Amsterdam Institute of Finance Joseph V. Rizzi November, 2012 PRODUCTS: EXPANDED DEBT CAPACITY...
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Transcript of Amsterdam Institute of Finance Joseph V. Rizzi November, 2012 PRODUCTS: EXPANDED DEBT CAPACITY...
Amsterdam Institute of FinanceJoseph V. Rizzi
November, 2012
22
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
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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
The above table shows the features of different debt options available to issuers The availability of the different options is subject to market conditions
3Amsterdam Institute of Finance November, 2012
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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.
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.
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan-Aug 12
Sr Only Sr + 2nd Lien Sr + Mezz Sr + 2nd Lien + Mezz Sr + HY Bond
Amsterdam Institute of Finance November, 2012
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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 - Public Disclosure - Cash flow control - Call Premium - Bridging - 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
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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
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77
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
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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’.
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.
Amsterdam Institute of Finance November, 2012
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‘‘OpCo \ PropCo’ Financing (2)OpCo \ PropCo’ Financing (2)
Financing Notes
OpCo PropCo
BidCo
Rental Payments
Approx.100%
Approx.100%
Amsterdam Institute of Finance November, 2012
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1010
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
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1111
• 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
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1212
Key High Yield TermsKey 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
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13To 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.
Note: HY volume excludes PIK instruments & short-term bonds; reflects corporate bonds onlyIn 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.
Volume Transaction Count
0
20
40
60
80
100
120
140
Secured Unsecured Subordinated
€0B
€8B
€16B
€24B
€32B
€40B
€48B
Secured Unsecured Subordinated
Amsterdam Institute of Finance November, 2012
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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
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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.
€0M
€500M
€1,000M
€1,500M
€2,000M
€2,500M
€3,000M
€3,500M
Jan-00
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Amsterdam Institute of Finance November, 2012
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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.
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)
E+150
E+300
E+450
E+600
E+750
E+900
E+1,050
E+1,200
E+1,350
Mar
-00
Aug-0
0
Jan-
01
Jun-
01
Nov-0
1
Apr-0
2
Sep-0
2
Feb-0
3
Jul-0
3
Dec-0
3
May
-04
Oct-04
Mar
-05
Aug-0
5
Jan-
06
Jun-
06
Nov-0
6
Apr-0
7
Sep-0
7
Feb-0
8
Jul-0
8
Dec-0
8
May
-09
Oct-09
Mar
-10
Aug-1
0
Jan-
11
Jun-
11
Nov-1
1
Apr-1
2
PIK Spread Total Spread
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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% Covenant Lite 7% 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
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PIKPIK•Pay if you can togglePay if you can toggle
•Eats up equityEats up equity
•CharacteristicsCharacteristics
PIK SLL
Spread 825/900 500
Toggle 900-1000 n/a
Term 7.5-10 9.5
Call 5xNC n/a
Leverage 6.5x+ 6x+
Amsterdam Institute of Finance November, 2012
(Source: LCD)
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Staple financing term sheet to deal book
Be prepared to fund
Establishes ceiling
Conflicts of interest
Stapled FinancingStapled Financing
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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
Bridge LoansBridge 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
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2222
Increasing layers of debt Directed at different investors Intercreditors conflicts
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 +
2006 – 1H07
• Common equity
• Hybrid preferred (0.5x)
• 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%
FDX – 6x + PPX – 8.5 +Amsterdam Institute of Finance
November, 201222
2323
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 (3.46x) TermSpread
Amortization
(cum. At maturity)
- R/C 2.000 bln
- ABL 2.000 bln
- T/LA 2.250 bln
- T/LB 9.300 bln
- EUR T/L 1.250 bln
6
6
6
7
7
250
175
250
250
250
0
0
50%
7%
7%
2nd Lien (1.33x)
- Cash 4.200 bln
- PIK/T 1.500 bln
8
8
9.75%
10.0 %
8%
8%
Existing unsecured
7.470 bln 2009 7.5 % --
Equity 4.965 bln -- -- --
◦ EBITDA/I – 1.9x (2007E)◦ EBITDA – CAPEX/I – 1.1x (2007E)
Amsterdam Institute of Finance November, 2012
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HCA HCA Legal StructureLegal Structure
Europeansubs
Sub C
Healthtrust Holdings
Management
Euro T/L
Unrestricted subs Restricted subs(gurantors)
Sub D Sub ESub BSub A
Acquisition CorpHCA, Inc
Equity
Bank Loans
Existing Notes
Sponsors
Merge
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DisclosureDisclosure
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.
25Amsterdam Institute of Finance November, 2012
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