Structuring Corporate Loans for Small and Middle Market Companies Chris Droussiotis 2013

Table of Contents 1.Corporate Loans – an overview (Small and Middle Market transactions in the U.S.) 2.Market Overview in the U.S. 3. Loan Terms and Conditions (Money and Non-Money terms) 4.Credit and RAROC Loan Analysis 5.Marketing and Structuring a primary syndicate/club deal with other banks 6.Structuring a Loan: Debt Capacity, Leverage, Coverage and Collateral analysis 7.Case Studies for Debt Capacity using Cash Flow and Asset Coverage 8.Lecturer’s Biography 1

U.S. Corporate Loans – An Overview Two Markets Served 2 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 Leverage Ratios (Debt/EBITDA>3.0x) Large Cap Market (Rated) EBITDA > $100mm Middle Market (Rated/NonRated) $5mm > EBITDA < $100 mm Small Business (Non-Rated) $200,000 > EBITDA < $5 mm

U.S. Middle Market Loan Overview 3 Total Year 2012

U.S Small Business Loan Market Overview 4

Typical Leveraged Deal Term Sheet / Credit Agreement 1. Parties to the Credit Agreement:  Borrower  Holding Company  Guarantor / Parent and Subsidiaries’ Guarantee  Agent Banks (for middle market deals)  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) – Use of Proceeds 5

3.Money Terms:  Amount / Tranches  Revolving Credit / Line of Credit  Term Loans  Equipment Loans  Real Estate Loans  Pricing  Interest Rate / Margin over LIBOR/Prime  Commitment Fees on unfunded portion  Maturities (months/years)  Amortization Schedule (set principal payments) / monthly mortgage like payments (P+I) for Small Loans and Quarterly for Middle Market Loans  Collateral In a middle market, the company needs 100% Vote from the syndicate banks to amend these terms Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) 6

4. Non-Money Terms:  Financial Covenants  Negative Covenants  Affirmative Covenants / Management Covenants Need Majority Vote (typical 51%) from the syndicate banks to amend these terms Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) 7

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 Maximum Total Liabilities to Tangible Net Worth (Small Business Loans) 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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) New Terminology in 2006 and 2007: Covenant Lite Structures (“Covy lite”) Incurrence Tests Vs Maintenance Tests 8

Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) 5.Other Terms & Conditions:  Security / Liens / Guarantees  Borrowing Base  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) 9

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued) 10

 Underwritten deal  Best-efforts syndication  Club deal Types of Loan Syndication Formats for Middle Market Deals 11

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 for Middle Market Deals (Continued) 12

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). Types of Loan Syndication Formats for Middle Market Deals (Continued) 13

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). Types of Loan Syndication Formats for Middle Market Deals (Continued) 14

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 Internal Application for Approval Process 15 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 Risk Assessment Analysis 16  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

Structuring a Loan – Small Business Debt Capacity, Leverage, Coverage and Collateral analysis 17 Terms & Conditions: 1. Loan Amounts: SBA 7a – Up To $2,000, Loan Amounts: SBA 504 – Up To $5,000, Interest Rate: Prime Rate + Spread Which Is Adjusted Quarterly 4. Term: Maximum 25 Years Amortization 5. LTV (Loan To Value): Up To 90% 6. Debt Coverage: 1.20x 7. Assumption: Yes 8. Recourse: Yes 9. Minimum 30 day closing but probably longer 10. Down Payment: 10%-20% on acquisitions 11. Borrower must occupy at least 51% of the property 12. Minimum FICO Score Of Minimum Loan Amount: $500,000.00

Structuring a Loan – Small Business Three Factors determining Eligibility for SBA loan Loan to Value Different SBA lenders and different SBA loans have different equity requirements. Many loans require the borrower to retain 10 to 20 percent of the equity in the business. 2. Personal Guarantees Many SBA loans call for personal guarantees. Some of the guarantees bind the borrower's personal credit to the loan; others call for the borrower to pledge personal assets to the loan. In some cases, SBA loans even require the collateral assignment of life insurance death benefits so that if the borrower passes away, the loan will be repaid. 3. Creditworthiness Contrary to popular belief, SBA loans are not for borrowers with poor credit or no business plan. The borrower must posses a valid business plan, good credit and committed capital in the business.

Structuring a Loan – Middle Market (Case Study) Debt Capacity, Leverage, Coverage and Collateral analysis 19 LBO Opportunity Ares Venture Management Group (“Ares”) decided to purchase ABC hotel property and its land in Austin Texas for $10,000,000. In addition, Areas will spend $2,000,000 for Renovations including new furniture and equipment. Capital Raising Bank Debt: Amount of Loan: 3.0x ABC’s First Year’s EBITDA Interest Rate: LIBOR + 4.5% Term: 7 years Schedule Principal Payments: Mezzanine: Amount of Loan: Up to 4.0x of ABC’s First Year EBITDA (Equity - not be less than 35% of total Capital) Interest Rate: 9.00% Term: 10 years Schedule Principal Payments: Years 1-9: $0 ; Year 10: The Balance Equity: Ares’ equity contribution to the purchase will be 35% or up to total leverage of 4.0x dictated by the Mezzanine Loan requirements. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 300, , , , ,000 Balance

Structuring a Loan – Middle Market (Case Study) Debt Capacity, Leverage, Coverage and Collateral analysis 20

Structuring a Loan – Middle Market (Case Study) - (Continued) Debt Capacity, Leverage, Coverage and Collateral analysis 21

Structuring a Loan – Middle Market (Case Study) Debt Capacity, Leverage, Coverage and Collateral analysis 22

Structuring a Loan – Middle Market (Case Study) Debt Capacity, Leverage, Coverage and Collateral analysis 23

24 Chris Droussiotis, MBA, C.H.E. Chris Droussiotis has twenty five 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 an Executive Director and 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, Derivatives, Debt & Fixed Income Markets 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.. BIOGRAPHY OF THE LECTURER