Joseph V. Rizzi
Amsterdam Institute of Finance
December, 2013
• Cash Flow

Impacts default risk
• Balance Sheet

Determines Loss in Event of Default (LIED)

Liquidity
Valuation
Amsterdam Institute of Finance
December, 2013
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
December, 2013
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
December, 2013
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
December, 2013
2H
07
Cris
is
Overheated 1H07
Rating
5

There are two different approaches to designing the capital structure:
Amsterdam Institute of Finance
December, 2013
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
December, 2013
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
December, 2013
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
December, 2013
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
December, 2013
10
Category (x)
BB+
BB
BBB+
B
B__________________________________________________________________________________
Total Debt with Equity Credit/
Operating EBITDA
3.1
3.8
2.9
4.5
5.3
6.0
Long Term Secured Debt/
Operating EBITDA
0.0
0.8
1.0
1.1
2.6
2.6
Total Adjusted Debt/
Operating EBITDAR
3.5
3.9
3.3
4.9
5.4
7.0
FFO Adjusted Leverage
3.7
4.2
3.7
5.1
6.4
6.7
FCF/Total Adjusted Debt
0.0
0.0
0.1
0.0
0.0
0.0
Operating EBITDA/
Gross Interest Expense
5.5
4.1
5.3
3.2
2.5
1.8
Amsterdam Institute of Finance
December, 2013
11
Bonds
Bonds +
Bank Debt
2013 LBO’s Funded
by
(YTD
17/09/13)
Only
Drawn Bank
Only
Debt
Number of Deals in Sample
6
4
23
€ 789.9
€ 2,957.0
€ 1,228.4
8.5x
9.4x
8.6x
Ave. Equity Contribution
44.8%
29.9%
43.9%
Ave. HY Bond/Total Sources
54.9%
22.9%
0.0%
Ave. Bank Debt/Total Sources
0.0%
47.2%
52.8%
Ave Total Debt/Total Sources
54.9%
70.1%
54.5%
4.9x
6.6x
4.6x
Ave. Transaction Size (M)
Ave. PPM
Ave. Debt/EBITDA
Source S&P Financial Services
Amsterdam Institute of Finance
December, 2013
12
Characteristics
LTM
Total Volume (€ B)
7.15
Total Deal Count
12
Avg. Pro Rata Spread (E+)
N/A
Avg. Wtd. Avg. Inst. Spread (E+)430.6
Avg. Deal Size (€ MM)
595.5
Avg. Pro Rata Term (Years)
N/A
Avg. Institutional Term (Years) 5.8
Avg. Pro Forma Trailing
Revenues (€ MM)
EBITDA (€ MM)
Adj. EBITDA (€ MM)
Amsterdam Institute of Finance
December, 2013
2012
1.74
6
475.0
591.7
289.2
5.9
5.7
2011
3.17
9
403.6
459.4
352.5
6.0
6.8
LTM
2012
5,117.29N/A
315.32 N/A
320.35 N/A
2011
466.5
62.86
62.86
13
Financial Ratios (Trailing Pro Forma)
Avg.
Debt/EBITDA
5.22
Sr. Debt/EBITDA
4.80
EBITDA/Cash Interest
3.55
EBITDA-Miant CapEx/Interest N/A
EBITDA-CapEx/Interest
N/A
Purchase Price Multiple
Equity Contribution
Amsterdam Institute of Finance
N/A
N/A
Max.
6.02
5.50
4.21
N/A
N/A
LTM
Min.
4.20
4.18
2.76
N/A
N/A
St. Dev.
.77
.64
.72
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
14
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
US
L+252.9
N/A
E+370.8
L+294.3
555.38
1,053.68
6.00
4.70
6.13
6.08
N/A
2,932.44
1,179.93
743.72
3.49x
3.65x
3.36x
3.56x
N/A
7.80x
4
107
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
Europe
E+449.7
E+445.3
438.18
5.02
6.13
1,385.80
209.97
4.92x
4.64x
4.19x
26
US
L+356.8
L+379.2
547.28
4.84
5.98
1,256.15
252.16
4.80x
4.71x
3.97x
432
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
December, 2013
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.
15
Amsterdam Institute of Finance
December, 2013
16
Revolver
Term Loans
A
B
C
Second Lien
Cov Lite
Mezzanine
PIK
Preferred Stock
Amsterdam Institute of Finance
December, 2013
17
R/C
2013 (9 mo) 14%
2012
14%
2011
15%
2010
14%
2009
15%
2008
12%
2007
12%
2006
13%
2005
14%
2004
15%
2003
15%
2002
16%
2001
16%
2000
20%















T/La
22%
30%
28%
32%
31%
31%
19%
28%
40%
40%
45%
46%
54%
50%
T/Lb
64%
56%
57%
54%
54%
40%
42%
31%
25%
26%
23%
26%
20%
20%
T/Lc
17%
17%
3%
20%
-
2ndL
10%
5%
5%
-
Source: Standard & Poor’s Financial Services
Amsterdam Institute of Finance
December, 2013
18















2013 (9 mo)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
8.0
8.9
8.4
8.6
8.9
9.3
9.3
8.4
7.9
7.2
6.5
6.6
6.1
6.9
Source: Standard & Poor’s Financial Services
Amsterdam Institute of Finance
December, 2013
Amsterdam Institute of Finance
December, 2013
19















2013 (9 mo)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
43%
50%
47%
50%
50%
45%
35%
35%
35%
36%
38%
39%
39%
38%
Source: Standard & Poor’s Financial Services
Amsterdam Institute of Finance
December, 2013
20







Europe
RC
T / LA
T / LB
T/ Lc
2nL
Other
10.7%
22.1%
62.7%
4.4%
U.S.
16.1%
1.1%
71.7%
.2%
10.9%
-


Source Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of Finance
December, 2013
21

LTM 9/30/13
2012
47.8%
1.8%
0.5%
0.8%
0.5%
1.4%
1.0%
44.3%
46.8%
0.4%
1.5%
38.4%
1.2%
1.7%
0.6%
4.2%
0.7%
7.2%
3.8%
41.1%
52.7%
1.2%


Bank Debt
2nd L
Secured HY
Sen Unsecur HY
Mez
Vendor Note
Shareholder Loan
Rollover Eq
Common Eq
Total Eq
Other
Bridge to HY

Source: Standard & Poor’s Financial Services











Amsterdam Institute of Finance
December, 2013
22

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
December, 2013
-
Earnings Before Interest and Taxes
Interest Rate
Straight line loan amortization
Proceeds from Asset Sales
Refinancing
23



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
December, 2013
24




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
December, 2013
25

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
December, 2013
BB
c3.0x
$300mln
10%
= (C/B)/D
= (300/3)/10%
= $1,000
26
 2013
( 9 mo )
 2013
 2013
 2011
 2010
 2009

9%
7%
12%
7%
9%
5%
Source: Standard & Poor’s Financial Services

Amsterdam Institute of Finance
December, 2013
27
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
December, 2013
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
28 of The McGraw-Hill Companies, Inc.