Transcript CB_Part_4_AIF_Capital_Structure_December_2013
Joseph V. Rizzi Amsterdam Institute of Finance December, 2013
• Cash Flow
Impacts default risk • Balance Sheet
Determines Loss in Event of Default (LIED)
Liquidity Valuation
Amsterdam Institute of Finance December, 2013
• • •
Business Risk: EBITDA Volatility
◦
Industry Characteristics
◦
Firm Characteristics Financial Risk: EBITDA Relative to Debt Structural Risk
◦
Issues
Priority of claim on assets and income
◦
Control Focus
Covenants, Seniority, Security
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• Quantitative ◦ Capitalization Cash Equity Total Debt Senior Debt (1) First Lien Second Lien ◦ Cash Flow LTM EBITDA / PFI 7 x LTM FFOCF / TLA (2) ◦ Liquidity Cash + MS + RCA / P+I (3) >25% <6.0x
<4.5x
<4.0x
<0.5x
>2:1 >1:1 > 1.5 : 1 1:- TLA usually >20% of senior debt and amortizes at least 30% by year 5 2:- FFOCF = LTM EBITDA - (WCI + CAPEX + Taxes + PF Interest) 3:- Liquidity tested day 1. MS (Marketable Securities). RCA (Revolving Credit Availability). Revolver usually set at 1 x EBITDA Amsterdam Institute of Finance December, 2013 4
• •
Debt capacity is derived from firm’s assets
◦ Operating Cash Flows ◦ Asset Sales / Asset Quality ◦ Leveragability
Market Conditions
2H 07 Cris is Credit curve shifts over time depending on the economy Overheated 1H07 •
Target financing structure
Amsterdam Institute of Finance December, 2013 Rating 5
There are two different approaches to designing the capital structure: Cash Flow Model Balance Sheet Model 3 - 4x EBITDA 50% 4 - 6x EBITDA Equity 30% 20% Senior Debt Sub Debt Equity Amsterdam Institute of Finance December, 2013 6
•
Ratio Approach
•
Cash Flow
•
Advance Rate
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Market ◦ Maximum senior debt and total debt ratios ◦ Vary over cycle ◦ ◦ ◦ Peers Identify Rating Classification Key Ratios ◦ Rating Agencies Credit Statistics Amsterdam Institute of Finance December, 2013 8
12 Months Ended Sales Gross Margin EBITDA Margin Interest Expense Capex % of Sales Total Assets Secured Bank Debt Unsecured Bank Debt Other Senior Debt Total Senior Debt Subordinated Debt Total Debt Equity Total Capitalization Total Debt/EBITDA Senior Debt/EBITDA Total Debt/Capital EBITDA/Interest (incl. A/S) Credit Ratings S&P Moody's Market Capitalization Enterprise Value Ent Value/EBITDA Ent Value/Sales Ent Value/Book Value Earnings per Share ABC DEF GHI JKL MNO PQR STU 02/10/20xx 30/09/20xx 01/01/20xx 30/09/20xx 31/10/20xx 30/11/20xx 31/12/20xx 3073.8
25.6% 8294.9
14.4% 6165.2
16.3% 852.4
19.8% 2345.8
22.0% 1682.1
16.6% 2133.4
17.1% 153.7
5.0% 34.4
32.1
1.0% 1482.0
430.1
5.2% 78.6
40.7
0.5% 3835.4
272.3
4.4% 49.6
37.1
0.6% 2790.1
35.9
4.2% 13.2
9.8
1.1% 360.5
130.8
5.6% 19.5
25.8
1.1% 1099.5
77.3
4.6% 15.3
11.3
0.7% 829.3
100.3
4.7% 25.0
27.8
1.3% 961.5
455.4
0.0
111.7
567.1
0.0
567.1
419.9
987.0
3.7
3.7
57.5% 4.5
0.0
504.6
391.4
896.0
197.6
1093.6
1461.1
2554.7
2.5
2.1
42.8% 5.5
0.0
175.9
708.2
884.1
0.0
884.1
1293.3
2177.4
3.2
3.2
40.6% 5.5
117.8
0.0
6.3
124.1
0.0
124.1
150.2
274.3
3.5
3.5
45.2% 2.7
0.0
208.0
179.2
387.2
0.0
387.2
473.8
861.0
3.0
3.0
45.0% 6.7
0.0
210.0
0.0
210.0
0.0
210.0
414.4
624.4
2.7
2.7
33.6% 5.1
0.0
37.6
75.0
112.6
143.7
256.3
262.5
518.8
2.6
1.1
49.4% 4.0
BBB NR 468.2
1035.3
6.74
0.34
2.47
A A3 1482.0
2575.6
5.99
0.31
1.76
A A2 1295.8
2179.9
8.01
0.35
1.69
NR NR 104.4
228.5
6.36
0.27
1.52
$ (0.06) NR NR 510.9
898.1
6.87
0.38
1.90
NR NR 249.2
459.2
5.94
0.27
1.11
BB Baa3 177.9
434.2
4.33
0.20
1.65
Peer Average 3506.8
18.8% 171.5
4.8% 33.7
26.4
0.9% 1622.6
XYZ Actual 31/12/20xx 3025.4
17.8% 122.6
4.1% 55.2
10.7
0.4% 950.5
XYZ Pro-Forma 31/12/20xx 3205.3
17.4% 134.5
4.2% 55.8
10.7
0.3% 952.3
3.0
2.8
44.9% 4.8
211.9
0.0
42.6
254.5
289.2
543.7
(69.0) 474.7
4.4
2.1
114.5% 2.2
83.2
0.0
8.3
91.5
289.2
380.7
96.4
477.1
2.8
0.7
79.8% 2.4
612.6
1115.8
6.32
0.30
1.73
BB Ba2 Amsterdam Institute of Finance December, 2013 9
Important: Impact: Pricing: Loan Market Evolution from a bank to an institutional market (back to a bank market?) Majority of syndicated loans are rated Affected by rating Amsterdam Institute of Finance December, 2013 10
Category (x) BB+ BB BB B+ B B __________________________________________________________________________________ Total Debt with Equity Credit/ Operating EBITDA 3.1
3.8
2.9
4.5
5.3
6.0
Long Term Secured Debt/ Operating EBITDA Total Adjusted Debt/ Operating EBITDAR 0.0
3.5
0.8
3.9
1.0
3.3
1.1
4.9
2.6
5.4
2.6
7.0
FFO Adjusted Leverage FCF/Total Adjusted Debt Operating EBITDA/ Gross Interest Expense 3.7
0.0
5.5
4.2
0.0
4.1
3.7
0.1
5.3
5.1
0.0
3.2
6.4
0.0
2.5
6.7
0.0
1.8
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2013 LBO’s Funded by (YTD 17/09/13)
Debt Bank Debt Only Number of Deals in Sample Ave. Transaction Size (M) 6 € 789.9
4 € 2,957.0
23 € 1,228.4
Ave. PPM 8.5x
9.4x
8.6x
Ave. Equity Contribution Ave. HY Bond/Total Sources Ave. Bank Debt/Total Sources Ave Total Debt/Total Sources 44.8% 54.9% 0.0% 54.9% Ave. Debt/EBITDA Source S&P Financial Services Amsterdam Institute of Finance December, 2013 4.9x
29.9% 22.9% 47.2% 70.1% 6.6x
43.9% 0.0% 52.8% 54.5% 4.6x
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Characteristics LTM Avg. Pro Rata Term (Years) N/A Avg. Institutional Term (Years) 5.8
2012 5.9
5.7
2011 Total Volume (€ B) Total Deal Count 7.15
12 1.74
6 3.17
9 Avg. Pro Rata Spread (E+) Avg. Deal Size (€ MM) N/A 475.0 403.6
Avg. Wtd. Avg. Inst. Spread (E+)430.6 591.7 459.4
595.5 289.2 352.5
6.0
6.8
Avg. Pro Forma Trailing Revenues (€ MM) EBITDA (€ MM) Adj. EBITDA (€ MM) LTM 2012 5,117.29N/A 315.32 N/A 320.35 N/A 2011 466.5
62.86
62.86
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Financial Ratios (Trailing Pro Forma) Debt/EBITDA Sr. Debt/EBITDA EBITDA-CapEx/Interest Avg.
5.22
4.80
EBITDA/Cash Interest 3.55
EBITDA-Miant CapEx/Interest N/A N/A Purchase Price Multiple Equity Contribution N/A N/A Max.
6.02
5.50
4.21
N/A N/A N/A N/A LTM Min.
4.20
4.18
2.76
N/A N/A N/A N/A St. Dev.
.77
.64
.72
N/A N/A N/A N/A Amsterdam Institute of Finance December, 2013 14
Pro Rata Spread
BB/BB-
Weighted Avg Institutional Spread Deal Size ( €MM) Pro Rata Term (in Years) Institutional Term (in Years) Revenues ( €MM) EBITDA ( €MM) Pro Forma Debt/EBITDA Pro Forma Senior Debt/EBITDA Pro Forma Cash Interest Coverage Observations Europe
N/A E+370.8
555.38
6.00
6.13
N/A 1,179.93
3.49x
3.36x
N/A 4
US
L+252.9
L+294.3
1,053.68
4.70
6.08
2,932.44
743.72
3.65x
3.56x
7.80x
107 B+/B
Pro Rata Spread Weighted Avg Institutional Spread Deal Size ( €MM) Pro Rata Term (in Years) Institutional Term (in Years) Revenues ( €MM) EBITDA ( €MM) Pro Forma Debt/EBITDA Pro Forma Senior Debt/EBITDA Pro Forma Cash Interest Coverage Observations Europe
E+449.7
E+445.3
438.18
5.02
6.13
1,385.80
209.97
4.92x
4.64x
4.19x
26
US
L+356.8
L+379.2
547.28
4.84
5.98
1,256.15
252.16
4.80x
4.71x
3.97x
432
Wtd. Avg. ProRata spread is the average RC/TLA spread weighted by sizes of the RC and TLA tranches.
Wtd. Avg. Institutional Spread is the average TLB/TLC spread weighted by the sizes of the TLB and TLC tranches. Amsterdam Institute of Finance 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. December, 2013 15
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Revolver Term Loans A B C Second Lien Cov Lite Mezzanine PIK Preferred Stock
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2013 (9 mo) 14% 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 R/C 14% 15% 14% 15% 12% 12% 13% 14% 15% 15% 16% 16% 20% T/La 22% 30% 28% 32% 31% 31% 19% 28% 40% 40% 45% 46% 54% 50% Source: Standard & Poor’s Financial Services T/Lb 64% 56% 57% 54% 54% 40% 42% 31% 25% 26% 23% 26% 20% 20% T/Lc 17% 17% 3% 20% 5% 5% 2ndL 10% Amsterdam Institute of Finance December, 2013 18
2013 (9 mo) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Source: Standard & Poor’s Financial Services 8.0
8.9
8.4
8.6
8.9
9.3
9.3
8.4
7.9
7.2
6.5
6.6
6.1
6.9
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2013 (9 mo) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Source: Standard & Poor’s Financial Services 43% 50% 47% 50% 50% 45% 35% 35% 35% 36% 38% 39% 39% 38% Amsterdam Institute of Finance December, 2013 20
Europe U.S.
RC 2nL Other 10.7% T / LA 22.1% T / LB 62.7% T/ Lc 4.4% 16.1% 1.1% 71.7% .2% 10.9% -
Source Standard & Poor’s Financial Services LLC. All rights reserved Amsterdam Institute of Finance December, 2013 21
LTM 9/30/13 Bank Debt 2 nd L Secured HY Sen Unsecur HY Mez Vendor Note Shareholder Loan Rollover Eq Common Eq Total Eq Other Bridge to HY Source: Standard & Poor’s Financial Services 47.8% 1.8% 0.5% 0.8% 0.5% 1.4% 1.0% 44.3% 46.8% 0.4% 1.5% 2012 38.4% 1.2% 1.7% 0.6% 4.2% 0.7% 7.2% 3.8% 41.1% 52.7% 1.2% Amsterdam Institute of Finance December, 2013 22
Maximum debt capacity formula: MDC = f(operations, amortization, rate, asset sales) MDC = [EBIT / (i+ 1/n)] + AS + RF EBIT i n AS RF - Earnings Before Interest and Taxes - Interest Rate - Straight line loan amortization - Proceeds from Asset Sales - Refinancing Amsterdam Institute of Finance December, 2013 23
Opening Balance Sheet Adjustments – from sources and uses – including purchase price assumptions Proforma balance Sheet
◦ Income Statement ◦ Cash Flow Statement
Capitalization table/transaction structure Debt Schedule Term sheet(s) Valuation/maximum purchase price Returns Analysis – IRR and MOC
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Issues ◦ Adjustments (beware of solving for cash flows to justify price) ◦ Normalization Cyclicality Bad Management Value Test ◦ Projections implied price Reverse Engineer - Management implied forecast ◦ Firms ◦ Peers Tie Into ◦ Compensation ◦ Covenants Amsterdam Institute of Finance December, 2013 25
Macro/Market Level ◦ Determine rating target ◦ Use target rating level financial characteristics Funded Debt/EBITDA EBITDA/Interest Expense Funded Debt/Total Cap Example : (A) Target Rating (B) EBITDA/Int for Target Rating (C) Firm EBITDA (D) Interest Rate for Target Rating (E) Maximum Debt Capacity BB c3.0x
$300mln 10% = (C/B)/D = (300/3)/10% = $1,000 Amsterdam Institute of Finance December, 2013 26
2013 ( 9 mo ) 9% 2013 7% 2013 2011 12% 7% 2010 2009 9% 5%
Source: Standard & Poor’s Financial Services Amsterdam Institute of Finance December, 2013 27
30%
Share of Credit Issue in Distress Based on Count
24.8% 24% 30% 24% 18% 12% 11.3% 15.7% 11.5%
Share of Credit Issue in Distress Based on Share of Sr. Par Issue
18% 16.3% 17.2% 12% 28.4% 17.9% 6% 4.9% 6% 5.1% 4.5% 2.8% 0.0% 0.0% 0% 0% 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011
Year of Credit Issue Year of Credit Issue Charts reflect share of credits issued each year that eventually went into distress.
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Distressed credits are issues rated D or restructuring.
December, 2013 To access the data points underlying the chart, double-click on the chart. 28