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The Banking and Corporate Finance Training Specialist

Structuring & Negotiating

Mezzanine, PIK, Second Lien And

Unitranche

Analysis of junior debt products - structuring issues, application, terms and pricing

This course is presented in London on:

27 November 2018, 25 February 2019, 21 June 2019, 18 November 2019

This course can also be presented in-house for your company

or via live on-line webinar

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Course Overview

Participants will: Gain an introduction to the junior debt spectrum Explore the structuring parameters – how much senior and how much junior debt is

appropriate in a given structure Get to grips with the different types of mezzanine: its use and key issues

Master the features of second lien finance Be taught about PIK (PIYC, PIYW, Toggles)

Develop an understanding of products within unitranche & direct lending Get to grips with relevant intercreditor issues and agreements among lenders (“AAL”) Gain an insight into the use of junior debt in developin nmarkets, its challenges and how

to mitgate them

Introduction to the junior debt spectrum

Overview of the market The role of direct lenders

Review of the various products Mezzanine PIK, PIYC & Toggles

Second Lien Unitranche

Structuring parameters – how much senior and how much junior debt

Typical approaches to gauging debt capacity / capital structure What are the key criteria to consider

Multiples vs Capital approach Key ratios (covenants where relevant) used to right-size the debt

How Jurisdiction can affect debt capacity (and how to mitigate)

Types of Mezzanine: use and key issues

Main features of the mezzanine European vs US vs Asian mezzanine

Warrantless mezzanine – return structure Fixed vs floating rate Cash pay

PIK Redemption premia – stepped vs linear

Other tools for achieving the target IRR

OID to enhance returns Using Libor/Euribor floors Fees

Call protection - hard vs soft call protection

Equity Kickers Warranted mezzanine Coinvertibles pro& cons

Equity strips – why they make sense Other forms of structured equity carry

Issues for junior lenders What is an ‘exit’ – had vs soft Information rights – what are the options

Board / Observer status – riks and how to mitigate them Other (better) options

Other variants of mezzanine Senior mezzanine

Course Objectives

Course Content

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Junior mezzanine Hybrid mezzanine

Mezzanine in Emerging markets – specific problems and how to resolve them The different role to developed markets

Legal risk – why and how it matters Tools for mitigating legal risk

How to structure the deal & collateral to overcome Reputation issues Recourse / PGs?

Other tools Second Lien

Use and application Market trends / recent deals

Documenting the 2nd Lien - composite or separate facility agreement “Typical” terms, leverage, pricing and call protection Pros and cons of 2L vs unitranche, high yield bonds

Other tools for achieving the target IRR

PIK (PIYC, PIYW, Toggles) Pay-in-Kind (PIK) generally Different types PIK

PIYW Toggle

PIYC “Typical” terms, leverage and pricing Call protection - hard vs soft call protection Market trends / recent deals

Unitranche & direct lending products Market trends Recent developments

Where and how its used Review of different “unitranche” structures

Classic product Clubbed Dual tranche

Structured First out / last out

Interaction with bank led finance & impact on bank lenders “Typical” terms & leverage “Typical” pricing

Cash coupon PIK

Warrants Other tools for achieving the target IRR Leverage – how much and impact on returns

Call protection Why it matters to lenders

Hard vs soft call protection Are direct lenders able now able to compete with high yiked bonds and larger syndicated

loans

Comparing HY syndicated loans and unitrache Intercreditor issues & Agreement

Among Lenders (“AAL”) Typical inter-creditor issues for junior debt

Enforcement standstills

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Turnover – why and where this matters Option to purchase - Practical issues

Key issues in distress

Information rights Why going on the Board may not help

Costs in distress Valuation in distress (q.v. IMO Carwash) Release of collateral (q.v. European Directories)

The role of the Agents - how and why it matters in distress Appointing a separate Facility Agent

Appointing a separate Security Agent – key issues to consider

The trainer is a consultant, public speaker and author. He provides training programmes

globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the

UK, Europe, and Australasia & South Africa. He has been involved in mezzanine for 18n years and was previously on the advisory panel fo the IIR mezzanine conference. He has

knowledge of junior debt in both develped and developing markets in africa and Asia.

He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure / project finance module for the MBA programme at the Cass Business School

in London.

Despite copies amouts of liquidity in nthe creidt markets, junior debt, in all its forms,

continues to enjoy an attractive part of the funding spectrum from both lenders and borrowers. Borrowers welcome the benefits of reduced costs of capital, strecjed leverage

and, in devloping markets, a product than can bridge the funding gap. The intense competition between providers of junior debt means that hard data about

pricing, leverage and terms remains veiled as lenders remain wary of revealing commeccially sensitive information which could inhibit their own funds.

Providers of junior debt have become increasingly eclectic about which type of product they can provide. Unitranche, in its various forms, remains the product of choice for lenders as it

enables them to deploy greater amounts of capital and to retain a greater degree of control both pre and post distress than other junior forms of junior debt. Data from Deloitte’s

Alternative Deal tracker, shows continued growth in that market and against a backdrop of strong demand from borrowers across Europe. Moreover, funds increasingly are targeting larger deals as large scale is essential to mitigate the expense of deal origination and portfolio

management. Against this background, direct lenders are firmly on the radar of both syndicated lenders and arrangers of high yield given their ability to deploy increasingly large

amounts of capital which can compete with all but the largest loans and bonds. The Second Lien market, which is primarily a product in the syndicated market (but can be

deployed as a stretched senior product too in smaller deals) has seen increased issuance in the last 12 months.

Mezzanine continues to face pressure from other cheaper products (2L in larger deals and unitranche in smaller deals), but continues to remain an important tool in lender’s arsenal of

products. Mezzanine was provided by Capzanine for Dorsia and by Kartesai for Rafaut. Mezzanine continues to exert a strong influence on other junior debt products as many direct

Background of the Trainer

Course Summary

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lenders had their roots in mezzanine and have been willing to apply the practices in that market to direct lending (e.g. the use of PIK and warrants)

PIK remains popular as lenders chase returns up the risk/reward curve but the recent dual tranche notes issued by Recordati emphasised the eclectic nature of debt markets as the

coupon was bifurcated between a cash pay and smaller PIK element. This is a usual structure for senior debt and was last seen in the Focus Wickes Mezzanine Notes issued in 2005.

Junior debt is also showing signs of growth in the developing markets where if fulfils a different function to developed markets in that it provides funding where local credit markets are

embryonic. The programme looks at the challenges lenders face in these markets and suggests ways in which they may be mitigated.

Whilst junior debt offers attractive returns, this is not without risk and the lesson from the credit crisis is that these providers invariably ended up receiving little or nothing in distress

(e.g. Imo Carwash, Stabilus). Against this background, junior lenders have sought ways to mitigate these risks and have been assisted by an updated LMA Intercreditor (2012). However,

many, more sophisticated providers have sought other ways to improve their position, for example through the appointment of their own Facility and even Security Agents, although this is not without controversy.

This programme examines the range of junior debt loan products available in the market, their

use and application, the typical terms and conditions, market pricing and returns. The program also considers the various techniques junior lenders can adopt to structure their credit ab initio (via Intercreditor issues), how they can monitor their credit thereafter (and have advanced

warning of impending distress) and finally how they can maximise recovery in distress. The course is highly practical and interactive and will include case studies which will first, require

participants to devise appropriate junior debt structures and second, to consider the various Intercreditor and other matters which can protect their position in distress.

The programme will review the impact of the draft ECB guidance on leveraged transactions.

A model will be provided in advance of the programme and participants will be

required to bring a laptop to the course with that model loaded.

What Redcliffe’s clients are saying about the course:

“High quality and relevance of the material covered.” --Investment Manager, BNP Paribas

“Comprehensive materials and knowledgeable presenter.” --Vice President, Rabobank

“Very useful course with a good overview of all topics related to PIK/Mezz and second

lien.”

--Corporate Finance, Ernst & Young LLP

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9:00-17:00

London

Standard Price: £725 + VAT Membership Price: £580 + VAT

In-House Training

Delivering this course in-house for a number of participants could be very cost effective.

The venue and timing can be agreed to suit the client, as well as the selection of the trainer and the precise contents of the seminar.

Tailored Learning

All of our training courses can be tailored to suit your company’s exact training needs.

We will work closely with you to help develop a training programme with content that is unique for your organisation.

Please email us on enquiries@redcliffetraining.co.uk for more information

E-Learning

This course can also be presented as a bespoke e-learning programme created by you to fit your exact requirements.