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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
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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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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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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+
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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
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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
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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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