Joseph V. Rizzi
Amsterdam Institute of Finance
November, 2012
• Cash Flow

Impacts default risk
• Balance Sheet

Determines Loss in Event of Default (LIED)

Liquidity
Valuation
Amsterdam Institute of Finance
November, 2012
2
•
•
•
Business Risk: EBITDA Volatility
◦ Industry Characteristics
◦ Firm Characteristics
Financial Risk: EBITDA Relative to Debt
Structural Risk
◦ Issues
 Priority of claim on assets and income
 Control
◦ Focus
 Covenants, Seniority, Security
Amsterdam Institute of Finance
November, 2012
3
•
Quantitative
◦
◦
◦
Capitalization
 Cash Equity
 Total Debt
 Senior Debt (1)
 First Lien
 Second Lien
>25%
<6.0x
<4.5x
<4.0x
<0.5x
Cash Flow
 LTM EBITDA / PFI
 7 x LTM FFOCF / TLA(2)
>2:1
>1:1
Liquidity
 Cash + MS + RCA / P+I
(3)
> 1.5 : 1
1:- TLA usually >20% of senior debt and amortizes at least 30% by year 5
2:- FFOCF = LTM EBITDA - (WCI + CAPEX + Taxes + PF Interest)
3:- Liquidity tested day 1. MS (Marketable Securities). RCA (Revolving Credit Availability). Revolver usually set at 1 x EBITDA
Amsterdam Institute of Finance
November, 2012
4
•
Debt capacity is derived from firm’s assets
◦ Operating Cash Flows
◦ Asset Sales / Asset Quality
◦ Leveragability
Market Conditions
Credit curve shifts over
time depending on the economy
•
Rates
•
Target financing structure
Amsterdam Institute of Finance
November, 2012
2H
07
Cris
is
Overheated 1H07
Rating
5

There are two different approaches to designing the capital structure:
Amsterdam Institute of Finance
November, 2012
Cash Flow
Model
Balance Sheet
Model
3 - 4x
EBITDA
50%
4 - 6x
EBITDA
30%
Equity
20%
Senior Debt
Sub Debt
Equity
6
•
Ratio Approach
•
Cash Flow
•
Advance Rate
Amsterdam Institute of Finance
November, 2012
7
Market
◦ Maximum senior debt and total debt ratios
◦ Vary over cycle
Peers
◦ Identify
◦ Rating Classification
◦ Key Ratios
Rating Agencies
◦ Credit Statistics
Amsterdam Institute of Finance
November, 2012
8
12 Months Ended
Sales
Gross Margin
EBITDA
Margin
Interest Expense
Capex
% of Sales
Total Assets
ABC
DEF
GHI
JKL
MNO
PQR
STU
02/10/20xx 30/09/20xx 01/01/20xx 30/09/20xx 31/10/20xx 30/11/20xx 31/12/20xx
3073.8
8294.9
6165.2
852.4
2345.8
1682.1
2133.4
25.6%
14.4%
16.3%
19.8%
22.0%
16.6%
17.1%
153.7
430.1
272.3
35.9
130.8
77.3
100.3
5.0%
5.2%
4.4%
4.2%
5.6%
4.6%
4.7%
34.4
78.6
49.6
13.2
19.5
15.3
25.0
32.1
40.7
37.1
9.8
25.8
11.3
27.8
1.0%
0.5%
0.6%
1.1%
1.1%
0.7%
1.3%
1482.0
3835.4
2790.1
360.5
1099.5
829.3
961.5
Secured Bank Debt
Unsecured Bank Debt
Other Senior Debt
Total Senior Debt
Subordinated Debt
Total Debt
Equity
Total Capitalization
455.4
0.0
111.7
567.1
0.0
567.1
419.9
987.0
Total Debt/EBITDA
Senior Debt/EBITDA
Total Debt/Capital
EBITDA/Interest (incl. A/S)
3.7
3.7
57.5%
4.5
2.5
2.1
42.8%
5.5
BBBNR
AA3
Credit Ratings
S&P
Moody's
Market Capitalization
Enterprise Value
Ent Value/EBITDA
Ent Value/Sales
Ent Value/Book Value
Earnings per Share
Amsterdam Institute of Finance
November, 2012
468.2
1035.3
6.74
0.34
2.47
$
1.78
0.0
504.6
391.4
896.0
197.6
1093.6
1461.1
2554.7
1482.0
2575.6
5.99
0.31
1.76
$
1.73
0.0
175.9
708.2
884.1
0.0
884.1
1293.3
2177.4
117.8
0.0
6.3
124.1
0.0
124.1
150.2
274.3
0.0
208.0
179.2
387.2
0.0
387.2
473.8
861.0
0.0
210.0
0.0
210.0
0.0
210.0
414.4
624.4
0.0
37.6
75.0
112.6
143.7
256.3
262.5
518.8
3.2
3.2
40.6%
5.5
3.5
3.5
45.2%
2.7
3.0
3.0
45.0%
6.7
2.7
2.7
33.6%
5.1
2.6
1.1
49.4%
4.0
A
A2
NR
NR
NR
NR
NR
NR
BB
Baa3
1295.8
2179.9
8.01
0.35
1.69
$
2.83
$
104.4
228.5
6.36
0.27
1.52
(0.06)
$
510.9
898.1
6.87
0.38
1.90
2.37
$
249.2
459.2
5.94
0.27
1.11
1.69
$
177.9
434.2
4.33
0.20
1.65
1.09
Peer
Average
3506.8
18.8%
171.5
4.8%
33.7
26.4
0.9%
1622.6
XYZ
Actual
31/12/20xx
3025.4
17.8%
122.6
4.1%
55.2
10.7
0.4%
950.5
211.9
0.0
42.6
254.5
289.2
543.7
(69.0)
474.7
3.0
2.8
44.9%
4.8
4.4
2.1
114.5%
2.2
XYZ
Pro-Forma
31/12/20xx
3205.3
17.4%
134.5
4.2%
55.8
10.7
0.3%
952.3
83.2
0.0
8.3
91.5
289.2
380.7
96.4
477.1
2.8
0.7
79.8%
2.4
BBBa2
612.6
1115.8
6.32
0.30
1.73
$
1.63
9

Important:
Loan Market Evolution from a
bank to an institutional market
(back to a bank market?)

Impact:
Majority of syndicated loans are
rated

Pricing:
Affected by rating
Amsterdam Institute of Finance
November, 2012
10
U.S. Leveraged Market Quarterly – June 23, 2012
Median Credit Ratios – First Quarter 2012
Amsterdam Institute of Finance
November, 2012
11
BB/BBPro Rata Spread
Weighted Avg Institutional Spread
Deal Size (€MM)
Pro Rata Term (in Years)
Institutional Term (in Years)
Revenues (€MM)
EBITDA (€MM)
Pro Forma Debt/EBITDA
Pro Forma Senior Debt/EBITDA
Pro Forma Cash Interest Coverage
Observations
Europe
N/A
E+406.3
200.78
5.11
6.56
1,487.61
448.71
4.10x
4.05x
4.03x
4
US
L+275.6
L+369.6
869.07
4.82
6.07
2,313.66
616.22
3.80x
2.88x
6.12x
69
Europe
E+482.1
E+532.5
359.87
5.27
6.48
2,087.55
499.12
4.81x
4.39x
3.38x
16
US
L+443.8
L+473.3
446.59
4.91
5.79
1,360.45
275.63
4.51x
3.71x
3.88x
206
B+/B
Pro Rata Spread
Weighted Avg Institutional Spread
Deal Size (€MM)
Pro Rata Term (in Years)
Institutional Term (in Years)
Revenues (€MM)
EBITDA (€MM)
Pro Forma Debt/EBITDA
Pro Forma Senior Debt/EBITDA
Pro Forma Cash Interest Coverage
Observations
Wtd. Avg. ProRata spread is the average RC/TLA spread weighted by sizes of the RC and TLA tranches.
Wtd. Avg. Institutional Spread is the average TLB/TLC spread weighted by the sizes of the TLB and TLC tranches.
Amsterdam Institute of Finance
November, 2012
To access the data points underlying the chart, double-click on the chart.
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
12
BB+/BB/BBSenior Loan Volume (€B)
Deal Count
Avg. Deal Size (€M)
Wtd. Avg. ProRata Spr. (bps)
Wtd. Avg. Inst. Spr. (bps)
Average ProForma Credit Statistics:
Leverage thru 1st Lien Debt
Leverage thru 2nd Lien Debt
Total Debt/EBITDA
EBITDA/Cash Interest
B+/B/BSenior Loan Volume (€B)
Deal Count
Avg. Deal Size (€M)
Wtd. Avg. ProRata Spr. (bps)
Wtd. Avg. Inst. Spr. (bps)
Average ProForma Credit Statistics:
Leverage thru 1st Lien Debt
Leverage thru 2nd Lien Debt
Total Debt/EBITDA
EBITDA/Cash Interest
Not Rated
Senior Loan Volume (€B)
Deal Count
Avg. Deal Size (€M)
Wtd. Avg. ProRata Spr. (bps)
Wtd. Avg. Inst. Spr. (bps)
Average ProForma Credit Statistics:
Leverage thru 1st Lien Debt
Leverage thru 2nd Lien Debt
Total Debt/EBITDA
EBITDA/Cash Interest
6ME 30/09/11
6ME 31/12/11
6ME 31/03/12
6ME 30/06/12
2012 YTD
€ 6.96
19
€ 389.21
410.00
452.68
€ 2.93
6
€ 530.95
N/A
495.83
€ 2.52
8
€ 314.75
N/A
N/A
€ 2.50
7
€ 357.81
N/A
406.25
€ 2.50
7
€ 357.81
N/A
406.25
3.3x
3.9x
4.1x
4.5x
2.8x
3.7x
4.4x
4.4x
2.7x
4.2x
4.3x
3.6x
2.5x
4.0x
4.1x
4.0x
2.5x
4.0x
4.1x
4.0x
€ 13.45
37
€ 395.89
404.72
458.71
€ 7.82
23
€ 358.23
430.33
497.62
€ 6.65
19
€ 377.31
468.75
525.00
€ 10.46
30
€ 365.21
484.38
534.56
€ 10.46
30
€ 365.21
484.38
534.56
4.1x
4.3x
4.6x
3.8x
4.2x
4.4x
4.9x
3.6x
3.8x
4.2x
4.7x
3.7x
3.6x
4.4x
4.9x
3.4x
3.6x
4.4x
4.9x
3.4x
€ 2.76
15
€ 183.90
400.00
442.05
€ 4.83
12
€ 402.57
433.33
487.50
€ 4.22
14
€ 322.07
458.33
500.00
€ 3.32
16
€ 219.16
465.00
510.34
€ 3.32
16
€ 219.16
465.00
510.34
3.5x
3.5x
3.8x
3.8x
2.3x
2.3x
2.3x
N/A
3.0x
3.0x
3.0x
N/A
3.9x
3.9x
4.0x
4.4x
3.9x
3.9x
4.0x
4.4x
Deal Count excludes amendment transactions and counts First Lien and Second Lien portfolios of the same transaction as one event.
Average Deal Size excludes Amendment and Add-on transactions and combines First Lien and Second Lien portions of the same transaction.
Analysis is based upon First Lien tranches only.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
13
November, 2012
Apr-12
May-12
Jun-12
2012 YTD
€ 0.48
€ 1.24
€ 0.00
€ 1.72
€ 0.00
€ 1.72
€ 1.59
€ 1.36
€ 0.00
€ 2.95
€ 0.11
€ 3.06
€ 1.04
€ 1.47
€ 0.00
€ 2.51
€ 0.39
€ 2.90
€ 5.87
€ 6.73
€ 0.10
€ 12.71
€ 0.70
€ 13.40
8
62.50%
0.00%
0.00%
12
91.67%
0.00%
8.33%
8
87.50%
0.00%
12.50%
45
77.78%
0.00%
8.89%
Purpose Diversification (lagging 12 months, based on deal count)
Share of Buyouts
53.33%
Share of Public to Private Buyouts
1.67%
Share of Sponsor to Sponsor Buyouts 35.00%
Share of Recapitalizations
3.33%
Share of Dividend Recaps
0.00%
Share of Refinancings
21.67%
52.78%
2.78%
34.72%
2.78%
0.00%
23.61%
51.25%
2.50%
35.00%
5.00%
1.25%
23.75%
40.00%
2.22%
26.67%
6.67%
2.22%
31.11%
Primary Pricing (lagging 3 months)
All LBOs
Wtd. Average ProRata Spread
Wtd. Average Institutional Spread
478.57
516.25
470.00
525.00
475.00
529.82
478.57
523.39
Average ProForma Credit Statistics (lagging 3 months)
All LBOs
Leverage thru 1st Lien Debt
Senior Debt/EBITDA
Total Debt/EBITDA
EBITDA/Cash Interest
3.5x
4.3x
4.5x
3.9x
3.4x
4.5x
4.8x
3.4x
3.5x
4.3x
4.7x
3.6x
3.5x
4.3x
4.7x
3.6x
3.5x
3.9x
4.2x
4.3x
3.6x
4.2x
4.5x
3.8x
3.8x
4.2x
4.8x
3.6x
3.6x
4.1x
4.5x
3.6x
New-Issue Deal Flow (€ in billions)
All LBOs
Pro Rata
TLB/TLC
Second Lien
Total Senior
Mezzanine
Total Volume
Total Loan Count:
Share with TLB/TLC
Share with Second Lien
Share with Mezzanine
All Buyouts
Amsterdam Institute of Finance
November, 2012
Leverage thru 1st Lien Debt
Senior Debt/EBITDA
Total Debt/EBITDA
EBITDA/Cash Interest
To access the data points underlying the chart, double-click on the chart.
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary
14 of The McGraw-Hill Companies, Inc.
Revolver
Term Loans
A
B
C
Second Lien
Cov Lite
Mezzanine
PIK
Preferred Stock
Amsterdam Institute of Finance
November, 2012
15
60%
B
45%
A
30%
15%
RC
C
2nd
0%
1998
1999
2000
2001
RC
2002
2003
TLa
2004
2005
TLb
2006
2007
TLc
2008
2009
2010
2011
1H12
2nd Lien
Chart reflects initial sponsor acquisitions and MBOs. The remaining category excluded from this chart includes tranches such as acquisition
loans, Capex and Guarantee facilities. Based on Volume.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
November, 2012
16
10.0x
0.4
0.4
9.0x
0.6
0.4
8.0x
0.4
0.4
0.4
0.4
0.4
0.3
7.0x
0.4
0.5
0.4
0.3
0.4
9.3
0.3
9.3
8.4
6.0x
8.6
8.4
8.7
8.4
7.9
7.8
7.3
7.0
7.2
6.9
6.7
6.6
6.5
5.0x
19
)
)
(1
2
1H
12
20
11
(3
6
)
(2
4
10
20
20
09
(8
)
)
08
(5
6
5)
20
20
07
(1
2
06
(1
0
0)
)
20
05
(8
7
)
20
04
(7
7
)
20
03
(6
6
)
20
02
(5
2
)
20
01
(3
7
)
20
20
00
(4
0
)
(3
3
19
99
(3
5
98
19
97
(O
bs
er
v
at
io
ns
:
14
)
)
4.0x
Purchase Price
Fees/Expenses
Excluding Platform Acquisitions and Other Sponsor Driven Transactions.
Includes only transactions for which Sources/Uses were made available.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012
by
Standard
&
Poor’s
Financial
Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
17
November, 2012
60%
40%
45.4%
30%
43.0%
46.9%
29.0%
20%
33.5%
33.9% 33.9%
44.2%
42.1%
31.9%
33.9% 33.2%
32.7% 32.9% 32.5%
25.5%
10%
Retained Equity / Vendor Financing
7.7%
7.1%
3.1%
1H
12
3.7%
20
11
2.7%
20
10
1.1%
20
08
0.8%
20
07
1.0%
20
06
2.7%
20
05
3.4%
20
09
6.7%
20
04
3.7%
20
03
3.5%
20
02
19
98
19
97
0%
2.4%
20
01
6.6%
20
00
4.1%
19
99
Equity as a Percent of Total Sources
50%
Contributed Equity
Equity includes shareholder loans, common equity and preferred stock down streamed to the operating company as common equity as well as
vendor note proceeds.
Includes only transactions for which Sources/Uses were made available.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
18
November, 2012
Europe
Other
6.8%
2nd Lien
1.5%
US
2nd Lien
11.1%
RC
10.0%
RC
15.5%
TLa
1.8%
TLa
28.3%
TLb
53.4%
TLb
71.5%
Europe: Other includes Bridge Loans, Capex, Acquisition, Restructuring and Guarantee Facilities
Excludes Platform Acquisitions and other sponsor driven transactions. Based on Volume.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
19
November, 2012
LTM 30/06/12
2011
Total Equity: 47.7%
Total Equity: 47.2%
Other
Sources
1.7%
Common
Equity
37.2%
Rollover
Equity
4.2%
Rollover
Equity
2.1%
Shareholder
Loan
5.1%
Bank Debt
42.5%
2nd-Lien
Debt
1.1%
Secured Debt
Vendor Note
1.3%
Mezzanine
2.3%
Unsec Debt
1.6%
3.1%
Observations: 26
Average Sources: €1,147.4M
Average Senior Loan Size: €499.2M
Common
Equity
39.4%
Other
Sources
1.1%
Shareholder
Loan
4.6%
Bank Debt
44.7%
Preferred
Equity
0.1%
Vendor Note
1.0%
Secured Debt
3.3%
Unsec Debt
Bridge
0.8%
Loan/Public
Mezzanine
High Yield
2.1%
0.7%
Observations: 36
Average Sources: €842.0M
Average Senior Loan Size: €368.5M
Excluding Platform Acquisitions and Other Sponsor Driven Transactions.
Includes only transactions for which Sources/Uses were made available.
Amsterdam Institute of Finance
November, 2012
To access the data points underlying the chart, double-click on the chart.
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill
20
Companies, Inc.
Germany *
Netherlands
Total Equity: 43.7%
Rollover
Equity
2.2%
Total Equity: 41.4%
Common
Equity
24.8%
Other
Sources
2.3%
Common
Equity
36.8%
Bank Debt
34.6%
Shareholder
Loan
15.6%
Vendor Note
4.6%
Bank Debt
52.9%
Vendor Note
1.2%
Mezzanine
3.3%
Secured Debt
21.7%
*Data reflects LTM 31/03/12, due to not
enough observations for LTM 30/06/12
Observations: 3
Average Sources: €591.2M
Average Senior Loan Size: €143.7M
Observations: 3
Average Sources: €473.3M
Average Senior Loan Size: €241.7M
Includes only transactions for which Sources/Uses were made available.
Excluding Platform Acquisitions and Other Sponsor Driven Transactions.
To access the data points underlying the chart, double-click on the chart.
Copyright©
2012
by
Standard
&
Poor’s
Financial
Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
21
November, 2012

Maximum debt capacity formula:MDC = f(operations, amortization, rate, asset sales)
MDC = [EBIT / (i+ 1/n)] + AS + RF
EBIT
i
n
AS
RF
Amsterdam Institute of Finance
November, 2012
-
Earnings Before Interest and Taxes
Interest Rate
Straight line loan amortization
Proceeds from Asset Sales
Refinancing
22



Opening Balance Sheet
Adjustments – from sources and uses – including
purchase price assumptions
Proforma balance Sheet
◦ Income Statement
◦ Cash Flow Statement
Capitalization table/transaction structure
Debt Schedule
Term sheet(s)
Valuation/maximum purchase price
Returns Analysis – IRR and MOC
Amsterdam Institute of Finance
November, 2012
23




Issues
◦ Adjustments (beware of solving for cash flows to justify price)
◦ Normalization
 Cyclicality
 Bad Management
Value Test
◦ Projections implied price
Reverse Engineer - Management implied forecast
◦ Firms
◦ Peers
Tie Into
◦ Compensation
◦ Covenants
Amsterdam Institute of Finance
November, 2012
24

Macro/Market Level
◦ Determine rating target
◦ Use target rating level financial characteristics
 Funded Debt/EBITDA
 EBITDA/Interest Expense
 Funded Debt/Total Cap

(A)
(B)
(C)
(D)
(E)
Example:
Target Rating
EBITDA/Int for Target Rating
Firm EBITDA
Interest Rate for Target Rating
Maximum Debt Capacity
Amsterdam Institute of Finance
November, 2012
BB
c3.0x
$300mln
10%
= (C/B)/D
= (300/3)/10%
= $1,000
25
Share of Credit Issue in Distress Based on Count
30%
Share of Credit Issue in Distress
Based on Share of Sr. Par Issue
30%
28.4%
24.8%
24%
24%
18%
18%
15.7%
12%
11.5%
11.3%
16.3%
17.9%
17.2%
12%
6%
4.9%
6%
4.5%
5.1%
2.8%
0.0%
0%
0.0%
0%
2005
2006
2007
2008
2009
2010
Year of Credit Issue
2011
2005
2006
2007
2008
2009
2010
2011
Year of Credit Issue
Charts reflect share of credits issued each year that eventually went into distress.
Distressed credits are issues rated D or restructuring.
Amsterdam Institute of Finance
November, 2012
To access the data points underlying the chart, double-click on the chart.
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary
26 of The McGraw-Hill Companies, Inc.
Amsterdam Institute of Finance
November, 2012
27
Amsterdam Institute of Finance
November, 2012
28
This information has been prepared solely for informational purposes and is not
intended to provide or should not be relied upon for accounting, legal, tax, or
investment advice. The factual statements herein have been taken from sources
believed to be reliable, but such statements are made without any representation
as to accuracy or completeness. Opinions expressed are current opinions as of the
date appearing in this material only.
These materials are subject to change,
completion, or amendment from time to time without notice and CapGen Financial
is not under any obligation to keep you advise of such changes.
All views
expressed in this presentation are those of the presenter, and not necessarily those
of CapGen Financial.
Amsterdam Institute of Finance
November, 2012
29