June,2012, Erasmus University, Rotterdam
Rabobank International | Acquisition Finance

 Bjorn Stibbe
1982 - 1988
1988 - 1992
1993 - 1996
1996 - 1998
1999 - 2001
2001 - 2006
2006
2007
2008
2009
RU Groningen Business Administration
F. van Lanschot Bankiers, Banker
Citibank Amsterdam, Senior Banker Global Corporate Banking
Citibank Moscow, Member Policy Committee
Citibank Frankfurt, Senior Banker, Member Management Team
Citigroup London, Director Leveraged Finance
Rabobank London, Director Leveraged Finance
Rabobank Utrecht, Senior Vice President Leveraged Finance
Author of Financial thriller ‘De Zwendelaar’
Rabobank Utrecht, Head of Acquisition Finance, The Netherlands
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Introduction to Rabobank Acquisition Finance
Some (jargon-busting) definitions
How do Financials Sponsors create returns for their investors?
Structuring LBO deals
What is currently happening in the Leveraged Finance market
Q & A
I
II
III
IV
V
VI
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Rabobank International | Acquisition Finance

Our approach
 Our approach
We arrange and syndicate senior & subordinated term debt
We undertake club deals and participate in syndicated loans
 Our clients
Financial sponsors and leveraged corporates
 Our focus
In our home market we cover all industries with a preference for Food and Agribusiness (“F&A”)
Globally our primary focus is on F&A
 Full range of products and advice to support lending
Corporate Advisory, M&A
Food & Agri (“F&A”) Research
Risk management / Global Financial Markets
Securitisation / High Yield bond solutions
Close cooperation with corporate banks
 At heart, Rabobank is a relationship driven bank with lending as our core activity
Appetite to commit balance sheet
Willing and able to retain significant ‘final hold’ positions
Our business
 A focused team of over 50 professionals in 9 locations globally
 Origination and portfolio management integrated in product line
Transactions stay with Acquisition Finance
 Total leveraged loan portfolio of EUR 3.5bn
Source: Rabobank International
6

Boxes to tick for new transactions

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Strong preference for F&A or company active in Dutch market
Focus on reputable sponsor; relationship is key

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



Track record of acceptable sponsor behaviour in restructurings
Mid market transaction (debt packages between EUR 100 mln and EUR 1,000 mln)
Strong and realistic business case, showing reliable and sustainable cash flows (no hockey sticks)
Strong negotiation power in the value chain & strong position in sustainable market
Limited exposure to economic cycle, e.g. staple goods, non-discretionary items
Sufficient cross sell vital for success of new transactions (M&A/DCM etc)
More is better. However, not all boxes need to be ticked
Source: Rabobank International

Tick....
 Key issues in structuring/arranging new deals
–
Relationship
–
–
–
–
Sector
Credit
Liquidity
Valuation
 Underwritten sponsor deals are back – with a vengeance
–
Competitive fees and margins
– Underwritten transactions are back on the table
 Banks
–
–
More nationalistic
Herd mentality persists
–
–
Preference for either multi-arranging deals or club deals
Risk of lowest common denominator
Source: Rabobank International
..........all the boxes
8

Transactions:
Parallel roles:
Size:
Sectors:
Products/Cross-Sell:
 Leveraged buy-out
 Public-to-private
 Recapitalisation/refinancing
 Corporate acquisition
 Lead Arranger and underwriter
 Joint Underwriter and/or Participant in syndicated loans
 Debt packages between EUR 100m and EUR 1,000m
 All sectors with particular strength in Food & Agribusiness
 Senior, second lien, mezzanine term debt and PIK
 Bridging facilities
 Total return swaps
 Securitisation
 Asset based financing
 Hedging
 Leasing
 Real Estate Financing (the Netherlands)
Source: Rabobank International

 High-yield bond (cooperation with Jefferies)
Liquidity
Underwriting requirement / horizon
Can be longer-term
Bullet repayment
Incurrence covenants
Ongoing flexibility?

Onerous reporting

Prepayment premium
 All-equity deal
Certain Funds (if required)
Visibility of subsequent take-out
 Equity guarantee
A drawing on the fund?
Enables top-slice soft underwriting
Subsequent book-building
Source: Rabobank International
 Mezzanine + senior
Expensive/dilutive
Inflexible
Liquidity
 Best efforts / Book-building
Stage-by-stage
No Certain Funds
 Disposals
Back-to-back
Debt-bridging
 Asset backed loans
Receivables
Inventory
Other
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Achievements in 2011
 Having successfully weathered what seems to have been the worst of the economic crisis, Rabobank AF is proud of what is has achieved in challenging times completing both new transactions as well as executing several restructurings
• Lead underwrites
• Innovation
• Transforming client relationships
• Collaboration with other departments
Examples of 2011 Acquisition Finance Utrecht deals
Hunkemöller
(The Netherlands)
Leveraged buy-out by PAI
Partners
Bookrunner and Mandated
Lead Arranger
Scotch & Soda
(The Netherlands)
Leveraged buy-out by Sun Capital
Mandated Lead Arranger
Raet
(The Netherlands)
Leveraged buy-out by CVC
EUR 300,000,000
Senior debt facilities
Underwriter, Bookrunner and MLA
Hans Anders
Hans Anders
(The Netherlands)
Sale of Hans Anders to Alpha
Action Holding
(The Netherlands)
Act ion Holding
(The Netherlands)
Acquisition facilities
Bookrunner
2011
2011
2011 2011
2011
2011
Pending

Rabobank International | Acquisition Finance

Hoeveel flex zit erin?
We gaan 4 of 5 trees opzetten
Vandaag wordt de SPA getekend Back to Back gecovered
Covenant Lite
Super Senior
Hebben we dit geflagd?
Wij zijn MLA
Key Sponsor due dill
Bankers meeting
We wachten nog op vendor due dil chuncky
Pre crunch?
Bankview team
Welke multiple doet ie?
We clubben met 2 others
We hebben buy side
Ik vind ‘m vrij
In the DC krijgt hij de double whammy
De comps doen 6x
Zitten er nog p2p’s in de pipeline?
Misschien kunnen we er een PIK note ingooien?
Hoe draait de DSCR?
13

“Private equity firms are worse than mafia, says
union chief”
The Observer (March 4,
2007) – “They are a risk to the economy as a whole”
The Guardian (May 11,
2007) – “Barbarians at the gate of Boots”
The Independent ( June 9,
2007) – “IMF chief attacks
‘complacency’ of private equity industry”
Source: Rabobank International
Private Equity
Netherlands – “60% of
Dutch company chairmen positive about venture capitalists”
UK - “Trustees of the UK’s biggest pension fund, extol the benefits of private equity”
Tony Blair – “I think the private equity market brings a lot of benefits to our economy.”
PWC - “As a result of ….. private equity…. activity in the European food sector is rising with the value of deals completed already well ahead on this time last year”
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Investors
Examples
Fund-raising
Financial Sponsors
Examples
Returns
Cash
Firm/Targe t
Examples
Source: Rabobank International
Equity
Overview Private Equity
 Private Equity firms (‘Financial Sponsors’) are investment schemes, using funds raised from investors to acquire substantial stakes in companies and holding on to these interests for a period of time - usually 3 to 5 years - and then disposing them
 Private Equity funds (some as large as EUR 10-18b), usually have a maximum life of around 10 years
 Private Equity transactions are referred to as Leveraged
Buy-Outs, as they are often financed with significant amounts of debt (‘leverage’)
 Strategy:
— Buy the asset with external debt
—
—
—
Make improvements to increase profitability
Wait for the right time to sell (exit)
With debt fixed, all the value goes to equity
 Success measured in terms of Cash Multiples and IRR
(Internal Rate of Return). IRR erodes over time (the
'time value of money’) making private equity the perfect banking client.

 What is an LBO?
Acquisition of a company (or a controlling stake) using a significant amount of borrowed money to meet the cost of acquisition
Leveraged Buy-Outs definitions
Management / leveraged buy-out
 Managers acquire a business they have been managing
Management buy-in
 External management group makes an acquisition  Reasons for selling a business:
Lack of capital to fund the continued operations of the business
The business is unprofitable
More focused strategy: back to core business
Investment realisation
Leveraged build up/ platform buy-out
Sponsored spin-out
 Buy-out with intention to make further synergistic acquisitions
 New company is partially owned by previous owners
 Reasons for buying a company through an LBO:
Value creation
Leveraged recapitalization
 Company borrows in order to make a cash payout to existing shareholders
Source: Rabobank International

Rabobank International | Acquisition Finance

Operational value creation
 Improved performance, e.g. EBITDA growth, improved working capital management, synergistic acquisitions, etc.
Multiple value creation
 Clear exit strategy
 M&A skills PE manager
 Change company profile
 Improve market position
Financial value creation
 Leverage effect
 Use of debt leverages return on equity substantially
Most Financial Sponsors target annual returns of at least 20%, using a combination of value creation techniques
Source: Rabobank International
19

T = 0
Scenario A
T = 1
Scenario B
T = 0
40% Equity, 60% Debt
T = 1
100
100
110
110
Equity
Total
Debt
Equity
Total
60
40
100
60
50
110
Debt
Equity
Total
Return on Equity is (110 - 100)/100 = 10% Return on Equity is (50- 40)/40 = 25%
Use of debt increases returns significantly: the higher the amount of debt, the higher the return on equity for the sponsor
Source: Rabobank International
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IPO  Listing of company on a stock exchange through an IPO
Secondary Buy
Out
 Sale of company to another financial buyer
Trade sale
 Sale of company to a strategic buyer, perhaps in the same industry sector
 Often at a higher price than a secondary due to synergies
 Historically, the most frequently used exit
Recapitalization
 Sale of stake to a newco which is then recapitalized with equity and debt
 Proceeds from sale are partly reinvested into the equity of newco
 More a method to receive a substantial dividend payment; not really an exit
Source: Rabobank International
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Rabobank International | Acquisition Finance

The lower the equity cushion, the higher the leverage effect -> Sponsors seek maximum leverage…
Sources and Uses of Funds at Acquisition
Uses
Equity Value of Target
Sources
Equity Investment: Private
Equity
Equity Investment: Management
Equity Cushion:
40-60% of total
Sources
Net debt (total debt minus cash) of Target
Transaction Costs
Third Party Debt
… and here comes
Leveraged
Finance…
A large part of the role of leveraged financiers is to calculate how much of what type of debt finance should be raised
… Leveraged Finance is the provision of debt to fund acquisitions
Source: Rabobank International
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Senior Debt
 Consists of term debt (used to finance acquisition) and working capital facilities
 First security
Second Lien
 Second security interest (generally on same assets as senior)
 Typical ‘bubble’ instrument; now out of vogue
 Unsecured and subordinated debt
 Sources of return: cash interest, PIK interest, equity
 Capital market instrument
 Rated below investment grade
 Generally unsecured
Mezzanine
High Yield Bonds
 PIK: “Payment in Kind”: Interest paid out in additional debt, as opposed to cash
 May be considered more a form of equity than debt
Return expectations
Source: Rabobank International
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Senior Term Loan A 60%
80%
Senior Term Loan B 30%
Senior Term Loan C 10%
Intermediate Capital
20%
 One size does not however fit all and structures are highly dependent on the company and market conditions!
Source: Rabobank International
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Purpose
Revolving
Credit Facility
Senior debt
Tranche A
(TLA)
Tranche B
(TLB)
Finance working capital swings
Finance acquisition and
Idem TLA transaction costs
Term 5 years
Amortisation
Pricing
No amortisation required; but often clean down period
Generally same as TLA
5 years
Fully amortised during term
E+500bps
6 years
Bullet
E+550bps
Tranche C
(TLC)
Idem TLA
6,5 years
Bullet
Second Lien
Subordinated Debt
High Yield
Debt
Mezzanine
Idem TLA
< 10 years
Bullet
E+575/600bps n/a 1
Idem TLA
7-10 years
Bullet n/a 1
Idem TLA
5-10 years
Bullet
Investors Banks Typically
Banks
Typically
Institutional
Investors
Typically
Institutional
Investors
Typically
Institutional
Investors
Typically
Institutional
Investors
E+1300bps
(cash, PIK and/or warrants)
Typically
Institutional
Investors
Note 1: No current pricing can be determined for these instruments as there is currently no primary activity involving these products
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Rabobank International | Acquisition Finance

Level of business risk
 The lower the business risk the more stable the cash flows of a company
 Stable, predictable cash flows provide comfort for higher amounts of debt
 Market position, margins, etc.; what are the defensive characteristics of the target?
% of purchase price
 Banks need to form a view on the purchase price. Did the Financial Sponsor pay too much; will the exit proceeds be sufficient to repay the debt?
 A certain amount of the purchase price should be equity; if things go wrong the equity providers should take the first hit
Sponsor /
Management
 Relationships and reputation of the equity providers are also important drivers of the amount of debt banks are willing to lend
 Given burden of debt on business high quality and committed management vital
 Often committed through (substantial) equity investment
Source: Rabobank International
28

Debt components are structured to capture different sources of repayments
Cash flow
 Principal source of repayment in LBOs
 In most cases all remaining cash flow (i.e. after payment of amortisation and interest) is used to prepay debt (cash sweep)
Asset disposals  Not the preferred source of cash as over time marketability and asset valuations volatile
Refinancing
 Dependent on:
Credit supply
-
Market appetite/perception
Company’s historical performance
 Some level of refinancing risk is often acceptable
Source: Rabobank International
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Key component of a leveraged finance banker’s work is forecasting cash flows
Operating Profit (EBIT)
+/-
Non cash expenses / income (incl. depreciation and amortisation)
Cash Tax charges
-
Increase in Net Working
Capital
Capital Expenditure
Cash available for debt
Service
Source: Rabobank International
Interest
Principal
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Conditions
Precedent
A set of preconditions that must be satisfied before the borrower can request drawdown or facilities be made available
Representations
& Warranties
Statements by which the borrower gives certain assurances to the lenders, and on which the lenders may rely
Undertakings &
Covenants
Agreements by a borrower to undertake
(positive) or not to undertake (negative) a action. A breach is considered an event of default
Events of Default
Contractually specified events that allow lenders to accelerate repayment of debt
Security
Borrowers grant security over important assets, to provide the banks with a last source of repayment in case of serious distress
Source: Rabobank International
Protect repayment sources
Influence strategy
Signal deterioration
Negotiating power
Last source of repayment
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Financial
 Total/senior Net Debt / EBITDA
 ICR
 Debt Service Cover
 Maximum capex
 Cash sweep
 No dividends
 No further indebtedness
 Guarantor cover test
Non-financial
 No acquisitions, mergers, joint ventures, disposals
 No change of ownership/ management
 Maintenance of assets, intellectual property, security and insurances
 Compliance with (environmental) laws
 Transactions at arms length basis
 Delivery of (monthly/quarterly/annual) information, budget
 Hedging
Source: Rabobank International
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Structural Legal Maturity
 Derived from the corporate structure
 Junior creditors as creditors of holdco rank behind creditors of subsidiaries lower down in the group structure
 When a holding company and its subsidiaries become insolvent, the creditors of the opco’s will be paid out before any distribution is made to holdco as shareholder in the subsidiary
 Only if holdco receives a distribution from the liquidator of a subsidiary will holco be able to meet the claims of its creditors
Source: Rabobank International
 Contractual or collateral
 Only once senior debt has been repaid, can the proceeds of security be used to repay junior debt
Example of structural subordination
Mezzanine
Senior Debt
Senior Debt


Timing of interest payments and principal payments
Senior debt should mature prior to junior debt
Shareholders
Holdco 1
Holdco 2
Opco’s
33

Deal flow is picking up
IMCD Holding
(The Netherlands)
Tertiary buy-out
EUR 395,000,000
Senior Facilities
Participant
2011
Teleplan
(The Netherlands/Germany)
Public-to-Private transaction
EUR 115,000,000
Senior Facilities
Underwriter, Bookrunner and
MLA
2011
Lucas Bols
(The Netherlands)
Refinancing
EUR 151,000,000
Senior and Mezzanine Facilities
Bookrunner and Mandated Lead
Arranger
2011
Koole
(The Netherlands)
Leveraged buy-out by EQT
EUR 210,000,000
Senior Facilities
Coordinator and Mandated Lead
Arranger
2011
Source: Rabobank International

Rabobank International | Acquisition Finance

 High Yield
 Significant developments over the past two years in the European HY market are reflected in steady issuance volume;
 The YTD issuance volume is EUR 29.7mln equivalent (incl. USD deals) compared to EUR 40.6mln (incl. USD deals) by the same point last year, with especially
February and March showing strong HY issue volume in Europe;
 However the continued European macro economic uncertainty has resulted in a significant slowdown in primary activity in the European HY market;
 The market has been starved of new issues for more than a month as of May 11th, although the drought finally broke last week with a GBP 525mln, dual-tranche offering from Four Seasons Healthcare and an EUR 400mln offering from Kabel Deutschland this week. Still the market is some way away from re-opening fully or at the right price for most single B credits;
 As European sovereign debt issues have dominated headlines since the second half of 2011, a flight to quality has seen the European indices widen significantly since August 2011, with the European Single B index trading over 430bps wider than the US Single B index;
 As a result European issuers with significant assets or operations in the US have taken advantage of stronger primary conditions in the US (ytd USD proceeds from
European issuers reached USD 15.8bln)
 Loan Market
 In the 5 months to 31 st May, loan issuance was EUR 14bln, 35% behind the corresponding result for the previous year, but a significant improvement on previous months with May volume EUR 5.3bln, which included 2 EUR 1bln + financings, providing the boost. Significantly, US issuance by European borrowers in the 5 months to 31 May was even higher at EUR 15.5bln;
 Secondary pricing has declined again in recent weeks, with flow names bid at just over 94 compared with just over 96 in March, the peak this year. By contrast, the
Broad Secondary Composite, reflecting the mid-market names, was still down in the mid 80s, just below 85, compared with a high YTD of 85.60. Notwithstanding the disparity, both sets of prices are being influenced primarily by macro factors;
 The relative lack of activity is reflected in higher multiples for both large market deals, such as BSN and Iglo (4.5x senior, 6.5x total), where there is significant extant liquidity, and smaller mid-market deal, such as St.Hubert, which is attracting bids at up to 5.5x total and for which there is no existing liquidity;
 So, yet again there are signs of the market hotting up in terms of arranging bank bids, with institutional investors reserving their positions, the intimation being an investment rollover is not guaranteed if the terms are not right;
 Mezzanine issue this year has been tiny at c.EUR 300mln, but due to the parlous state of the HY market, BSN is now said to be structuring with mezzanine, although Iglo is still looking to the bond markets;
 Everything is better in the US YTD, in terms of issuance, higher leverage for borrowers (4.5x vs 4.3x senior on average) and, of course, CLO issuance, at c.USD
14bln this year from 33 vehicles, versus zero in Europe
36

 Monthly US vs Europe High Yield Issue Volume (in USD bn)  Monthly New-Issue: Leveraged Loans vs. HY Bonds (in EUR bn)
 Broad Secondary Market: Avg. Bid vs Flow Names (Dec 04-Jun
12)
900
850
800
750
700
650
600
550
500
 European iTraxx Crossover vs European High Yield Indices
European BB Index
European iTraxx Crossover Series 16 (LHS)
European B Index (RHS)
European iTraxx Crossover Series 17 (LHS)
16%
14%
4%
2%
0%
12%
10%
8%
6%
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Rabobank International | Acquisition Finance