Joseph V. Rizzi Amsterdam Institute of Finance November, 2012.

Joseph V. RizziAmsterdam Institute of FinanceNovember, 2012

22

• Cash Flow

Impacts default risk

• Balance Sheet

Determines Loss in Event of Default (LIED)

Liquidity

Valuation

Amsterdam Institute of Finance November, 2012

3

• 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


4

• Quantitative◦ Capitalization

Cash Equity >25% Total Debt <6.0x Senior Debt (1) <4.5x First Lien <4.0x Second Lien <0.5x

◦ Cash Flow LTM EBITDA / PFI >2:1 7 x LTM FFOCF / TLA(2) >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


5

• Debt capacity is derived from firm’s assets◦ Operating Cash Flows◦ Asset Sales / Asset Quality◦ Leveragability

• Market Conditions

• Target financing structure

Credit curve shifts over

time depending on the economy

Rating

Rate

s

2H07Crisis

Overheated 1H07


6

There are two different approaches to designing the capital structure:

20%

30%

50%

Cash FlowCash FlowModelModel

Balance SheetBalance SheetModelModel

Senior Debt

Sub Debt

Equity

3 - 4xEBITDA

4 - 6xEBITDA

Equity


7

• Ratio Approach

• Cash Flow

• Advance Rate


8

Market◦ Maximum senior debt and total debt ratios◦ Vary over cycle

Peers◦ Identify◦ Rating Classification◦ Key Ratios

Rating Agencies◦ Credit Statistics


9

Peer XYZ XYZABC DEF GHI JKL MNO PQR STU Average Actual Pro-Forma

12 Months Ended 02/10/20xx 30/09/20xx 01/01/20xx 30/09/20xx 31/10/20xx 30/11/20xx 31/12/20xx 31/12/20xx 31/12/20xxSales 3073.8 8294.9 6165.2 852.4 2345.8 1682.1 2133.4 3506.8 3025.4 3205.3Gross Margin 25.6% 14.4% 16.3% 19.8% 22.0% 16.6% 17.1% 18.8% 17.8% 17.4%EBITDA 153.7 430.1 272.3 35.9 130.8 77.3 100.3 171.5 122.6 134.5 Margin 5.0% 5.2% 4.4% 4.2% 5.6% 4.6% 4.7% 4.8% 4.1% 4.2%Interest Expense 34.4 78.6 49.6 13.2 19.5 15.3 25.0 33.7 55.2 55.8Capex 32.1 40.7 37.1 9.8 25.8 11.3 27.8 26.4 10.7 10.7 % of Sales 1.0% 0.5% 0.6% 1.1% 1.1% 0.7% 1.3% 0.9% 0.4% 0.3%Total Assets 1482.0 3835.4 2790.1 360.5 1099.5 829.3 961.5 1622.6 950.5 952.3

Secured Bank Debt 455.4 0.0 0.0 117.8 0.0 0.0 0.0 211.9 83.2Unsecured Bank Debt 0.0 504.6 175.9 0.0 208.0 210.0 37.6 0.0 0.0Other Senior Debt 111.7 391.4 708.2 6.3 179.2 0.0 75.0 42.6 8.3 Total Senior Debt 567.1 896.0 884.1 124.1 387.2 210.0 112.6 254.5 91.5Subordinated Debt 0.0 197.6 0.0 0.0 0.0 0.0 143.7 289.2 289.2 Total Debt 567.1 1093.6 884.1 124.1 387.2 210.0 256.3 543.7 380.7Equity 419.9 1461.1 1293.3 150.2 473.8 414.4 262.5 (69.0) 96.4 Total Capitalization 987.0 2554.7 2177.4 274.3 861.0 624.4 518.8 474.7 477.1

Total Debt/EBITDA 3.7 2.5 3.2 3.5 3.0 2.7 2.6 3.0 4.4 2.8Senior Debt/EBITDA 3.7 2.1 3.2 3.5 3.0 2.7 1.1 2.8 2.1 0.7Total Debt/Capital 57.5% 42.8% 40.6% 45.2% 45.0% 33.6% 49.4% 44.9% 114.5% 79.8%EBITDA/Interest (incl. A/S) 4.5 5.5 5.5 2.7 6.7 5.1 4.0 4.8 2.2 2.4

Credit Ratings S&P BBB- A- A NR NR NR BB BB- Moody's NR A3 A2 NR NR NR Baa3 Ba2

Market Capitalization 468.2 1482.0 1295.8 104.4 510.9 249.2 177.9 612.6Enterprise Value 1035.3 2575.6 2179.9 228.5 898.1 459.2 434.2 1115.8Ent Value/EBITDA 6.74 5.99 8.01 6.36 6.87 5.94 4.33 6.32Ent Value/Sales 0.34 0.31 0.35 0.27 0.38 0.27 0.20 0.30Ent Value/Book Value 2.47 1.76 1.69 1.52 1.90 1.11 1.65 1.73Earnings per Share 1.78$ 1.73$ 2.83$ (0.06)$ 2.37$ 1.69$ 1.09$ 1.63$


10

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


11

U.S. Leveraged Market Quarterly – June 23, 2012

Median Credit Ratios – First Quarter 2012


12

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.

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.

Europe USPro Rata Spread N/A L+275.6Weighted Avg Institutional Spread E+406.3 L+369.6Deal Size (€MM) 200.78 869.07 Pro Rata Term (in Years) 5.11 4.82 Institutional Term (in Years) 6.56 6.07 Revenues (€MM) 1,487.61 2,313.66 EBITDA (€MM) 448.71 616.22 Pro Forma Debt/EBITDA 4.10x 3.80xPro Forma Senior Debt/EBITDA 4.05x 2.88xPro Forma Cash Interest Coverage 4.03x 6.12xObservations 4 69

Europe USPro Rata Spread E+482.1 L+443.8Weighted Avg Institutional Spread E+532.5 L+473.3Deal Size (€MM) 359.87 446.59 Pro Rata Term (in Years) 5.27 4.91 Institutional Term (in Years) 6.48 5.79 Revenues (€MM) 2,087.55 1,360.45 EBITDA (€MM) 499.12 275.63 Pro Forma Debt/EBITDA 4.81x 4.51xPro Forma Senior Debt/EBITDA 4.39x 3.71xPro Forma Cash Interest Coverage 3.38x 3.88xObservations 16 206

BB/BB-

B+/B


13


Analysis is based upon First Lien tranches only.

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.

6ME 30/09/11 6ME 31/12/11 6ME 31/03/12 6ME 30/06/12 2012 YTDBB+/BB/BB-

Senior Loan Volume (€B) € 6.96 € 2.93 € 2.52 € 2.50 € 2.50Deal Count 19 6 8 7 7Avg. Deal Size (€M) € 389.21 € 530.95 € 314.75 € 357.81 € 357.81Wtd. Avg. ProRata Spr. (bps) 410.00 N/A N/A N/A N/AWtd. Avg. Inst. Spr. (bps) 452.68 495.83 N/A 406.25 406.25

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 3.3x 2.8x 2.7x 2.5x 2.5xLeverage thru 2nd Lien Debt 3.9x 3.7x 4.2x 4.0x 4.0xTotal Debt/EBITDA 4.1x 4.4x 4.3x 4.1x 4.1xEBITDA/Cash Interest 4.5x 4.4x 3.6x 4.0x 4.0x

B+/B/B-Senior Loan Volume (€B) € 13.45 € 7.82 € 6.65 € 10.46 € 10.46Deal Count 37 23 19 30 30Avg. Deal Size (€M) € 395.89 € 358.23 € 377.31 € 365.21 € 365.21Wtd. Avg. ProRata Spr. (bps) 404.72 430.33 468.75 484.38 484.38Wtd. Avg. Inst. Spr. (bps) 458.71 497.62 525.00 534.56 534.56

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.1x 4.2x 3.8x 3.6x 3.6xLeverage thru 2nd Lien Debt 4.3x 4.4x 4.2x 4.4x 4.4xTotal Debt/EBITDA 4.6x 4.9x 4.7x 4.9x 4.9xEBITDA/Cash Interest 3.8x 3.6x 3.7x 3.4x 3.4x

Not RatedSenior Loan Volume (€B) € 2.76 € 4.83 € 4.22 € 3.32 € 3.32Deal Count 15 12 14 16 16Avg. Deal Size (€M) € 183.90 € 402.57 € 322.07 € 219.16 € 219.16Wtd. Avg. ProRata Spr. (bps) 400.00 433.33 458.33 465.00 465.00Wtd. Avg. Inst. Spr. (bps) 442.05 487.50 500.00 510.34 510.34

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 3.5x 2.3x 3.0x 3.9x 3.9xLeverage thru 2nd Lien Debt 3.5x 2.3x 3.0x 3.9x 3.9xTotal Debt/EBITDA 3.8x 2.3x 3.0x 4.0x 4.0xEBITDA/Cash Interest 3.8x N/A N/A 4.4x 4.4x


14To 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.

Apr-12 May-12 Jun-12 2012 YTDNew-Issue Deal Flow (€ in billions)All LBOs Pro Rata € 0.48 € 1.59 € 1.04 € 5.87

TLB/TLC € 1.24 € 1.36 € 1.47 € 6.73Second Lien € 0.00 € 0.00 € 0.00 € 0.10

Total Senior € 1.72 € 2.95 € 2.51 € 12.71Mezzanine € 0.00 € 0.11 € 0.39 € 0.70

Total Volume € 1.72 € 3.06 € 2.90 € 13.40

Total Loan Count: 8 12 8 45Share with TLB/TLC 62.50% 91.67% 87.50% 77.78%Share with Second Lien 0.00% 0.00% 0.00% 0.00%Share with Mezzanine 0.00% 8.33% 12.50% 8.89%

Purpose Diversification (lagging 12 months, based on deal count)Share of Buyouts 53.33% 52.78% 51.25% 40.00%Share of Public to Private Buyouts 1.67% 2.78% 2.50% 2.22%Share of Sponsor to Sponsor Buyouts 35.00% 34.72% 35.00% 26.67%Share of Recapitalizations 3.33% 2.78% 5.00% 6.67%Share of Dividend Recaps 0.00% 0.00% 1.25% 2.22%Share of Refinancings 21.67% 23.61% 23.75% 31.11%

Primary Pricing (lagging 3 months)All LBOs Wtd. Average ProRata Spread 478.57 470.00 475.00 478.57

Wtd. Average Institutional Spread 516.25 525.00 529.82 523.39

Average ProForma Credit Statistics (lagging 3 months)All LBOs Leverage thru 1st Lien Debt 3.5x 3.4x 3.5x 3.5x

Senior Debt/EBITDA 4.3x 4.5x 4.3x 4.3xTotal Debt/EBITDA 4.5x 4.8x 4.7x 4.7xEBITDA/Cash Interest 3.9x 3.4x 3.6x 3.6x

All Buyouts Leverage thru 1st Lien Debt 3.5x 3.6x 3.8x 3.6xSenior Debt/EBITDA 3.9x 4.2x 4.2x 4.1xTotal Debt/EBITDA 4.2x 4.5x 4.8x 4.5xEBITDA/Cash Interest 4.3x 3.8x 3.6x 3.6x


RevolverTerm Loans

ABC

Second LienCov LiteMezzaninePIKPreferred Stock

15


16


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.

0%

15%

30%

45%

60%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12

RC TLa TLb TLc 2nd Lien

B

A

RC

C2nd


17


7.0

7.8

7.36.9

6.7 6.6 6.5

7.2

7.98.4

9.3 9.3

8.4 8.6 8.48.7

0.40.3

0.4

0.4

0.4

0.4 0.4

0.5

0.6

0.4

0.4

0.4

0.3

0.4

0.40.3

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

Purchase Price Fees/Expenses

Excluding Platform Acquisitions and Other Sponsor Driven Transactions.Includes only transactions for which Sources/Uses were made available.


18


4.1%6.6%

2.4% 3.5% 3.7% 3.4% 2.7% 3.7% 3.1%7.1%

25.5%

29.0%33.5%

33.9% 33.9%31.9%

33.9% 33.2%32.7% 32.9% 32.5%

42.1%

45.4%

46.9%44.2%

43.0%

1.0% 1.1%0.8%7.7%

2.7%6.7%

0%

10%

20%

30%

40%

50%

60%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1H12

Eq

uity

as

a P

erc

en

t of T

ota

l So

urc

es

Retained Equity / Vendor Financing 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.


19


Europe US

Excludes Platform Acquisitions and other sponsor driven transactions. Based on Volume.

Europe: Other includes Bridge Loans, Capex, Acquisition, Restructuring and Guarantee Facilities

TLb53.4%

2nd Lien1.5%

Other6.8% RC

10.0%

TLa28.3%

2nd Lien11.1%

RC15.5%

TLa1.8%

TLb71.5%


20

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.

Secured Debt3.1%

Unsec Debt1.6%

Mezzanine2.3%

Bank Debt42.5%

2nd-Lien Debt1.1%

Vendor Note1.3%

Rollover Equity4.2%

Shareholder Loan5.1%

Common Equity37.2%

Other Sources

1.7%

Total Equity: 47.7%

LTM 30/06/12

Observations: 26Average Sources: €1,147.4M

Average Senior Loan Size: €499.2M

Excluding Platform Acquisitions and Other Sponsor Driven Transactions.


Other Sources

1.1%

Common Equity39.4%Rollover

Equity2.1%

Preferred Equity0.1%

Shareholder Loan4.6%

Vendor Note1.0%

Secured Debt3.3%

Bank Debt44.7%

Bridge Loan/Public High Yield

0.7%

Mezzanine2.1%

Unsec Debt0.8%

Total Equity: 47.2%

2011

Observations: 36Average Sources: €842.0M



21


Common Equity24.8%

Secured Debt21.7%

Bank Debt34.6%

Rollover Equity2.2%

Shareholder Loan

15.6%

Vendor Note1.2%

Total Equity: 43.7%



Germany *

Excluding Platform Acquisitions and Other Sponsor Driven Transactions.


Vendor Note4.6%

Common Equity36.8%

Other Sources

2.3%

Bank Debt52.9%

Mezzanine3.3%

Total Equity: 41.4%



Netherlands

*Data reflects LTM 31/03/12, due to not enough observations for LTM 30/06/12


22

Maximum debt capacity formula:-MDC = f(operations, amortization, rate, asset sales)MDC = [EBIT / (i+ 1/n)] + AS + RF

EBIT - Earnings Before Interest and Taxesi - Interest Raten - Straight line loan amortizationAS - Proceeds from Asset Sales

RF - Refinancing


Opening Balance Sheet Adjustments – from sources and uses – including

purchase price assumptions Proforma balance Sheet

◦ Income Statement◦ Cash Flow StatementCapitalization table/transaction structureDebt ScheduleTerm sheet(s)Valuation/maximum purchase priceReturns Analysis – IRR and MOC

23


24

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


25

Macro/Market Level◦ Determine rating target◦ Use target rating level financial characteristics

Funded Debt/EBITDA EBITDA/Interest Expense Funded Debt/Total Cap

Example:(A) Target Rating BB(B) EBITDA/Int for Target Rating c3.0x(C) Firm EBITDA $300mln(D) Interest Rate for Target Rating 10%(E) Maximum Debt Capacity = (C/B)/D

= (300/3)/10%= $1,000


26To 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.

Share of Credit Issue in Distress Based on Count Share of Credit Issue in DistressBased on Share of Sr. Par Issue

Distressed credits are issues rated D or restructuring.Charts reflect share of credits issued each year that eventually went into distress.

Year of Credit Issue Year of Credit Issue

11.3%

15.7%

24.8%

11.5%

4.9%

0.0%

2.8%

0%

6%

12%

18%

24%

30%

2005 2006 2007 2008 2009 2010 2011

16.3%17.2%

28.4%

17.9%

4.5%5.1%

0.0%0%

6%

12%

18%

24%

30%

2005 2006 2007 2008 2009 2010 2011


27


28


29

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.


Joseph V. Rizzi Amsterdam Institute of Finance November, 2012.

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Transcript of Joseph V. Rizzi Amsterdam Institute of Finance November, 2012.