Amsterdam Institute of Finance Joseph V. Rizzi November, 2012 PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

Amsterdam Institute of FinanceJoseph V. Rizzi

November, 2012

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Rising purchase price multiples and ROE concerns drove acquirers to seek ways to expand their debt capacity. Some of the most common techniques are:

Adjusted (Increased) EBITDA- Operating improvements- Normalization

Asset Sales- Bridges to asset sales- Liquidity is key in case bridge cannot be taken out

Innovative Securities- Defer interest- Push out amortization- Increase flexibility

Amsterdam Institute of Finance November, 2012

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Term Amortization Covenant Call Seniority Secured

Revolver 5 – 7 Bullet FULL YES YES YES

Term Loan A 5 – 7 40% in first 5 years FULL YES YES YES

Institutional Term Loans

7 - 8 1% per annum / bullet FULL YES YES YES

Covenant Lite 8 - 10 1% per annum / Bullet LIGHT PREMIUM YES YES

Mezzanine 10 + Bullet LIGHT PREMIUM NO Depends

High Yield 10 + Bullet LIGHT PREMIUM NO NO

Holding Company PIK

10 + Bullet LIGHT PREMIUM NO NO

Bridge Term Loans 1 - 3 Bullet FULL YES YES YES

Securitization 1 - 5 Revolver with Borrowing Base

FULL YES YES YES

Second Lien 8-9 Bullet FULL YES YES YES

Bifurcated Lien(cross lien)

8-10 1% P.A./Bullet Yes Yes Yes Partial

Unsecured 1-10 1% P.A./Bullet Yes Yes Yes No

OPCO/PROPCO 10+ Bullet Yes Yes Yes Yes

The above table shows the features of different debt options available to issuers The availability of the different options is subject to market conditions

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To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.

This chart represents the percentage of deals which have senior facilities only, vs. senior first lien and second lien, etc based upon transaction count. For example, during 2006, 28.7% of all deals had Senior, 2 nd Lien and Mezz structure.

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan-Aug 12

Sr Only Sr + 2nd Lien Sr + Mezz Sr + 2nd Lien + Mezz Sr + HY Bond


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Innovative securities allow for the expansion of debt capacity by one or more of the following mechanisms:

Reduce Annual Debt Service - Reducing cash interest expense - Lengthen duration (Reduce/Delay amortization)

Increasing Flexibility - Covenants - Public Disclosure - Cash flow control - Call Premium - Bridging - Partial/fully Unsecured

Tranching (sequential ordering of payment or priorities) - Holding Company instruments - Restricted Subsidiaries - Second lien/bifurcated collateral-crossing liens - Senior/Subordinated

Cost – Second Lien vs Mez


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Senior Secured, but with Junior or Second Lien◦ Higher default◦ Lower recovery

Originally developed as Rescue Finance Competing with EURO Mezzanine

◦ Investors – hedge funds and CLO Formerly Attractive Pricing: Spread differential between

Second Lien and First Lien 350 BP. Issues:

- Inter-creditor - Standstill Agreement - Obligations - New Investors Behavior in a Workout- CLO Rating Impact


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Covenant Issues◦ Creditor – preserve deal; recovery value◦ Debtor - flexibility

Covenant Lite – liquidity vs. structure◦ Similar to Investment Grade◦ One or No Financial Covenants

Rating Agency impact on CLO Volume

◦ US – Returning◦ Europe – Shut down 1Q08

difficult

Amsterdam Institute of Finance November 2012

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Example:-◦ Target company de-merged into ‘PropCo’, which owns the real

estate assets, and ‘OpCo’, the operating company.◦ Banks finance ‘PropCo’ acquisition of properties at agreed

Loan to Value ratio.◦ ‘PropCo’ leases the real estate assets to ‘OpCo’.◦ ‘PropCo’ debt refinanced by traditional Property Lenders or

via Commercial Mortgage Backed Securities (CMBS) market. ◦ ‘OpCo’ required to service the acquisition debt not assumed

by ‘PropCo’.

By structuring the financing of a pool of assets with a credit quality stronger than the

corporate credit as a whole, ‘OpCo’ \ ‘PropCo’ financing can provide a cost effective source of

(acquisition) financing.


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‘‘OpCo \ PropCo’ Financing (2)OpCo \ PropCo’ Financing (2)

Financing Notes

OpCo PropCo

BidCo

Rental Payments

Approx.100%

Approx.100%


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1010

Requirements:◦ Stable and resilient cash flows from business◦ Control over cash flows through sale of assets or

adequate legal structure◦ Target investment grade rating to maximize access

to investors and lower cost of capital

Different leverage measurements

Issues◦ Favorable bankruptcy laws◦ Inter-creditor issues◦ Flexibility

Closed: 2H07 to present


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1111

• Longer Term Bonds

7-10 years and longer

4/5 NC

• Public or Private

Usually issued in private form with exchange rights

Pricing would step up if bonds not public within short period (say 180

days of close)

• Usually issued as subordinated debt but can also be senior

unsecured

• Markets

US - $1 T size

Euro - €100B size


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Key High Yield TermsKey High Yield Terms

• Registration Rights

• Issuer

• Status

• Degree of Subordination

• Limitations on liens

• Limitations on indebtedness

• Restricted payments

• Asset sales

• Change in control


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13To access the data points underlying the chart, double-click on the chart. Copyright©

2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.

Note: HY volume excludes PIK instruments & short-term bonds; reflects corporate bonds onlyIn case of a global issue, the portion allocated to European HY investors is counted (if unknown, the entire global issue is counted)

In the case of multi-tranche bonds issued within the same transaction, each tranche is counted separately.

Volume Transaction Count

0

20

40

60

80

100

120

140

Secured Unsecured Subordinated

€0B

€8B

€16B

€24B

€32B

€40B

€48B

Secured Unsecured Subordinated


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Covenants * Extensive (bank type) * Maintenance basis (tested quarterly)

Security * Second secured

Call Provisions * Generally callable immediately (103,102,101)

Maturity * Ten year

Pricing * LIBOR + 800 bps (400 cash, 400 PIK) * Warrants for total return (15-17%)

Liquidity * Low

Disclosure: * Limited

Marketing * No research coverage, no roadshow

Rating Requirements * None


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€0M

€500M

€1,000M

€1,500M

€2,000M

€2,500M

€3,000M

€3,500M

Jan-00

May-00

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12


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There are not enough observations to generate meaningful data for some periods during 2009 – 2011.3-months rolling through 4Q08 and 6-months rolling thereafter (due to a limited number of observations)

E+150

E+300

E+450

E+600

E+750

E+900

E+1,050

E+1,200

E+1,350

Mar

-00

Aug-0

0

Jan-

01

Jun-

01

Nov-0

1

Apr-0

2

Sep-0

2

Feb-0

3

Jul-0

3

Dec-0

3

May

-04

Oct-04

Mar

-05

Aug-0

5

Jan-

06

Jun-

06

Nov-0

6

Apr-0

7

Sep-0

7

Feb-0

8

Jul-0

8

Dec-0

8

May

-09

Oct-09

Mar

-10

Aug-1

0

Jan-

11

Jun-

11

Nov-1

1

Apr-1

2

PIK Spread Total Spread


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Trend: Increasing segmentation of loans with reduced covenant or collateral◦ Percentage of institutional loans with impaired covenants or collateral

1H07 47%, 2H07-Nil 2006 24%

◦ Breakdown 2007 1H07 47% 11% Second Lien 6.4% Bifurcated 23% Covenant Lite 7% Unsecured

Bifurcated/Crossing Liens – See HCA for an example◦ Asset backed revolving credit backed by first lien or receivables and inventory◦ Term loans back by lien on other non-current assets

Property, plant and equipment Stock pledge

◦ Pricing premium – 100 bps compared to revolver◦ Inter-creditor complications


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PIKPIK•Pay if you can togglePay if you can toggle

•Eats up equityEats up equity

•CharacteristicsCharacteristics

PIK SLL

Spread 825/900 500

Toggle 900-1000 n/a

Term 7.5-10 9.5

Call 5xNC n/a

Leverage 6.5x+ 6x+


(Source: LCD)

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Staple financing term sheet to deal book

Be prepared to fund

Establishes ceiling

Conflicts of interest

Stapled FinancingStapled Financing


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ACCORDING LOAN

Incremental Loan Facilities

• Option allowing increase in principal under existing terms subject to certain conditions• Existing lenders can participate or new lenders can be sought

Dilution of Lender Interest

• Uncommitted – access requires lenders willing to provide• Suffer dilution if you elect not to participate and facility approved


Bridge LoansBridge Loans

Equity◦ Bank provides equity

Find other equity investors later or keep Reduce PE equity Lowers need for club or larger deals

◦ Rationale – pay to play

◦ Bonds


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Increasing layers of debt Directed at different investors Intercreditors conflicts

2004 + 2H07 - Present

• Common equity

• Unsecured/mezzanine (1x)

• Senior secured bank loan (4x)

- Amortizing T/LA – 40%

- B/C tranches – 60%

FDX – 5x + PPX – 7.5 +

2006 – 1H07

• Common equity

• Hybrid preferred (0.5x)

• PIK notes (0.5x)

• Unsecured/mezzanine (1x)

• Carve-out collateral (1x)

- securitization

- OPCO/PROPCO

• Second lien loans (1x)

• Senior secured bank loan (4x)

- Amortizing T/LA – 20%

- B/C tranches – 80%

FDX – 6x + PPX – 8.5 +Amsterdam Institute of Finance

November, 201222

2323

HCA – 33 bln USD (corp rating B2/B+)◦ FDX – 6.53x (LTM)◦ PPX – 7.7x◦ Club – Bain, KKR, ML (5 bln)◦ W/W – BofA, JPMC, Citi, ML ◦ Debt Package

1st Lien (3.46x) TermSpread

Amortization

(cum. At maturity)

- R/C 2.000 bln

- ABL 2.000 bln

- T/LA 2.250 bln

- T/LB 9.300 bln

- EUR T/L 1.250 bln

6

6

6

7

7

250

175

250

250

250

0

0

50%

7%

7%

2nd Lien (1.33x)

- Cash 4.200 bln

- PIK/T 1.500 bln

8

8

9.75%

10.0 %

8%

8%

Existing unsecured

7.470 bln 2009 7.5 % --

Equity 4.965 bln -- -- --

◦ EBITDA/I – 1.9x (2007E)◦ EBITDA – CAPEX/I – 1.1x (2007E)


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HCA HCA Legal StructureLegal Structure

Europeansubs

Sub C

Healthtrust Holdings

Management

Euro T/L

Unrestricted subs Restricted subs(gurantors)

Sub D Sub ESub BSub A

Acquisition CorpHCA, Inc

Equity

Bank Loans

Existing Notes

Sponsors

Merge


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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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Documents

Amsterdam Institute of Finance Joseph V. Rizzi November, 2012 PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)