Amsterdam Institute of Finance
Joseph V. Rizzi
November, 2012
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
November, 2012
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
Amsterdam Institute of Finance
November, 2012
The above table shows the features of different debt options available to issuers
The availability of the different options is subject to market conditions
3
100%
80%
60%
40%
20%
0%
2003
2004
Sr Only
2005
Sr + 2nd Lien
2006
2007
Sr + Mezz
2008
2009
Sr + 2nd Lien + Mezz
2010
2011
Jan-Aug 12
Sr + HY Bond
This chart represents the percentage of deals which have senior facilities only, vs. senior first lien and second lien,
etc based upon transaction count. For example, during 2006, 28.7% of all deals had Senior, 2 nd Lien and Mezz
structure.
To access the data points underlying the chart, double-click on the chart.
Amsterdam Institute of Finance
November, 2012
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
4





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
November, 2012
5
Senior Secured, but with Junior or Second Lien

◦ Higher default
◦ Lower recovery
Originally developed as Rescue Finance
Competing with EURO Mezzanine


◦


Investors – hedge funds and CLO
Formerly Attractive Pricing: Spread differential between
Second Lien and First Lien 350 BP.
Issues:
- Inter-creditor
- Standstill Agreement
- Obligations
- New Investors Behavior in a Workout
- CLO Rating Impact
Amsterdam Institute of Finance
November, 2012
6




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 – Returning
◦ Europe – Shut down 1Q08
 difficult
Amsterdam Institute of Finance
November 2012
7
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’.
Amsterdam Institute of Finance
November, 2012
8
‘OpCo \ PropCo’ Financing (2)
BidCo
Financing
Approx.
100%
Notes
Approx.
100%
OpCo
PropCo
Rental Payments
Amsterdam Institute of Finance
November, 2012
9
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
Closed: 2H07 to present
Amsterdam Institute of Finance
November, 2012
10
• 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)
• Usually issued as subordinated debt but can also be senior
unsecured
• Markets
 US - $1 T size
 Euro - €100B size
Amsterdam Institute of Finance
November, 2012
11
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
November, 2012
12
Volume
Transaction Count
€48B
140
120
€40B
100
€32B
80
€24B
60
€16B
40
€8B
20
€0B
Secured
Unsecured
Subordinated
Secured
Unsecured
12
1H
11
1H
20
11
20
10
20
09
20
08
20
07
20
06
12
1H
11
1H
20
11
20
10
20
09
20
08
20
07
20
06
0
Subordinated
Note: HY volume excludes PIK instruments & short-term bonds; reflects corporate bonds only
In case of a global issue, the portion allocated to European HY investors is counted (if unknown, the entire global issue is counted)
In the case of multi-tranche bonds issued within the same transaction, each tranche is counted separately.
To access the data points underlying the chart, double-click on the chart.
Copyright©
Amsterdam Institute of Finance
2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary
13
of The McGraw-Hill Companies, Inc.
November, 2012
Covenants
*
*
Extensive (bank type)
Maintenance basis (tested quarterly)
Security
*
Second secured
Call Provisions
*
Generally callable immediately (103,102,101)
Maturity
*
Ten year
Pricing
*
*
LIBOR + 800 bps (400 cash, 400 PIK)
Warrants for total return (15-17%)
Liquidity
*
Low
Disclosure:
*
Limited
Marketing
*
No research coverage, no roadshow
Rating Requirements
*
None
Amsterdam Institute of Finance
November, 2012
14
€3,500M
€3,000M
€2,500M
€2,000M
€1,500M
€1,000M
€500M
€0M
0 0 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 0 0 0 1 1 1 2 2
-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1
n
Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma
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
15
E+1,350
E+1,200
E+1,050
E+900
E+750
E+600
E+450
E+300
M
ar
Au 00
g0
Ja 0
n0
Ju 1
nN 01
ov
-0
Ap 1
rSe 02
pFe 02
b0
Ju 3
l-0
D 3
ec
M 03
ay
-0
O 4
ct
M 04
ar
Au 05
g0
Ja 5
n0
Ju 6
nN 06
ov
-0
Ap 6
rSe 07
pFe 07
b0
Ju 8
lD 08
ec
M 08
ay
-0
O 9
ct
M 09
ar
Au 10
g1
Ja 0
n1
Ju 1
nN 11
ov
-1
Ap 1
r-1
2
E+150
PIK Spread
Total Spread
There are not enough observations to generate meaningful data for some periods during 2009 – 2011.
3-months rolling through 4Q08 and 6-months rolling thereafter (due to a limited number of observations)
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.
16

Trend: Increasing segmentation of loans with reduced covenant or collateral
◦
◦
Percentage of institutional loans with impaired covenants or collateral

1H07
47%, 2H07-Nil

2006
24%
Breakdown 2007 1H07 47%



11%
Second Lien
6.4% Bifurcated

23%

7%
Covenant Lite
Unsecured
Bifurcated/Crossing Liens – See HCA for an example
◦
◦
◦
◦
Asset backed revolving credit backed by first lien or receivables and inventory
Term loans back by lien on other non-current assets

Property, plant and equipment

Stock pledge
Pricing premium – 100 bps compared to revolver
Inter-creditor complications
Amsterdam Institute of Finance
November, 2012
17
PIK
•Pay if you can toggle
•Eats up equity
•Characteristics
PIK
Amsterdam Institute of Finance
November, 2012
SLL
Spread
825/900
500
Toggle
900-1000
Term
7.5-10
9.5
Call
5xNC
n/a
Leverage
6.5x+
6x+
n/a
(Source: LCD)
18
Stapled Financing

Staple financing term sheet to deal book

Be prepared to fund

Establishes ceiling

Conflicts of interest
Amsterdam Institute of Finance
November, 2012
19
ACCORDING 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
November, 2012
20
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
November, 2012
21



Increasing layers of debt
Directed at different investors
Intercreditors conflicts
2006 – 1H07
• Common equity
• Hybrid preferred (0.5x)
2004 + 2H07 - Present
• 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
November, 2012
FDX – 6x +
PPX – 8.5 +
22

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
November, 2012
23
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
November, 2012
Sub B
Sub C
Sub D
Sub E
Restricted subs
(gurantors)
24
Disclosure
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
25