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