2
4
3.5
2L
0.5
0.1
0.1
0.1
__
__
0.5
0.5
0.3
0.2
__
Other
0.5
0.75
0.9
0.6
1
1
1
1
1
1
1
7





Senior Secured, but with Junior or Second Lien-Lower recovery
Competing with EURO Mezzanine
◦ Investors – hedge funds and CLO
Spread differential between Second Lien and First Lien
currently around 325 BP
Volume:
U.S. 1H14 $24B v YE06 $28.3B
EUR 1H14 $1.1B
YE07 $18.6B
Issues:
- Inter-creditor
- Standstill Agreement
- Obligations
- New Investors Behavior in a Workout
- CLO Rating Impact
Amsterdam Institute of Finance
October, 2014
8





Covenant Issues
◦ Creditor – preserve deal; recovery value
◦ Debtor – flexibility
Covenant Lite – liquidity vs. structure
◦ Similar to Investment Grade
◦ One or No Financial Covenants
Rating Agency impact on CLO
Volume
◦ US – Now dominant form >90%
◦ Europe – Majority of new issuance >50%
Almost no incremental yield over first lien loans with
financial covenants
Amsterdam Institute of Finance
October, 2014
9
By structuring the financing of a pool of assets with a credit quality stronger than the
corporate credit as a whole, ‘OpCo’ \ ‘PropCo’ financing can provide a cost effective source of
(acquisition) financing.


Example:◦ Target company de-merged into ‘PropCo’, which owns the real
estate assets, and ‘OpCo’, the operating company.
◦ Banks finance ‘PropCo’ acquisition of properties at agreed Loan
to Value ratio.
◦ ‘PropCo’ leases the real estate assets to ‘OpCo’.
◦ ‘PropCo’ debt refinanced by traditional Property Lenders or via
Commercial Mortgage Backed Securities (CMBS) market.
◦ ‘OpCo’ required to service the acquisition debt not assumed by
‘PropCo’.
REIT
Amsterdam Institute of Finance
October, 2014
10
‘OpCo \ PropCo’ Financing (2)
BidCo
Financing
Approx.
100%
Notes
Approx.
100%
OpCo
PropCo
Rental Payments
Amsterdam Institute of Finance
October, 2014
11
Requirements:
◦ Stable and resilient cash flows from business
◦ Control over cash flows through sale of assets or
adequate legal structure
◦ Target investment grade rating to maximize access
to investors and lower cost of capital
Different leverage measurements
Issues
◦ Favorable bankruptcy laws
◦ Inter-creditor issues
◦ Flexibility
Availability: Difficult Post Crisis; primarily UK
Amsterdam Institute of Finance
October, 2014
12
• Longer Term Bonds

7-10 years and longer

4/5 NC
• Public or Private

Usually issued in private form with exchange rights

Pricing would step up if bonds not public within short period (say 180
days of close)
• Markets
U.S.
Euro
Amsterdam Institute of Finance
October, 2014
Issuance ($)
1H14
2013
$175B
$325B
$ 75B
$100B
Market Size
1H14
$1.4T
$400B
13
Key High Yield Terms
• Registration Rights
• Issuer
• Status
• Degree of Subordination
• Limitations on liens
• Limitations on indebtedness
• Restricted payments
• Asset sales
• Change in control
Amsterdam Institute of Finance
October, 2014
14
Covenants
*
*
Extensive (bank type)
Maintenance basis (tested quarterly)
Security
*
Second secured
Call Provisions
*
Generally callable immediately (103,102,101)
Maturity
*
Ten year
Pricing
*
*
*
LIBOR +
Warrants for total return
TBD
Liquidity
*
Low
Disclosure:
*
Limited
Marketing
*
No research coverage, no roadshow
Rating Requirements
*
None
Amsterdam Institute of Finance
October, 2014
15
PIK
•
Pay if you can toggle
•
Ratings – NR or CCC
•
Eats up equity
•
Holding Company Issuer
•
Characteristics
Amsterdam Institute of Finance
October, 2014
Spread
825/900
Toggle
900-1000
Term
7.5-10
Call
5xNC
Leverage
6.5x+
16
Stapled Financing

Staple financing term sheet to deal book

Be prepared to fund

Establishes ceiling

Conflicts of interest
Amsterdam Institute of Finance
October, 2014
17
ACCORDIAN LOAN
Incremental Loan Facilities
•
•
Option allowing increase in principal under existing terms subject to
certain conditions
Existing lenders can participate or new lenders can be sought
Dilution of Lender Interest
•
•
Uncommitted – access requires lenders willing to provide
Suffer dilution if you elect not to participate and facility approved
Amsterdam Institute of Finance
October, 2014
18
Bridge Loans

Equity
◦ Bank provides equity
 Find other equity investors later or keep
 Reduce PE equity
 Lowers need for club or larger deals
◦ Rationale – pay to play
◦ Bonds
Amsterdam Institute of Finance
October, 2014
19



Increasing layers of debt
Directed at different investors
Intercreditors conflicts
2012 - Present
• Common equity
• Hybrid preferred (0.5x)
2004 + 2H07 - 2011
• Common equity
• Unsecured/mezzanine (1x)
• Senior secured bank loan (4x)
- Amortizing T/LA – 40%
- B/C tranches – 60%
FDX – 5x +
PPX – 7.5 +
• PIK notes (0.5x)
• Unsecured/mezzanine (1x)
• Carve-out collateral (1x)
- securitization
- OPCO/PROPCO
• Second lien loans (1x)
• Senior secured bank loan (4x)
- Amortizing T/LA – 20%
- B/C tranches – 80%
Amsterdam Institute of Finance
October, 2014
FDX – 6x +
PPX – 8.5 +
20

HCA
◦
◦
◦
◦
◦
– 33 bln USD (corp rating B2/B+)
FDX – 6.53x (LTM)
PPX – 7.7x
Club – Bain, KKR, ML (5 bln)
W/W – BofA, JPMC, Citi, ML
Debt Package
1st Lien
Term
- R/C
2.000 bln
6
250
0
- ABL
2.000 bln
6
175
0
- T/LA
2.250 bln
6
250
50%
- T/LB
9.300 bln
7
250
7%
- EUR T/L 1.250 bln
7
250
7%
2nd Lien
Spread
Amortization
(3.46x)
(cum. At maturity)
(1.33x)
- Cash
4.200 bln
8
9.75%
8%
- PIK/T
1.500 bln
8
10.0 %
8%
Existing unsecured
Equity
◦
◦
7.470 bln
2009
4.965 bln
--
7.5 %
--
---
EBITDA/I – 1.9x (2007E)
EBITDA – CAPEX/I – 1.1x (2007E)
Amsterdam Institute of Finance
October, 2014
21
HCA
Legal Structure
Sponsors
Management
Healthtrust Holdings
Equity
Merge
Acquisition Corp
HCA, Inc
Bank Loans
Existing Notes
Euro T/L
European
subs
Sub A
Unrestricted subs
Amsterdam Institute of Finance
October, 2014
Sub B
Sub C
Sub D
Sub E
Restricted subs
(guarantors)
22