Transcript AIF Capital Structure June 2010
Joseph V. Rizzi Amsterdam Institute of Finance June, 2010
Hedge Finance
Speculative Finance
Ponzi Finance
Fantasy Finance
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• Cash Flow Impacts default risk • Balance Sheet Determines Loss in Event of Default (LIED) Liquidity Valuation Amsterdam Institute of Finance June, 2010
• • • 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 Amsterdam Institute of Finance June, 2010 5
• 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 June, 2010 6
• •
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
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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 June, 2010 8
•
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 June, 2010 10
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 June, 2010 11
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 June, 2010 12
Transformation: European LBO market transformed during 202-2007 from conservative cash flow based largely bank funded (OTD) originate to rated distribute market funded by non bank CLO demand.
Credit Quality: Ratings mitigration - 2002 – 75% B+/B or higher 2010 – 59% B – or lower Amsterdam Institute of Finance June, 2010 13
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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10YTD Amsterdam Institute of Finance June, 2010 PPX 7.9
7.23
6.07
5.81
6.44
7.0
6.92
8.16
8.15
9.51
9.15
7.43
8.13
FDX 5.4
4.7
4.2
4.1
4.0
4.6
4.8
5.25
5.43
6.23
4.9
4.0
4.37
15
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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 June, 2010 17
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 June, 2010 18
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 June, 2010 19
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Amsterdam Institute of Finance June, 2010 Source S&P 21
Tend to default at same rate as similarly rated non sponsored firms Larger deals tend to have worse performance PE underwriting performance varies Firm Cerberus Apollo TH Lee Carlyle Bain Goldman Warburg Providence TPG Welsh JPM Blackstone Madison KKR Amsterdam Institute of Finance June, 2010 Defaulted and Distressed Deals (D&D) (%) 4(67%) 13 (65%) 6 (55%) 16(52%) 10(45%) 8(38%) 5(36%) 4(33%) 6(32%) 4(31%) 2(29%) 6(27%) 3(25%0 3(15%) Source: Moody’s 22
Initiation of Bankruptcy - Who has the right to file for bankruptcy?
- What kinds of enterprises should be eligible to file for bankruptcy?
- Can the decision to file be challenged?
- When should inappropriate cases be terminated?
Preserving Firm Value / Minimizing Business Losses in Bankruptcy - Should the business be reorganized or liquidated?
- How should creditors be prevented from dismembering the business?
- Should the debtor be required to honor pre-bankruptcy contracts with suppliers and lenders?
- Should debtor-in possession (DIP) financing be made available?
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Corporate Governance in Bankruptcy - Should the debtor’s decision making authority be limited?
- How should debtor management be monitored?
Choosing the Plan of Reorganization - Should the process be consensual or formulaic?
- Who has the right to propose a plan?
- How should the plan be voted upon?
- How should dissenting claimholders be treated?
- Should there be a time limit?
- How should the debtor’s new capital structure be determined?
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Equilibrium ASSETS Restructure ASSETS Amsterdam Institute of Finance June, 2010 LIABILITIES + EQUITY LIABILITIES + EQUITY 25
How Big is the pie?
- Valuation of LHS How much does each claimholder receive?
- RHS waterfall analysis - Legal System How should this consideration be paid?
- Cash - Instruments How much debt can the company support after a reorganization?
- Debt capacity Amsterdam Institute of Finance June, 2010 26
• • •
Determining debt capacity using credit analysis Expanding debt capacity What to expect when you exceed debt capacity
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Banks Lose $3.7B in loans - $20.9B
Goldman - $850 ABN Amros/RBS - £1B write-off on $3.4B
claim UBS - $500 Out of Season – 2H07/1H07
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Purchase Price 20% Premium to 7/16/07 closing price Commodity Basell/Blavatnik and Lyondell – Russian Rule DIP – Debt converted into post petition financing
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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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