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U. S. Loan Syndications Chris Droussiotis 2012

U. S. Loan Syndications Chris Droussiotis 2012. Table of Contents. Loan Syndication Background & History Syndication Loan Market Overview Types of Loan Syndications Formats Loan Syndication Process including a summary of Internal Rating Analysis Typical Leverage Loan Structure

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U. S. Loan Syndications Chris Droussiotis 2012

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  1. U. S. Loan Syndications Chris Droussiotis 2012

  2. Table of Contents • Loan Syndication Background & History • Syndication Loan Market Overview Types of Loan Syndications Formats • Loan Syndication Process including a summary of Internal Rating Analysis • Typical Leverage Loan Structure • Typical Leverage Loan Term Sheet / Credit Agreement • Example of Large Syndication • Lecturer’s Biography 2

  3. Loan Syndication Background & History • 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. 3

  4. Two Markets Served • 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) • Leverage Loan Market purpose: • Leverage Buyouts (LBO) • Acquisitions using substantial debt • Refinancing 4

  5. Two Markets Served in the U.S. Investment Grade Loan Market Leveraged Loan Market (BB+ and below) $845 Billion $762 Billion 6

  6. Loan Syndication Market Overview (Continued) The Exponential Surge in Supply of Syndicated Loans was driven by large Leveraged Buyouts starting in 2005 thru the summer of 2007 $37.9 $33.0 Hi Yield $11.25 $28.4 Hi Yield $11.3 $22.3 Hi Yield $13.22 Other (CMBS) $7.25 Leveraged Loan$26.65 $11.3 Hi Yield $6.03 Leveraged Loan$21.7 $8.0 Leveraged Loan$15.185 Hi Yield $3.0 Leveraged Loan$11.3 Leveraged Loan$9.0 Leveraged Loan$5.0 28 Mar 05 20 Nov 05 24 Jul 06 2 Oct 06 26 Feb 07 30 Jun 07 Source: LoanConnector 8 Extremely high liquidity in the market gave banks confidenceto underwrite larger and larger deals…

  7. Loan Syndication Market Overview (Continued) Institutional Investors through June 2007 dominated the market Loan Syndication Participants: Source: Deutsche Bank Over time, institutional investors have replaced banks as lenders with over 75% of demand coming from institutional investors as of LTM 6/30/07 9

  8. Loan Syndication Market Overview (Continued) – Lessons LearnedThe Leverage Loan Syndication Supply and Demand Imbalance After (2nd Half 2007(2)) As of 12/05/07 Before (LTM June 30, 2007(1)) ($ in Billions) $350 $620 $620 $162 B (46.3%) Capital Required to Absorb Excess Supply (4) $95 (15%) $350 $45 (14.5%) $50 Liquidation / Collateral Calls Cross-overInvestor / Distress Buyer / Opportunity Funds $120 (19.3%) (3) $33 (9.4%) $95 (15%) Hedge Funds / HY $50 (14.3%) Other $620 (3) $50 (14.3%) Primary $310 (50%) $10 (3.5%) Issuance(5) Banks $300 CLOs (2) (2) Demand Supply Investor Landscape has changed • 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 • Finance Companies, Insurance Companies, Prime Rate Funds • Standard & Poors LCD News 12/5/07 • (5) Grossed up for ordinary issuance 10

  9. The Secondary Loan Market took a plunge as a result of oversupply at the time of financial crisis. New Issue Loans with LIBOR Floor, higher Spread pricing and tighter structures post 2007 11

  10. Types of Loan Syndication Formats • Underwritten deal • Best-efforts syndication • Club deal 12

  11. Types of Loan Syndication Formats (Continued) • 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. 13

  12. Types of Loan Syndication Formats (Continued) • 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

  13. Types of Loan Syndication Formats (Continued) • 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

  14. The Loan Syndication Process Lead Arranger Bank Administrative Agent Issuer /Company Bookrunner Bank #1 Syndication Agent Bookrunner Bank #2 Documentation Agent Bookrunner Bank #3 Documentation Agent First 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 Second Tier Bank or Institution Bank or Institution Bank or Institution Bank or Institution Bank or Institution “Retail” Level 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 16

  15. The Loan Syndication Process (Continued) • 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. As part of the syndication process we will discuss in detailed these two items following this page. 17

  16. The Loan Syndication Process (Continued) 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 This process will be discussed following this page 18

  17. The Loan Syndication Process (Continued) 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 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 • 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. 19

  18. 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

  19. 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) 21

  20. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) • 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 22

  21. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) • 4. Non-Money Terms: • Financial Covenants • Negative Covenants • Affirmative Covenants Need Majority Vote (typical 51%) from the syndicate banks to amend these terms 23

  22. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) New Terminology in 2006 and 2007: Covenant Lite Structures (“Covy lite”) Incurrence Tests Vs Maintenance Tests Typical Financial 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 New Terminology in 2006 and 2007: “Green Shoe” Typical Negative Covenants 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 24

  23. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) • 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

  24. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) • Pricing, Fees and Expenses on Separate Documents: • Fee Letter • Interest Rate (Applicable Margin and Leveraged Grids) • Expenses 26

  25. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) 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

  26. Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) Other Schedules Attached to the Credit Agreement • Intercreditor Agreement • Purchase Agreement • Hedging Arrangement / Hedging Agreement 28

  27. Example of a Large Syndicated Loan Harrah’s Entertainment 29

  28. Example of a Large Syndicated Loan Harrah’s Entertainment • 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

  29. Example of a Large Syndicated Loan Harrah’s Entertainment TRANSACTION SOURCES & USES 31

  30. Example of a Large Syndicated Loan Harrah’s Entertainment STRUCTURE – TOO LEVERAGE?? Aggressive Structure?? 32

  31. Example of a Large Syndicated Loan Harrah’s Entertainment CORPORATE STRUCTURE 33

  32. Example of a Large Syndicated Loan Harrah’s Entertainment SUMMARY OF TERMS – SENIOR CREDIT FACILITY 34

  33. Example of a Large Syndicated Loan Harrah’s Entertainment 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

  34. Example of a Large Syndicated Loan Harrah’s Entertainment 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

  35. BIOGRAPHY OF THE LECTURER 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. 37

  36. Primary Market for Institutional Loans (Excludes Banks) – 3Q11 To provide a more realistic view of institutional buying habits in today’s market, we add to the CLO tally the institutional commitments held by the arranger at close. For tax purposes of course, CLOs tend to participate as primary assignees and therefore are often left off the “at close” allocation list. In addition, beginning in 2002, we have made a better effort to track hedge funds and other investors in this analysis.

  37. Lagging 12-Month Default Rate – Number of Issuers Default rate is calculated as the number of defaults over the last twelve months divided by the number of issuers in the Index at the beginning of the twelve-month period. Includes all loans including those not included in the LSTA/LPC mark-to-market serviceVast majority are institutional tranchesSource: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index

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