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Amsterdam Institute of FinanceJoseph V. RizziOctober, 2014
22
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 October, 2014 2
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
3Amsterdam Institute of Finance
October, 2014
100%= 30 (equity)
+ 70 (debt financing)
Players LBO financing package Target company (2)
Equity30%
LBO funds (1)
Banks
Hedge funds
CLO
Senior debt60%
Debt financing 70%
Second lien loans5%
Subordinated debt5%
Debt financing
70%
Leverage effect =debt/EBITDA
=70/12=5.8
(EBITDA 12%)Mezzanine funds
Public Markets High Yield, PIK
Amsterdam Institute of Finance October, 2014
4
Equity#1
Equity#2
EuropeanHolding Company
United StatesHolding Company
NEWCO
United States Target
ForeignOperating
Subsidiary*
DomesticOperatingSubsidiary
DomesticOperatingSubsidiary
DomesticOperatingSubsidiary
Collapsed
After Closing
Equity
Preferred Stock
High Yield/Sub Notes
Due to the structural nature ofSubordination in Europe, bankDebt would be placed at the Operating subsidiary level.
Bank Deal with Upstream Guarantee
* Tax limitations surrounding guarantees from foreign subs.
Guarantee
Amsterdam Institute of Finance October, 2014
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66
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
Amsterdam Institute of Finance October, 2014
6
Total FL 2L Other
1H14 5 4 0.5 0.52013 4.75 3.9 0.1 0.752012 4.8 3.6 0.1 0.92011 4.5 3.8 0.1 0.62010 4.5 3.5 __ 12009 4 3 __ 12008 5.1 3.6 0.5 12007 6 4.5 0.5 12006 5.5 4.2 0.3 12005 5.3 4 0.2 12004 4.5 3.5 __ 1
7Amsterdam Institute of Finance October, 2014
88
Senior Secured, but with Junior or Second Lien-Lower recovery
Competing with EURO Mezzanine◦ Investors – hedge funds and CLO
Spread differential between Second Lien and First Lien currently around 325 BP
Volume: U.S. 1H14 $24B v YE06 $28.3BEUR 1H14 $1.1B YE07 $18.6B
Issues: - Inter-creditor - Standstill Agreement - Obligations - New Investors Behavior in a Workout
- CLO Rating Impact
Amsterdam Institute of Finance October, 2014 8
99
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 – Now dominant form >90%◦ Europe – Majority of new issuance >50%
Almost no incremental yield over first lien loans with financial covenants
Amsterdam Institute of Finance October, 2014
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1010
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’.
REIT
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.
Amsterdam Institute of Finance October, 2014
10
‘‘OpCo \ PropCo’ Financing (2)OpCo \ PropCo’ Financing (2)
Financing Notes
OpCo PropCo
BidCo
Rental Payments
Approx.100%
Approx.100%
Amsterdam Institute of Finance October, 2014
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1212
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
Availability: Difficult Post Crisis; primarily UK
Amsterdam Institute of Finance October, 2014 12
1313
• 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)
• Markets Issuance ($) Market Size 1H14 2013 1H14
U.S. $175B $325B $1.4TEuro $ 75B $100B $400B
Amsterdam Institute of Finance October, 2014 13
1414
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
Amsterdam Institute of Finance October, 2014 14
1515
Covenants * Extensive (bank type) * Maintenance basis (tested quarterly)
Security * Second secured
Call Provisions * Generally callable immediately (103,102,101)
Maturity * Ten year
Pricing * LIBOR + * Warrants for total return* TBD
Liquidity * Low
Disclosure: * Limited
Marketing * No research coverage, no roadshow
Rating Requirements * None
Amsterdam Institute of Finance October, 2014
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PIKPIK• Pay if you can togglePay if you can toggle
• Ratings – NR or CCCRatings – NR or CCC
• Eats up equityEats up equity
• Holding Company IssuerHolding Company Issuer
• CharacteristicsCharacteristics
Spread 825/900
Toggle 900-1000
Term 7.5-10
Call 5xNC
Leverage 6.5x+
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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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ACCORDIAN 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
Amsterdam Institute of Finance October, 2014
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
Amsterdam Institute of Finance October, 2014
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2020
Increasing layers of debt Directed at different investors Intercreditors conflicts
2004 + 2H07 - 2011
• Common equity
• Unsecured/mezzanine (1x)
• Senior secured bank loan (4x)
- Amortizing T/LA – 40%
- B/C tranches – 60%
FDX – 5x + PPX – 7.5 +
2012 - Present
• 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
October, 2014 20
2121
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)
Amsterdam Institute of Finance October, 2014 21
22
HCA HCA Legal StructureLegal Structure
Europeansubs
Sub C
Healthtrust Holdings
Management
Euro T/L
Unrestricted subs Restricted subs(guarantors)
Sub D Sub ESub BSub A
Acquisition CorpHCA, Inc
Equity
Bank Loans
Existing Notes
Sponsors
Merge
Amsterdam Institute of Finance October, 2014 22