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PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

Amsterdam Institute of Finance Joseph V. Rizzi December, 2013. PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products). Expanding Debt Capacity.

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PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

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  1. Amsterdam Institute of Finance Joseph V. Rizzi December, 2013 PRODUCTS: EXPANDED DEBT CAPACITY(Affordability Products)

  2. Expanding Debt Capacity 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 2 2 Amsterdam Institute of Finance December, 2013

  3. Debt Options The above table shows the features of different debt options available to issuers The availability of the different options is subject to market conditions Amsterdam Institute of Finance December, 2013 3

  4. Total Transaction Structure for Euro Buyouts Sr Only Sr + 2L Sr + Mez Sr +2L+Mez Sr + HYB  2013 (9 mo) 58% 2% 10% - 30% 2012 67% 3% 10% - 20% 2011 52% 3% 10% - 25% 2010 60% - 20% - 10% 2009 78% - 22% - - 2008 22% 3% 65% 10% - 2007 25% 20% 25% 27% 3% 2006 25% 10% 35% 27% 3% 2005 37% 10% 35% 15% 3% 2004 42% 5% 50% 3% - 2003 45% - 55% - - • Source: Standard & Poor’s Financial Services Amsterdam Institute of Financer December, 2013

  5. Innovative Securities Institutional Investors/Relative Value Considerations • 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 5 5 Amsterdam Institute of Finance December, 2013

  6. Second Lien Loans • Senior Secured, but with Junior or Second Lien • Higher default • Lower recovery • Originally developed as Rescue Finance • Competing with EURO Mezzanine • Investors – hedge funds and CLO • Formerly Attractive Pricing: Spread differential between Second Lien and First Lien 350 BP. • Issues: - Inter-creditor - Standstill Agreement - Obligations - New Investors Behavior in a Workout - CLO Rating Impact 6 6 Amsterdam Institute of Finance December, 2013

  7. Covenant Lite • 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 – Returning • Europe – Shut down 1Q08 • difficult 7 7 Amsterdam Institute of Finance December, 2013

  8. Cov - Lite % of U.S. Buyouts New Issuance 2013 ( 9 mo ) 60%  2012 30% 2011 25% 2010 8% 2009 10% 2008 5% 2007 25% 2006 8%  2005 2%  2004 - Amsterdam Institute of Finance December, 2013

  9. ‘OpCo \ PropCo’ Financing (1) 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. • 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’. 9 9 Amsterdam Institute of Finance December, 2013

  10. ‘OpCo \ PropCo’ Financing (2) BidCo Notes Financing Approx. 100% Approx. 100% PropCo OpCo Rental Payments 10 Amsterdam Institute of Finance December, 2013

  11. Asset Securitization 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 …ability: Difficult Post Crisis 11 11 Amsterdam Institute of Finance December, 2013

  12. High Yield Bonds • 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) • Usually issued as subordinated debt but can also be senior unsecured • Markets • US - $1 T size • Euro - €100B size 12 12 Amsterdam Institute of Finance December, 2013

  13. Key High Yield Terms • Registration Rights • Issuer • Status • Degree of Subordination • Limitations on liens • Limitations on indebtedness • Restricted payments • Asset sales • Change in control 13 13 Amsterdam Institute of Finance December, 2013

  14. European High Yield Issuance ( € Mln ) Amt % Secured 2013 ( 9 mo ) 60 40% 2012 30 50% 2011 35 40% 2010 45 50% 2009 24 30% 2008 5 0% 2007 24 30% 2006 23 20% Source: Standard & Poor’s Financial Services Amsterdam Institute of Finance December, 2013

  15. European Mezzanine Terms Covenants * Extensive (bank type) * Maintenance basis (tested quarterly) Security * Second secured Call Provisions * Generally callable immediately (103,102,101) Maturity * Ten year Pricing * LIBOR + 800 bps (400 cash, 400 PIK) * Warrants for total return (15-17%) Liquidity * Low Disclosure: * Limited Marketing * No research coverage, no roadshow Rating Requirements * None 15 15 Amsterdam Institute of Finance December, 2013

  16. Euro Mezzanine Amsterdam Institute of Finance December, 2013

  17. Bifurcated Collateral(Crossing Liens) • Trend: Increasing segmentation of loans with reduced covenant or collateral • Percentage of institutional loans with impaired covenants or collateral • 1H07 47%, 2H07-Nil • 2006 24% • Breakdown 2007 1H07 47% • 11% Second Lien • 6.4% Bifurcated • 23% Covenant Lite • 7% Unsecured • Bifurcated/Crossing Liens – See HCA for an example • Asset backed revolving credit backed by first lien or receivables and inventory • Term loans back by lien on other non-current assets • Property, plant and equipment • Stock pledge • Pricing premium – 100 bps compared to revolver • Inter-creditor complications 17 Amsterdam Institute of Finance December, 2013

  18. PIK • Pay if you can toggle • Eats up equity • Characteristics (Source: LCD) 18 18 Amsterdam Institute of Finance December, 2013

  19. Stapled Financing Staple financing term sheet to deal book Be prepared to fund Establishes ceiling Conflicts of interest 19 19 Amsterdam Institute of Finance December, 2013

  20. 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 December, 2013

  21. Bridge 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 21 Amsterdam Institute of Finance December, 2013

  22. Changing Nature of Leveraged FinanceCapital Structures • 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% • 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 + FDX – 6x + PPX – 8.5 + • Increasing layers of debt • Directed at different investors • Intercreditors conflicts 22 22 Amsterdam Institute of Finance December, 2013

  23. HCA: Structuring in Action • EBITDA/I – 1.9x (2007E) • EBITDA – CAPEX/I – 1.1x (2007E) • 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 23 23 Amsterdam Institute of Finance December, 2013

  24. HCA Legal Structure Sponsors Management Healthtrust Holdings Equity Merge Acquisition Corp HCA, Inc Bank Loans Existing Notes Sub D Sub E Sub A Sub B Sub C European subs Euro T/L Restricted subs (gurantors) Unrestricted subs 24 Amsterdam Institute of Finance December, 2013

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