joseph v. rizzi amsterdam institute of finance december, 2013

Joseph V. RizziAmsterdam Institute of FinanceDecember, 2013

22

• Cash Flow

Impacts default risk

• Balance Sheet

Determines Loss in Event of Default (LIED)

Liquidity

Valuation

Amsterdam Institute of Finance December, 2013

3

• 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


4

• Quantitative◦ Capitalization

Cash Equity >25% Total Debt <6.0x Senior Debt (1) <4.5x First Lien <4.0x Second Lien <0.5x

◦ Cash Flow LTM EBITDA / PFI >2:1 7 x LTM FFOCF / TLA(2) >1:1

◦ Liquidity Cash + MS + RCA / P+I (3) > 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


5

• Debt capacity is derived from firm’s assets◦ Operating Cash Flows◦ Asset Sales / Asset Quality◦ Leveragability

• Market Conditions

• Target financing structure

Credit curve shifts over

time depending on the economy

Rating

Rate

s

2H07Crisis

Overheated 1H07


6

There are two different approaches to designing the capital structure:

20%

30%

50%

Cash FlowCash FlowModelModel

Balance SheetBalance SheetModelModel

Senior Debt

Sub Debt

Equity

3 - 4xEBITDA

4 - 6xEBITDA

Equity


7

• Ratio Approach

• Cash Flow

• Advance Rate


8

Market◦ Maximum senior debt and total debt ratios◦ Vary over cycle

Peers◦ Identify◦ Rating Classification◦ Key Ratios

Rating Agencies◦ Credit Statistics


9

Peer XYZ XYZABC DEF GHI JKL MNO PQR STU Average Actual Pro-Forma

12 Months Ended 02/10/20xx 30/09/20xx 01/01/20xx 30/09/20xx 31/10/20xx 30/11/20xx 31/12/20xx 31/12/20xx 31/12/20xxSales 3073.8 8294.9 6165.2 852.4 2345.8 1682.1 2133.4 3506.8 3025.4 3205.3Gross Margin 25.6% 14.4% 16.3% 19.8% 22.0% 16.6% 17.1% 18.8% 17.8% 17.4%EBITDA 153.7 430.1 272.3 35.9 130.8 77.3 100.3 171.5 122.6 134.5 Margin 5.0% 5.2% 4.4% 4.2% 5.6% 4.6% 4.7% 4.8% 4.1% 4.2%Interest Expense 34.4 78.6 49.6 13.2 19.5 15.3 25.0 33.7 55.2 55.8Capex 32.1 40.7 37.1 9.8 25.8 11.3 27.8 26.4 10.7 10.7 % of Sales 1.0% 0.5% 0.6% 1.1% 1.1% 0.7% 1.3% 0.9% 0.4% 0.3%Total Assets 1482.0 3835.4 2790.1 360.5 1099.5 829.3 961.5 1622.6 950.5 952.3

Secured Bank Debt 455.4 0.0 0.0 117.8 0.0 0.0 0.0 211.9 83.2Unsecured Bank Debt 0.0 504.6 175.9 0.0 208.0 210.0 37.6 0.0 0.0Other Senior Debt 111.7 391.4 708.2 6.3 179.2 0.0 75.0 42.6 8.3 Total Senior Debt 567.1 896.0 884.1 124.1 387.2 210.0 112.6 254.5 91.5Subordinated Debt 0.0 197.6 0.0 0.0 0.0 0.0 143.7 289.2 289.2 Total Debt 567.1 1093.6 884.1 124.1 387.2 210.0 256.3 543.7 380.7Equity 419.9 1461.1 1293.3 150.2 473.8 414.4 262.5 (69.0) 96.4 Total Capitalization 987.0 2554.7 2177.4 274.3 861.0 624.4 518.8 474.7 477.1

Total Debt/EBITDA 3.7 2.5 3.2 3.5 3.0 2.7 2.6 3.0 4.4 2.8Senior Debt/EBITDA 3.7 2.1 3.2 3.5 3.0 2.7 1.1 2.8 2.1 0.7Total Debt/Capital 57.5% 42.8% 40.6% 45.2% 45.0% 33.6% 49.4% 44.9% 114.5% 79.8%EBITDA/Interest (incl. A/S) 4.5 5.5 5.5 2.7 6.7 5.1 4.0 4.8 2.2 2.4

Credit Ratings S&P BBB- A- A NR NR NR BB BB- Moody's NR A3 A2 NR NR NR Baa3 Ba2

Market Capitalization 468.2 1482.0 1295.8 104.4 510.9 249.2 177.9 612.6Enterprise Value 1035.3 2575.6 2179.9 228.5 898.1 459.2 434.2 1115.8Ent Value/EBITDA 6.74 5.99 8.01 6.36 6.87 5.94 4.33 6.32Ent Value/Sales 0.34 0.31 0.35 0.27 0.38 0.27 0.20 0.30Ent Value/Book Value 2.47 1.76 1.69 1.52 1.90 1.11 1.65 1.73Earnings per Share 1.78$ 1.73$ 2.83$ (0.06)$ 2.37$ 1.69$ 1.09$ 1.63$


10

Important: Loan Market Evolution from a bank to an institutional market(back to a bank market?)

Impact: Majority of syndicated loans are rated

Pricing: Affected by rating


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 0.0 0.8 1.0 1.1 2.6 2.6

Total Adjusted Debt/

Operating EBITDAR 3.5 3.9 3.3 4.9 5.4 7.0

FFO Adjusted Leverage3.7 4.2 3.7 5.1 6.4 6.7

FCF/Total Adjusted Debt 0.0 0.0 0.1 0.0 0.0 0.0

Operating EBITDA/

Gross Interest Expense5.5 4.1 5.3 3.2 2.5 1.8

Amsterdam Institute of FinanceDecember, 2013

11

2013 LBO’s Funded by (YTD 17/09/13)

Amsterdam Institute of FinanceDecember, 2013 12

Bonds Only

Bonds + Drawn Bank

Debt

Bank Debt Only

Number of Deals in Sample 6 4 23

Ave. Transaction Size (M) € 789.9 € 2,957.0 € 1,228.4

Ave. PPM 8.5x 9.4x 8.6x

Ave. Equity Contribution 44.8% 29.9% 43.9%

Ave. HY Bond/Total Sources 54.9% 22.9% 0.0%

Ave. Bank Debt/Total Sources

0.0% 47.2% 52.8%

Ave Total Debt/Total Sources

54.9% 70.1% 54.5%

Ave. Debt/EBITDASource S&P Financial Services

4.9x 6.6x 4.6x

Characteristics LTM 2012 2011Total Volume (€ B) 7.15 1.74 3.17Total Deal Count 12 6 9Avg. Pro Rata Spread (E+) N/A 475.0 403.6Avg. Wtd. Avg. Inst. Spread (E+) 430.6 591.7 459.4Avg. Deal Size (€ MM) 595.5 289.2 352.5Avg. Pro Rata Term (Years) N/A 5.9 6.0Avg. Institutional Term (Years) 5.8 5.7 6.8

Avg. Pro Forma Trailing LTM 2012 2011Revenues (€ MM) 5,117.29N/A 466.5EBITDA (€ MM) 315.32 N/A 62.86Adj. EBITDA (€ MM) 320.35 N/A 62.86


Financial Ratios (Trailing Pro Forma) LTMAvg. Max. Min. St. Dev.

Debt/EBITDA 5.22 6.02 4.20 .77Sr. Debt/EBITDA 4.80 5.50 4.18 .64EBITDA/Cash Interest 3.55 4.21 2.76 .72EBITDA-Miant CapEx/Interest N/A N/A N/A N/AEBITDA-CapEx/Interest N/A N/A N/A N/A

Purchase Price Multiple N/A N/A N/A N/AEquity Contribution N/A N/A N/A N/A


14

15

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.

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.


Europe USPro Rata Spread N/A L+252.9Weighted Avg Institutional Spread E+370.8 L+294.3Deal Size (€MM) 555.38 1,053.68 Pro Rata Term (in Years) 6.00 4.70 Institutional Term (in Years) 6.13 6.08 Revenues (€MM) N/A 2,932.44 EBITDA (€MM) 1,179.93 743.72 Pro Forma Debt/EBITDA 3.49x 3.65xPro Forma Senior Debt/EBITDA 3.36x 3.56xPro Forma Cash Interest Coverage N/A 7.80xObservations 4 107

Europe USPro Rata Spread E+449.7 L+356.8Weighted Avg Institutional Spread E+445.3 L+379.2Deal Size (€MM) 438.18 547.28 Pro Rata Term (in Years) 5.02 4.84 Institutional Term (in Years) 6.13 5.98 Revenues (€MM) 1,385.80 1,256.15 EBITDA (€MM) 209.97 252.16 Pro Forma Debt/EBITDA 4.92x 4.80xPro Forma Senior Debt/EBITDA 4.64x 4.71xPro Forma Cash Interest Coverage 4.19x 3.97xObservations 26 432

BB/BB-

B+/B


16

RevolverTerm Loans

ABC

Second LienCov LiteMezzaninePIKPreferred Stock

17


R/C T/La T/Lb T/Lc 2ndL 2013 (9 mo) 14% 22% 64% - - 2012 14% 30% 56% - - 2011 15% 28% 57% - - 2010 14% 32% 54% - - 2009 15% 31% 54% - - 2008 12% 31% 40% 17% - 2007 12% 19% 42% 17% 10% 2006 13% 28% 31% 3% 5% 2005 14% 40% 25% 20% 5% 2004 15% 40% 26% - - 2003 15% 45% 23% - - 2002 16% 46% 26% - - 2001 16% 54% 20% - - 2000 20% 50% 20% - - Source: Standard & Poor’s Financial Services

Amsterdam Institute of Finance

December, 2013 18

2013 (9 mo) 8.0 2012 8.9 2011 8.4 2010 8.6 2009 8.9 2008 9.3 2007 9.3 2006 8.4 2005 7.9 2004 7.2 2003 6.5 2002 6.6 2001 6.1 2000 6.9 Source: Standard & Poor’s Financial Services



2013 (9 mo) 43% 2012 50% 2011 47% 2010 50% 2009 50% 2008 45% 2007 35% 2006 35% 2005 35% 2004 36% 2003 38% 2002 39% 2001 39% 2000 38% Source: Standard & Poor’s Financial Services


LTM 9/30/13 2012 Bank Debt 47.8% 38.4% 2nd L 1.8% 1.2% Secured HY 0.5% 1.7% Sen Unsecur HY 0.8% 0.6% Mez 0.5% 4.2% Vendor Note - 0.7% Shareholder Loan 1.4% 7.2% Rollover Eq 1.0% 3.8% Common Eq 44.3% 41.1% Total Eq 46.8% 52.7% Other 0.4% 1.2% Bridge to HY 1.5% Source: Standard & Poor’s Financial Services


23

Maximum debt capacity formula:-MDC = f(operations, amortization, rate, asset sales)MDC = [EBIT / (i+ 1/n)] + AS + RF

EBIT - Earnings Before Interest and Taxesi - Interest Raten - Straight line loan amortizationAS - Proceeds from Asset Sales

RF - Refinancing


Opening Balance Sheet Adjustments – from sources and uses – including

purchase price assumptions Proforma balance Sheet

◦ Income Statement◦ Cash Flow StatementCapitalization table/transaction structureDebt ScheduleTerm sheet(s)Valuation/maximum purchase priceReturns Analysis – IRR and MOC

24


25

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


26

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 BB(B) EBITDA/Int for Target Rating c3.0x(C) Firm EBITDA $300mln(D) Interest Rate for Target Rating 10%(E) Maximum Debt Capacity = (C/B)/D

= (300/3)/10%= $1,000


2013 ( 9 mo ) 9% 2013 7% 2013 12%2011 7%2010 9% 2009 5%

Source: Standard & Poor’s Financial Services


28To 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.

Share of Credit Issue in Distress Based on Count Share of Credit Issue in DistressBased on Share of Sr. Par Issue

Distressed credits are issues rated D or restructuring.Charts reflect share of credits issued each year that eventually went into distress.

Year of Credit Issue Year of Credit Issue

11.3%

15.7%

24.8%

11.5%

4.9%

0.0%

2.8%

0%

6%

12%

18%

24%

30%

2005 2006 2007 2008 2009 2010 2011

16.3%17.2%

28.4%

17.9%

4.5%5.1%

0.0%0%

6%

12%

18%

24%

30%

2005 2006 2007 2008 2009 2010 2011


joseph v. rizzi amsterdam institute of finance december, 2013

Documents

bb ebitda

bb pretax

total debt ratios

b total debtcapitalization22

bbbb bbbimplied rating

ebitda relative

total interest45

total debt20