The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A Acquisition Financing Trends for Private Equity Sponsors and Strategic Buyers: Commitment Letters, Documentation and More Evaluating Current Financing Options, Negotiating and Structuring Loan Terms Today’s faculty features: WEDNESDAY, AUGUST 5, 2015 Lawrence F. Flick, II, Partner, Blank Rome, New York Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek, Uniondale, N.Y. S. Randy Lampert, President, Lampert Debt Advisors, New York Brian Schofield, Managing Director, Lampert Debt Advisors, New York 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Transcript
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Acquisition Financing Trends for Private Equity
Sponsors and Strategic Buyers: Commitment
Letters, Documentation and More Evaluating Current Financing Options, Negotiating and Structuring Loan Terms
Today’s faculty features:
WEDNESDAY, AUGUST 5, 2015
Lawrence F. Flick, II, Partner, Blank Rome, New York
Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek, Uniondale, N.Y.
S. Randy Lampert, President, Lampert Debt Advisors, New York
Brian Schofield, Managing Director, Lampert Debt Advisors, New York
30 years of experience, over $15 billion of debt financings completed for over 60 clients Experience across a broad array of industries including technology, telecommunications,
financial services, industrial, and consumer/retail Co-founder of Debt Capital Markets Group and Head of Business Development at
Morgan Joseph Founder and Head of Leveraged Finance at Nomura Securities
Completed over $2 billion of transactions as either principal or advisor Vice President – ICON Capital Corp., originated, structured and underwrote private debt
investments in numerous industries and special situations Highly developed lender/investor network capable of investing across the capital
structure Founder of Schofield Realty Group, a real estate finance, development, and brokerage
company
Lampert Debt Advisors is a boutique investment bank specializing in arranging debt financing for privately-owned, sponsor-backed and publicly-traded companies
August 2015 | 6
M I D D L E M A R K E T AC Q U I S I T I O N F I N A N C I N G OV E RV I E W
Uber-competitive environment for attractive assets is driving valuations to all time highs…
…and resulting in leverage levels not seen since the halcyon days of 2007…or is it the other way around??
Purchase Price Multiple
9.3x
8.3x
6.6x
8.4x 8.2x7.9x
8.8x
9.6x 9.8x 9.7x
2007 2008 2009 2010 2011 2012 2013 2014 1H15 2Q15
Leverage Multiples
5.6x
4.5x
3.3x
4.2x 4.3x4.5x
4.8x
5.3x5.1x 5.2x
2007 2008 2009 2010 2011 2012 2013 2014 1H15 2Q15
FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA
August 2015 | 7
TO O M U C H C A P I TA L , C H A S I N G TO O F E W D EA L S Dry powder abounds for both private equity sponsors and lenders, alike; however acquisition-related volume has been relatively soft
…creating a favorable pricing environment for borrowers
Pro Rata and Institutional Leveraged Loan Volume Pro Rata and Institutional Spreads
L+0
L+100
L+200
L+300
L+400
L+500
L+600
L+700
2007 2008 2009 2010 2011 2012 2013 2014 1H15 2Q15
Pro Rata Institutional
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Institutional Pro Rata
$ in billions
A lack of M&A activity has led to weak year-over-year acquisition related loan volume
August 2015 | 8
A S S E T - B A S E D LOA N S R E M A I N A K E Y C O M P O N E N T
Footnotes: (1) Data for 3Q14 unavailable; (2) Data for 4Q14 unavailable
ABL volume increased significantly in the 2Q15 reaching $5.5 billion
2Q15 spreads averaged L + 179 bps, Commitment fees ticked up slightly in 2Q15 to 33 bps
Intense competition amongst banks for asset-based facilities has resulted in extraordinarily favorable pricing for borrowers
Volume and Number of Deals ($ in billions)
$33
$21
$16
$13
$25
$19 $20 $20
$9
$6
0
10
20
30
40
50
60
70
80
90
$0
$5
$10
$15
$20
$25
$30
$35
2007 2008 2009 2010 2011 2012 2013 2014 1H15 2Q15Volume Number of Deals
Average ABL Spreads (bps)(1)
L+000
L+050
L+100
L+150
L+200
L+250
L+300
L+350
L+400
L+450
L+500
August 2015 | 9
P R E VA I L I N G T R E N D S The prevalence of non-bank lenders, such as BDCs and private debt funds, combined with regulatory constraints impacting commercial banks, has underpinned the shift away from traditional bifurcated debt structures
Observation Commentary
Unitranche becoming more commonplace • Ease of execution combined with attractive pricing make unitranches very competitive • AAL rather than intercreditor • Pricing of L + 650 – 1000 depending on the credit
• Forcing junior capital (2nd lien / mezz) providers to be more flexible in order to win mandates • Tighter pricing, fees • 30-35% covenant cushions • Greater intercreditor flexibility
Covenant flexibility • Cushions of 25%+ for first lien and unitranche
Availability of delayed draw facilities for Acquisitions • Typically limited to 12-18 months for banks, longer for non-bank lenders
• Net neutral impact on pro forma leverage • Conditioned on prenegotiated metrics, e.g. purchase multiple,
line of business, geography, etc.
August 2015 | 10
P R E VA I L I N G T R E N D S The prevalence of non-bank lenders, such as BDCs and private debt funds, combined with regulatory constraints impacting commercial banks, has underpinned the shift away from traditional bifurcated debt structures
Observation Commentary
Impact of leveraged lending guidelines • Tangible impact on banks’ appetite for leveraged credits • 3.0x senior / 4.0x total leverage for domestics • 3.5x – 4.0x senior / 5.0x – 6.0x total for foreign banks
Required Due Diligence • Quality of Earnings from reputable firm is almost universally required
• LDA has recommended clients engage the accounting firm early in the process to accelerate the closing timeline
August 2015 | 11
L DA D E BT F I N A N C I N G AU C T I O N P R O C E S S
Structure
Implement optimal structure based on real-time knowledge of current market terms and requirements and the company’s needs
Identification and mitigation of credit and transaction-related risks Specific covenants and inter-creditor terms established upfront to avoid “eleventh hour”
negotiations
Solicitation
Rapid deployment and comprehensive solicitation of investors for each financing layer Concentrated management meetings minimize distraction from running the business Successfully secure multiple proposals and commitments to enhance degrees of freedom
throughout the process
Closing
Seamless transition from commitment to closing Reduction in closing surprises and elimination of “drift” in terms Increased likelihood of successful closing
August 2015 | 12
S E L EC T R EC E N T LY C O M P L E T E D T R A N SAC T I O N S
$430,000,000 Business Combination
has merged with
Exclusive Financial Advisor and Placement Agent
$250,000,000 Refinancing
A Monomoy Capital Partners Portfolio
Company
Co-Manager
Undisclosed Acquisition Financing
has acquired
Exclusive Financial Advisor and Placement Agent
$78,500,000 Acquisition Financing
has acquired
Exclusive Financial Advisor and Placement Agent
$38,000,000 Recapitalization
Exclusive Restructuring Advisor and Placement
Agent
$75,000,000 Recapitalization
PAQ, Inc. & QSI, Inc.
Operator of:
Exclusive Financial Advisor and Placement Agent
$77,200,000 Recapitalization
Exclusive Restructuring Advisor and Placement
Agent
$66,000,000 Recapitalization
A Monomoy Capital Partners Portfolio Company
Exclusive Financial Advisor and Placement Agent
$45,000,000 Acquisition Financing
has acquired
Exclusive Financial Advisor and Placement Agent
Undisclosed
has acquired
Exclusive Financial Advisor and Placement Agent
2100 Trust, LLC
Acquisition Financing: Strategies for Deal Counsel
Evaluating Financing Options, Structuring the Deal, Addressing Loan Documentation and Intercreditor Issues
Lawrence F. Flick, II, Partner, Blank Rome, New York
Structuring the Transaction • Cash Flow vs. ABL; Layers of Financing
– During downturn, cash flow loans largely disappeared and traditional cash flow lenders became ABL lenders.
– Amend/extends often accompanied by conversion to ABL structure and/or additional covenants. Strongest borrowers were able to extend existing loans, reduce covenant hurdles, and upsize facilities to continue growth.
– More cash flow deals getting done, but ABL deals still very common, especially in lower middle market.
– Important to understand real availability in ABL structures. Increasing lender discretion in borrowing base criteria versus borrower's desires for certain of access to capital.
– Split collateral package loans.
– Increase in sponsors providing mezz/sub debt or even senior debt in order to more quickly deploy capital; to be determined whether there will be an adequate supply of traditional lender loans to refinance sponsor financing.
• Use of holding companies – Important to understand lender's requirements around org chart early in process.
– Most lenders require pledge of equity in borrower/operating company to facilitate transfer of control in default situation (exercise of pledge rights vs. foreclosure on operating assets)
14
• Fraudulent transfer issues – Traditional lenders increasingly focused on issue, particularly as leverage levels
increase.
– Many approaches: Target as borrower, acquisition entity as borrower with target assuming obligations immediately upon closing, new strategies to limit loans made to operating subsidiaries, stronger solvency representations.
– Does not seem to be a standard approach at this time.
• Intercreditor issues – Many possible intercreditor issues, affecting subordinate and second lien lenders,
sponsors (relating to management fees), holders of seller notes and earnout recipients.
15
• Focus on when and to what extent subordinated lenders can exercise enforcement rights and the extent of the senior lender's ability to make decisions binding on subordinated lenders in enforcement proceedings.
• Subordinated lenders focused on an exit strategy, a seat at the table during enforcement proceedings, and objective asset valuations.
• Seller notes and earnouts are often deeply subordinated, which is a key issue to be handled; different approaches on timing of these discussions.
• Seller notes and earnouts often subject to refinancing indebtedness, further prolonging the lifecycle.
16
17
Investors/
Sponsor
Parent
(Top Co)
Sub-Holding
Company
Senior Borrower
(Purchaser)
Target Company
Senior Lenders 2nd Lien Lenders
Subsidiary 1 of
Target
Subsidiary 2 of
Target
Subsidiary 3 of
Target
Mezzanine/High
Yield Lenders
Equity Investment by way of
Loan Notes Equity Investment by way of subscription for
Share of Parent (including Preference Shares)
Subscription for Share of
Sub-Holding Company and
Structural Intra Group Loan
Subordinated
Loan/Bond/Note
Downstreaming of
funds
Senior Loan
Acquisition
2nd Lien Loan/Note (if
applicable)
Warrants
(if applicable)
(Term Facilities A, B and C
plus Revolver)
Equity
pledge
Equity pledge
Rollover equity
18
Challenges of Borrower’s Counsel
19
Investors/
Sponsor
Parent
(Top Co)
Sub-Holding
Company
Senior Borrower
(Purchaser)
Now Merged
Target Company
Senior Lenders 2nd Lien Lenders
Subsidiary 1 of
Target
Subsidiary 2 of
Target
Subsidiary 3 of
Target
Mezzanine/High
Yield Lenders
Equity Investment by way of
Loan Notes Equity Investment by way of subscription for
Share of Parent (including Preference Shares)
Subscription for Share of
Sub-Holding Company and
Structural Intra Group Loan
Subordinated
Loan/Bond/Note
Downstreaming of
funds
Senior Loan
2nd Lien Loan/Note (if
applicable)
Warrants
(if applicable)
(Term Facilities A, B and C
plus Revolver)
Equity
pledge
Equity pledge
Rollover equity
Dividends
?
Management
Fees, Tax
distributions, etc
?
Payment of Notes
to Seller(s)
Commitment Letter Issues
• “SunGard” provisions
• Market flex provisions
– Increased sponsor resistance given increased competition among lenders.
– Certainty of deal terms and shifting some or all of the syndication risk to lenders is critical for many sponsors.
– Increased sponsor focus on covenant compliance and cash-flow sweep provisions (extensive negotiations on EBITDA add-backs and other inputs driving covenant compliance and cash-flow sweep numbers).
– Sponsor demands for flexibility to contribute additional capital without mandatory pre-pays, undertake equipment and other operational financing options, and to execute growth strategy through add-on acquisitions.
– Trend towards negotiating definitions at term sheet/commitment letter stage.
• Permitted acquisitions – Often a critical negotiating point for sponsors, but rarely will lenders provide self-executing
carveouts from negative covenants for material transactions. – Focus on issues other than the basket: can process be streamlined, amendment fees agreed to up
front or waived, etc. – For negative covenants generally, sponsor focus on avoiding yet another costly amendment:
certainty on covenant compliance, flexibility for growth/ordinary course event, tying together negative covenants so that an exception to one is an exception to all, predetermined amendment fees for non-default amendments.
• Permitted distributions – Rarely will pure dividends be permitted, but important to negotiate rights to make tax distributions. – Need to look up the org chart to understand the complete picture around tax distributions. – Consider need for carveouts in respect of dividend accruals on preferred stock, management fees,
earnouts, and equity repurchases from departing employees.
21
• Equity cure rights – Sponsors have different strategies.
– If included, negotiations around amount of cure permitted, number of cures permitted, and time frame over which cure amounts included in covenant calculations.
• Solvency representations
• Defaulting lender provisions
– Typical remedies.
– Lead lender(s) commitment to make loans for defaulting lenders.
– Impact on availability of swingline loans.
• Consents to assignments – Sponsor focus on the "relationship" and have approval right on new agent or
