79
The Business of Financing Business Wednesday, May 4, 2010 9:30 AM – 10:45 AM
The Business of Financing Business
Wednesday, May 4, 2010
9:30 AM – 10:45 AM
IPO market trendsActivity picked up by end of 2009 and skyrocketed at end of 2010
Source: E&Y, Dealogic, Thompson Financial.2
$29 $33 $29 $39 $29 $39 $38 $74 $39 $66 $49 $112 $37 $95 $59 $105 $41 $39 $13 $2 $1 $10 $34 $67 $54 $47 $53 $132
339
385
339
457
327
409
364
452
360
473
355
608
395
574
442
603
253274
164
7852
82
146
297 293314 302
484
0
100
200
300
400
500
600
700
0
20
40
60
80
100
120
140
Q1
04
Q2
04
Q3
04
Q4
04
Q1
05
Q2
05
Q3
05
Q4
05
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
Q4
07
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Number of dealsUS$ billions
Capital raised
Number of deals
Companies worldwide raised $766 billion
in 2010 via common stock issuance
Sources: Dealogic, Thompson Reuters.
0
100
200
300
400
500
600
700
800
900
1000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
US$ billions
IPO
Follow-on
offering
3
M&A trendsActivity gradually picking back up since dip in Q1 2009
Source: Bloomberg.4
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0
200
400
600
800
1,000
1,200
1,400
1,600
Q1
01
Q3
01
Q1
02
Q3
02
Q1
03
Q3
03
Q1
04
Q3
04
Q1
05
Q3
05
Q1
06
Q3
06
Q1
07
Q3
07
Q1
08
Q3
08
Q1
09
Q3
09
Q1
10
Q3
10
Q1
11
Deal countUS$ billions
Volume Deal count(Left axis) (Right axis)
Highlights of 2011 IPOs and M&AsAre more blockbuster deals on the horizon?
Source: Bloomberg April 2011.
5
Top three 2011 IPOs
• Freescale Semiconductors
• USD 1,150m
• Arcos Dorados
• USD 937m
• Allison Transmission
• USD 750m
Top three 2011 M&As*
• T-Mobile USA / AT&T
• USD 39.0B
• Progress Energy / Duke Energy
• USD 25.5B
• Genzyme Corp / Sanofi-Aventis
• USD 19.6B
*Right side = Acquirer
Potential IPO and M&A transactionsWhich will materialize in the forthcoming quarters?
6
Upcoming (Priced) IPOs
• General Motors
• USD 15,800m
• HCA Healthcare
• USD 3,720m
• Kinder Morgan
• USD 2,320m
Proposed M&As*
• BskyB / News Corp
• USD 13.2B
• Tenet Healthcare /
Community Health Systems
• USD 6.6B
• Equinox Minerals/
Minmetals Resources
• USD 6.3B
Source: Bloomberg April 2011.
*Right side = Acquirer
Mid-market firms also recoveringSteady deal flow with increasing volume since Q1 2009
Source: Deloitte Corporate Finance “Middle Market M&A News 2010: Year in Review”.7
Capital markets have favored largest issuers
Capital structure breakdown for Q2 2009 to Q1 2010
Bond and loan issuance
Size of capital structure % of issuers that priced bonds
or loans over the past 12 months
$300mm or less 13.9%
$301mm to $999mm 28.0%
$1bn to $3bn 48.5%
$3bn and greater 59.4%
Source: JPMorgan. 8
Small capital structures have the majority
of refinancing ahead of them
Maturity schedule by capital structure size
Size of capital structure % total outstanding
2010 - 2012
% total outstanding
2013 - 2015
$300mm or less 27.4% 59.7%
$301mm to $999mm 18.7% 57.5%
$1bn to $3bn 12.4% 53.8%
$3bn and greater 16.6% 46.0%
Source: JPMorgan.9
Total private credit market debt/US GDP1916 to 2010
Sources: Federal Reserve, Historical Statistics of the United States, Bureau of Labor Statistics, Milken Institute.
0
50
100
150
200
250
300
350
400
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Percent
Great Depression
Today
10
Global corporate bond issuance1980 to 2010
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
US$ billions
Sources: Dealogic, Thompson Reuters. 11
Source: Dealogic.
0.0
0.5
1.0
1.5
2.0
2.5
1993 1995 1997 1999 2001 2003 2005 2007 2009
Investment grade
Leveraged loans
Highly leveraged loans
US$ trillions
Loan issuance in the United StatesStill downward trend and highly leveraged loans disappearing
12
Corporate bond issuance in the United States1996 to 2010
0
200
400
600
800
1,000
1,200
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US$ billions
Investment grade
High yield
Source: SIFMA. 13
Investment returns for selected asset classes
Sources: Bloomberg, Milken Institute.
$446
$237
$191$169
$133 $122
0
100
200
300
400
500
Emerging markets
U.S. high yield bonds
U.S. AAA corporates
U.S. Treasuries Commodities S&P 500
As of March 2011, a $100 investment made in December 2000 gives you:
14
-
Total return index 1986 to 2011High yield hit by credit crunch but now more robust than ever
Source: Bloomberg.15
Index, March 1980 = 100
0
100
200
300
400
500
600
700
800
900
Aug-86 Nov-88 Feb-91 May-93 Aug-95 Nov-97 Feb-00 May-02 Aug-04 Nov-06 Feb-09
High yield bonds Government bonds Corporate bonds-
Spread to worst 1996 to 2011Spreads spiked during credit crunch but have now subsided
Source: Bloomberg. 16
0
500
1,000
1,500
2,000
2,500
Dec-96 Apr-98 Aug-99 Nov-00 Mar-02 Jul-03 Nov-04 Mar-06 Jul-07 Nov-08 Mar-10
Basis Points High yield bonds Government bonds Corporate bonds-
0
5
10
15
20
25
Sep-86 Nov-88 Feb-91 May-93 Aug-95 Nov-97 Feb-00 May-02 Aug-04 Nov-06 Feb-09
% High yield bonds Government bonds Corporate bonds
Yield to maturity 1986 to 2011High yield spiked multiple times more than corporates during crisis
Source: Bloomberg. 17
Percentage -
The credit cycle vs. high-yield use of proceedsRefinancing dominates issuance during recessions and early stages of recovery
50 49 50 4937
70 73 7256
46 4233
44
64 60
31 3928 30
40
16 13 10
11
13 17
18
16
2623
1912
22 21 2214 14 17
3240 41
4940
1017
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percent Refinancing General capital expenditure M&A/LBO
Source: Fitch Ratings.
18
Percentage
U.S. high-yield corporate bonds outstanding
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1971 1976 1981 1986 1991 1996 2001 2006 March 2011
US$ trillions
Source: Edward Altman.
19
U.S. high-yield default rates
Source: Edward Altman.
0
2
4
6
8
10
12
14
1971 1976 1981 1986 1991 1996 2001 2006 2011 YTD
Percent
20
Percentage
Effects of the financial crisisHighlights of U.S. financial regulation reform bill
Source: Reuters “Factbox: Highlights of U.S. financial regulation reform bill”. 21
• OTC derivatives trading would be redirected through more accountable channels
such as exchanges and clearinghouses.
• Volcker rule: A new rule would bar proprietary trading by banks for their own accounts
unrelated to customers.
• Behind the hedge: Private equity and hedge funds would have to register with
regulators and open their books to scrutiny.
• Bank cushions: Banks would have to set aside more capital to ride out tough times,
but will get several years to comply.
Consolidation in the U.S. banking industry1934 to 2010
Source: FDIC.
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Number of commercial banks
22
Non-bank institutions are playing an
ever-larger role in U.S. financial sectorShare of financial sector assets, 1970 to 2010
Source: Federal Reserve, Flow of Funds.
0
2
4
6
8
10
12
14
16
18
20
0
10
20
30
40
50
60
70
1970 1975 1980 1985 1990 1995 2000 2005 2010
PercentPercent
Banks (left axis)
Non-bank financial institutions(right axis)
23
Big banks dominate U.S. banking industry:
Asset shares by bank size
Sources: FDIC, Milken Institute.
(107 banks or
1.3% of total
number)
Greater than $10 billion
42%
$1 billion to$10 billion
30%
$100 million to $1 billion
20%
Less than$100 million
8%
1984Number: 14,484 banks
Assets: $2,508 billion
Greater than $10 billion
77%
$1 billion to $10 billion
11%
$100 million to $1 billion
11%
Less than $100 million
1%
2009Number: 8,012 banks
Assets: $13,109 billion
24
Are the biggest banks too big to fail?
Trillion dollar banks, ranked by assets, 2010
Sources: Bloomberg, Milken Institute.
Note: Market capitalization is from April 6, 2011.
Bank Country
Total
assets
(US$
trillions)
Market
cap (US$
billions)
13 China Construction
Bank
China 1.6 240
14 Banco Santander Spain 1.6 102
15 Bank of China China 1.6 150
16 Agricultural Bank
of China
China 1.6 146
17 Lloyds Banking U.K. 1.5 69
18 Societe Generale France 1.5 50
19 UBS Switzerland 1.4 71
20 Sumitomo Mitsui Japan 1.3 41
21 Wells Fargo U.S. 1.3 169
22 Credit Suisse Switzerland 1.1 52
23 Commerzbank Germany 1.0 11
Bank Country
Total
assets
(US$
trillions)
Market
cap (US$
billions)
1 BNP Paribas France 2.7 92
2 Deutsche Bank Germany 2.5 56
3 HSBC Holdings U.K. 2.5 192
4 Barclays U.K. 2.3 59
5 Royal Bank of
Scotland
U.K. 2.3 77
6 Bank of America U.S. 2.3 138
7 Mitsubishi UFJ Japan 2.2 62
8 Credit Agricole France 2.1 40
9 JPMorgan Chase U.S. 2.1 188
10 ICBC China 2.0 258
11 Citigroup U.S. 1.9 131
12 Mizuho Financial Japan 1.7 33
25
Price-to-book ratio of investment banksPlummeted in 2008 but now stabilizing
Source: Bloomberg.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Price/book ratio
Goldman Sachs Group
UBS
26
State of the Leverage Financing Market
Milken Institute
Global Conference
May 4, 2011
Brian Reynolds
Founder & Managing Partner
Chatham Capital
Agenda
I. Robust Leverage Financing Market
II. Syndicated Deals Pricing Trend
III. New Issue Volume Rebound
IV. Worry of Refinancing Wall Decreased
V. Comparison of Mezzanine/High Yield vs. Other Asset Classes
VI. Lower Middle Market Update
VII. New Market Participants
VIII. New Participants Exit
IX. Middle Market Financing Trend
X. Lower Middle Market – Senior Cash Flow Financing
XI. Lower Middle Market – Mezzanine Financing
XII. Typical Subordinated Debt Term Sheet
XIII. Summary of Market Terms
XIV. Case Study – Empower/Crimzon Rose/Healthfield
28
Robust leverage financing market
The debt markets turned in a remarkable
year in 2010
Debt market increasingly open to more
aggressive structures and uses of
proceeds
The competitive environment will continue
to benefit borrowers – especially for
sub $15 million EBITDA as lenders and
investors tend to pursue high-yield
opportunities
Source: Standard & Poor’s
6.0%
6.2%
6.4%
6.6%
6.8%
7.0%
7.2%
7.4%
7.6%
7.8%
8.0%
6.2%
Leveraged loans new issue average yield
29
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
Pe
ak 1
0
J.T
. B
ake
r
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Hile
x P
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are
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Le
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's P
oo
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Fo
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So
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aye
r
Lin
ea
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Po
we
r
Asce
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Le
arn
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Asce
nd
Le
arn
ing
(2
nd
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n)
Sa
xco
Inte
rna
tio
na
l
Ap
plie
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yste
ms
Ap
plie
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yste
ms (2
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L
ien
) CC
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nsta
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Hyla
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So
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are
Be
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yste
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Sm
ile
Bra
nd
s
Pre
sid
io
Su
mm
it M
ate
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ls
He
nry
Co
Syndicated deals pricing trend
Source: Thomson Reuters LPC
October 2010 November 2010 December 2010
Fle
x d
ow
n
Fle
x u
p
More deals were flexed down than flexed up toward the end of 2010 30
New issue volume rebound
The overall leverage finance market rebounded
strongly in 2010
High-yield volume dominated the overall
institutional loans volume with record domestic
issuance level
Improving environment, excess demand, and
strong refinancing activities led such volume
increase
Source: Standard & Poor’s
Issuance US$ billions
New issue volume
0
50
100
150
200
250
300
350
400
450
500
HY bonds
Institutional loans
31
Worry of refinancing wall decreased
Source: Standard & Poor’s
Refinancing wall is fading as maturities
have been pushed back through high-
yield take-outs and extensions
Debt maturities over 2014 remain of
interest
Question over the ability to digest such
a concentrated maturity with declining
demand from CLOs, of which
reinvestment period comes due
32
0
50
100
150
200
250
300
350
Issu
an
ce
($
Bils.)
Upcoming Maturities
2009 Level
Institutional Loans
HY Bonds
Comparison of mezzanine/HY
vs. other asset classes
Mezzanine loan and high yield bonds
have outperformed than other asset
classes for the recent five years –
especially, during the recession period
Mezzanine and high yield investment
demonstrated an “equity-like” return with
“debt-like” risk characteristics
Source: Bloomberg, Credit Suisse, Bank of America Merrill Lynch, S&P
LCD, Thomson Reuters, and Economic Research by Federal Reserve
Bank of St. Louis-60%
-40%
-20%
0%
20%
40%
60%
Jan-07 Jan-08 Jan-09 Jan-10
US Investment Grade Corporate Bond BBB
US High Yield BB
10-year Treasury
S&P 500 Index
Leveraged Loan Index
Mezzanine
Holding period return 2007 - 2010
33
Lower middle market update
After a slow start to 2011, deal activity is beginning to pick up in April
Increasing M&A activities
Continuing refinancing and recapitalization program
Q2 2011 credit conditions have remained favorable to both borrowers and lenders
For borrowers, pricing has tightened through Q4’10/Q1’11
For lenders, attractive yield based on lower cost of capital and stickiness of
Libor floor
Regional commercial banks are increasingly under pressure from their regulator
Historically the primary source of low cost senior debt
Borrowers will increasingly be pushed toward non-bank lenders34
RevolverTerm BTerm A
Last Out
SeniorTranche B
Common
EquityPreferred
Equity
Sub Debt
w/ WarrantsSub Debt
Fixed Rate Only
Second Lien
Loans
LIBOR
+250
LIBOR
+300
LIBOR
+350
LIBOR
+400 to 800%15 -17% 17 - 19% 19 – 22% 23%+
Enterprise Value
Second Lien Loans
Bank Senior Debt Mezzanine Debt Private Equity
Traditional
Banks
Finance
CompaniesBDCs Hedge Funds
Insurance Companies
Mezzanine Funds
PEF
New Market Participants
Non- Bank Senior Debt
During 2005 – 2007, a number of new entrants coupled with CLO financing provided significant liquidity in the
market, which created a bubble.
35
RevolverTerm BTerm A
Last Out
SeniorTranche B
Common
EquityPreferred
Equity
Sub Debt
w/ WarrantsSub Debt
Fixed Rate Only
Second Lien
Loans
LIBOR
+250
LIBOR
+300
LIBOR
+350
LIBOR
+400 to 800%15 -17% 17 - 19% 19 – 22% 23%+
Enterprise Value
Second Lien Loans
Bank Senior Debt Mezzanine Debt Private Equity
Traditional
Banks
Finance
CompaniesBDCs Hedge Funds
Insurance Companies
Mezzanine Funds
PEF
New Participants Exit
Non- Bank Senior Debt
Post credit crisis, a lot of liquidity has been lost and senior lender’s capacity has shrunk. As a result, mezzanine
grows in popularity to fill the financing gap as ‘one-stop’ financing solution.
36
Bank of America
Citigroup
J.P. Morgan Chase
U.S. Bancorp
Wachovia
Wells Fargo
American National Bank & TrustFirst Commerce Norstar Bank
Bank of America First Fidelity Norwest
Bank of Boston First Interstate OFFIBANK Holdings
Bank of New England First National Bank of ChicagoPacific Northwest Bancorp
BANK ONE First Pennsylvania Bank Philadelphia National Bank
Bank South First Star Prem. Bancorp
Barclays Business Credit First Union Republic Security Financial
Barnett Fleet Bank RIHT National Bank
BayBanks Fleet Boston Roosevelt Financial
Boatmen’s Florida National Salomon Smith Barney
C&S/Sovran Fourth Financial Sanwa
Casco Northern Bank Great American Seattle-First National Bank
Central Fidelity Banks Hamilton Bank Security Pacific
Chase Manhattan Bank J.P. Morgan Shawmut Bank
Chemical Bank KorAm Bank Signet Banking Corporation
Citibank Liberty National SouthTrust Bank
Citizens and Southern Manufacurers Hanover Trust Sovran Bank
Congress Financial Corp Maryland National Star Bank
Connecticut National Bank Mercantile Bank Summit Bancorp
Continental Bank Meridian Texas Commerce Bank
Corestates Bank Montgomery Securities Travelers
Dominion Bank NationsBank Two Rivers Corporation
EAB NatWest U.S. Bancorp
First Bank System NBD Bank N.A. Valley National
First Chicago NCNB Wachovia
First City Bancorporation New Jersey National Bank Wells Fargo
Before: 78 banks with over $5.2 trillions assets
Now: 6 banks with over $5.2
trillions assets
Consolidation continues with the recent Bank of America’s acquisition of LaSalle Business Credit.
Middle Market Financing Trend
37
Lower middle market –
Senior cash flow financing
Leverage multiple remains conservative level
Lenders wary to go above 2.5x LTM EBITDA for credit with sub $15MM in EBITDA
Mezzanine lenders provide senior bridge/one-stop as an alternative
Maturities greater of five years or six months after maturity of the senior debt
Recap liquidity still available
Amortization schedule
>$15MM EBITDA: 5% - 10% per annum
<$15MM EBITDA: 7 – 10 year straight line
Pricing Metrics
Libor + 3.5% ~ 4.5% & 25-50bps unused (bank lender)
Libor + 4.0% ~ 6.5% & 50-75bps unused (non-bank lender)
0.375% ~ 0.563% upfront fee (bank lender)
0.75% ~ 2.0% upfront fee (non-bank lender)38
Lower middle market – mezzanine financing
Investor eager to deploy capital
Receptive to smaller issue (<$10MM EBITDA) issuers
Receptive to “storied” credits
Leverage tolerances more than 4x for larger deals (>$20MM EBITDA)
3.5x – 3.75x for dividend recaps or “storied” credit
Pricing consistently 14% - 18% for subordinated debt
<$15MM EBITDA deals pricing at 15% - 18%
>$15MM EBITDA deals pricing at 14% - 16%
Competitive environment upon return of cross-section investors
Traditional LP funds, credit opportunity funds, captive bank funds, BDCs, hedge funds,
commercial finance companies, and insurance companies creating pricing pressure
Coupon-only deals readily available
Warrants routinely requested for
Storied credit, greater than 4x Debt/EBITDA, leveraged recap, and insufficient equity capital
39
Typical subordinated debt term sheet
Security Senior Subordinated Notes (the “Subordinated Notes”)
Maturity Five years from Closing
PricingAggregate Internal Rate of Return (“IRR”) of Approximately 14%-18% (20%+ with warrants)
• IRR Components: 12% cash interest, 2% - 6% PIK interest.
Subordination
Terms
The Subordinated Notes will be subordinated to prior payment in full of the principal of, and premium, if any, and interest on any senior debt, and senior to any subsequently issued subordinated indebtedness, and any convertible indebtedness, upon any distribution of the assets of the Company upon any dissolution, winding up, total or partial liquidation or reorganization of the Company.
Mandatory
Prepayments No amortization; payable in full at maturity.
Optional
Prepayments
Pre-payable per the following indicative schedule:
Year 1: No Prepayment
Year 2: 2% of the principal amount outstanding
Year 3: 1% of the principal amount outstanding
Year 4: par
CovenantsFree Cash Flow to Fixed Charge Ratio of 1.05x growing to 1.10x in later years
Total Debt to EBITDA ratio of 4.50x, reducing to 4.00x in later year
Default
ProvisionsCross Acceleration on all senior indebtedness of the Company 40
Summary of market terms
Deal component April 2011 April 2010
Cash flow Senior Debt (Debt/EBITDA)
<$10MM EBITDA 1.50-2.00x
>$15MM EBITDA 2.00-3.25x
>$25MM EBITDA 2.50-3.50x
<$10MM EBITDA 1.50-2.00x
>$15MM EBITDA 2.00-3.00x
Total Debt Limit (x EBITDA):
<$10MM EBITDA 3.00-3.75x
>$15MM EBITDA 3.50-4.50x
>$25MM EBITDA 4.00x-5.00x
<$10MM EBITDA 3.00-3.75x
>$15MM EBITDA 3.50-4.50x
Senior Cash Flow Pricing:<$10MM EBITDA 3.00-3.75x
>$15MM EBITDA 3.50-4.50x
<$10MM EBITDA 3.00-3.75x
>$15MM EBITDA 3.50-4.50x
Second Lien Pricing (Avg): L+7%-10%, (with 1%-2% floor) L+7%-10%, (with 1%-2% floor)
Subordinated Debt Pricing:14%-18%
>$35MM EBITDA 12%-14% 16%-19%
“One Stop” Pricing8.5%-11.5% Fixed
L+7.5-9% Floating ( 1%-1.5% Floor) NA
Warrants Feature:
Not necessarily absent for very small issuers (<$10MM
EBITDA) or in Dividend Recaps where 100% or more of
initial investment is returned
Requested, not Required
LIBOR Floors: 1.00%-2.00% Libor floor, Cash Flow
deals only in most cases.
1.5-2.0% Libor floor on most CF deals
(Some on ABL deals)
Mezzanine Opt. Pre-Payment (first 3
years): Mezzanine Opt. Pre-Payment (first 3 years):
2nd Lien: 102,101 Par
Sub: No-Call year one, 102, 101, par
Minimum Equity Contribution: 30% 35%
Source: SPP Capital/ Middle Market Leveraged Financing Update (April, 2011)41
May 2007 – Fund III funded $5.3 million (in conjunction
with a $16.8 million facility with Fifth Third Bank) to
complete the acquisition of Empagio by management.
In August 2007, Company agreed to redeem
10.5% (of 35.5%) Chatham warrant for
$5.15 million.
October 2007 - March 2009 – Company completed three
acquisitions with additional financing provided by
Chatham and Atlanta Equity.
Annual revenue increased from $13 million
in 2007 to $30 million as of 2010.
New $38 million of institutional capital
contributed behind Chatham.
January 2011 – Lake Capital completed majority
recapitalization ($57 million investment) that repaid
Chatham’s $32 million of second lien loans and
$250,000 of preferred equity.
Over the term of the facility (less than four
years), Fund III generated a realized IRR of
56.9% ($28.1 million of income).
Cascade realized IRR of 22.5%
Case study – Empower
Transaction Result
Since the original closing in May 2007, Chatham received total income of $30.4 million, which
resulted in IRR of 56.9% for Fund III and 22.5% for Cascade 42
July 2009 – With retail industry out of favor and other
lenders nervous, Chatham provides a $7 million term
loan (in conjunction with a $17.5 million senior revolver
from Wells Fargo) to Crimzon Rose to fund the
acquisition of Erica Lyons, a branded fashion jewelry
line
• Loan conservatively underwritten with
Debt/EBITDA of less than 2.5 times at
peak; significant collateral coverage
through excess availability on revolver
• September 2010 - Following the successful integration
of Erica Lyons, Company exceeds Year 1 EBITDA
projections by 20% and uses excess borrowing capacity
on its senior line of credit to repurchase one-third of
Chatham’s warrant
• Fund III received $2.2MM warrant
income.
February 2011 – With continued strong financial
performance and confident market position, Company
refinances Chatham debt and repurchases remaining
warrant
• Fund III realized IRR of 87.5%
Case study – Crimzon Rose
Transaction Result
Over 21 month investment period, Chatham received $10.4 million of income; realized IRR of 87.5% 43
Case study – Healthfield
2001 2/19/2002 9/25/2003 6/30/2004 7/29/2004 6/30/2005 2/28/2006
Milestone/Key Acquisitions MBO out of
Foreclose
Sale
Columbus
Acquisition
TotalCare
Acquisition
Gadsden
Acquisition
Wiregrass
Acquisition
Capital Health
Acquisition
Acquired by
Gentiva/
Chatham Exit
Key Financials
Combined PF Rev $70.5MM $85.3MM $119.3MM $124.3MM 188.8MM 315.0MM 328.1MM
Combined PF EBITDA $13.1MM $17.4MM $20.2MM $21.3MM $32.4MM $54.0MM $58.6MM
Chatham Investments
Chatham Loan Amount $1.1MM Term
Loan (Add’l
$1.9MM in 03
$6.25MM
Term Loans
$3.3MM
Term Loans
$15.0MM
Term Loans
$5.0MM Term
Loan
Total
Realized IRR*
Warrant/Equity % 50% in
Columbus and
2.75% in Parent
1.11% in
Parent
25% in
Gadsden
1.005% in
Parent
Fund IRR –
129.3%
Chatham IRR* 129.3% 47.9% 38.6% 33.0% 15.1% Fund II IRR –
88.6%
Over the last 4 years, Chatham has completed 6 transactions with Healthfield which resulted in an IRR of
129.3% for Fund I and 88.6% for Fund II.
*Includes purchased warrants and equity, retunes exclude additional upside estimated at $900k over the next two years
44
Case study – Healthfield
February 2002 – Chatham funded $1.1 million for
Company’s initial acquisition after management’s 2001
buyout from foreclosure sale. Revenue of $85 million
and EBITDA of $17 million at time of initial investment.
Chatham obtained 50% warrant in Target
and 2.75% warrant in Parent
129.3% IRR on initial investment
September 2003 - June 2005 – Company completed
four acquisitions across Southeast. Chatham funded
additional $30 million to complete acquisitions.
Emerged as the largest and most
profitable home care company in the
Southeast
Revenue of $315 million and EBITDA of
$54 million
February 2006 – Company acquired by Gentiva for $454
million in cash and stock. Chatham fully repaid on its
investment.
Fund I Realized IRR of 129.3%
Fund II Realized IRR of 88.6%
Transaction Result
Over 4 years, Chatham completed 6 transactions with Healthfield, which resulted in an IRR of
129.3% for Fund I and 88.6% for Fund II.45
Update on leveraged finance markets
Jefferies & Company, Inc.
Member SIPC
Leveraged loan market
Jefferies & Company, Inc.Member SIPC
47
Leveraged loan market trendsSecondary market snapshot
Key points
The secondary loan market has had a stronger tone this year as fundamentals have improved across the spectrum, but
more importantly, been driven by strong supply and demand fundamentals. Loan fund inflows have grown as both retail
and institutional investors alike have sought the current yield and protection against rate increases as well as collateral
cushion that loans offer.
This has led to fundamental imbalance as demand has far outstripped supply; helping to make loan returns positive this
year.
–The LSTA Leveraged Loan Index returned 10.38% in 2010 and 51.62% in 2009 versus a loss of 29% in 2008.
–The average bid of the LSTA Leveraged Loan Index currently is at 98.24%, a 1,089 basis point increase from the
12/31/09 close of 87.35%, up from a low of 60.32% set on 12/17/2008.
Outstanding Loans have decreased since reaching a high of $596 billion in 2008 to $502 billion currently.
Issuers have taken advantage of the recent favorable market conditions through refinancings of recently issued loans as
this category has occupied over 47% of new loans issued YTD.
48
High yield and leveraged loan
returns versus the equity market
8.87% 9.32%10.77%
5.39% 5.54%6.26%
1.74%2.88%
-1.49%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Since 2000 Since 2006 Since 2008
BAML High Yield Index LSTA Leveraged Loan Index S&P 500
Annualized
returns
49
6.4% 6.4%
7.8% 7.8% 7.9%
7.2%
6.7%6.5% 6.6%
6.0%
5.3% 5.3%
6.2% 6.2%
7.6% 7.5% 7.6%
6.9%
6.4%6.2%
6.4%
5.8%
5.1% 5.1%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11
Primary Secondary Break2006 YTM peaked at 6.60%
L+250
L+500
L+750
L+1000
L+1250
L+1500
Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
Ba3/BB- B1/B+ B2/B
Leveraged loan market update
Average spreads to maturity by corporate credit rating
Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index. Reflects 15 largest index names in each category.
Average yield-to-maturity for primary loans
Secondary market snapshot
50
Leveraged loan market trendsPrimary market snapshot
Key points
The Leveraged loan market has continued its resurgence this year as borrowers have found the market open to new
issuance. Fueled by strong technicals and demand, new loans are on pace to outstrip 2010 by over three times.
The continued demand for loan transactions has fueled new issuance to reach $164 billion year to date, but more
importantly, we have seen dividend transactions continue at last year’s pace at 15% of all activity. In addition,
acquisitions and LBO’s have grown to 14% and 15% of loan activity respectively, with refinancings taking the lion
share of 48% of all new issues.
− As a reference, 2006 saw acquisitions and LBO’s account for 26% of issuance each respectively, while dividends
were only 7%.
Healthy fund balances and strong sentiment have allowed credit spreads to tighten via reduced coupon, lower Libor
floors, and tighter OID. Additionally, a resurgence of covenant-lite and second lien transactions by strong issuers have
been met with support.
51
Weekly bank loan mutual fund flows
Leveraged loans – Last twelve months
3.0x 3.1x2.9x
3.3x 3.3x 3.2x 3.4x 3.5x3.2x 3.3x 3.2x 3.4x
1.1x1.2x
0.9x
1.1x0.8x
0.7x0.5x
0.7x0.9x 1.0x 0.9x
0.5x
4.1x4.3x
3.7x
4.4x
4.1x3.9x 3.9x
4.2x 4.1x4.3x
4.1x3.9x
2.5x
3.0x
3.5x
4.0x
4.5x
5.0x
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
First Lien Other Total
$13.6 $10.8 $9.6 $4.5$20.7 $14.9 $20.3 $15.0
$27.9$52.3
$23.5 $19.5$8.4 $7.6 $4.3 $3.6
$11.0$7.0
$8.6$6.4
$6.5
$17.6
$14.5 $14.4$22.0 $18.4 $13.9
$8.2$31.7
$21.9$28.9
$21.4$34.4
$69.8
$38.0 $33.9
0
20
40
60
80
100
120
140
$0
$20
$40
$60
$80
$100
May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 ME 4/21/11
Institutional Pro Rata Deals
Leveraged loan market update
Deals
$ in millions
Average leverage of highly leveraged loans
Primary market snapshot
$848
$708 $804
$686
$381
$707 $639 $597
$532
$200
$400
$600
$800
$1,000
$1,200
25-Feb 4-Mar 11-Mar 18-Mar 25-Mar 1-Apr 8-Apr 15-Apr 22-Apr
52
LCD flow name index levels
60
65
70
75
80
85
90
95
100
105Low: 63.53 on 12/16/2008
High: 98.643 on 2/8/2011
Currently: 98.24
53
Average secondary market spreads for middle
market and large corporate leveraged loans
L + 200L + 400L + 600L + 800
L + 1000L + 1200L + 1400L + 1600L + 1800L + 2000L + 2200L + 2400L + 2600
Middle Market Large Corporates
Middle market
Low: L+676 – 4/15/11
High: L+2444 – 3/31/09
Currently: L + 676
Large corporates
Low: L+ 482 – 4/15/11
High: L + 2371 – 12/31/08
Currently: L + 482
In 2006, spreads reached a low of
L+217 for Large Corporate and
L+290 for Middle Market Loans.
54
5.01%
7.35%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%Highest Yield on 12/31/2008 at 19.44%All Loans
Historical Average
All leveraged loans index yield
55
3.45%
6.03%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%Highest Yield on 11/28/2008 at 15.30%
BB Loans
Historical Average
BB loan index yield
56
5.47%
8.04%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%Highest Yield on 12/31/2008 at 23.92%B Loans Historical Average
B loan index yield
57
Institutional leveraged
loan volume outstanding
$400
$557 $596$531 $504 $503
$0
$100
$200
$300
$400
$500
$600
$700
YE2006 YE2007 YE2008 YE2009 YE2010 4/15/2011
($M
illio
ns)
Bond-for-loan take-outs have driven a net reduction in loans outstanding, underpinning market strength
58
0%
2%
4%
6%
8%
10%
12%
14%
Lagging 12-month default rate
by number of issuers
The default cycle appears to have bottomed
59
High yield market
Jefferies & Company, Inc.Member SIPC
60
High yield market trendsSecondary market snapshot
Key points
The secondary high yield market has continued the positive trend began in 2009 as a number of factors have
contributed to the overall sentiment in the market this year. High yield returns and mutual fund flows have remained
positive while defaults have trended downward.
−The US High Yield Broad Market Index has returned 5.18% year to date versus 15.19% in 2010, 57.51% in 2009
and (26.39%) in 2008.
−Mutual fund inflows have recorded another positive year so far with over $6.9 billion coming in versus $10.6 billion in
2010, $20.6 billion in 2009 and $2.2 billion in 2008.
−US speculative grade default rates have receded from their November 2009 highs of 14.66% to 2.07% in March
2011.
The Broad Market Yield is currently at 6.76%, below its previous low of 6.81% set in 2004. The all time high of
22.65% was reached in December of 2008. The Index has been reporting since 1994.
−Spreads to worst on the broad market shrank to their lowest margin in June of 2007 when they reached 252 and
peaked at 2,145 in December 2008. Their lowest margin this year was 453 in April and are currently at 469.61
Recent secondary market performance: Yields and risk premium
5.5%
6.5%
7.5%
8.5%
9.5%
10.5%
1/1/10 2/1/10 3/1/10 4/1/10 5/1/10 6/1/10 7/1/10 8/1/10 9/1/10 10/1/10 11/1/10
US BB HY Index US B HY Index US HY Broad Market Index
Deals
$ in
bil
lio
ns
$ in
mil
lio
ns
6.76%
6.75%
5.65%
High yield market trendsSecondary market snapshot
6.76%
Weekly new high yield issuances and volume Weekly high yield mutual funds and ETF flows
62
High yield market trendsPrimary market snapshot
Key points
The current year to date issuance has reached over $117 billion, a year-over-year record for the high yield market. This is
coming off of what was a record 2010 with $283 billion in new issue.
− Sponsored deals have accounted for 41% of new deals this year while they only represented 30% in 2010.
2011 has seen refinancing of debt continue as the largest use of proceeds for borrowers making up 56% of new issues,
compared to 67% in 2010.
Overall, average new-issue yields have been grinding tighter this year versus 2010. The average new-issue yield this
year is 8.21% versus 8.81% in 2010; a tightening of 60 basis points. In 2009, the average new-issue yield was 10.27%.
Total High Yield Bonds Oustanding have increased this year to over $1.01 trillion, an increase from $983 billion at year
end in 2010 and the most on record. 63
4.6x 4.6x 4.7x 5.0x4.1x 4.1x
4.9x
3.7x3.5x
4.7x 5.1x4.4x
0.0x1.0x2.0x3.0x4.0x5.0x6.0x
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11
Note: Excludes Add-on issues. (1) Includes BB/BBB split issues. (2) Includes CCC/B split issues.
CCC (2)17%
B43%
B/BB13%
BB (1)27%
LTM high yield issuances by total volume Average at-issue total leverage multiples
High yield market trendsPrimary market snapshot
Total Average at Issuance
# of Issues Volume Deal Size Leverage Price Yield
Last Four Weeks 57 25,802$ 453$ 4.3x 98.914 8.319%
Last Three Months 158 73,140 463 4.4x 99.056 8.374%
Last Twelve Months 609 296,939 488 4.4x 99.259 8.630%
Fiscal Year 2009 360 165,122 459 4.1x 96.779 10.272%
Last Twelve Months
BB(1)130 79,632 613 3.4x 99.698 7.011%
B/BB 83 37,480 452 3.2x 99.735 7.773%
B 261 123,039 471 4.4x 99.361 9.079%
CCC(2)111 48,362 436 5.6x 98.699 9.747%
Under $200 million 53 7,484 141 4.6x 97.773 10.730%
$200 - $499 million 382 135,817 356 4.3x 99.265 8.694%
$500 million and Greater 168 149,985 893 4.6x 99.662 7.826%
Corporates - Consumer and Retail 151 71,734 475 4.9x 98.640 9.072%
Corporates - Energy 101 52,205 517 3.3x 99.563 8.063%
Corporates - Healthcare 51 23,725 465 5.0x 98.781 8.498%
Corporates - Industrials 185 88,338 478 4.3x 99.576 8.533%
Corporates - Leisure and Gaming 26 11,150 429 4.6x 99.372 8.832%
Corporates - TMT 86 44,893 522 4.0x 99.604 8.641%
Refinance 368 177,487 482 4.3x 99.535 8.544%
General Corporate Purposes 110 57,328 521 3.4x 99.498 8.443%
M&A / LBO 86 42,015 489 4.6x 99.701 8.803%
Dividend 33 12,801 388 5.4x 94.003 9.876%
Use of
Proceeds
Ratings
Issuer
Time Frame
Size
64
11.53%
5.00%
7.00%
9.00%
11.00%
13.00%
15.00%
17.00%
19.00%
21.00%
23.00%
25.00%
YTW Historical Average
Highest Yield to Worst on 12/12/2008 – 22.65%
High yield broad market index
Yield to Worst
10.15%
6.76%
65
853
0
500
1,000
1,500
2,000
2,500
STW Historical Average
High yield broad market index
Spread to Worst
604
469
Highest Spread to Worst on 12/15/2008 - 2,182
66
8.93%
5.00%
7.00%
9.00%
11.00%
13.00%
15.00%
17.00%
YTW Historical Average
Highest Yield to Worst on 12/5/2008 – 16.38%
High yield BB index
Yield to Worst
8.14%
5.65%
67
587
300
500
700
900
1,100
1,300
1,500 STW
Historical Average
Highest Spread to Worst on 12/16/2008 – 1,468
High yield BB index
Spread to Worst
451
393
68
587
0
200
400
600
800
1,000
1,200
1,400
1,600
STW Historical Average
High yield BB index
Spread to Worst
393
331
Highest Spread to Worst on 12/16/2008 – 1,468
69
11.70%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
22.00%
24.00%
YTW Historical Average
Highest Yield to Worst on 11/24/2008 – 23.07%
High yield single B index
Yield to Worst
10.04%
6.75%
70
866
0
500
1,000
1,500
2,000
2,500
STW Historical Average
High yield single B index
Spread to Worst
591
470
Highest Spread to Worst on 11/21/2008 – 2,084
71
16.87%
7.00%
12.00%
17.00%
22.00%
27.00%
32.00%
37.00%
42.00%
47.00%
YTW Historical Average
Highest Yield to Worst on 12/12/2008 – 41.30%
High yield CCC index
Yield to Worst
16.19%
9.81%
72
1398
250
750
1,250
1,750
2,250
2,750
3,250
3,750
4,250
4,750
STW Historical Average
Highest Spread to Worst on 12/15/2008 – 4,429
High yield CCC index
Spread to Worst
1247
792
73
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%5 Year 10 Year 5 Year Historical Average 10 Year Historical Average
5-year and 10-year treasury yields –
last twelve months
3.36%
2.10%
4.56%
4.02%
74
U.S. high yield new issue statistics
$76
$171
$283
$117135
377
592
275
0
100
200
300
400
500
600
700
$1
$51
$101
$151
$201
$251
$301
$351
2008 2009 2010 YTD
(# o
f De
als)($M
illio
ns)
Yearly Issuance # of Deals
75
High Yield Use of Proceeds
Refinancing / Bank Debt
30%
Refinancing / Bonds13%
Acquisition4%Corp
Purpose5%
Refinancing / General
3%
LBO41%
Other2%
Recap / Dividend
2%
2008
Refinancing / Bank Debt
45.29%
Refinancing / Bonds
20.30%
Acquisition5.58%
Corp Purpose13.61%
Refinancing / General10.67%
Other0.30%
Recap / Dividend
4.25%
Refinancing / Bank Debt
34%
Refinancing / Bonds
23%Acquisition
10%
Corp Purpose
10%
Refinancing / General
10%
LBO4%
Other5%
Recap / Dividend
4%
2009
2010
Refinancing / Bank Debt
23%
Refinancing / Bonds
23%Acquisition
7%
Corp Purpose
9%
Refinancing / General
10%
LBO6%
Other8%
Recap / Dividend
14%
2011
76
Monthly high yield mutual fund flows
$1,501
-$1,388
$2,542
$1,384
-$3,548
$260
$2,786 $1,523$3,049
$1,297
$306
$924
$2,915$2,578
$67
$1,085
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
($M
illio
ns)
2010 Total fund inflows: $10,637bn
2011 YTD total fund inflows: $6,645bn
77
Quarterly Composition of New Issues
by Moody’s Rating
BB40%
B52%
CCC8% BB
30%
B52%
CCC18%
BB41%
B50%
CCC9%
BB25%
B55%
CCC20%
Q1 2010 Q2 2010 Q3 2010 Q4 2010
BB30%
B54%
CCC16% BB
28%
B63%
CCC9%
Q1 2010 Q2 2010
78
Default Rate of US Speculative Grade Issuers
The default cycle appears to have bottomed
79
