Joseph V. Rizzi Amsterdam Institute of Finance May, 2008 Sponsor Based Leveraged Acquisition Market...

Joseph V. RizziJoseph V. RizziAmsterdam Institute of FinanceAmsterdam Institute of Finance

May, 2008May, 2008

1. Volume2. Issuers3. Private Equity4. CLO5. Banks6. Rating Agencies

2Amsterdam Institute of Finance May 2008

Volume


Amsterdam Institute of Finance May 2008

4

€0B

€5B

€10B

€15B

€20B

€25B

€30B

€35B

€40B

€45B

€50B

1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08

FIRST QUARTER LBO LOAN VOLUME

Source: S&P


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To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.

1Q 07 2Q 07 3Q 07 4Q 07 1Q 08Buyouts

Volume € 31.49 € 41.30 € 10.63 € 11.07 € 7.33Deal Count 55 52 22 23 16Average Deal Size € 572.59 € 794.28 € 483.14 € 481.30 € 458.25Wtd. Avg. ProRata Spr. (bps) 209.42 201.90 209.48 239.26 227.91Wtd. Avg. Inst. Spr. (bps) 258.53 249.58 273.74 307.49 309.18

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.3x 5.1x 5.0x 4.5x 4.3xLeverage thru 2nd Lien Debt 5.1x 5.8x 5.7x 5.3x 4.4xTotal Debt/EBITDA 5.9x 6.7x 7.0x 6.5x 6.0xEBITDA/Cash Interest 2.2x 2.4x 2.0x 1.9x 2.0x

RecapitalizationVolume € 7.67 € 10.96 € 2.77 € 4.30 € 0.00Deal Count 19 26 6 5 0Average Deal Size € 298.02 € 465.69 € 462.40 € 1,059.49 N/AWtd. Avg. ProRata Spr. (bps) 207.00 206.35 195.00 215.92 N/AWtd. Avg. Inst. Spr. (bps) 260.59 256.88 266.07 275.64 N/A

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.6x 4.7x 5.6x 5.6x N/ALeverage thru 2nd Lien Debt 5.3x 5.1x 6.0x 6.2x N/ATotal Debt/EBITDA 6.0x 5.5x 6.6x 6.2x N/AEBITDA/Cash Interest 2.6x 2.6x 2.2x N/A N/A

RefinancingVolume € 4.85 € 5.91 € 0.83 € 0.82 € 0.33Deal Count 13 15 4 3 1Average Deal Size € 340.63 € 502.79 € 263.70 € 274.57 € 325.00Wtd. Avg. ProRata Spr. (bps) 192.73 193.11 225.00 N/A 250.00Wtd. Avg. Inst. Spr. (bps) 242.10 235.27 312.50 250.00 300.00

Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.2x 4.9x N/A N/A N/ALeverage thru 2nd Lien Debt 4.9x 5.4x N/A N/A N/ATotal Debt/EBITDA 5.8x 5.9x N/A N/A N/AEBITDA/Cash Interest 3.2x 3.2x N/A N/A N/A


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Cancelled U.S. Private Equity Deals

FIRM VALUE ANNOUNCED WITHDRAWN SPONSOR

HARMAN $ 8.2B 4/25/07 9/21/07 KKRAXCIOM $ 2.9B 5/16/07 10/01/07 Silver LakeAffiliated Computer $ 8.2B 3/20/07 10/01/07 CerbeusSLM $25.5B 4/16/07 12/13/07 JC FlowersUnited Rentals $ 4.0B 7/23/07 12/24/07 CerbeusPPH $ 1.7B 8/15/07 1/01/08 BlackstoneNIBC $ 4.4B 8/15/07 1/30/08 JC FlowersReddy Ice $ 1.1B 7/02/07 1/31/08 GSO Capital3 Com $ 2.2B 9/28/07 3/20/08 BainAlliconce Data $ 6.4B 5/17/07 4/18/08 Blackstone

Source: Fortune

IssuersIssuers


Sponsor to Sponsor Club Transactions Dividend Recapitalizations Public to Private Spin offs Private Company Sales Middle Market


Leveraged Buyouts: Type Diversification Trends

Based on Loan Volume Based on Deal Count


0%

15%

30%

45%

60%

75%

90%

2002 2003 2004 2005 2006 2007 1Q080%

15%

30%

45%

60%

75%

90%

2002 2003 2004 2005 2006 2007 1Q08

Copyright © 2008 Standard & Poor's, a division of The McGraw-Hill Companies, Inc.

P2P

Corporate

S25

Other

Corporate

S2S

Other

P2P

Private EquityPrivate Equity


LBO Sponsor Diversification: 1Q08


Sponsor ShareBridgepoint Capital 4.26%Charterhouse Equity Partners 3.19%CVC 3.19%EQT Partners 3.19%Permira 2.13%Kohlberg, Kravis & Roberts 2.13%Blackstone Group 2.13%Apax Partners 2.13%Allianz Capital 2.13%ABN AMRO 2.13%Candover Investments 2.13%LBO France Gestion 2.13%Macquarie 1.06%PAI Management 1.06%Cinven Ltd 1.06%Carlyle Group 1.06%Goldman Sachs 1.06%Texas Pacific Group 1.06%TA Associates 1.06%Dubai International Capital 1.06%Rank Group Ltd. 1.06%Madison Dearborn Partners 1.06%Eurazeo 1.06%Sagard Private Equity Partners 1.06%Electra Fleming 1.06%

25 Most Active Sponsors

Multiple Sponsors on Transaction

19.2%

Single Sponsor on Transaction

80.8%

Single vs. Multiple Sponsors

The analysis reflects sponsors related to buyouts (initial and secondary) only.Most Active Sponsors reflects activity based upon all sponsors named on a transaction. Share is based upon transaction count.


Europe Senior LBO: 1Q08

Fund manager

Carried interest

partner

General

Partner

LP

A

LP

B

LP

C

US Investors

US Exempt

Investors

Non-US

Investors

FUND

Investment Investment InvestmentInvestment

Hold Co.

Hold Co.

Operating Entity

Bank

Bridge finance

Syndicate participants

Leverage finance

syndicate participants

Nominee

High Yield

Investors

Mezzanine

InvestorsFLL

SLL

CLO

Hedge funds


Now In 5 yrs

EBITDA of Acquired Firm 125 188 (c)Sale value @ 8 x EBITDA 1,000 1,500

Financing Plan: Equity @ .20 200 Debt @ .80 800

Total Capital Raised 1,000

Fees 30 50

Net Sale Proceeds on Exit 1,450

Original Debt 800 Less: Debt pay down over 5 years 260Debt at end of 5 years -540 540Return of Original Equity -200Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710


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(a) Share to CEO 2% points or $14.2 x 1 = $14.2Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 Total Management share $71.0

(b) Equals a 28.4% compound annual rate of return on investment.(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.

Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions TransactionHarvard Business School case 9-206-1 Rev 10/16/06

- $ millions -

Terra Firma Bridgepoint Permira Doughty Hanson


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Breakdown of own accounts

PortfolioCompanies: Turnover

Details of profits/earnings

Employee numbers

Management named

Advent International and Montagu Private Equity did not provide any of the aboveSource: Private Equity News


15

Top 10 funds currently raising Industry benchmark medium IRR (%)

Vintage Years

0

5

10

15

20

25

30

1996 98 2000 02 04

11%

7%9%

12%

17%

28%

22%

30%

22%

12%

• Private Equity IPOs and financial aggressiveness

• Credit Correction

•CLO Shutdown

•Frozen syndications

•Writedowns

• Returns – Concentrated in larger more established firms

•Compare to Index: Just Leveraged equity?

•Investors – endowments vs. banks

•Capacity

• Large unused capacity

•Record fund raising continues


• Increased Debt (lower taxes)

• Bargain Purchase

• Operating Improvements

• Improved Governance

• Bondholder Value transfer


InvestorsInvestors


• Banks (Relationship Driven)

• Typically invest in the pro-rata portion of bank facilities (Revolver and Term Loan A)

• Seek first priority claim on assets

• Preference for price stability over liquidity

• Institutional Investors (Yield Driven)

• Primarily looking for high coupon/yield. Embedded option and subordination translate to higher coupons

• Cross over investors (relative value between bank loans and high yield bonds)

• Hedge Funds (unknown impact)



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0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 LTME31/3/08

Europe US

Institutional Investors’ Share of the Institutional Investors’ Share of the Primary MarketPrimary Market

Source: S&P EUR US/Europe: 1Q08 www.lcdcomps.com

Total Return

US Index and Europe’s Euro Denominated Index are single currency indexes and contain only USD and EUR denominated facilities respectively. Their total returns consist of Interest Income Return plus Market Value Return.

Europe’s Multi Currency Index contains facilities denominated in EUR, GBP and USD. The Index calculates returns based upon non-Euro facilities converted into Euros at conversion rates at the time of calculation. As a result, the total return for the

Multi Currency Index consists of Interest Income, Market Value and Currency segments.


9.78%

5.13% 5.06%

6.74%

2.02%

-5.74%

3.22%

5.44% 5.88% 6.36%

-8.56%

5.55% 5.76% 5.30%6.27%

1.12%

-7.60%

-0.57%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

2003 2004 2005 2006 2007 1Q08

US (S&P/LSTA Loan Index) Europe (S&P European Loan Index Multi Currency) Europe (S&P European Loan Index Euro Denominated)

Institutional Loan Investor Groups


314

53

116 109

68 74 7886

225

307318

3318

7

99

22

170

254

132

0

50

100

150

200

250

300

350

1999 2000 2001 2002 2003 2004 2005 2006 2007 LTME31/3/08

European Manager Groups US Manager Groups


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Spread per Unit of Leverage (SPL)


40 bps

50 bps

60 bps

70 bps

80 bps

90 bps

100 bps

110 bps

Europe U.S.

Based upon weighted average institutional spread versus average pro forma total debt leverage ratios.US leverage reflects ratios for Large Corporate Transaction (minimum EBITDA of $50M).

To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. `


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Jan 97-Jun 07 Jan 97-Feb081.00

0.50

0.00

S&P/LSTAIndex

M&L HIGHYIELD(H0A0)

10YR TREAS(GA10)

S&P 500(SPX)

MLHIGRADE

CORP (COCO)

Source: S&P

0.22

0.40

0.30

0.20

0.30

0.30

0.25

0.60

0.65

0.90

BanksBanks


Deal Value No. of

($bn) Deals

JP Morgan 274.8 564

Bank of America 177.4 656

Citigroup 150.3 282

Credit Suisse 113.8 241

Deutsche Bank 104.5 172

Goldman Sachs 100.8 177

Lehman Brothers 73.1 146

Merrill Lynch 69.2 150

RBS 65.7 129

Wachovia 62.7 269

*Global syndicated since Jan 2007 to date.


26Source: Dealogic; Standard & Poor’s LCD

Deutsche Bank 96Citigroup 97Goldman Sachs 95Credit Suisse 94Merrill Lynch 97JP Morgan 95Morgan Stanley 91Lehman n.a.RBS 95Barclays 98UBS 96Credit Agricole 94HSBC 98BNP Paribas 92Societe Generale 96

** Including both funded and unfunded commitments. Exposures and writedowns are net of hedges. Figures as of Dec. 2007 except Goldman, Lehman and Morgan Stanley which are Nov 2007

Merrill Lynch 3,567 1,003 57 47 1,105 5,780


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ABS Leveraged Residential Commercial CMBSEstimated

Company CDOs Loans Mortgages Real EstateTotal

Citigroup 1,108 2,620 2,954 129 ND 16,810

Bank of America 2,725 699 3,338 575 2,596 9,902

JP Morgan 120 1,472 2,880 176 2,959 7,605

Wachovia 213 507 1,570 641 1,451 4,382

Source: Company reports, CreditSights*CDO related losses does not include FG or other subprime. DCO exposure estimated for GS & LEH.1Q08 CDO mark est. at lower of Etrade case & Mark implied by change in ABX. ND: Not disclosed. NA: Not Available

Fixing the Broken Deal – Price and Structural FlexIncrease spread

Original issue discount

Eliminate PIK

Reduce debt

Add a subordinate tranche

More equity

Add covenants

Reduce Price

Seller Paper

MAC


New Buyers of Discounted Bank Loans (adding insult to injury)

• Issuers: TDC @90-95% of par

• PE forms: Citi $12B @ 90%

Apollo

TPG

Blackstone



30

CLO

CLOCLOEnhancement levels

Equity - minimize equity

Maximize AAA

Rating agencies

less multiple

asset default / recovery history

Example

History indicates5% default probability with 0% recovery

Multiples

AAA 6 30

AA 5 25

A 4 20

BBB 3 15

BB 2 10

B 1 5

E 0



32

15 1813 12 15

27

56

108100

3

€0B

€50B

€100B

€150B

1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08

US Europe


How much demand is there absent CLOs? We know that € 34 bn of loan supply was issued to investors other than CLOs last year, non-traditional investors have been adding exposure, and cash has been accumulating.What if the calendar doesn’t clear? Absent deals committed to in the 1H’07, there really hasn’t been any supply. Banks may find room to fund solid credits looking forward, but shareholder-friendly deals seem unlikely (€ 140 bn last year).Bottom Line: The leveraged finance market is shrinking, but that does not mean broad market pricing is “rich” per se.


33

Supply Demand

“New” Investors

‘08 Paydowns:???

‘08 Coupons:€14.9 bn

‘08 Maturities:€28.7 bn

€

Forward Volume*€ 58 bn

Source: UBS, Bloomberg, S&P Note: As of April 17, 2008*This figures comes from S&P. Includes both pro-rata and institutional loans. We estimate €63bn in high-yield supply backlog. Coupon based on avg coupons on €130 bn of loans (S&P ELLI) and €74 bn of bonds (ML Eur HY index) over the remainder of the year. Maturities based on debt distribution schedules for all bonds and loans in Bloomberg less the amount of USD-denominated bonds and loans in Bloomberg. Assumed €/$1.5 for maturity conversion.


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New Year Volume

1998 201999 392000 562001 692002 84 2003 1012004 1062005 1472006 2172007 301

Market size are estimates*CLO new issuance as of 12/31/07

Source: Credit Suisse, Moody’s, S&P, Fitch


35

2008 mantra – Survive and Advance Draining leverage Steep declines in volume CLO – Small Numbers Fund raising – institutional money: Little or no leverage Old pitch: high leverage/low beta New pitch: low leverage/high alpha Smaller, more conservative deals – High equity contributions Default rates trend higher Higher volatility continues

Areas of opportunity: Asset based lending Clubbish, off the run deals Rescue finance Middle market


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DisclosureDisclosure

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.

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Joseph V. Rizzi Amsterdam Institute of Finance May, 2008 Sponsor Based Leveraged Acquisition Market...

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