AIF Capital Structure November 2012

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Transcript AIF Capital Structure November 2012

Joseph V. Rizzi Amsterdam Institute of Finance November, 2012

• Cash Flow



Impacts default risk • Balance Sheet



Determines Loss in Event of Default (LIED)



Liquidity Valuation

Amsterdam Institute of Finance November, 2012

• • •

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 November, 2012 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 November, 2012 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 November, 2012 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 November, 2012 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

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

40.6% 5.5

117.8

0.0

6.3

124.1

0.0

124.1

150.2

274.3

3.5

45.2% 2.7

0.0

208.0

179.2

387.2

0.0

387.2

473.8

861.0

3.0

45.0% 6.7

0.0

210.0

0.0

210.0

0.0

210.0

414.4

624.4

2.7

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 November, 2012 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 November, 2012 10

U.S. Leveraged Market Quarterly – June 23, 2012 Median Credit Ratios – First Quarter 2012 Amsterdam Institute of Finance November, 2012 11

BB/BB-

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

N/A E+406.3

200.78

5.11

6.56

1,487.61

448.71

4.10x

4.05x

4.03x

L+275.6

L+369.6

869.07

4.82

6.07

2,313.66

616.22

3.80x

2.88x

6.12x

69 B+/B

E+482.1

E+532.5

359.87

5.27

6.48

2,087.55

499.12

4.81x

4.39x

3.38x

L+443.8

L+473.3

446.59

4.91

5.79

1,360.45

275.63

4.51x

3.71x

3.88x

206

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. November, 2012 12

BB+/BB/BB-

Senior Loan Volume (€B) Deal Count Avg. Deal Size (€M) Wtd. Avg. ProRata Spr. (bps) Wtd. Avg. Inst. Spr. (bps) Average ProForma Credit Statistics: Leverage thru 1st Lien Debt Leverage thru 2nd Lien Debt Total Debt/EBITDA EBITDA/Cash Interest

B+/B/B-

Not Rated

6ME 30/09/11 6ME 31/12/11 6ME 31/03/12 6ME 30/06/12

€ 6.96

19 € 389.21

410.00

452.68

€ 2.93

6 € 530.95

N/A 495.83

€ 2.52

8 € 314.75

N/A N/A € 2.50

7 € 357.81

N/A 406.25

3.3x

3.9x

4.1x

4.5x

€ 13.45

37 € 395.89

404.72

458.71

4.1x

4.3x

4.6x

3.8x

€ 2.76

15 € 183.90

400.00

442.05

3.5x

3.8x

2.8x

3.7x

4.4x

€ 7.82

23 € 358.23

430.33

497.62

4.2x

4.4x

4.9x

3.6x

€ 4.83

12 € 402.57

433.33

487.50

2.3x

N/A 2.7x

4.2x

4.3x

3.6x

€ 6.65

19 € 377.31

468.75

525.00

3.8x

4.2x

4.7x

3.7x

€ 4.22

14 € 322.07

458.33

500.00

3.0x

N/A 2.5x

4.0x

4.1x

4.0x

€ 10.46

30 € 365.21

484.38

534.56

3.6x

4.4x

4.9x

3.4x

€ 3.32

16 € 219.16

465.00

510.34

3.9x

4.0x

4.4x

2012 YTD

€ 2.50

7 € 357.81

N/A 406.25

2.5x

4.0x

4.1x

4.0x

€ 10.46

30 € 365.21

484.38

534.56

3.6x

4.4x

4.9x

3.4x

€ 3.32

16 € 219.16

465.00

510.34

3.9x

4.0x

4.4x

Deal Count excludes amendment transactions and counts First Lien and Second Lien portfolios of the same transaction as one event.

Average Deal Size excludes Amendment and Add-on transactions and combines First Lien and Second Lien portions of the same transaction. Analysis is based upon First Lien tranches only.

Amsterdam Institute of Finance November, 2012

New-Issue Deal Flow (€ in billions) All LBOs

Pro Rata TLB/TLC Second Lien Total Senior Mezzanine Total Volume Total Loan Count: Share with TLB/TLC Share with Second Lien Share with Mezzanine

Apr-12

€ 0.48

€ 1.24

€ 0.00

€ 1.72

€ 0.00

€ 1.72

8 62.50% 0.00% 0.00%

Purpose Diversification (lagging 12 months, based on deal count)

Share of Buyouts 53.33% Share of Public to Private Buyouts Share of Sponsor to Sponsor Buyouts 1.67% 35.00% Share of Recapitalizations Share of Dividend Recaps Share of Refinancings 3.33% 0.00% 21.67%

Primary Pricing (lagging 3 months) All LBOs

Wtd. Average ProRata Spread Wtd. Average Institutional Spread

Average ProForma Credit Statistics (lagging 3 months) All LBOs

Leverage thru 1st Lien Debt Senior Debt/EBITDA Total Debt/EBITDA EBITDA/Cash Interest

All Buyouts

Leverage thru 1st Lien Debt Senior Debt/EBITDA Total Debt/EBITDA EBITDA/Cash Interest 478.57

516.25

3.5x

4.3x

4.5x

3.9x

3.5x

3.9x

4.2x

4.3x

May-12

€ 1.59

€ 1.36

€ 0.00

€ 2.95

€ 0.11

€ 3.06

12 91.67% 0.00% 8.33% 52.78% 2.78% 34.72% 2.78% 0.00% 23.61% 51.25% 2.50% 35.00% 5.00% 1.25% 23.75% 470.00

525.00

3.4x

4.5x

4.8x

3.4x

3.6x

4.2x

4.5x

3.8x

Jun-12

€ 1.04

€ 1.47

€ 0.00

€ 2.51

€ 0.39

€ 2.90

8 87.50% 0.00% 12.50% 475.00

529.82

3.5x

4.3x

4.7x

3.6x

3.8x

4.2x

4.8x

3.6x

2012 YTD

€ 5.87

€ 6.73

€ 0.10

€ 12.71

€ 0.70

€ 13.40

45 77.78% 0.00% 8.89% 40.00% 2.22% 26.67% 6.67% 2.22% 31.11% 478.57

523.39

3.5x

4.3x

4.7x

3.6x

4.1x

4.5x

3.6x

To access the data points underlying the chart, double-click on the chart. 14

Revolver Term Loans A B C Second Lien Cov Lite Mezzanine PIK Preferred Stock

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60% B 45% 30% A 15% RC 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12 C 2nd RC TLa TLb TLc 2nd Lien Chart reflects initial sponsor acquisitions and MBOs. The remaining category excluded from this chart includes tranches such as acquisition loans, Capex and Guarantee facilities. Based on Volume.

10.0x

0.4

9.0x

0.4

8.0x

0.4

7.0x

0.3

0.4

0.3

0.4

0.3

0.4

6.0x

7.0

7.8

7.3

6.9

6.7

6.6

6.5

7.2

5.0x

0.4

7.9

8.4

9.3

0.5

0.6

0.4

8.4

8.6

8.4

8.7

4.0x

19 97 (O bse rva tio ns: 1 4) 19 98 (3 5) 19 99 (3 3) 20 00 (4 0) 20 01 (3 7) 20 02 (5 2) 20 03 (6 6) Purchase Price 20 04 (7 7) 20 05 (8 7) 20 06 (1 20 ) 20 07 (1 05 ) 20 08 (5 6) Fees/Expenses 20 09 (8 ) 20 10 (2 4) 20 11 (3 6) 1H 12 (1 2) Excluding Platform Acquisitions and Other Sponsor Driven Transactions.

Includes only transactions for which Sources/Uses were made available.

Amsterdam Institute of Finance November, 2012 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. 17

60% 50% 40% 30% 20% 25.5% 29.0% 33.5% 33.9% 33.9% 31.9% 33.9% 33.2% 32.7% 32.9% 32.5% 42.1% 45.4% 46.9% 44.2% 43.0% 10% 0% 4.1% 6.6% 2.4% 3.5% 3.7% 6.7% 3.4% 2.7% 1.0% 0.8% 1.1% 2.7% 7.7% 3.7% 3.1% 7.1% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12 Retained Equity / Vendor Financing Contributed Equity Equity includes shareholder loans, common equity and preferred stock down streamed to the operating company as common equity as well as vendor note proceeds.

Includes only transactions for which Sources/Uses were made available. To access the data points underlying the chart, double-click on the chart. Amsterdam Institute of Finance Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. 18 November, 2012

2nd Lien 1.5%

Europe

Other 6.8% RC 10.0% 2nd Lien 11.1%

RC 15.5% TLa 1.8% TLa 28.3% TLb 53.4% TLb 71.5% Europe: Other includes Bridge Loans, Capex, Acquisition, Restructuring and Guarantee Facilities Excludes Platform Acquisitions and other sponsor driven transactions. Based on Volume.

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. Amsterdam Institute of Finance 19 November, 2012

LTM 30/06/12 2011

Total Equity: 47.7% Common Equity 37.2% Rollover Equity 4.2% Other Sources 1.7% Total Equity: 47.2% Rollover Equity 2.1% Common Equity 39.4% Other Sources 1.1% Shareholder Loan 5.1% Bank Debt 42.5% Shareholder Loan 4.6% Vendor Note 1.3% 2nd-Lien Debt Preferred Equity 0.1% Mezzanine 2.3% 3.1% Vendor Note 1.0% Secured Debt 3.3% Unsec Debt 1.6%

Observations: 26 Average Sources: €1,147.4M

Average Senior Loan Size: €499.2M

Bridge Unsec Debt Loan/Public Mezzanine 0.8% High Yield 2.1% 0.7%

Observations: 36 Average Sources: €842.0M

Average Senior Loan Size: €368.5M

Excluding Platform Acquisitions and Other Sponsor Driven Transactions.

Bank Debt 44.7% Amsterdam Institute of Finance November, 2012 Includes only transactions for which Sources/Uses were made available. 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 20 Companies, Inc.

Germany * Netherlands

Total Equity: 43.7% Common Equity 24.8% Rollover Equity 2.2% Total Equity: 41.4% Common Equity 36.8% Other Sources 2.3% Shareholder Loan 15.6% Bank Debt 34.6% Vendor Note 1.2% Vendor Note 4.6% Bank Debt 52.9% Secured Debt 21.7%

*Data reflects LTM 31/03/12, due to not enough observations for LTM 30/06/12

Mezzanine 3.3%

Observations: 3 Average Sources: €591.2M

Average Senior Loan Size: €143.7M

Observations: 3 Average Sources:

Includes only transactions for which Sources/Uses were made available.

€473.3M

Average Senior Loan Size: €241.7M

Amsterdam Institute of Finance November, 2012 Excluding Platform Acquisitions and Other Sponsor Driven Transactions.

 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 November, 2012 22

  

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

Amsterdam Institute of Finance November, 2012 23

    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 November, 2012 24

 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 November, 2012 25

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.

Amsterdam Institute of Finance

Distressed credits are issues rated D or restructuring.

November, 2012 To access the data points underlying the chart, double-click on the chart. 26

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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.

Amsterdam Institute of Finance November, 2012 29