u. s. loan syndications chris droussiotis 2011. table of contents 1.loan syndication background...

U. S. Loan Syndications

Chris Droussiotis

2011

Table of Contents

1. Loan Syndication Background & History

2. Syndication Loan Market Overview Types of Loan Syndications Formats

3. Loan Syndication Process including a summary of Internal Rating Analysis

4. Typical Leverage Loan Structure

5. Typical Leverage Loan Term Sheet / Credit Agreement

6. Example of Large Syndication

7. Lecturer’s Biography

2

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial or investment banks known as Arrangers.

Arrangers serve the investment-banking role of raising investor dollars for an issuer in need of capital.

The issuer pays the Arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan.

In the Mid-1980’s when the larger buyouts needed bank financing, the syndicated loan market became the dominant way for issuers to tap banks and other institutional capital providers for loans.

In the late 90s to early 2000’s hundreds of Collateral Loan Obligation funds (CLO’s) were created and joined the loan syndication process. These funds were referred to as non-bank institutions or institutional investors. These institutional investors played a key role in the exponential growth of the Mega LBO deals seen in 2005-2007.

By 2007, nearly 75% of the loans were provided by non-banks, versus less than 20% 10 years earlier. The Fall of 2007 – the end of liquidity in the U.S Syndication market – Traditional Banks had to step up in the months and years to follow the liquidity crisis.

For two years after the crisis (2007-2009), the syndication market has completely changed; Was more cautious, new language was added in the syndication agreements between the banks and the customers to protect against market risk

Starting in the summer of 2010 through today, the syndication markets started to loosen up again as the liquidity in the loan market has come back significantly. In 2010, the HY bond market issuance had the best year ever.

Loan Syndication Background & History

3

Two Markets Served

4

Investment Grade Loan Market

• Rated BBB- and Higher (Corporate)

• Arrangers hold Higher Exposure ($200 million +)

• The majority of the Syndicate are traditional banks

Leveraged Loan Market

• Rated BB+ and Lower (Corporate)

• Arrangers hold Lower Exposure – thus the need to syndicate

• The majority of the Syndicate are non-banks (Financial institutions)

Two Markets Served – Global

5

Investment Grade Loan Market

0.0

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450.0

1Q05

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1Q07

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4Q10

Americas EMEAAsia-Pacif ic (ex Japan) Japan (beg. '06)

0.0

50.0

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450.0

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

Americas EMEA Asia-Pacif ic (incl. Japan)

Leveraged Loan Market (BB+ and below)

Two Markets Served in the U.S.

6

Investment Grade Loan Market Leveraged Loan Market (BB+ and below)

$715 Billion

$229 Billion

350.9

410.4

351.3

239.5

307.4

398.0 389.2

624.1

679.0

242.4201.5

222.2 221.7

518.5

$0B

$250B

$500B

$750B

$1000B

Pro Rata Institutional High-Yield

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

19

90

199

11

99

219

93

19

94

199

51

99

619

97

19

98

199

92

00

02

00

120

02

20

03

20

04

200

52

00

62

007

20

08

20

09

201

0

I-G

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e V

olu

me

($

Bils

.)

AAA AA A BBB

Loan Syndication Market Overview (Continued)

Exponential Demand Surge of Syndicated Leveraged Loans Vs Bonds during the financial crisis

7

Extremely high liquidity in the market gave banks confidenceto underwrite larger and larger deals…

$0

$5

$10

$15

$20

$25

$30

$35

$40

$ in

Bill

ions

OtherHigh YieldLeveraged Loan

Leveraged Loan$5.0

$8.0

$11.3

$22.3

$28.4

$33.0

$37.9

Hi Yield $3.0 Leveraged Loan$11.3 Leveraged Loan

$9.0

Hi Yield $6.03

Other (CMBS) $7.25

Leveraged Loan$15.185

Hi Yield $13.22

Leveraged Loan$21.7

Hi Yield $11.3

Leveraged Loan$26.65

Hi Yield $11.25

28 Mar 05 20 Nov 05 2 Oct 0624 Jul 06 26 Feb 07 30 Jun 07

Source: LoanConnector


The Exponential Surge in Supply of Syndicated Loans was driven by large Leveraged Buyouts starting in 2005 thru the summer of 2007

8

Institutional Investors through June 2007 dominated the market

Over time, institutional investors have replaced banks as lenders with over 75% of demand coming from institutional investors as of LTM 6/30/07

Source: Deutsche Bank

0%

20%

40%

60%

80%

100%

94 95 96 97 98 99 00 01 02 03 04 05 06

LTM 6/

30/0

7

(% o

f Inv

esto

r B

ase)

0%

20%

40%

60%

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100%

(% Investor B

ase)

U.S. Banks Non-U.S. BanksFinance Co. / Securities CLOs / Hedge Funds / High-Yield FundsInsurance Co. % Banks


Loan Syndication Participants:

9

Before (LTM June 30, 2007(1)) After (2nd Half 2007(2)) As of 12/05/07

Investor Landscape has changed

CLOs

Banks

Other

Hedge Funds / HY

Primary Issuance

Demand Supply

($ in Billions)

Sources:

(1) Standard & Poor’s Leveraged Lending Review 2Q07

(2) Demand assumptions: Banks and Other at 35% consistent with LTM 6/30/07; CLO, Hedge Fund and New Capital amounts Wall Street estimatesSupply assumptions: Primary Issuance based on current estimated forward calendar; Liquidation / Collateral Calls amounts Wall Street estimates

(3) Finance Companies, Insurance Companies, Prime Rate Funds

(4) Standard & Poors LCD News 12/5/07

(5) Grossed up for ordinary issuance

(3)

Liquidation / Collateral Calls

Primary Issuance (5)

CLOs

Banks

DemandSupply

(3)

Other

$95 (15%)

$120 (19.3%)

$95 (15%)

$310 (50%)

$620

$300

$50

$50 (14.3%)

$50 (14.3%)

$10 (3.5%)

$620 $620

$350

$162 B (46.3%)Capital Required to Absorb Excess Supply

$350

Loan Syndication Market Overview (Continued) – Lessons LearnedThe Leverage Loan Syndication Supply and Demand Imbalance

Hedge Funds / HY

$33 (9.4%)

Cross-over Investor / Distress Buyer / Opportunity Funds

$45 (14.5%)

(2)(2)

(4)

10

The Secondary Loan Market took a plunge as a result of oversupply at the time of financial crisis.

11

New Issue Loans with LIBOR Floor, higher Spread pricing and tighter structures post 2007

50

60

70

80

90

100

110

Underwritten deal

Best-efforts syndication

Club deal

Types of Loan Syndication Formats

12

Underwritten deal

Arrangers guarantee the entire commitment, then syndicate the loan to reduce their exposure.

If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference.

Reasons for Arrangers to underwrite:

• Offering an underwritten loan can be a competitive tool to win mandates.

• Underwritten loans usually require higher fees New Terms:

• “Flex Language” • Memorandum of Understanding (MOU)

•Balancing between holding and syndicating exposure •For preferred customers, the banks tend to hold higher exposure justifying it by additional products offered going forward (an important variable in the banks’ profitability calculations (RAROC), though given the size of the facility, the banks’ are phased with the dilemma of successfully syndicating and holding their exposure.

Types of Loan Syndication Formats (Continued)

13

Best-efforts syndication

The Arranger commits to underwrite less than the entire amount of the loan.

If the loan is undersubscribed, the deal may not close unless the terms/pricing/structure are changed.

Best-efforts syndications were used for risky borrowers or for complex transactions.

As in the case of underwriting, for preferred customers, the banks tend to hold higher exposure justifying it by additional products offered going forward (an important variable in the banks’ profitability calculations (RAROC).


14

Club deal

Pre-marketed to a group of issuer’s or equity sponsor’s relationship lenders.

Typically a smaller loan (usually $25 million to $200 million but as high as $500 million)

The arranger is generally a first among equals, and each lender gets a full cut of the fees.

For preferred customers, the banks tend to hold higher exposure justifying it by additional products offered going forward (an important variable in the banks’ profitability calculations (RAROC).


15

The Loan Syndication Process

Issuer /CompanyLead Arranger Bank

Administrative Agent

Bookrunner Bank #1

Syndication Agent

Bookrunner Bank #2

Documentation AgentFirst Tier

Co-Mgr

Bank #1

Co-Mgr

Bank #2

Co-Mgr

Bank #3

Co-Mgr

Bank #4

Co-Mgr

Bank #5

Co-Mgr

Bank #6

“Retail” Level

Second Tier

Bookrunner Bank #3

Documentation Agent

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

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The issuer or Company solicits bids from Arrangers. Arrangers will outline their syndication strategy and their view on the way the loan will price in market.

Issuer gives the mandate to one or more Arrangers (Co-Arrangers) The arranger will prepare an information memo (IM) describing the terms of the transactions.

The IM typically will include: Executive Summary Investment Considerations Summary of Terms and Conditions (Term Sheet) Transaction Overview Company Management and Equity Sponsor Overview Industry Overview Financial Model Timing for commitments, closing, as well as fees on level of commitments

Bank meeting is scheduled at which potential lenders hear the management and the Investor group.

A deadline is given for the banks to send their commitment levels subject to final documentation

Each Bank analyzes the deal’s credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.

The Arranger collects all commitments – different amounts from each Bank

Allocations are given and Legal Documentation is sent for their final review.

If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.

After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.

The Loan Syndication Process (Continued)

17

As part of the syndication process we will discuss in detailed these two items following this page.

Typical Internal Analysis Process by each bank

Internal Application sent to their respected investment/credit committees. This application includes the following:

Requested amount that is within the rating parameters for each bank Recommended amounts by Tranche (Revolving Credit / Term Loans) Term and Conditions of the Loans (includes pricing, structure and covenants) Profitability (RORA and RAROC) Syndication strategy Transaction discussion including Source and Uses and Capital Structure Company discussion including historical performance and outlook Corporate Structure Management Biographies / Equity Sponsor Profile Collateral Analysis Industry Analysis Financial Analysis (Projections’ Model) Internal Rating Analysis

Internal Legal Review

KYC (know-your-customer) and Compliance Review


18

This process will be discussed following this page

Typical Internal Rating Analysis by each bank

Most banks’ internal ratings are in line with the Agencies’ external ratings, though the analysis is done independently. This analysis is based on two approaches:

Quantitative Analysis Qualitative Analysis


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The Quantitative Analysis for establishing the Internal rating which measures the probability of default is based on the following parameters (each component is weighted at a specific level of importance):

Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA)

Capitalization Ratio – the relationship between the bank debt and the rest of the capital (Capital Leases, Bonds, Equity)

Coverage Ratio - Issuer’s Cash Flow covering it’s debt obligations (interest and principal payments)

Variance of Projections – based on the projections, the model typically assumes a certain haircut (10-30%) to the management’s projections and it tests it’s ability to pay its debt obligations.

The Quantitative approach adjusts up or down based on industry characteristics (Recession resistance, cyclical, or event driven).

The Qualitative Analysis is subjective based on each bank’s internal policy. The Analysis would include strength of management, support from the equity sponsor, recovery analysis (asset collateral) and outlook.

The Typical Scale is 1-10, 1 being with very limited risk to default and 10 the issuer being in bankruptcy with no chance of recovery

Typical Leverage Loan Structure (Rated by S&P as BB or lower)

Bank Debt Facilities (typically represented 30-35% of Total Capital):

Revolving Credit (Typically, Commercial Banks provide this facility)

Commitment Amount

Typical maturities of 5-6 years

Funded Versus Unfunded Amount

Funded Pricing and Unfunded Pricing (Commitment Fee)

Letters of Credit

Term Loans (typically, Non-Bank institutions provide this facility)

Funded Amount – sometimes structured as Delayed Draw Down

Typical Maturities of 6-8 years

Public Bonds / Notes (typically represented 20-25% of Total Capital):

Typical maturities of 9-11 years

Unsecured Debt

Private Equity (typically represented 30-45% of Total Capital):

20

Typical Leveraged Deal Term Sheet / Credit Agreement

1. Parties to the Credit Agreement:

Borrower

Holding Company

Guarantor / Parent and Subsidiaries’ Guarantee

Agent Banks

Administrative Agent

Collateral Agent

Syndication Agent

Documentation Agent

Law Firms representing the Borrower and Agent Banks

2. Description of the Transaction / Purpose of the Loan (s)

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3. Money Terms:

Amount / Tranches

Revolving Credit

Term Loans

Pricing

Interest Rate / Margin over LIBOR

Commitment Fees on unfunded portion

Maturities

Amortization Schedule (set principal payments)

Need 100% Vote from the syndicate banks to amend these terms

Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

22

4. Non-Money Terms:

Financial Covenants

Negative Covenants

Affirmative Covenants

Need Majority Vote (typical 51%) from the syndicate banks to amend these terms


23

Typical Financial Covenants

Typical Negative Covenants

Maximum Leverage Ratio (Total Debt / EBITDA)

Maximum Senior Leverage Ratio (Bank Debt / EBITDA

Minimum Coverage Ratio (EBITDA / Interest

Minimum Fixed Charge Ratio (EBITDA – Capex – Taxes ) / Interest + Principal Payments)

Maximum Capital Expenditures

Minimum Tangible Net Worth

Limitations on Additional Debt

Limitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactions

Limitations of Dividends / Investments

Limitation on Liens / Negative Pledges

Excess Cash Sweep

Limitations of Change of Ownership


New Terminology in 2006 and 2007:

Covenant Lite Structures (“Covy lite”)

Incurrence Tests Vs Maintenance Tests

New Terminology in 2006 and 2007:

“Green Shoe”

24


5. Other Terms & Conditions:

Security / Liens / Guarantees

Mandatory Prepayments

Optional Prepayments / Call Protection

Financial Reporting / Maintaining Corporate Existence (“Affirmative Covenants”)

Representation and Warranties

Conditions Precedent at Closing

Events of Default

Assignments and Participations / Secondary Sales

Waivers and Amendments

Indemnification

Cross Default

Material Adverse Clause (MAC)

25


6. Pricing, Fees and Expenses on Separate Documents:

Fee Letter

Interest Rate (Applicable Margin and Leveraged Grids)

Expenses

26

Other Terminology to the Credit Agreement

LIBOR Floor

Original Issuer Discount (OID)

Margin Spread

A typical calculation of Loan Yields in the secondary market for loans:

LIBOR or LIBOR Floor + Margin Spread + (100-OID)/4* years = Loan Yield

*market convention is to use 4 years as it represents the average life

Example:

LIBOR Floor = 1.00%

Margin Spread = 400 basis points (or 4.00%)

OID = 98

Then the Loan Yield is calculated to:

1.0% + 4.0% + [(100 – 98)/100]/4 = 5.0% + (2.0% / 4) = 5.0% + 0.5% = 5.5% Yield


27

Other Schedules Attached to the Credit Agreement

Intercreditor Agreement

Purchase Agreement

Hedging Arrangement / Hedging Agreement


28

Example of a Large Syndicated Loan Harrah’s Entertainment

29


TRANSACTION OVERVIEW

On December 19, 2006, Harrah’s Entertainment Inc. (“Harrah’s” or the “Company”) announced that it had entered into an agreement to be acquired by affiliates of Apollo Management (“Apollo”) and TPG Capital (“TPG”) in a transaction valued at approximately $31.2 billion (including estimated fees and expenses)

Harrah’s Entertainment, based in Las Vegas, Nevada, is the world’s largest and most geographically diversified gaming company, operating 50 casinos in six countries, with the #1 or #2 market share in almost every major gaming market in the U.S.

At the time of the acquisition, Harrah’s generated LTM 9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of $10.6 billion and $2.9 billion, respectively.

Harrah’s Operating Company (“HOC”) owns or manages 43 of the 50 Harrah’s Entertainment casinos and generated LTM 9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of $8.0 billion and $2.0 billion, respectively

30


TRANSACTION SOURCES & USES

SOURCES: USES:TERM L+ RATE COMM $ AMT % CAP $ AMT

Revolver 6 3.00% 7.25% 2,000.0 0.0 0.0% Purchase Shares 17,291.0New Term Loan-B 7 3.00% 7.25% 7,250.0 7,250.0 23.2% Extra Cash 642.0 Total Bank Debt 9,250.0 7,250.0 23.2%Existing Senior Debt 8 6.70% 4,624.0 14.8% Refinance Existing Debt 7,582.0CMBS 5 7.50% 6,500.0 20.8% Fees & Expenses 1,106.0Senior Unsecured Notes 10 10.75% 5,275.0 16.9% Rollover Debt 4,624.0Senior Unsecured Notes (PIK) 10 10.75% 1,500.0 4.8% Total Senior Sources 25,149.0 80.5% Total Uses 31,245.0

Senior Sub Debentures 0 0.00% 0.0 0.0% Sources - Uses 0.0Junior Sub Debentures 0 0.00% 0.0 0.0% Total Junior Sources 0.0 0.0%

New Preferred Stock 10 10.00% 2,000.0 6.4%New Common Equity 4,096.0 13.1% Total Equity 6,096.0 19.5%Total Sources 31,245.0 100.0%

ASSUMED LIBOR (1/2008) 4.25%

31


STRUCTURE – TOO LEVERAGE??

Pro Forma Capitalization Pro Forma % of 2007($ in MM) At Close Total Cap EBITDA$2B Revolver -$ 0.0% 0.0xTerm Loan B 7,250.0 31.4% 3.6x

Bank Debt 7,250.0$ 31.4% 3.6x

Sr unsecured cash-pay 5,275 22.9% 2.6xSr unsecured PIK toggle 1,500 6.5% 0.7x

Total Senior Debt 14,025.0$ 60.8% 6.9x

Rollover of existing debt 4,624.0 20.0% 2.3x

Total Debt 18,649.0$ 80.8% 9.2x

Contributed Equity 4,422.3 19.2%Total Capitalization 23,071.3$ 100.0%Source: SMBC analysis

Adjusted 2007 EBITDA 2,037.0$

Aggressive Structure??

32


CORPORATE STRUCTURE

33


SUMMARY OF TERMS – SENIOR CREDIT FACILITY

34


SYNDICATION PROCESS – WRONG TIMING FOR AN UNDERWRITTEN DEAL???

The general syndication of Harrah's was launched 1/15/2008 with a bank meeting in New York. Over 1,000 bankers attended the general syndication meeting with commitments requested by 1/29/2008.

Unfortunately, given the: i) global correction in the financial markets on the week of January 21, 2008, ii) dramatic widening of high yield credit spreads and iii) reduction in the 3-month Libor Rate by at least 120 bps that followed, the secondary market loan prices pulled back materially and bank investors started to demand a much higher All-In Yield (about L+ 500) on primary market transactions, like Harrah's. Investors were demanding All-In Yield of between L+ 450 - 500 to commit/purchase Harrah's Term Loan B. Since the offered TLB margin spread was L+300, investors were demanding a discount (OID) of between 92-93 (compared to the original OID offer of 96.5) from the Underwriters/Arrangers. Following the failed syndication, Arrangers in order to reduce their exposure, were offering Harrah's TLB with an OID in the low 90's.

35


SYNDICATION PROCESS – WRONG TIMING FOR AN UNDEWRITTEN DEAL?? (continued)

At the time, given such low demand, it was reported that Credit Suisse started to quietly syndicate their exposure prior to the commitment deadline (1/29/2008), independent of the other Arrangers. As a consequence, each of the Arrangers started to syndicate their own exposure to their own investors offering as low as 90's OID to syndicate their exposure.

After that incident, there was a new agreement made between the Arrangers called The Memorandum of Understanding (MOU) where it prohibits one arranger to sell their exposure within an agreeable period (6 months after the commitments are due) without the consent of the other Arrangers.

36

37

Chris Droussiotis, MBA, C.H.E.

Chris Droussiotis has twenty three plus years of banking experience working in the investment banking divisions of major New York money center banks, such as Bank of America, CIBC Oppenheimer, Sumitomo Mitsui Banking Corp., Mitsui Nevitt Merchant Bank, Mizuho Financial Group and Bank of Tokyo-Mitsubishi, specializing in the financing and structuring of merger & acquisition, leveraged buyout and recapitalization transactions.

Chris is currently the Head of the Leveraged and Sponsor Finance Group at Sumitomo Mitsui Banking Corporation managing a $1.4 billion investment portfolio of leveraged loan investments.

Duties include portfolio analysis, valuation, financial projections, credit assessment, as well as interaction with issuers, broker-dealers, investment banks, Private Equity firms and bank management.

Prior to his banking career, Chris taught mathematics and business statistics at FDU’s Sullivan Business School in Rutherford, NJ. He holds a B.Sc. in business, an MBA from FDU’s Sullivan School of Business, was credit trained at Bank of America, and completed advanced professional development courses in corporate taxation at New York University.

Chris is also an Adjunct Professor of certain finance courses for undergraduate and graduate programs at Baruch College and FDU including Investment Analysis, Quantitative Analysis in Business, Managerial Accounting, Business Statistics and Advanced New Venture Management.

Chris has given various lectures on various subjects including Leveraged Buyouts, Credit Markets, Capital Markets for Baruch College, as well as companies such as Cendant Corporation, Wyndham Worldwide, Travelocity and the Industrial Bank of Japan.

Chris is also the president and founder of CSD&A, a financial consulting firm established in 1989 to assist companies with business plan development, quantitative analysis, financial modeling, enterprise valuation, Portfolio Anaysis, M&A, and debt and equity capital procurement.

BIOGRAPHY OF THE LECTURER

u. s. loan syndications chris droussiotis 2011. table of contents 1.loan syndication background...

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