Growth finance - KPMG · 2020. 7. 14. · In H1 16, 27% of bank deals were Unitranche with junior...

Growth finance

Deal Advisory—

23 November 2016

2© 2016 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International"), a Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

• 8.30: Rob Kirkby, Advisory Executive Director, KPMG in the Channel Islands

• 8.35 – 9.00: Mark Ashburn, Associate Director, KPMG in the Channel Islands

• 9.00 – 9.25: Simon Greenhill and David Moxham, Royal Bank of Scotland Plc Leveraged Finance

• 9.25 – 9.50: David Madoc-Jones and Siobhan Murray, KPMG Debt Advisory London

• 9.50: Q&A

• 10:00: Close

Timings and speakers



• Global M&A

• CI M&A trends

• Key due diligence matters

• Industry performance

• Future trends

KPMG Agenda



Global M&A in 2016

Source: Thomson Reuters, Mergers and Acquisitions Review Financial Advisors H1 2016

614.6 465.0 446.9 566.6 759.1 636.1

586.4 565.5 559.7

963.9 1,039.0

723.2

599.6 522.9 646.4

856.5

955.6

448.9

474.4 757.5 571.4

865.9

1,204.2

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2011 2012 2013 2014 2015 2016

Num

ber of deals

$ B

n

Global M&A Trend

Q1 Value (US$b) Q2 Value (US$b) Q3 Value (US$b) Q4 Value (US$b) No. of Deals



CEO global survey September 2016

58%

55%

55%

Inorganic growth(M&A or jointventures)

Organic growth (newlines of business,geographic expansion)

Collaborative growth(external partnershipsor collaboration withother firms)

Which of the following describes your development plans to drive shareholder value for the next 3 years?*

What forms of M&A or other significant deals do you expect to undertake in the next 3 years?*

50%

47%

45%

41%

40%

Creating partnershipsor collaborative

arrangements withother firms

Changing the capitalstructure through

equity

Changing the capitalstructure withdebt/financing

Buying business(es),assets or capabilities

Selling business(es),assets or capabilities

* Percentages represent the proportion of the 100 CEOs surveyed who share a particular view

NOW OR NEVER



Current key trends in Channel Islands M&A

Current Transaction

Drivers

New Business

flows

Multi jurisdictional

presence

Access to new distribution

channels

Regulatory pressures

Yielding counter cyclical

investments

Industry consolidation

Availability bank debt

PE buy and build strategy



Equity gap

Valu

e ex

pect

atio

ns

Junior, minority & incoming shareholders

Senior, majority & exiting shareholders

GAP



Due diligence themes– cross sector

Customer “stickiness”

Cash generative

Differentiated propositionStrength of

senior management

Regulatorycompliance

Appropriate funding structure

Corporate and private client risk

IT due diligence



2016 CI M&A highlights

Buyers

Buyer

Targets

Target

ConsolidatorsInbound acquisitions Outbound acquisitions

Buyer TargetBuyer Target

10


© 2016 KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Channel Island multiples

9.5x

7.2x

Oct 162.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

Jan-07 Jun-08 Oct-09 Feb-11 Jul-12 Nov-13 Apr-15 Aug-16

Tran

sact

ion

EV

/ E

BIT

DA

mul

tiple

s

Transaction announcement date

Oct-16

Historic development of transaction valuation multiples by size of target in corporate, trust and fiduciary services market



Valuation driversVa

luat

ion

Partnership

Professional services firm in corporate wrapper

Private equity backed entity

Evolution/Development



CI CSPs industry performance

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015

% M

argi

n

Average Margins (%)

Net profit margin Gross profit margin

22% 23%20%

44%48%49%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2014 2015

% G

row

th

Annual Growth (%)

Revenue Gross profit Net profit after tax



Listed fiduciary performance in 2016 Brexit

*As at October 31 2016

40

60

80

100

120

140

160

Jan

uary

201

6

Feb

ruar

y 20

16

Mar

ch 2

016

Apr

il 20

16

May

201

6

Jun

e 20

16

Jul

y 20

16

Aug

ust 2

016

Sep

tem

ber 2

016

Oct

ober

201

6

Shar

e pr

ice

reba

sed

to 1

00

Sanne Intertrust STM FTSE



Predicted future trends in Channel Islands M&A

Future Transaction

Drivers

Growth alternative

assets

Increasing partnerships/

JV’s model

PE exits (capital

markets)

Succession planning

Next generation of

clients

Service and jurisdictional diversification

Clients flight to quality

Technology and service

delivery models

RBS Regional Structured Finance, South

Offshore M&A ~ A Lender’s Perspective

November 2016

Simon Greenhill and David Moxham

Confidential

Agenda

Regional Structured Finance (‘RSF’) – Who We Are

Dedicated Specialist Team

RSF South, Corporates

Funds and Administration

The Evolving Lending Landscape

Product Innovation

~ RBS Evolution

~ Unitranche Alliance

~ Direct Co-Lending Arrangements

A Lender’s Perspective

Key Learnings

Summary

16

Regional Structured Finance (‘RSF’) – Who We Are The RBS Structured Finance Team focuses on the proactive

origination and execution of event-driven financing for bothexisting and new clients.

A national team of over 120 corporate finance professionals, operatingon a regional basis with 20 based in the South region ~ comprisingBristol, Reading & the Offshore Territories.

The team has extensive experience of originating, structuring andexecuting across a wide range of deal types, sectors and businesssize.

Working alongside both Corporates and Sponsors, and drawing uponthe market wide expertise across RBS, we are able to offer a holisticrange of structured finance solutions with innovative products to meetthe needs of the customer through their lifecycle, including:

1DC Advisory Transaction Volume

Commercial &Private Banking

Structured Finance

Regional Structured Finance

Scotland

17

London

South Midlands North

– Bilateral or multi bank club transactions

– Complex acquisition or refinancing

– Sponsor backed transactions (including Management Buy Outs, Buy and Builds, Recapitalisations etc)

– Shareholder liquidity

– Public to Private

– Debt capital market transactions including Private Placements and Bond Issuance

– Syndication and underwriting

– Infrastructure and PFI transaction financing.

Supporting the Indigenous RBSI Coverage Teams

The RSF South Team has specific expertise in supporting sponsor and corporate backed investments across a variety of sectors. Whereappropriate, flexible structures are tailored to help businesses capitalise on value creation opportunities.

Responsible within RBSG for the Trust and Intermediary asset class from a financial sponsors perspective, RSF South provide support toRBSI and management teams. The team has built up considerable experience of leveraging offshore businesses with financial sponsorbacking, together with follow on funding for acquisition opportunities.

Our aim is to build a select portfolio of high performing offshore clients, across all sectors, and since Mar ‘12 we have completed 19offshore transactions, including follow-on funding.

Viewed by the market as the “go to” Transactional and Relationship banking team providing leveraged debt and market leading after careto the offshore market.

Dedicated Specialist Team

18

RSF South, Corporates

Originating, structuring, and executing significant financing events for our customers

19

South and Offshore focused origination and execution of our structured finance large & mid cap corporate loans and SME origination:

Responsible for the execution of event-driven financings and re-financings for Corporate & Commercial customers

Responsible for origination, deal structuring through to documentation.

Focus on Bilateral and Syndicated transactions with a debt quantum >£30m

Full product capability including IPO, Underwriting, Syndications

Mid Market Debt Origination (MMDO) proactively identify and support high growth UK businesses in the mid-market

Focus on strategic debt coverage to UK mid-market:

Thought-led engagement alongside Coverage

Focusing on where we can add value

Thought led – first to the client with ideas and strategies, prior to point of transaction

Engaged in shared relationship plans

Drive risk appetite debate

Clients span SME to FTSE 250 with UK domiciled HQs and are:

Management Buy-Outs

Company Acquisitions

Share & Balance Sheet Restructuring

Roll-out Funding

Growth & Development Capital

CustomersThe South Franchise

We help to support more UK mid-

corporates than any other bank

Trust and Fund Administration

Increased regulation / legislation driving consolidation opportunities.

Desire to diversify revenue streams (i.e. into corporate, personal, funds admin).

Balancing growth in core markets with potential fee sensitivity.

Globalisation of wealth driving roll out into new jurisdictions.

More mature markets are relatively low growth & gaining organic share in a sticky market isn’t easy.

All against the backdrop of increased political rhetoric.

Key Sector Trends

20

The Evolving Lending Landscape

• Continue to lead the market.

• Some retrenchment (e.g. Bx).

• In H1 16, 27% of bank deals were Unitranche with junior lenders (vs. 20% in H1 15).

Summary

• Continued proliferation of funds and Unitranchestructures.

• Large hold positions of up to and exceeding £100m.

Competitor Type

Primary UK Clearers Debt Funds Other Banks

• Growing presence in UK mid-market.

• Increased competitive tension on senior club processes.

21

Influencing

• Leverage

• Pricing

• Returns

• Structuring

• Covenants

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjgvMLR37TPAhWQmhQKHb6aAHYQjRwIBw&url=http://contactdir.uk/royal-bank-scotland-southport-uk/&psig=AFQjCNFM7kJUXySiJPv_bVPq8U8e4bQwkw&ust=1475244007674130

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjgvMLR37TPAhWQmhQKHb6aAHYQjRwIBw&url=http://contactdir.uk/royal-bank-scotland-southport-uk/&psig=AFQjCNFM7kJUXySiJPv_bVPq8U8e4bQwkw&ust=1475244007674130

We have developed our product capability over the last 18 months to offer greater flexibility and access to institutional liquidity to sponsors and borrowers

1Includes transactions with non Unitranche Alliance partners

Traditional Acquisition Finance Facilities Direct Co-Lending ArrangementsUnitranche Alliance

We provide term debt, acquisition / capexfacilities, working capital and ancillary facilities alongside operational banking requirements to support UK and Western European mid-market leveraged buy-outs

We have additional capabilities across the large-cap market providing syndicated leveraged loans, post-IPO facilities and high yield bonds

We have strong links across RBS, including our, award-winning Invoice Finance and Leasing teams. We also work in partnership with Coutts, with a number of our core sponsors acquiring Coutts clients, and providing personal banking services to management teams

We have a compelling synthetic unitrancheproposition, providing super senior debt (drawn and undrawn) alongside our leading junior debt fund partners, providing higher leveraged flexible debt structures on competitive terms, typically at a lower weighted average cost of capital (WACC) than traditional rival unitranche products

Pre-agreed intercreditors are in place with each junior debt provider ensuring extremely efficient transaction execution

13

9

2014 2015 YTD 2016

Unitranche transaction volumes1

We have exclusive partnerships with 3 market leading pension / insurance fund investors to allow RBS to coordinate and front materially higher senior debt commitments (up to £100m+)

Fully aligned processes, with the PE sponsor / advisor / borrower only dealing with RBS, ensuring efficient execution from NDA through structuring, credit approval and legal documentation to AML/KYC

38

2015 YTD 2016

2002 – To Date 2014 First Unitranche transaction with Alcentra 2015 First Direct Co-Lending transaction with M&G

Product Innovation ~ RBS Evolution

22

RBS has developed Unitranche Alliances with a number of junior debt funds to offer a flexible, non-amortising debt structure rivalling traditional unitranche products

Transaction examplesOverview of arrangement

RBS has joined up with leading mid-market junior debt lenders :Alcentra; Barings; BlackRock; CVC Credit Partners; KKR Credit Advisors; and Rothschild Five Arrows Credit Solutions (FACS)

This enables the offering of a non-amortising unitranche debt package which provides enhanced flexibility to the borrower with higher leverage, and competitive pricing, terms and conditions (covenants, headroom, etc.).

RBS provides drawn term debt, acquisition / capex facilities and working capital RCF on a super senior basis with RBS’ junior fund partners providing junior term debt. The blend creates a non-amortising synthetic unitranche structure with competitive weighted average cost of capital (WACC), often lower than traditional unitranche products, and with the same typical level of flexibility

RBS has agreed detailed LMA-based intercreditor agreements and related loan document clauses with each partner for speed of transaction execution

March 2016United Kingdom

Citation Limited

UndisclosedManagement Buyout

Mandated Lead Arranger

First Names Group Ltd

UndisclosedRefinance

Mandated Lead Arranger

June 2016United Kingdom

“We were extremely pleased with the delivery of the refinance package which

achieved closing within a short time frame. Key to this was the pre-agreed joint junior / senior terms sheets, the pre-agreed

Intercreditor and the highly effective relationship between RBS and Alcentra.”

Sovereign Capital - 2015

”Their [RBS/FACS] joint package met all of our refinance priorities with a competitive and well structured solution including a flexible capex / acquisition line to enable the business to take advantage of development opportunities. We are delighted to have closed this transaction

with two longstanding relationship led lenders. We look forward to working with them

as the business continues its development”. Livingbridge - 2015

Product Innovation ~ Unitranche Alliance

23

RBS’ Direct Co-Lending investors include: AIG Asset Management (Europe); Hermes Investment Management; and M&G Investments

RBS has contracted separately with each of AIG Asset Management (Europe) Limited (“AIG”), Hermes Investment Management (“Hermes”) and M&G Alternatives Investment Management (“M&G”), in order to provide RBS with exclusive access to their long term funding capacity, to invest in UK Mid Market Leveraged Loans for Sponsor Owned Corporates. In these materials, the terms “co-lending investor", “co-lending investors" and “arrangement" refer to these contracts, not to any legal partnership, joint venture or agency arrangement.

RBS has developed exclusive Direct Co-Lending Arrangements with AIG, Hermes, and M&G to enable RBS to arrange higher holds without compromising on risk discipline

Transactions to dateOverview RBS has sourced and negotiated exclusive arrangements with leading

institutional investors (AIG, Hermes, and M&G), to participate as Lenders of Record alongside RBS in senior debt leveraged transactions

This enables RBS to significantly improve competitive positioning, through co-ordination and private pre-placement, to deliver PE sponsor clients materially higher hold levels without compromising RBS’ credit and portfolio discipline (regarding hold levels and portfolio diversification)

RBS originates, arranges, fronts and co-ordinates each transaction and all Direct Co-Lenders, introducing a new source of substantial senior debt liquidity and reducing complexity in terms of building a syndicate of lenders

Fully aligned processes from NDA, through credit structuring and legal documentation to AML/KYC. All negotiations are through RBS

RBS can now ‘speak for’ up to £100m+ per transaction, through innovation and co-ordination of a distinct club of co-lenders

Illustrative

15-30+

10-25+

15-20+

Up to £100m+15-25+

Available funding per transaction through partnerships (£m)

“We were very pleased with the joined up approach between RBS and M&G. Even though this is a new

venture for both parties, from a borrower perspective it worked seamlessly.”

Richard Donner, Hg Capital

RBS have completed 11 transactions to date on these senior co-lending structures, with PE sponsors and advisors confirming the efficiency and reliability of RBS’ Direct Co-Lending process with its partner investors

All Direct Co-Lending partners are currently involved on multiple live transactions

“From an adviser’s perspective it is absolutely fantastic. The ability to deliver what was on each of

the two deals well north of £70m of committed funding is a real positive.”

Adviser

Total

“We were highly impressed with the way in which RBS and its 3 Direct Co-Lending investors executed the

transaction smoothly, efficiently, and without disruption in a

compressed timeline. The ability to seamlessly deliver £65m of senior liquidity was a key enabler for the process and we appreciate RBS’ efforts and its well organised co-

lending process.” Alexander Clark, LDC

Product Innovation ~ Direct Co-Lending Arrangements


TCE1 % - May 15

Transaction Rationale Strategic Vision Historic Investment Employee Track Record

What We Seek To Understand

What ‘Good’ Looks Like for a Cashflow Lender

Other Considerations

Recurring Revenue Defensible Niche Market Strong Net Profit Margins “Sticky” Clients

Regulatory Landscape and Approvals The Economics - Returns Ancillaries

Customer Dynamics Level of Granularity Management qualities & Experience

Resilience in an Economic Downturn High Cash Conversion Appropriate Financing Structure Providing

Comfortable Levels of Headroom

Appropriate Covenants LMA Documents

25

Key Considerations

Be prepared to come to market.

Don’t underestimate the level of deal distraction on your day to day business. Get an advisor on board.

Choose your sponsor carefully. Biggest price doesn’t always translate to best sector knowledge / cultural fit.Personal relationships are vital – can you work together?

To over leverage senior debt on day one may hamper your M&A ambitions. Leave liquidity in the structure.

Don’t be tempted to include acquisitions in your forecasts when preparing Banking Case forecasts which willbe used for setting covenants. They never occur in the same form or when predicted.

Don’t be too prudent in your financing case; we will always sensitise your assumptions.

Deals in the current environment take longer to complete. The more prepared you are in terms of provision ofinformation, the due diligence process, and selecting advisors who truly understand the nature of thetransaction you are embarking on, then the smoother the process will be. Taking short cuts or skimping onadvice for cost reasons invariably turns out to be a false economy.

26

Summary

RSF South & Offshore

Fund & Admin Market

The Evolving Debt Market


Differentiated senior offering: unique and exclusive Direct Co-Lending partnerships to deliver institutional senior debtliquidity with a proven highly efficient transaction execution and delivery process, fully fronted by RBS.

Proven Unitranche Alliance product delivering higher leverage, greater flexibility and competitive pricing, allied withefficient execution underpinned by pre-agreed intercreditor agreements.

Large-cap underwriting capability: providing syndicated leveraged loans, post-IPO facilities, high yield bonds, andbridges.

The Offshore market is one we understand and one with dynamics conducive to the provision of leveraged debt.

Genuine sector experience within the sponsor and corporate communities to sit alongside management teams and drivevalue creation opportunities.

Within the Funds and Administration sector in particular there are clear M&A opportunities driven by tightening regulationand globalisation of wealth.

Increase in scale & presence in key jurisdictions are attractive to large trade players at exit.

As one of the leading debt providers over the last decade, our challenge lies in the unearthing of quality opportunitiesrather than that of lack of capacity to support our markets. Our focus has been to originate opportunities and supportmanagement teams & sponsors in key markets (including the offshore space).

With the capabilities to support you across the corporate lifecycle (be that sponsor ownership, M&A, IPO etc) we arevery keen to meet and develop a dialogue with management teams who have aspirations of undertaking a transaction,whether the thought process is in its infancy or more advanced.

27

KPMG Debt Advisory

Debt market conditionsNovember 2016

29


© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Agenda

1Introduction

2

3

Debt markets overview

Market trends

Good practice4

30



We are a highly experienced, market leading independent debt advisory team focussed on delivering the best financing outcomes for our clients

■ KPMG’s Debt Advisory Group has 25 specialists with each senior practitioner having over 15 years of direct debt market experience

■ In the last two years we have advised on debt financing aggregating in excess of £60bn across the full spectrum of bank and debt capital markets

Introduction – KPMG Debt Advisory

Client first approach1

Independent advice2

Broad client base3

Market expertise4

Track record5

David Madoc-JonesDirectorKPMG Debt Advisory

T: +44 (0)20 7694 3039E: [email protected]

Siobhan MurrayManagerKPMG Debt Advisory

T: +44 (0)20 7641 1871E: [email protected]

1

mailto:[email protected]

mailto:[email protected]

31



Post – Referendum debt markets landscape

There has been some volatility in the UK market since Brexit, but lenders remain receptive to new deals, albeit with a greater level of caution

■ Liquidity and volume strong 2014 through to H1 2016

■ “Hard Brexit” fears, Eurozone concerns, Sterling depreciation and the US election have all contributed to higher volatility

■ US election has led to a sell off in bonds

2

Underlying rates

00.20.40.60.8

11.21.41.61.8

2

%

3 month libor 10 year gilts 5 year swap

Source: Eikon

Brexit

There continues to be a number of threats to market confidence – but the market is proving to be resilient and continues to offer attractive terms to borrowers

- 20 40 60 80

100 120 140 160 180 200

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

$bn

EMEA loan volume by purpose

Refinancing M&A Non-M&A New Money

Source: LoanConnector

Brexit

32



Market trends

Corporate market Leveraged market

■ Range of financing options available

■ Relationship driven bank market

■ Continuing shift towards debt capital market issuance for larger borrowers

■ Low interest rate environment with attractive spreads resulting in opportunistic refinancings and desire to extend maturities

■ Banks are ‘open for business’ but focussed on ancillary income as lending returns are being compressed

3

Over-arching trend across the the debt markets of increasing competition and emergence of alternative lending structures and providers

■ Lending is generally transactional based and priced for risk

■ Some pressure on leverage post-Referendum

■ New lenders adding liquidity

Increasing number of debt funds is making the lender market crowded

Funds have significant levels of dry powder in Europe

33



Market trends – Leveraged market

Increasing competition in the lender market is resulting in more innovative / collaborative financing structures from banks and funds

3

Bank lenders Credit funds

https://www.linkedin.com/company/beechbrook-capital

https://www.linkedin.com/company/beechbrook-capital

https://www.rothschild.com/home/

https://www.rothschild.com/home/

34



Market trends – Leveraged market

There has been a shift in the market that allows borrowers to achieve higher leverage levels

■ The unitranche structure provides a single tranche of debt from one lender with a blended margin – this means no inter-creditor complexity between senior and mezzanine lenders

■ The chart below shows the upper range of EBITDA leverage currently achievable in each debt structure

3

0

1

2

3

4

5

6

Indi

cativ

e EB

ITD

A le

vera

ge (x

)

Senior bank Credit fund Unitranche

SENIOR BANK UNITRANCHE FIRST OUT, SECOND OUT

SENIOR AND 2ND LIEN /

MEZZANINE

Source: KPMG analysis

35



Market trends – Leveraged market3

Unitranche issuance (number of deals)

Source: LoanConnector

0

2

4

6

8

10

12

14

16

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

Num

ber o

f dea

ls

UK France Germany Other

Strong unitranche market in Europe

36



Market trends – Leveraged market3

Private Debt Dry Powder by Fund Geographic Focus

Source: Preqin Private Debt Online

Credit funds have significant levels of dry powder after a number of years of substantial fund growth

37



Things to think about . . . .

1. . . . . General tips

■ Preparation and information provision

■ Forecasting and sensitivity analysis

■ Anticipate questions (for example there may be additional scrutiny from lenders on the impact of the Referendum)

2. . . . . In the financial services sector

■ Corporate governance and oversight

■ Strength of regulatory compliance

■ Aggressive tax structuring

■ Other reputational risks inherent in business model

3. . . . . Around M&A financing

■ The appropriate leverage level and the impact of covenants on business flexibility and the ability to pay shareholders

4

Q&A

Thank you


The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

kpmg.com/channelislands kpmg.com/app

© 2016 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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