Raising Capital
Raising Equity
Selling Securities to the Public
• Management must obtain permission from the Board of
Directors
• Firm must file a registration statement with the SEC
• The SEC examines the registration during a 20-day
waiting period
– A preliminary prospectus, called a red herring, is
distributed during the waiting period
– If there are problems, the company is allowed to amend
the registration and the waiting period starts over
• Securities may not be sold during the waiting period
• The price is determined on the effective date of the
registration
15-3
Underwriters
• Services provided by underwriters
–
–
–
–
Formulate method used to issue securities
Price the securities
Sell the securities
Price stabilization by lead underwriter
• Syndicate – group of investment bankers that market the
securities and share the risk associated with selling the
issue
• Spread – difference between what the syndicate pays
the company and what the security sells for initially in the
market
15-4
Firm Commitment Underwriting
• Issuer sells entire issue to underwriting syndicate
• The syndicate then resells the issue to the public
• The underwriter makes money on the spread
between the price paid to the issuer and the price
received from investors when the stock is sold
• The syndicate bears the risk of not being able to
sell the entire issue for more than the cost
• Most common type of underwriting in the United
States
15-5
Best Efforts Underwriting
• Underwriter must make their “best effort” to sell the
securities at an agreed-upon offering price
• The company bears the risk of the issue not being sold
• The offer may be pulled if there is not enough interest at
the offer price. In this case, the company does not get
the capital, and they have still incurred substantial
flotation costs
• Not as common as it previously was
15-6
Dutch Auction Underwriting
• Underwriter accepts a series of bids that include number
of shares and price per share
• The price that everyone pays is the highest price that will
result in all shares being sold
• There is an incentive to bid high to make sure you get in
on the auction but knowing that you will probably pay a
lower price than you bid
• The Treasury has used Dutch auctions for years
• Google was the first large Dutch auction IPO
15-7
Green Shoes and Lockups
• Green Shoe provision
– Allows the syndicate to purchase an additional 15% of the
issue from the issuer
– Allows the issue to be oversubscribed
– Provides some protection for the underwriters as they
perform their price stabilization function
• Lockup agreements
– Restriction on insiders that prevents them from selling their
shares of an IPO for a specified time period
– The lockup period is commonly 180 days
– The stock price tends to drop when the lockup period
expires due to market anticipation of additional shares
hitting the street
15-8
IPO Underpricing
• May be difficult to price an IPO because
there isn’t a current market price available
• Private companies tend to have more
asymmetric information than companies that
are already publicly traded
• Underwriters want to ensure that, on
average, their clients earn a good return on
IPOs
• Underpricing causes the issuer to “leave
money on the table”
15-9
Raising Debt
An overview of the at
Bank Loan Syndication Process
Two Markets Served for both the Corporate Bond and Bank Debt
Investment Grade Bond / Loan Market
HY Bond / everaged Loan Market
• Rated BBB- and Higher (Corporate)
• Rated BB+ and Lower (Corporate)
• Arrangers hold Higher Exposure ($200 million +)
• Arrangers hold Lower Exposure
• The majority of the Syndicate are traditional banks
• The majority of the Syndicate are nonbanks (Financial institutions)
4
The Bond / 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
13
The Loan Syndication Process
(Continued)
 The issuer or Company solicits bids from Arrangers.
 Arrangers will outline their syndication strategy for both the Bond and Loan markets 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) / Red Hearing describing the terms of the transactions.
As part of the
 The IM typically will include:
syndication process
 Executive Summary
we will discuss in
 Investment Considerations and Risks (bond)
detailed these two
 Summary of Terms and Conditions (Term Sheet)
items following this
 Transaction Overview
 Company
page.
 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.14
 After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.
The Loan Syndication Process
(Continued)
Typical Internal Analysis Process by each bank
 Internal Application sent to their respected investment/credit committees. This application
includes the following:
 Requested amount that is within the rating parameters for each bank
 Recommended amounts by Tranche (Revolving Credit / Term Loans)
 Term and Conditions of the Loans (includes pricing, structure and covenants)
 Profitability (RORA and RAROC)
 Syndication strategy
 Transaction discussion including Source and Uses and Capital Structure
 Company discussion including historical performance and outlook
 Corporate Structure
 Management Biographies / Equity Sponsor Profile
 Collateral Analysis
 Industry Analysis
 Financial Analysis (Projections’ Model)
 Internal Rating Analysis
This process will be
discussed following this
 Internal Legal Review
page
 KYC (know-your-customer) and Compliance Review
15
The Loan Syndication Process
(Continued)
Typical Internal Rating Analysis by each bank
 Most banks’ internal ratings are in line with the Agencies’ external ratings, though the analysis is
done independently. This analysis is based on two approaches:
 Quantitative Analysis
 Qualitative Analysis
The Typical Scale is 1-10, 1 being
with very limited risk to default and
10 the issuer being in bankruptcy
with no chance of recovery
The Quantitative Analysis for establishing the Internal rating which measures the probability of
default is based on the following parameters (each component is weighted at a specific level of
importance):
 Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA)
 Capitalization Ratio – the relationship between the bank debt and the rest of the capital (Capital
Leases, Bonds, Equity)
 Coverage Ratio - Issuer’s Cash Flow covering it’s debt obligations (interest and principal
payments)
 Variance of Projections – based on the projections, the model typically assumes a certain haircut
(10-30%) to the management’s projections and it tests it’s ability to pay its debt obligations.
 The Quantitative approach adjusts up or down based on industry characteristics (Recession
resistance, cyclical, or event driven).
 The Qualitative Analysis is subjective based on each bank’s internal policy. The Analysis would
include strength of management, support from the equity sponsor, recovery analysis (asset
16
collateral) and outlook.
Typical Leverage Loan Structure (Rated by S&P as BB or lower)
Bank Debt Facilities (typically represented 30-35% of Total Capital):
 Revolving Credit (Typically, Commercial Banks provide this facility)
 Commitment Amount
 Typical maturities of 5-6 years
 Funded Versus Unfunded Amount
 Funded Pricing and Unfunded Pricing (Commitment Fee)
 Letters of Credit
 Term Loans (typically, Non-Bank institutions provide this facility)
 Funded Amount – sometimes structured as Delayed Draw Down
 Typical Maturities of 6-8 years
Public Bonds / Notes (typically represented 20-25% of Total Capital):
 Typical maturities of 9-11 years
 Unsecured Debt
Private Equity (typically represented 30-45% of Total Capital):
17
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)
18
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
19
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
20
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
21
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)
22
Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)
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
i.e.
LIBOR Floor = 3.00%
Margin Spread = 400 basis points (or 4.00%)
OID = 96
Then the Loan Yield is calculated to:
3.0% + 4.0% + [(100 – 96)/100]/4 = 7.0% + (4.0% / 4) = 7.0% + 1.0% = 8.0% Yield
24
Example of a Large Syndicated Loan
Harrah’s Entertainment
26
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
27
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%
28
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
29
Example of a Large Syndicated Loan
Harrah’s Entertainment
CORPORATE STRUCTURE
30
Example of a Large Syndicated Loan
Harrah’s Entertainment
SUMMARY OF TERMS – SENIOR CREDIT FACILITY
31
Example of a Large Syndicated Loan
Harrah’s Entertainment
SYNDICATION GROUP
Lender
Bank of America (Joint Lead Arranger)
Deutsche Bank (Joint Lead Arranger)
Citibank (Joint Bookrunning Managers)
Credit Suisse (Joint Bookrunning Managers)
JP Morgan (Joint Bookrunning Managers)
Merrill Lynch (Joint Bookrunning Managers)
Bear Stearns (Co-Managers)
Goldman Sachs (Co-Managers)
Morgan Stanley (Co-Managers)
32
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.
33
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.
34