An Overview of
Leveraged Buyouts
Chris Droussiotis, Executive Director
Head of the Leverage & Sponsor Group
June 2013
Table of Contents
1.
Leverage Buyouts (LBO)
A. Definition
B. History
C. Market evolution
2.
Financing an LBO / Capital Markets
A. Senior Debt
B. Subordinated Debt
C. Equity
D. Debt Capacity
3.
Loan Syndication
A. Definition (Primary / Secondary
B. Market Overview / Market Evolution
C. Investor Base / CLOs, Loan Funds and Banks
4.
Understanding Term & Conditions
A. Money Terms
B. Non-Money Terms
C. Other Terms
5.
Loan Pricing
A. Loan Pricing / Spread / OID / LIBOR Floors
B. Bond Pricing YTM, YTC, YTW
C. Equity Return Analysis (DCF)
6.
Example of a Large Syndication: Harrahs
2
Leveraged Buyouts Definition/Description

A leveraged buyout (or LBO, or highly leveraged transaction (HLT) occurs when an investor, typically a
financial sponsor acquires a controlling interest in a company's equity and where a significant percentage of the
purchase price is financed through leverage (Debt).
 The Debt raised (by issuing bonds or securing a loan) is ultimately secured upon the acquisition target and
also looks to the cash flows of the acquisition target to make interest and principal payments.
 Acquisition debt in an LBO is usually non-recourse to the financial sponsor and to the equity fund that the
financial sponsor manages.
 The amount of debt used to finance a transaction as a percentage of the purchase price for a leverage
buyout target, varies according to the financial condition and history of the acquisition target, market conditions,
the willingness of lenders to extend credit. Typically the debt portion of a LBO ranges from 50%-85% of the
purchase price, but in some cases debt may represent upwards of 95% of purchase price.
 To finance LBO's, private-equity firms usually issue some combination of syndicated loans and high yield
bonds.
3
Leveraged Buyouts History & Market Evolution

The first leveraged buyout may have been the purchase of two companies: Pan-Atlantic and Waterman
companies (steamship companies) in 1955 by McLean Industries.
 McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock.
 When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the
loan debt.
 The Debt raised (by issuing bonds or securing a loan) is ultimately secured upon the acquisition
target and also looks to the cash flows of the acquisition target to make interest and principal payments.
 The use of publicly traded holding companies as investment vehicles to acquire portfolios of investments in
corporate assets was a relatively new trend in the 1960s, popularized by the likes of Warren Buffett via
Berkshire Hathaway and Victor Posner via DWG Corporation.
 The leveraged buyout boom of the 1980s was conceived by a number of corporate financiers, most notably
Jerome Kohlberg, Jr. and later his protégé Henry Kravis and his cousin George Roberts – both working for Bear
Stearns – to create KKR.
 In 1989, KKR closed in on a $31.1 billion dollar takeover of RJR Nabisco. It was, at that time and for over
17 years, the largest leverage buyout in history. The event was chronicled in the book (and later the movie),
Barbarians at the Gate: The Fall of RJR Nabisco.
 Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during
the 1980s due to its leadership in the issuance of high-yield debt.
 Mega Deals of 2005-2007: The combination of decreasing interest rates, loosening lending standards,
creation of CLOs and regulatory changes for publicly traded companies (specifically the Sarbanes-Oxley Act.)
would set the stage for the largest boom private equity had seen.
4
Leveraged Buyouts – Enhancing Equity Returns
Your Business
Income Statement
EBIT :
$1.5 million
Interest Exp.:
$ 0 million
Balance Sheet
ASSETS:
LIABILITIES:
$0 (No Debt)
ROA = 10%
Pretax Income: $1.5 million
Taxes (33%):
$0.5 million
Net Income:
$1.0 million
EQUITY:
$10 million
ROE = 10%
$10 million
The offer: $10mm (10 x Net Income) borrowed $9 million (90%) at 10%
LBO: NewCo
Income Statement
EBIT:
$1.5 million
Interest Exp.:
$ 0.9 million
Balance Sheet
ASSETS:
LIABILITIES:
$9 million
Pretax Income: $ 0.6 million
Taxes (33%):
$ 0.2 million
Net Income:
$ 0.4 million
EQUITY:
$10 million
ROA = 10%
ROE = 40%
$1 million
5
Leveraged Buyouts – Enhancing Equity Returns
Your Business
Income Statement
EBIT :
$1.5 million
Interest Exp.:
$ 0 million
Balance Sheet
ASSETS:
LIABILITIES:
$0 (No Debt)
ROA = 10%
Pretax Income: $1.5 million
Taxes (33%):
$0.5 million
Net Income:
$1.0 million
EQUITY:
$10 million
ROE = 10%
$10 million
The offer: $12 mm (12 x Net Income) borrowed $10.8 million (90%) at 10%
LBO: NewCo
Income Statement
Balance Sheet
EBIT:
$1.50 million
ASSETS:
LIABILITIES:
Interest Exp.:
$1.08 million
Purchase: $10 million
$10.8 million
Pretax Income: $ 0.42 million
Taxes (33%):
$ 0.14 million
Net Income:
$ 0.28 million
Goodwill:
$ 2 million
EQUITY:
Total:
$12 million
ROA = 10% (tang)
ROE = 23%
$ 1.2 million
6
Capital Markets: Types of Financing
Senior Debt (Bank Loan or Leverage Loan)
 Ranks ahead of all other debt and equity capital in the business
 Bank loans are typically structured in up to three tranches: Revolver, TL A and TL B.
 The debt is usually secured on specific assets of the company, which means the lender can automatically
acquire these assets if the company breaches its obligations under the relevant loan agreement; therefore it has
the lowest cost of debt.
 Typical Maturity 5-7 years
 Senior Debt represent 45-60% of total Capital
 Senior Debt Multiples represent 3.0x – 4.0x of historic EBITDA
 Revolver and TL A (called Pro-rata facilities) are provided by traditional banks
 Term Loan B (called institutional facility) is provided by non-banking institutions (CLOs, Insurance Co., Funds)
Pros
 Usually offers the lowest cost of funding
 Prepayable at no or little cost
 Deep established market in the U.S which can
accommodate large transactions
 Private market and therefore less exposed to
volatile market conditions
 No equity dilution
Cons
 Requires periodic amortization out of free cash
flows, therefore this instrument may not be suitable
for companies consuming cash for some years
 Strict maintenance covenants are tightly
monitored, usually on a quarterly basis (eg total
leverage, interest cover, fixed charge cover ratio,
etc)
 Full security required in most cases
7
Capital Markets: Types of Financing
Subordinated Debt (Mezzanine)
 Ranks behind senior debt in order of priority on any liquidation.
 The terms of the subordinated debt are usually less stringent than senior debt.
 Repayment is usually required in one ‘bullet’ payment at the end of the term.
 Typical maturity is 8-10 years
 Since subordinated debt gives the lender less security than senior debt, lending costs are typically higher.
 An increasingly important form of subordinated debt is the high yield bond, often listed on US markets.
 They are fixed rate, publicly traded, long-term securities with a looser covenant package than senior debt
though they are subject to stringent reporting requirements.
 High yield bonds are not prepayable for the first five years and after that, they are prepayable at a premium
(Call premiums)
 SEC requires the Issuer of these bonds to be rated by two independent agencies (Moody’s and S&P)
 Subordinated Debt represent 15-25% of total Capital
 Total Debt (including both the Senior and Sub debt represent 5.0x – 6.0x of historic EBITDA.
Private Equity
 Ranks at the bottom of the “waterfall” in order of priority on any liquidation.
 Equity represent 20-35% of total Capital
8
Capital Markets: Types of Financing
Estimate Debt Capacity
 The next step is to estimate the amount of debt that the company can take on.
 The financial statements should make provisions for interest and debt costs.
 The company can only bear debt to the extent that it has available cash flows. Note that all
existing debt will need to be refinanced. When modelling (Equity or Debt investors) the financing
assumptions used are according to market conditions, industry characteristic and company specific
issues. Set out below are some parameters that will influence financing considerations for the model:







Minimum interest cover (times)
Total debt/EBITDA (times)
Senior debt repayment (in years)
Mezzanine debt repayment (in years)
Senior debt interest rate
Subordinated interest rate
Mezzanine finance exit IRR
9
Capital Markets: Types of Financing
Example:
XYZ Company trades at NYSE at $15 with 20 million shares and has $300 million of Debt, $100 of Cash and $100 mm of
EBITDA, so
Trading Enterprise Value (EV) = (Equity at $15 x 40 million shares) + $300 mm Debt – $ 100 mm Cash = $800 mm
or 8.0x EBITDA trading multiple ( EV / EBITDA)
The PE firm are in the process of tendering for all the shares of XYZ. To ensure a success of acquiring all the shares, they
thinking of offering 33% premium to the existing trading level stock, or tendering for the stock at $20 per share putting he
EV at $1 billion - ($20 x 40 mm shares ) + $300 mm Debt - $100mm Cash = $1 billion
Transaction Sources & Uses
Sources
Uses
Capacity Amount
% Cap
Senior Debt
4.0x $ 400.00
40.0%
Purchase of Stock
800.0
Subordinated Debt
6.0x $ 200.00
20.0%
Refinance of Debt
300.0
$ 400.00
40.0%
Cash
1,000.0
100.0%
Equity
Total Sources
EBITDA
10.0x
Total Uses
The PE firm will need to run
their own LBO Analysis to see
if $1 billion acquisition makes
sense given the Debt Capacity
and improvement of EBITDA in
the next 3-5 years.
(100.0)
1,000.0
$ 100.00 mm
10
Loan Syndication Background & History
 A syndicated loan is one that is provided by a group of lenders and is
structured, arranged, and administered by one or several commercial or
investment banks known as Arrangers.
 Arrangers serve the investment-banking role of raising investor dollars for an
issuer in need of capital.
 The issuer pays the Arranger a fee for this service, and this fee increases with the complexity and risk factors of the
loan.
 In the Mid-1980’s when the larger buyouts needed bank financing, the syndicated loan market became the dominant way
for issuers to tap banks and other institutional capital providers for loans.
 In the late 90s to early 2000’s hundreds of Collateral Loan Obligation funds (CLO’s) were created and joined the loan
syndication process. These funds were referred to as non-bank institutions or institutional investors. These institutional
investors played a key role in the exponential growth of the Mega LBO deals seen in 2005-2007.
 By 2007, nearly 75% of the loans were provided by non-banks, versus less than 20% 10 years earlier.
 The Fall of 2007 – the end of liquidity in the U.S Syndication market – Traditional Banks had to step up in the months
and years to follow the liquidity crisis.
 For two years after the crisis (2007-2009), the syndication market has completely changed; Was more cautious, new
language was added in the syndication agreements between the banks and the customers to protect against market risk
 Starting in the summer of 2010 through today, the syndication markets started to loosen up again as the liquidity in the
loan market has come back significantly. In 2010, the HY bond market issuance had the best year ever.
11
Two Markets Served
Investment Grade Loan Market
Leveraged Loan Market
• Rated BBB- and Higher (Corporate)
• Rated BB+ and Lower (Corporate)
• Arrangers hold Higher Exposure ($200 million +)
• Arrangers hold Lower Exposure –
thus the need to syndicate
• The majority of the Syndicate are traditional banks
• The majority of the Syndicate are
non-banks (Financial institutions)
Leverage Loan Market purpose:
• Leverage Buyouts (LBO)
• Acquisitions using substantial debt
• Refinancing
4
Two Markets Served in the U.S.
Investment Grade Loan Market
800.0
700.0
AAA
AA
A
Leveraged Loan Market (BB+ and below)
BBB
$715 Billion
$535 Billion
500.0
$229 Billion
400.0
300.0
200.0
100.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
I-Grade Volume ($ Bils.)
600.0
13
Loan Syndication Market Overview (Continued)
The Exponential Surge in Supply of Syndicated Loans was driven by large Leveraged
Buyouts starting in 2005 thru the summer of 2007
$40
$35
$ in Billions
$30
$37.9
Other
High Yield
Leveraged Loan
$33.0
Hi Yield $11.25
$28.4
Hi Yield $11.3
$25
$22.3
Hi Yield $13.22
$20
Other (CMBS)
$7.25
$15
Leveraged Loan
$26.65
$11.3
Hi Yield $6.03
$8.0
$10
Hi Yield $3.0
$5
Leveraged Loan
$11.3
Leveraged Loan
$21.7
Leveraged Loan
$15.185
Leveraged Loan
$9.0
Leveraged Loan
$5.0
$0
28 Mar 05
20 Nov 05
24 Jul 06
2 Oct 06
26 Feb 07
30 Jun 07
Source: LoanConnector
Extremely high liquidity in the market gave banks confidence
to underwrite larger and larger deals…
14
Loan Syndication Market Overview (Continued)
Institutional Investors through June 2007 dominated the market
Loan Syndication Participants:
Non-U.S. Banks
CLOs / Hedge Funds / High-Yield Funds
% Banks
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
94
95
96
97
98
99
00
01
02
03
04
05
Source: Deutsche Bank
06 /07
30
/
6
TM
L
Over time, institutional investors have replaced banks as lenders with over 75% of demand
coming from institutional investors as of LTM 6/30/07
15
(% Investor Base)
(% of Investor Base)
U.S. Banks
Finance Co. / Securities
Insurance Co.
Loan Syndication Market Overview (Continued) – Lessons Learned
The Leverage Loan Syndication Supply and Demand Imbalance
After (2nd Half 2007(2)) As of 12/05/07
Before (LTM June 30, 2007(1))
($ in Billions)
$620
$95 (15%)
$120 (19.3%)
$95 (15%)
$620
Hedge Funds /
HY
Other (3)
Banks
Primary
Issuance
$620
CLOs
$310 (50%)
(2)
Demand
Supply
(2)
Investor Landscape has changed
Sources:
(1)
Standard & Poor’s Leveraged Lending Review 2Q07
(2)
Demand assumptions: Banks and Other at 35% consistent with LTM 6/30/07; CLO, Hedge Fund and New Capital amounts Wall Street estimates
Supply assumptions: Primary Issuance based on current estimated forward calendar; Liquidation / Collateral Calls amounts Wall Street estimates
(3)
Finance Companies, Insurance Companies, Prime Rate Funds
(4)
Standard & Poors LCD News 12/5/07
(5)
Grossed up for ordinary issuance
16
The Secondary Loan Market took a plunge as a result of oversupply at the time of
financial crisis.
110
New Issue Loans with LIBOR Floor,
higher Spread pricing and tighter
structures post 2007
100
90
80
70
60
Ja
n9
Se 7
pM 97
ay
-9
Ja 8
n9
Se 9
pM 99
ay
-0
0
Ja
n0
Se 1
pM 01
ay
-0
2
Ja
n0
Se 3
pM 03
ay
-0
Ja 4
n0
Se 5
pM 05
ay
-0
6
Ja
n0
Se 7
pM 07
ay
-0
Ja 8
n0
Se 9
pM 09
ay
-1
Ja 0
n1
Se 1
pM 11
ay
-1
2
Ja
n13
50
17
Types of Loan Syndication Formats

Underwritten deal

Best-efforts syndication

Club deal
18
Types of Loan Syndication Formats (Continued)
Underwritten deal

Arrangers guarantee the entire commitment, then syndicate the loan to reduce their exposure.

If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference.
Reasons for Arrangers to underwrite:
•
Offering an underwritten loan can be a competitive tool to win mandates.
•
Underwritten loans usually require higher fees
New Terms:
• “Flex Language”
•
Memorandum of Understanding (MOU)
19
Types of Loan Syndication Formats (Continued)
Best-efforts syndication

The Arranger commits to underwrite less than the entire amount of the loan.

If the loan is undersubscribed, the deal may not close unless the terms/pricing/structure are changed.

Best-efforts syndications were used for risky borrowers or for complex transactions.
20
Types of Loan Syndication Formats (Continued)
Club deal

Pre-marketed to a group of issuer’s or equity sponsor’s relationship lenders.

Typically a smaller loan (usually $25 million to $200 million but as high as $500 million)

The arranger is generally a first among equals, and each lender gets a full cut of the fees.
21
The Loan Syndication Process
Lead Arranger Bank
Issuer /Company
Administrative Agent
Bookrunner Bank #1
Bookrunner Bank #2
Bookrunner Bank #3
Syndication Agent
Documentation Agent
Documentation Agent
Co-Mgr
Co-Mgr
Co-Mgr
Co-Mgr
Co-Mgr
Co-Mgr
Bank #1
Bank #2
Bank #3
Bank #4
Bank #5
Bank #6
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
Bank or
Institution
First Tier
Second Tier
“Retail” Level
22
The Loan Syndication Process (Continued)
 The issuer or Company solicits bids from Arrangers.

Arrangers will outline their syndication strategy and their view on the way the loan will price in market.

Issuer gives the mandate to one or more Arrangers (Co-Arrangers)

The arranger will prepare an information memo (IM) describing the terms of the transactions.
 The IM typically will include:
 Executive Summary
 Investment Considerations
 Summary of Terms and Conditions (Term Sheet)
 Transaction Overview
 Company
 Management and Equity Sponsor Overview
 Industry Overview
 Financial Model
 Timing for commitments, closing, as well as fees on level of commitments
 Bank meeting is scheduled at which potential lenders hear the management and the Investor group.
 A deadline is given for the banks to send their commitment levels subject to final documentation
 Each Bank analyzes the deal’s credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.
 The Arranger collects all commitments – different amounts from each Bank
 Allocations are given and Legal Documentation is sent for their final review.


If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced
If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.
 After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.
23
Typical Leveraged Deal Term Sheet / Credit Agreement
1. Parties to the Credit Agreement:
 Borrower
 Holding Company
 Guarantor / Parent and Subsidiaries’ Guarantee
 Agent Banks
 Administrative Agent
 Collateral Agent
 Syndication Agent
 Documentation Agent
 Law Firms representing the Borrower and Agent Banks
2. Description of the Transaction / Purpose of the Loan (s)
24
Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)
3. Money Terms:


Amount / Tranches

Revolving Credit

Term Loans
Pricing

Interest Rate / Margin over LIBOR

Commitment Fees on unfunded portion

Maturities

Amortization Schedule (set principal payments)
Need 100% Vote from the syndicate
banks to amend these terms
25
Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)
4. Non-Money Terms:
 Financial Covenants
 Negative Covenants
Need Majority Vote (typical 51%) from the
syndicate banks to amend these terms
 Affirmative Covenants
26
Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)
New Terminology in 2006 and 2007:
Typical Financial Covenants
Covenant Lite Structures (“Covy lite”)
Maximum Leverage Ratio (Total Debt / EBITDA)
Incurrence Tests Vs Maintenance Tests
Maximum Senior Leverage Ratio (Bank Debt / EBITDA
Minimum Coverage Ratio (EBITDA / Interest
Minimum Fixed Charge Ratio (EBITDA – Capex – Taxes ) / Interest + Principal Payments)
Maximum Capital Expenditures
Minimum Tangible Net Worth
New Terminology in 2006 and 2007:
Typical Negative Covenants
“Green Shoe”
Limitations on Additional Debt
Limitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactions
Limitations of Dividends / Investments
Limitation on Liens / Negative Pledges
Excess Cash Sweep
Limitations of Change of Ownership
27
Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)
5. Other Terms & Conditions:

Security / Liens / Guarantees

Mandatory Prepayments

Optional Prepayments / Call Protection

Financial Reporting / Maintaining Corporate Existence (“Affirmative Covenants”)

Representation and Warranties

Conditions Precedent at Closing

Events of Default

Assignments and Participations / Secondary Sales

Waivers and Amendments

Indemnification

Cross Default

Material Adverse Clause (MAC)
28
Senior Debt / Loan Pricing
Other Terminology to the Credit Agreement
 LIBOR Floor
 Original Issuer Discount (OID)
 Margin Spread
A typical calculation of Loan Yields in the secondary market for loans:
LIBOR or LIBOR Floor + Margin Spread + (100-OID)/4* years = Loan Yield
*market convention is to use 4 years as it represents the average life
Example:
LIBOR Floor = 1.00%
Margin Spread = 400 basis points (or 4.00%)
OID = 98
Then the Loan Yield is calculated to:
1.0% + 4.0% + [(100 – 98)/100]/4 = 5.0% + (2.0% / 4) = 5.0% + 0.5% = 5.5% Yield
29
High Yield Bond Pricing
Concepts:
 Face Value / Par Value ($1,000)
 Market Value quoted as a % of Face Value (priced at 98 or 98% of $1,000)
 Coupon Payments / Coupon (Interest Rate)
 Semi Annual Payments (interest payments)
 Callable / Non-Callable Bonds
 YTM, YTC, YTW
Yield to Maturity Vs Yield to Call
BV=
MV=
Coupon=
n=
Year
Year 1 =
Year 2 =
Year 3 =
Year 4 =
Year 5 =
Year 6-10 =
1,000.00
850.00
8%
10 years
100 Face Value
85 Price
Call Price YTC/YTM
105
104
103
102
101
100
32.9%
19.6%
15.5%
13.5%
12.4%
10.5%
0
(850.00)
(850.00)
(850.00)
(850.00)
(850.00)
(850.00)
1
2
3
4
5
1,130.00
80.00 1,120.00
80.00
80.00 1,110.00
80.00
80.00
80.00 1,100.00
80.00
80.00
80.00
80.00 1,090.00
80.00
80.00
80.00
80.00
80.00
6
7
8
9
10
80.00
80.00
80.00
80.00 1,080.00
Other Bond Concepts:
 Duration & Convexity
 Convertible Bonds

30
Equity IRR Analysis
ALEXANDRIA HOTEL PROPERTY
LBO Equity Analysis using CAPM
TRANSACTION SOURCES & USES
Debt
Capacity
(EBITDA x)
Sources:
Bank Loan
Mezzanine Note
Total Debt
Equity
Total Sources
2.5x
Purchase Price (EV - including Debt)
Transaction Fees & Expenses
Total Uses
% Capital
50,000,000
30,000,000
80,000,000
43,600,000
123,600,000
4.0x
Uses:
Amount
1st Year's
EBITDA
Multiple
6.0x
3.0%
40.5%
24.3%
64.7%
35.3%
100.0%
120,000,000
% of
Total
Uses
97.1%
3,600,000
123,600,000
2.9%
100.0%
Amount
Expected
Return
(After Tax)
Expected
Return
5.660%
9.000%
3.622%
5.760%
20.00%
20.00%
WACC
(After Tax)
EBITDA
Multiple
1.47%
1.40%
2.86%
7.05%
9.92%
2.5x
1.5x
4.0x
2.2x
6.2x
WACD = 4.424%
Tax Rate=
36.0%
COST OF DEBT AND EQUITY CALCULATIONS
COST OF BANK DEBT CALCULATION
(Floaring Rate)
3M-LIBOR
Assumptions
0.60%
Loan
Spread
4.00%
Initial All -In
4.60%
COST OF MEZZANINE NOTE CALCULATION
9.00%
COST OF EQUITY CALCULATION
E (re) = rf + β . Pe + e
6-year Treasury Note [ rf ]
Beta for Publicly Traded Hotel [ β ]
Equity Premium [ Pe ]
Firm Specific Risk Premium [e]
Cost of Equity
1.95%
1.633x
11.05%
0.0%
20.00%
Equity Risk Premiums (1926-2006)
(CAPM Model)
Decile
Mkt Cap $MM
Risk Prem.
1
524,351
7.03%
2
3
4
10,344
4,144
2,177
8.05%
8.47%
8.75%
1,328
840
538
333
193
85
9.03%
9.18%
9.58%
9.91%
10.43%
11.05%
5
6
7
8
9
10
31
Equity IRR Analysis
DEBT ASSUMPTIONS & RETURN ANALYSIS
Bank Loan Information
Debt IRR
Amount Outstanding (End of Year)
Schedule Principal Payments
Interest Payment (Calc based on last Year's Outs)
Total Financing Payment
5.660%
Interest Rate
LIBOR RATE
LIBOR Rate Increase Assumptions
Corporate Bond Information
Amount Outstanding
Schedule Principal Payments
Interest Payment (Calc based on last Year's Outs)
Total Financing Payment
9.000%
Total Financing
Total Debt Outstanding
Terms
50,000,000
7 years
5.66%
(50,000,000)
0.60%
30,000,000
10 Years
9.00%
(30,000,000)
2010
47,000,000
3,000,000
2,300,000
5,300,000
4.60%
0.60%
0.00%
2011
42,000,000
5,000,000
2,397,000
7,397,000
5.10%
1.10%
0.50%
2012
37,000,000
5,000,000
2,352,000
7,352,000
5.60%
1.60%
0.50%
2013
31,000,000
6,000,000
2,442,000
8,442,000
6.60%
2.60%
1.00%
2014
24,000,000
7,000,000
2,046,000
9,046,000
6.60%
2.60%
0.00%
2015
15,000,000
9,000,000
1,584,000
10,584,000
6.60%
2.60%
0.00%
2016
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
30,000,000
2,700,000
2,700,000
8,000,000
77,000,000
10,097,000
72,000,000
10,052,000
67,000,000
11,142,000
61,000,000
11,746,000
54,000,000
13,284,000
45,000,000
18,690,000
30,000,000
15,000,000
990,000
15,990,000
6.60%
2.60%
0.00%
32
Equity IRR Analysis
CASH FLOW & EQUITY RETURN ANALYSIS
Company Projections
Operating
Assump.
5.00%
35.0%
15.0%
50.0%
3.00%
7
Revenues
Cost of Revenues
Operating Costs
EBITDA
Less Depreciation
Less Amortization of Fees
EBIT
Less Interest (Unlevered for DCF Analysis)
EBT
Less Taxes (adj out Interest Exp)
Plus Depreciation & Amortization
Less Working Capital
Less Capex
Cash Flow Before Financing (CFBF)
Entry Year
2009
growth
% of Revenue
% of Revenue
% of Revenue
years
36.0% % of EBT
1.00% % of Revenue
3.00% % of Revenue
Less Financing ( P + I )
Equity Cash Flows
Year 1
2010
40,000,000
(14,000,000)
(6,000,000)
20,000,000
(1,200,000)
(514,286)
18,285,714
18,285,714
(6,582,857)
1,714,286
(400,000)
(1,200,000)
11,817,143
Year 2
2011
42,000,000
(14,700,000)
(6,300,000)
21,000,000
(1,260,000)
(514,286)
19,225,714
19,225,714
(6,921,257)
1,774,286
(420,000)
(1,260,000)
12,398,743
Year 3
2012
44,100,000
(15,435,000)
(6,615,000)
22,050,000
(1,323,000)
(514,286)
20,212,714
20,212,714
(7,276,577)
1,837,286
(441,000)
(1,323,000)
13,009,423
Year 4
2013
46,305,000
(16,206,750)
(6,945,750)
23,152,500
(1,389,150)
(514,286)
21,249,064
21,249,064
(7,649,663)
1,903,436
(463,050)
(1,389,150)
13,650,637
Year 5
2014
48,620,250
(17,017,088)
(7,293,038)
24,310,125
(1,458,608)
(514,286)
22,337,232
22,337,232
(8,041,403)
1,972,893
(486,203)
(1,458,608)
14,323,912
Exit Year
2015
51,051,263
(17,867,942)
(7,657,689)
25,525,631
(1,531,538)
(514,286)
23,479,808
23,479,808
(8,452,731)
2,045,824
(510,513)
(1,531,538)
15,030,850
(8,000,000)
3,817,143
(10,097,000)
2,301,743
(10,052,000)
2,957,423
(11,142,000)
2,508,637
(11,746,000)
2,577,912
(13,284,000)
1,746,850
Terminal Value
EBITDA Multiple Method (initial purchase multiple)
Growth
6.0x
153,153,788
Perpetuity Method (using WACC + growth) 3.50%
9.92%
242,876,485
Average Terminal Value
Debt Outstanding
Equity Value (TV - Debt)
2016
53,603,826
(18,761,339)
(8,040,574)
26,801,913
(1,608,115)
25,193,798
25,193,798
(9,069,767)
1,608,115
(536,038)
(1,608,115)
15,587,992
(18,690,000)
(3,102,008)
198,015,136
45,000,000
153,015,136
Equity Cash Flows
(43,600,000)
$ 1 PV Table (Expected Equity Rate)
PV Table (Expected Equity Rate)
20.00%
60,568,712
Initial Investment
NPV=
(43,600,000)
16,968,712
IRR=
27.5%
3,817,143
x
0.8333398
3,180,977
2,301,743
x
0.6944552
1,598,457
2,957,423
x
0.5787172
1,711,511
2,508,637
x
0.4822680
1,209,835
2,577,912
x
0.4018931
1,036,045
154,761,986
x
0.3349135
51,831,886
Equity Return Scenarios Given Different EBITDA Multiples
5.5x
6.0x
6.5x
7.0x
35.9%
27.5%
21.8%
17.6%
33
Equity IRR Analysis
EQUITY SCENARIO TABLE
Revenue Growth Rates
IRR=
27.5%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
5.5x
35.86%
36.76%
38.52%
41.11%
44.48%
48.55%
53.29%
58.64%
64.57%
60.08%
EBITDA Purchase Multiples
6.0x
7.0x
27.49%
17.61%
28.33%
18.38%
30.00%
19.92%
32.45%
22.16%
35.62%
25.07%
39.46%
28.59%
43.92%
32.66%
48.94%
37.26%
54.52%
42.36%
52.03%
46.24%
9.0x
8.33%
9.02%
10.38%
12.37%
14.95%
18.07%
21.70%
25.81%
30.36%
41.83%
34
Example of a Large Syndicated Loan
Harrah’s Entertainment
35
Example of a Large Syndicated Loan
Harrah’s Entertainment
TRANSACTION OVERVIEW
On December 19, 2006, Harrah’s Entertainment Inc.
(“Harrah’s” or the “Company”) announced that it had entered
into an agreement to be acquired by affiliates of Apollo
Management (“Apollo”) and TPG Capital (“TPG”) in a
transaction valued at approximately $31.2 billion (including
estimated fees and expenses)
Harrah’s Entertainment, based in Las Vegas, Nevada, is the
world’s largest and most geographically diversified gaming
company, operating 50 casinos in six countries, with the #1
or #2 market share in almost every major gaming market in
the U.S.
 At the time of the acquisition, Harrah’s generated LTM
9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of
$10.6 billion and $2.9 billion, respectively.
Harrah’s Operating Company (“HOC”) owns or manages 43
of the 50 Harrah’s Entertainment casinos and generated
LTM 9/30/07 Net Revenues and Pro Forma Adjusted
EBITDA of $8.0 billion and $2.0 billion, respectively
36
Example of a Large Syndicated Loan
Harrah’s Entertainment
TRANSACTION SOURCES & USES
SOURCES:
Revolver
New Term Loan-B
Total Bank Debt
Existing Senior Debt
CMBS
Senior Unsecured Notes
Senior Unsecured Notes (PIK)
Total Senior Sources
USES:
TERM
6
7
8
5
10
10
L+
RATE
3.00% 7.25%
3.00% 7.25%
6.70%
7.50%
10.75%
10.75%
COMM $ AMT % CAP
2,000.0
0.0
0.0%
7,250.0 7,250.0
23.2%
9,250.0 7,250.0
23.2%
4,624.0
14.8%
6,500.0
20.8%
5,275.0
16.9%
1,500.0
4.8%
25,149.0
80.5%
Senior Sub Debentures
Junior Sub Debentures
Total Junior Sources
0
0
0.00%
0.00%
0.0
0.0
0.0
0.0%
0.0%
0.0%
New Preferred Stock
New Common Equity
Total Equity
Total Sources
10
10.00%
2,000.0
4,096.0
6,096.0
31,245.0
6.4%
13.1%
19.5%
100.0%
ASSUMED LIBOR (1/2008)
Purchase Shares
Extra Cash
Refinance Existing Debt
Fees & Expenses
Rollover Debt
Total Uses
$ AMT
17,291.0
642.0
7,582.0
1,106.0
4,624.0
31,245.0
Sources - Uses
0.0
4.25%
37
Example of a Large Syndicated Loan
Harrah’s Entertainment
STRUCTURE – TOO LEVERAGE??
Pro Forma Capitalization
($ in MM)
$2B Revolver
Term Loan B
Bank Debt
Pro Forma
% of
At Close Total Cap
$
0.0%
7,250.0
31.4%
$ 7,250.0
31.4%
2007
EBITDA
0.0x
3.6x
3.6x
Sr unsecured cash-pay
Sr unsecured PIK toggle
Total Senior Debt
5,275
1,500
$ 14,025.0
22.9%
6.5%
60.8%
2.6x
0.7x
6.9x
Rollover of existing debt
Total Debt
4,624.0
$ 18,649.0
20.0%
80.8%
2.3x
9.2x
Contributed Equity
Total Capitalization
4,422.3
$ 23,071.3
19.2%
100.0%
Aggressive Structure??
Source: SMBC analysis
Adjusted 2007 EBITDA
$
2,037.0
38
Example of a Large Syndicated Loan
Harrah’s Entertainment
CORPORATE STRUCTURE
39
Example of a Large Syndicated Loan
Harrah’s Entertainment
SUMMARY OF TERMS – SENIOR CREDIT FACILITY
40
Example of a Large Syndicated Loan
Harrah’s Entertainment
SYNDICATION PROCESS – WRONG TIMING FOR AN UNDERWRITTEN DEAL???
 The general syndication of Harrah's was launched 1/15/2008 with a bank meeting in New York.
Over 1,000 bankers attended the general syndication meeting with commitments requested by
1/29/2008.
 Unfortunately, given the: i) global correction in the financial markets on the week of January 21,
2008, ii) dramatic widening of high yield credit spreads and iii) reduction in the 3-month Libor Rate by
at least 120 bps that followed, the secondary market loan prices pulled back materially and bank
investors started to demand a much higher All-In Yield (about L+ 500) on primary market
transactions, like Harrah's.
 Investors were demanding All-In Yield of between L+ 450 - 500 to commit/purchase Harrah's
Term Loan B. Since the offered TLB margin spread was L+300, investors were demanding a
discount (OID) of between 92-93 (compared to the original OID offer of 96.5) from the
Underwriters/Arrangers.
 Following the failed syndication, Arrangers in order to reduce their exposure, were offering
Harrah's TLB with an OID in the low 90's.
41
Example of a Large Syndicated Loan
Harrah’s Entertainment
SYNDICATION PROCESS – WRONG TIMING FOR AN UNDEWRITTEN DEAL?? (continued)
 At the time, given such low demand, it was reported that Credit Suisse started to quietly
syndicate their exposure prior to the commitment deadline (1/29/2008), independent of the other
Arrangers.
 As a consequence, each of the Arrangers started to syndicate their own exposure to their own
investors offering as low as 90's OID to syndicate their exposure.
 After that incident, there was a new agreement made between the Arrangers called The
Memorandum of Understanding (MOU) where it prohibits one arranger to sell their exposure within an
agreeable period (6 months after the commitments are due) without the consent of the other
Arrangers.
42