Financing Transactions in the Current Business and Economic Environment

February 24, 2009

Steven B. StokdykLatham & Watkins LLP

Henry SchwakeCitigroup

2

Table of Contents

1. Introduction

2. Bond Market Considerations

3. Bank Loan Considerations

4. Equity Market Considerations

5. Market Observations

Appendix

1. Introduction

4

The Meltdown

Institutional buyers have been on strike during the meltdown, forcing arrangers to become very risk averse and putting a premium on capital rather than new business

If arrangers cannot sell the paper they originate without incurring significant losses, the model is broken and the rules of the game that worked for years no longer apply

The credit market meltdown has led to a near collapse of the leveraged buyout market

5

Today’s Environment

Since leverage has contracted, the market dynamics have moved in favor of strategic players

Syndicated loans are especially difficult to come by, and creativity is needed to raise the senior debt

Due to concern of bank counterparty risk, agents are having a difficult time finding a bank to serve as LC Issuer or Swingline Lender

Lenders can dictate terms

6

$0

$2

$4

$6

$8

$10

$12

$14

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

$ (

Tri

llio

ns)

Highly Leveraged

Leveraged

Investment Grade

How Banks Got Here

The use of bank facilities grew dramatically through 2007 with longer terms and lower prices, but banks’ increasing funding costs are making these loans uneconomical.

Outstanding Facilities, Total – By Ratings Category’02 - ’07 CAGR

8%

19

11

Banks’ Funding Costs Make Funded Loans Uneconomical

Source: Citi Yieldbook.

0

100

200

300

400

500

600

700

800

900

1000

Jul-07 Oct-07 Feb-08 Jun-08 Sep-08 Jan-09

Sp

rea

d to

Tre

asu

ry (

bp

s)

Financial Index Industrial Index

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2Q07 4Q07 2Q08 4Q08

% o

f In

vest

men

t G

rad

e M

arke

t

364-Day

3-Year

5-Year

364-Day Issuance Returns in 2008

*1Q08 – 4Q08 includes 364-Day bridge facilities of 1%, 5%, 33%, and 40% respectively.Source: LPC.

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

1991

1992

1993

1995

1996

1997

1999

2000

2001

2003

2004

2006

2007

2008

Dra

wn

Co

st (

L +

bp

s)

AA A BBB

Drawn cost pricing jumps

Source: LPC (weekly).

7

Changing Attitudes Toward Liquidity

Pre-July 2007July 2007 –Dec 2008 Now

Environment

Capital Markets

► Ready access to capital

► Historically tight credit spreads

► Reasonable treasury rates

► Reduced access to capital

– Numerous markets closed

► Very wide credit spreads

► Very low treasury rates

► Windows of access open

– Primarily better rated companies

– Risk repriced across board

► Spreads stabilize, but wide

► Treasury rates low but likely to rise

Liquidity Strategy

Approach “Back of the Envelope”“Directional will do”

“Piggy Bank”“What can I really access now?”

“Sharpen the Pencils”“What is the ‘right’ liquidity amount?”

Assessment of Liquidity

High reliance on cash flows and ready access to capital markets

Cash + Available Facilities Reassessment of the building blocks of liquidity

Cost of Getting it “Wrong”

Too much – low direct cost

Too little – easy access if needed

Too much – no one fired

Too little – potential distress

Too much – may be expensive

Too little – still risky

Tactics Reduce reliance on CP and banks

Access market for term debt or equity when open

2. Bond Market Considerations

9

0

5

10

15

20

25

1/1

Wee

kly

Issu

ance

Vo

lum

e ($

bill

ion

s)

High Yield Corporates

BBB/BBB- Corporates

A-/BBB+ Corporates

Single A Corporates*

3

9 8 8

18 16

913

10

1 03

88

51 49

118

141

53

28 27

1823

27

21

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Am

ou

nt

Issu

ed (

$ b

illio

ns)

HY Bonds + Lev Loans IG Bonds

’09 IG Issuance Volumes ReboundIncreased Market Access for Issuers

Chart depicts week-ending IG and HY non-financial bond Issuance; *Denotes A Rated or better issuers; Source: Bloomberg

Seasonal HolidayLull

Monthly Issuance Volume Surges in Jan ‘09

5

58

$0

$20

$40

$60

Jan-09

Am

ou

nt

Issu

ed (

$ b

n)

12/5 12/12 12/19 12/26 1/2 1/9 1/16 1/23 1/30 2/6 2/13

10

2.0

2.5

3.0

3.5

4.0

1-Nov 18-Nov 5-Dec 22-Dec 8-Jan 25-Jan 11-Feb

yiel

d (%

)

160

210

260

310

360

1-Nov 18-Nov 5-Dec 22-Dec 8-Jan 25-Jan 11-Feb

spre

ad (

bp)

4

5

6

7

8

1-Nov 18-Nov 5-Dec 22-Dec 8-Jan 25-Jan 11-Feb

yiel

d (%

)

’09 IG Bond Market Has Rallied

Credit and Equity Markets Decouple…

Treasuries have stayed historically low (still in their

bottom 1st percentiles*), while spreads for corporate

issuers have tightened from their all-time wides

The result on coupon rates has been dramatic, as

evident from the flurry of new issues

In line with our strategists’ view that credit spreads

had overreacted in 2H’08, we have seen first steps

towards normalization of the IG bond markets in

Jan-‘09AA Rated Coupons

AA Rated Spreads

10-year Treasuries

Year-to-date, IG credit spreads (as measured by

the CDX IG 11 Index) have been range-bound

despite a ≈15% decline in the Dow Jones Industrial

Average and marked increase in volatility (as

measured by the VIX)

The relative outperformance of the corporate bond

market reflects a view that credit spreads may

have reached “oversold” levels along with the

impact of strong market technicals

…While Coupons Fall for IG Issuers

+

Range Bound Credit Spreads

Declining Equity Market Valuation

Source: Citi. *Uses weekly data over the last 20-years

7400

7600

7800

8000

8200

8400

8600

8800

9000

9200

20-Nov 4-Dec 19-Dec 3-Jan 18-Jan 2-Feb 17-Feb

DJI

A (

poin

ts)

180

190

200

210

220

230

240

250

260

270

280

Spr

ead

(bp)

DJIA IG CDX Index

11

100

300

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

98 99 00 01 02 03 04 05 06 07 08

Sp

read

(b

ps)

Citi BBB Index Citi HY BB IndexCiti HY B Index Citi BBB Avg.Citi HY BB Avg. Citi HY B Avg.

0

400

800

1,200

1,600

2,000

2,400

2,800

3,200

98 99 00 01 02 03 04 05 06 07 08

Sp

read

(b

ps)

BB Loans BB Loans Avg.B Loans B Loans Avg.

109173 190

362409

142

158 112

181165

5740

2003 2004 2005 2006 2007 2008

Leveraged Loans High Yield

Leveraged Finance Market Update

2008 New Issue Volume ($ in billions)

167 195278

130

30

8398

121

43

33277

1H06

2H06

1H07

2H07

1H08

2H08

Historical New Issue Volume ($ in billions)

Source: Citi, S&P/LCD.

$251

$331$302

$543$574

$250

$399

$293

$173

$97 $63

1

85 3

6 6

128

22

1

3 5

12

3

1

2

11

6

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Leveraged Loans High Yield

$3

$9$8 $8

$19

$16

$9

$12

$11

$1

Source: Citi, S&P/LCD.

A sharp and severe squeeze on liquidity has pushed spreads out to historically wide levels, exacerbating the problem by forcing some investors into further selling.

High Yield Secondary Spreads

BB Index10-Yr. Avg.: 403 bpsCurrent: 1104` bps

B Index10-Yr. Avg.: 604 bpsCurrent: 1609 bps

BBB Index10-Yr. Avg.: 208 bpsCurrent: 717 bps

B Loan Index10-Yr. Avg.: 600 bpsCurrent: 3164 bps

BB Loan Index10-Yr. Avg.: 382 bpsCurrent: 1792 bps

Leveraged Loan Secondary Spreads

$34$3

12

56

61

66

71

76

81

12/1 12/8 12/15 12/22 12/29 1/5 1/12 1/19 1/26 2/2 2/9

Pri

ce (

%)

Citi HY BB Index Citi HY B Index S&P LSTA Leveraged Loan 100 Index

Leveraged Finance has Rebounded Strongly in 2009Market Rally Ongoing ($ in millions)December’s rally has continued strongly into 2009

Source: Citi Proprietary Database, S&P.

Recent New Issuance ($ in millions)We are clearly in a window of opportunity, but one of uncertain duration

Issue Date

Face Amount

TenorIssue

RatingsYield at

IssuanceYield atFeb. 17

El Paso Dec. 9 $500 5 yrs Ba3/BB- 15.250% 9.674%

Cablevision Jan. 8 $844 5.25 yrs B1/BB 11.375% 8.747%

MetroPCS Jan. 14 $550 5.75 yrs B3/B 11.816% 9.926%

Fresenius Jan. 15 $500 6.5 yrs Ba1/BB 10.500% 8.308%

Fresenius Jan. 15 €275 6.5 yrs Ba1/BB 10.250% 8.939%

Nielsen Finance Jan. 21 $330 5 yrs Caa1 / B- 14.500% 14.212%

Petrohawk Energy Jan. 22 $600 5.5 yrs B3 / B 12.750% 10.743%

Crown Castle Jan. 22 $900 6 yrs B1 / B 11.250% 9.392%

Inergy LP/Finance Jan. 28 $225 6 yrs B1 / B+ 11.000% 9.045%

Chesapeake Energy Jan. 28 $1,000 6 yrs Ba3 / BB 10.625% 10.033%

Intelsat Subsidiary Holding Company

Jan. 29 $400 6 yrs B3 / BB- 11.620% 10.377%

El Paso Corp. Feb. 4 $500 7 yrs Ba3 / BB- 9.125% 8.685%

Landry's Restaurants, Inc.

Feb. 4 $296 2.5 yrs B3 / B 20.346% 21.545%

Cablevision Feb. 9 $526 10 yrs B1/BB 9.375% 9.186%

Denbury Resources Feb. 10 $420 7 yrs B1 / BB 11.250% 10.859%

Chesapeake Energy Feb. 11 $425 6 yrs Ba3 / BB 10.000% 10.199%

HCA Feb.11 $310 8 yrs B2 / BB- 10.500% 10.248%

Forest Oil Feb.11 $600 5 yrs B1 / BB- 9.750% 9.655%

Week Ended

12/5 12/12 12/19 12/ 26 1/ 2 1/ 9 1/16 1/ 23 1/ 30 2/ 6 2/13

HY Deals (#)

0 2 0 0 0 1 2 3 3 2 5

Issuance Amount

$0 $690 $0 $0 $0 $844 $1,558 $1,830 $1,625 $796 $2,281

$988

$185$86$127

$726 $691

$535

$352

$534

$725

$218

$0

$200

$400

$600

$800

$1,000

12/3 12/10 12/17 12/24 12/30 1/6 1/13 1/21 1/28 2/4 2/11

Source: AMG Data Services.

High Yield Weekly Mutual Fund Flows ($ in millions)Eleven straight weeks of positive inflows are supporting a technical rally

Current In-Market High Yield Transactions ($ in millions)

Source: Citi Syndicate.

Expect. Pricing

DateFace

Amount TenorIssue

Ratings Price Talk Comments

Precision Drilling Feb. 18 $250 6.5 yrs Ba2 / BB+15.5-16%

Full roadshow to repay bridge

debt

3. Bank Loan Considerations

14

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08

Am

ou

nt

Issu

ed (

$bill

ion

)

Overall Loan volume declined 38% to $130B in

4Q’08 relative to 3Q’08 Total Investment Grade volume in 2008 fell by

51% to $318B from 2007 levels Multi-year deals represented less than 2% of

4Q:08 issuance Bridge loans have become an increasingly large

component of overall lending, accounting for

40% of issuance in 4Q’08 versus 33% in 3Q’08 Drawn spreads continue to trend upward and

spread premiums, duration fees, coupon step-

ups and funding fees were prevalent for event-

driven deals

2008 Syndicated Loan Market Summary

IG Loan Volume Plummets

Source: Thomson Reuters.

IGDown 51%

4Q08

15

Current Bank Loan Market Overview

Capital and Capacity

Commitment renewals are difficult, even in 364-Day facilities, as lenders focus on capital allocation, right-sizing commitments & relationship returns

Overall reduction in bank capacity for A-2/P-2 & low IG borrowers due to higher probability of funding & related capital usage

Pricing

Recent pricing levels for event-driven deals have had market acceptance and are causing upward pressure on core revolver pricing

The market is focused on moving floors/caps for CDS priced deals significantly higher than those of earlier transactions

Execution

Bank consolidations have taken capacity out of the market and increased the challenges associated with maintaining or increasing deal sizes

Multi-year tenor is a challenge; 5-years is essentially not available, 3-years is more achievable

Borrowers need to remain flexible during syndication as bank requirements may dictate changes to deal terms and/or structure

Recent Market TrendsWe expect deal execution to remain challenging in 2009 from a capacity and tenor standpointLenders are focused on commitment sizes relative to relationship returns and portfolio considerations; increasing a

commitment is significantly more challenging than rolling an existing commitmentCDS-based pricing, especially for CP backstop facilities, has gained market acceptance and is a positive deal enhancementBorrowers seeking amendments for covenant relief are being required by lenders to pay fees and re-price deals to obtain

requisite consents

16

Western Union (A-/A3)

Enterprise Products

(BBB+/Baa1)

HP(A/A2)

Eaton(A/A2)

Tyco (BBB/NR)

Hospira(BBB+/Baa3)

TransCanada (NR/A3)

Broadridge(BBB-/Baa2) Intuit

(BBB-/Baa2)

Schering-Plough (A-/Baa1)

Transocean (BBB+/Baa2)

Staples (BBB+/Baa1)

Int'l Paper (BBB/Baa3)

Dr. Pepper (BBB-/Baa3)

CME(AA/Aa3)

Dow(A-/A3)

Verizon Wireless TL (A/NR)

WW Grainger (AA+/NR)

YUM!(BBB+/Baa1)

Tyco (BBB/Baa1)

Barr (BBB-/Ba1)

CenterPoint(BBB+/Baa2)

Discover (BBB/Baa2)

TimeWarner Cable (BBB/Baa2)

New ell Rubbermaid (BBB+/Baa2)

Altria(BBB+/Baa1)

Alcoa (BBB+/Baa1)

Cleveland-Cliffs (BBB-/Baa3)

Pepco (BBB-/Baa3)

0

25

50

75

100

125

150

175

200

225

250

275

300

325

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dra

wn

Cos

t (bp

s)

Bear Stearns Disruption

C redit C risis Begins

Lehman Disruption

Teck Cominco(BBB/Baa2)

DCP Mainstream(BBB+/Baa2)

VerizonWireless

(A/A2)

0

100

200

300

400

500

600

700

800

Wal

-Mar

t (A

A/A

a2)

Nov

artis

(A

A-/

Aa2

)

Met

Life

(A

/A2)

Con

stel

latio

n (B

BB

/Baa

2)

Cum

min

s (B

BB

/Baa

3)

Lim

ited

Bra

nds

(BB

B-/

Baa

3)

NiS

ourc

e (B

BB

-)

Car

gill

(A/A

2)Prior Deal Draw n Spread CDS/CDX caps MBP Spread as of 1/5/09

2009 Bank Market Outlook: Pricing Trends

Capital constraints and higher funding costs continue to push fees and spreads higher on 364-Day renewals

Higher fees and pricing on recent Bridge/Event Driven facilities have gained market acceptance and are expected to cause upward pricing pressure on core revolver pricing

CDS-based pricing continues to add deal enhancement, particularly for CP backstop facilities. As CDS levels and funding costs rise, there is an increase focus amongst lenders to push caps and floors in line with higher levels

Market Based Pricing and Event Driven Facilities Setting the Tone

Acquisition Deal 364-Day Multi-Yr

Source: Loan Pricing Corp. and Citigroup

Event Driven Pricing and CDS Levels Driving Pricing Up…

Source: Loan Pricing Corp.

4. Equity Market Considerations

18

2009 Equity & Convertible New Issue Trends

Equity Financing Alternatives

Straight Common Sale Convertible Structured Solutions

Equity issuance has slowed given market volatility

Bulk of issuance has come from financials

New issue discounts have widened

Citi re-opened the IPO market in January 2009

Citi re-opened the new issue market in January 2009 with $450M convertible debt for Newmont Mining

Significant demand – $4B (8x subscription) – from both fundamental and technical investors

Market expected to stay open, but sizing and terms will be issuer and situation specific

Preferred + Warrants offer returns desired by investors in difficult markets,

Private structured alternatives (e.g. Range Forward Sale) will offer certainty in uncertain environment by securing a minimum stock issue price while providing upside participation

Execution Trends

Continuous Offering Programs "Over-the-Wall" Execution Private Execution

Tactically similar to a reverse share repurchase – minimal sale discount to market price

Issuer has full control of timing, sizing, and price threshold of sales

Sizing dependent on liquidity and appetite for market risk

Engage select investors prior to public deal launch to gauge interest and validate structure and terms

Public tranche can then be executed on an accelerated basis (1-day)

Privately-negotiated offerings with equity strategic investors / sponsors

Terms typically reflect strategic nature of investment

Financial sponsors may seek board seat / other form of control despite minority ownership

19

Follow-On Discounts Remain Large

While issuers have selectively accessed the follow-on market, discounts remain wide and transaction sizes relatively small. Recent aftermarket performance, however, is showing some signs of improvement.

...Reducing Issuance Size Average Days Trading

Source: Dealogic and Bloomberg.

56x 54x

16x 17x 19x

29x

20x

33x

24x

16x 14x12x 12x 11x 11x12x

Q3 2007 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09

Offering Discounts Have Remained Volatile...Mean Marketed Follow-Ons File-to-Offer Discounts vs. Nasdaq

Source: Dealogic and Factset.

(12%)

(8%)

(12%)

(11%)

(13%)(12%)

(5%)

(11%)(13%)

(3%)

(8%)(9%)

(8%)

(10%)

Jan 08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09

File

-to-

Offe

r D

isco

unt (

%)

50%

60%

70%

80%

90%

100% Nasdaq P

rice Perform

ance (%)

Aftermarket Performance Showing Signs of ImprovementRecent Marketed Follow-On Offerings

Source: Dealogic and Factset, excludes deals < $30.0 mm, Financials, MLPs and REITs.

Offer Proceeds % of Days % Change RelativeDate Issuer ($mm) Market Cap Float Trading File/Offer Offer/Current Offer/Current

02/05/09 Pan American Silver Corp $90 6.2% 6.9% 3.1x (10.0%) 3.2% 0.5%

01/29/09 Whiting Petroleum Corp 232 15.7 16.6 5.7 (19.5) 9.4 6.6

01/28/09 Century Aluminum Co 110 48.9 72.2 14.2 (38.8) (3.3) (2.7)

01/28/09 New mont Mining Corp 1,110 6.5 6.8 3.2 (11.3) 12.2 12.9

01/07/09 Progress Energy Inc 469 4.5 4.6 6.4 (6.2) 7.1 11.3

12/31/08 SCANA Corp 102 2.4 2.6 2.6 0.2 (0.8) 3.1

12/10/08 Unitil Corp 40 34.0 36.0 235.8 (25.0) 1.5 4.9

12/09/08 American Public Education Inc 143 20.9 22.5 17.8 (11.1) 11.1 13.3

12/02/08 Haw aiian Electric Industries Inc 115 5.2 5.9 8.4 (11.1) (2.3) (4.7)

11/18/08 Central Vermont Public Service Corp 23 10.0 11.5 14.4 (12.7) 32.1 30.9

11/14/08 Solera Holdings Inc 90 5.2 6.5 6.8 (16.3) 23.3 23.8

11/13/08 Wynn Resorts Ltd 348 7.1 14.1 3.0 (2.8) (31.6) (26.9)

Mean $239 13.9% 17.2% 26.8x (13.7%) 5.2% 6.1%

Median 113 6.8 9.2 6.6 (11.2) 5.2 5.8

...And Issuance VolumeFollow-On Issuance by Type of Issuer (# of Deals)

Source: Dealogic.

12 15 1419

3125

15 1322

7 7 610

4

22 6

7

8

8

31

8

6 3 2

1

0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

# of

Fol

low

-Ons

Corporates Financials

20

(33%) (33%)

(42%)

(58%)

Unlevered Less Than 1.5x 1.5x to 3x Greater Than 3x

Quick rebound in 1H'09 unlikely given economic fundamentals

remain precarious with no "quick fixes" in sight

Valuation is being questioned by investors given earnings

uncertainty

Risk aversion continues across all financial markets and

corporate financing costs will remain elevated

Focus on liquidity and balance sheet strength as differentiator

Capital returns policies will likely be revisited and recalibrated

Liability management will be an area of focus

Once a bottom is formed, the market is expected to rebound

quickly

2009: Key Equity Market Themes

Source: FactSet and Bloomberg. Acute Care Facilities includes CYH, UHS, THC, LPNT, HMA and MDTH.

Balance Sheet Will Continue to Be Differentiator 2008 S&P 100 (Ex-Financials) Performance vs. Leverage

Expected Trends and ThemesHealthcare Re-Emerging As Defensive Play

Healthcare Performance Since November Bottom

100%

110%

120%

130%

140%

11/21/08 12/1/08 12/11/08 12/21/08 12/31/08 1/10/09 1/20/09 1/30/09

S&P 500 Amex Biotech IndexS&P Pharma S&P Healthcare EquipmentAcute Care

Valuation Argument Hurt By Expected RevisionsS&P 500 Trailing Price-to-Earnings Multiple1990 to Date 2008 To Date

10x

25x

40x

55x

70x

1990 1994 1998 2002 2006

Median = 22x c

13x

16x

19x

22x

25x

28x

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

21

2009 Convertible Market Dynamics

Convertible Secondary Market StabilizedHFRX Convertible Arbitrage Index (Aug ’08 to Date)

After the collapse in the hedge fund convertible arbitrage strategy in

2008, the convertible secondary market has stabilized, supported by

new buyers of the asset-class

– Equity (fundamental outright) investors attracted to converts with

equity-sensitivity (i.e. low conversion premium), strong downside

protection and sufficient yield pick-up vs. underlying common stock

– Other non-traditional convert buyers also active in the secondary

market

300

500

700

900

1100

Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

Supply / Demand Returns To Balance Convertible Issuance & Redemptions ($bn)

Redemptions include conversions and liability management transactions (if available).

$41

$69

$95

$62

($48)($59)

($49)($63)

($24)

($43)

($62)

($40)

($80)

($40)

$0

$40

$80

$120

2005 2006 2007 2008 2009 2010 2011 2012

Issuance Redemption Net Supply

Net supply of new convertible issuance over convert redemptions,

reached a peak of $40B in 2007, absorbed by new money flowing into

the asset class

The supply / demand relationship returned to a balance in 2008

– Lower issuance and increased Issuer repurchase activity in 2H’08 contributed to absorb traditional convert hedge funds net selling activity

– New cross-asset class buyers also surfaced in the secondary market

The market has turned to net buying in 2009, as evidenced by the exceptionally strong demand for Newmont Mining’s new issue

5. Market Observations

23

What Is Working in the New Environment?

Financings for strategics with a real business and benefits to be derived from the transaction (of course, it helps if the strategic buyer has a strong balance sheet to begin with), and tack-ons to pre-existing leveraged deals that have proven successful

Lower leverage – current deals often can’t have more than 2.5-3 times senior leverage, and must have pricing in the 500 to 800 bps range (inclusive of flex) for the senior debt portion

Keep the story simple – the more noise in the credit, the more likely there will be problems with the rating agencies and in syndication. Borrowers should fight the urge to reach for unnecessary flexibility that was available at the height of the leverage boom—and encourage their counsel to also exercise restraint

24

Middle Market Deals

Smaller, middle market deals have been more popular: the $100-$500M deal range is the only one experiencing positive growth, with alternative lenders willing to step in (unitranche lenders, hedge funds and mezzanine investors)

However, even middle market deals have slowed to a trickle and the cost is rising

Windows open from time to time when particular industries cycle into favor

25

What Companies Should Consider in This Market

Carrying less leverage heading into a downturn

– Protect earnings and reduce financial risk

– Prepares companies to issue debt as soon as markets are open

Establishing the ability to secure liquidity is a bullish signal and is vital in fragile markets

Things are happening quickly

– Loss of liquidity

– Access to market

Issuers are selling equity in order to secure liquidity as well as raise permanent capital

26

Selected Business Terms

Price flex and term flex are moving towards a “full flex” model with almost unlimited pricing and term flexibility

75% of leveraged loans in 2008 contain a LIBOR floor, and the average LIBOR floor is moving up from

Many loans have original issue discounts of 3-4 percentage points

Call protection has become a common feature, either in some variant of the NC1/102/101 structure or a total “non-call” structure where the borrower is required to pay a “make whole premium” for prepayments

The average total leverage ratio for leveraged loans in 2008 as of the end of September has fallen to 4.3x

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Asset-Based Lending

Banks are leery of committing capital to large cash flow loans in the current, unsettled syndication market. Asset-Based Lending is more palatable

ABL typically does not feature OID

The Commercial Finance Association reported that ABL saw a 16.2% increase in new credit commitments during Q2’08, 17.1% in Q3’08 (75% of reporting ABL lenders saw an increase in total credit commitments)

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Mezzanine Financing

Mezzanine debt is more expensive than senior debt because the subordinated lender must be compensated for the increased risk in making the loan

Interest rates on mezzanine debt typically range from 11-15% (recently increasing), but investors expect a higher total return in the range of 17-25% due to the usual equity participation feature of mezzanine financings

Mezzanine financing has taken-off during the credit crunch – the first half of 2008 saw $24B in mezzanine funds raised, up from $2B in 1H’07

Mezzanine financing is typically easier to close than second lien facilities, as the number of lenders involved is usually between 1 and 3, as opposed to upwards of 10 to 15 for second lien facilities

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Loan Documentation Issues

The credit crunch has resulted in substantive changes in loan documentation

– No more “covenant-lite” facilities

– No more PIK toggles

– No business MAC conditions (no Material Adverse Change in the business of the acquirer and target) are now being reinserted as an independent condition, and is coming back into the market

– LIBOR floors in senior debt, and more recently no distinction between LIBOR and Base Rate

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Loan Documentation Issues (cont.)

– Efforts by bidders to negotiate terms and documents as far in advance as possible to make the documentation condition a non-issue (putting more pressure on busted deal costs for arrangers)

– Significantly greater price flex (approaching full flex)– Significantly greater structure and terms flex (i.e. adding call

protections, reallocating amounts among traunches, etc.) (approaching full flex)

– Increasing the required lender vote for certain actions, such as for adding a new tranche or releasing collateral or guarantees.

– Imposing tighter restrictions on a borrower’s ability to “yank-a-bank”

– Imposing minimum EBITDA requirements– Reduced willingness on the part of arrangers to make available

bridge facilities (and an increase in the price of those bridge facilities that are made available)

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Amendments

While the market for amendments is in flux, it is generally getting more expensive to obtain covenant relief or other material changes. The following guideposts are evident from a sampling of recent amendments and the literature

– Upfront fees for covenant changes are now commonly 75 to 100 bps, with fees topping 100 bps for major changes

– Spreads are repricing to 600 to 800 bps, with some amendments requiring significantly higher spreads

– LIBOR floors are now common, with 3.50% being a common floor

– The dislocation in LIBOR is causing a re-examination of that pricing mechanism, and the justification for the differential between LIBOR and Base Rate

– Excess cash sweeps are being adjusted to 100%, with some opportunity for stepdowns

Of course, demands for new equity or warrants will be present in distressed situations

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Defaulting Lender Provisions

What do they do?– Allow LC Issuer and Swingline Lender to resign if a lender fails

to fund.– Allow other lenders to remove the administrative agent if that

lender defaults.

Goals:– Protect the LC Issuer and Swingline Lender if a syndicate

member has defaulted on its obligation to fund under the facility or has filed for bankruptcy protection (or whose parent company has filed).

– Clarify fees and other amounts due to a defaulting lender.– Clarify reallocations of commitments.

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Revolver DrawsBorrowers draw down revolvers and park the cash on their balance sheets,

incurring the negative carry, but increasing liquidity.

Typical conditions to revolver draw are notice, a bring down of reps and warranties, and no default or event of default

Considerations– Investment grade deals – frequently MAC rep is only made at closing and

not brought down at the revolver draw. This term was driven by rating agency pressure to ensure liquidity in a downturn for investment grade companies

– What happens when the company knows it is going to default on its financial maintenance covenants that quarter, and draws down its revolver based on the last quarter’s numbers?

– Anti-hording provision may come back, designed to prevent the company from building up a war chest for bankruptcy or workouts with borrowed funds

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Pro Rata and Buy Back Provisions

A borrower’s ability to buy back its term loans below par depends in part on two sections of the credit agreement aimed at ensuring ratable treatment of all lenders

– The “Pro Rata Payments”  provision requires a borrower to make all payments for distribution to lenders on a pro rata basis

– the “Ratable Sharing” or “Sharing of Payments” section requires any lender that receives a payment in excess of its ratable portion to purchase participations from the rest of the lenders so that everyone gets back to his pro rata share

For a borrower to be able to buy back its loans from only some lenders, a borrower usually has to amend one or both of the pro rata provisions of the credit agreement. This necessitates either a Required Lender vote (i.e., 51%) or a vote by each affected lender (i.e., 100%), with these thresholds varying by agreement

Keep in mind that intercreditor agreements may impose additional voting requirements. Even if a credit agreement allows a given section to be amended with a 51% vote, the intercreditor agreement may still say that any changes to that section have to be approved by a majority of second lien or other lenders

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The Big Picture – Choices for Restructuring Debt

Repurchase

Redeem/Defease

Cash Tender

Open Market Debt Repurchase

Exchange Offers

Pre-packaged Plans

Pre-negotiated Plans

Combination of Alternatives

Other Strategies

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General Principles of Covenant Review

Each covenant in an indenture and credit agreement is its own world– Just because the transaction may be allowed under one

covenant does not mean it will be allowed under any other covenant

– If a transaction is prohibited by any covenant, it is not permitted under the indenture and credit agreement

In a multi-step transaction, each step must be analyzed under each covenant

It may be helpful to view the transaction as if cash were flowing in order to break the transaction down to its component parts

Appendix

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Contact Information

Tel: +1.213.891.7421

E-mail: steven.stokdyk@lw.com

Education

JD, University of California, Los Angeles, 1991Editor, UCLA Law Review, Order of the Coif

BA, Stanford University, 1988with distinction

Bar Qualifications

Mr. Stokdyk is admitted to practice in California.

Areas of Expertise

Steven B. Stokdyk is a partner in the Corporate Department in the Los Angeles office of Latham & Watkins LLP where he serves as local chair of the firm’s company representation practice group. Mr. Stokdyk has extensive corporate, finance and acquisition experience representing companies, principal investors and financial advisors in a variety of industries, including technology, financial institutions, healthcare and REITs. His experience includes initial public offerings, high yield, convertible and secured debt offerings, hostile and negotiated mergers, recapitalizations and private equity and debt investments. He also regularly advises public and private clients on corporate governance and structure, securities law compliance and strategic transactions.

Mr. Stokdyk is on the Executive Committee of the Business Law Section of the State Bar of California and was the Co-Chair of the Corporations Committee of the State Bar of California for 2005-2006. He also currently serves on the Executive Committee of the Business and Corporations Sections of the Los Angeles County Bar Association and the Board of Governors of the Institute for Corporate Counsel. He was named a “Rising Star” for 2004, 2005, 2006 and 2007 by Southern California Super Lawyer Magazine. Prior to joining Latham & Watkins in 2005, Mr. Stokdyk was a partner at Sullivan & Cromwell LLP in Los Angeles.

Partner, Corporate Department, Los Angeles

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Contact Information

Tel: +1.213.833.2340

E-mail: henry.schwake@citi.com

Education

MBA, Anderson School at the University of California, Los Angeles

BSE, Finance, Wharton School at the University of Pennsylvania

Background

Mr. Schwake is a Managing Director in Citi’s Global Bank and focuses on the Healthcare and Consumer Industries. Mr. Schwake is based in the firm’s Los Angeles Office. In addition to his role as a senior banker on clients, Mr. Schwake also leads an initiative to develop corporate finance content and applicable solutions for Healthcare clients in partnership with Citi’s other bankers in the sector. Mr. Schwake has a broad range of capital markets and strategic advisory transaction experience for companies including Allergan, Amgen, Beckman Coulter, Invitrogen, Baxter, Hospira, Medtronic, Covidien, Genentech, Gilead, Tenet Healthcare, WellPoint Health Networks, Clorox, Mattel and Avery Dennison.