Amsterdam Institute of Finance Joseph V. Rizzi December, 2013 PRODUCTS: EXPANDED DEBT CAPACITY...

Amsterdam Institute of FinanceJoseph V. Rizzi

December, 2013

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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 December, 2013

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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

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Sr Only Sr + 2L Sr + Mez Sr +2L+Mez Sr + HYB

2013 (9 mo) 58% 2% 10% - 30%

2012 67% 3% 10% - 20%

2011 52% 3% 10% - 25%

2010 60% - 20% - 10%

2009 78% - 22% - -

2008 22% 3% 65% 10% -

2007 25% 20% 25% 27% 3%

2006 25% 10% 35% 27% 3%

2005 37% 10% 35% 15% 3%

2004 42% 5% 50% 3% -

2003 45% - 55% - -

Source: Standard & Poor’s Financial Services

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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


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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


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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


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2013 ( 9 mo ) 60% 2012 30%2011 25%2010 8%2009 10%2008 5%2007 25%2006 8% 2005 2% 2004 -

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December, 2013

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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.


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‘‘OpCo \ PropCo’ Financing (2)OpCo \ PropCo’ Financing (2)

Financing Notes

OpCo PropCo

BidCo

Rental Payments

Approx.100%

Approx.100%


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1111

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

…ability: Difficult Post Crisis


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• 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


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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


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Amt % Secured

2013 ( 9 mo ) 60 40%

2012 30 50%

2011 35 40%

2010 45 50%

2009 24 30%

2008 5 0%

2007 24 30%

2006 23 20%

Source: Standard & Poor’s Financial Services

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December, 2013

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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


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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+


(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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ACCORDIAN 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


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


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Increasing layers of debt Directed at different investors Intercreditors conflicts

2004 + 2H07 - 2011

• Common equity

• Unsecured/mezzanine (1x)

• Senior secured bank loan (4x)

- Amortizing T/LA – 40%

- B/C tranches – 60%

FDX – 5x + PPX – 7.5 +

2012 - Present

• 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

December, 201322

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)


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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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Amsterdam Institute of Finance Joseph V. Rizzi December, 2013 PRODUCTS: EXPANDED DEBT CAPACITY...

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Transcript of Amsterdam Institute of Finance Joseph V. Rizzi December, 2013 PRODUCTS: EXPANDED DEBT CAPACITY...