Amsterdam Institute of Finance Joseph V. Rizzi November, 2009 PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

22 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 Amsterdam Institute of Finance November,

TermAmortizationCovenantCallSenioritySecured Revolver5 – 7BulletFULLYES Term Loan A5 – 740% in first 5 yearsFULLYES Institutional Term Loans % per annum / bulletFULLYES Covenant Lite % per annum / BulletLIGHTPREMIUMYES Mezzanine10 +BulletLIGHTPREMIUMNODepends High Yield10 +BulletLIGHTPREMIUMNO Holding Company PIK 10 +BulletLIGHTPREMIUMNO Bridge Term Loans1 - 3BulletFULLYES Securitization1 - 5Revolver with Borrowing Base FULLYES Second Lien8-9BulletFULLYES Bifurcated Lien (cross lien) 8-101% P.A./BulletYes Partial Unsecured1-101% P.A./BulletYes No OPCO/PROPCO10+BulletYes 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 November,

44  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 Amsterdam Institute of Finance November,

55 Understand the motivation behind the structure Satisfy the demands of the bank group lending at the operating level Tax driven Provide greater financial flexibility to re-lever Position the company to make an acquisition Tap unserved investor base Understand how they will fare in insolvency Understand how they are priced Amsterdam Institute of Finance November,

6666  Holding company debt ◦ relies on funds from the sub through dividends or tax sharing agreements ◦ may be secured by the stock of the operating subsidiary ◦ the exercise of the pledged shares by the bondholders at the holding company may constitute a change of control provision of the debt at the subsidiary ◦ may be guaranteed through upstream guarantees ◦ may contain cross default clauses to the debts of other entities  Measure effective leverage through use of consolidated financial statements ◦ Look for multiple leveraging or the use of debt borrowed at one entity as equity in another to support further leveraging Amsterdam Institute of Finance November,

77  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 Amsterdam Institute of Finance November,

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Amsterdam Institute of Finance November, 2009 October 22,

Amsterdam Institute of Finance November,

11  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  1H07 – 104B (35% of loans)  3H07 – Virtually 0 ◦ Europe – Shut down 1Q08  difficult Amsterdam Institute of Finance November,

12  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’. 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. Amsterdam Institute of Finance November,

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

14 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 Closed: 2H07 to present Amsterdam Institute of Finance November,

15 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 - $871B size  Euro - €65B size Amsterdam Institute of Finance November,

Amsterdam Institute of Finance November, 2009 Registration Rights 16

17 Key High Yield Terms Registration Rights Issuer Status Degree of Subordination Limitations on liens Limitations on indebtedness Restricted payments Asset sales Change in control Amsterdam Institute of Finance November,

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

19 Amsterdam Institute of Finance November, 2009

20 Amsterdam Institute of Finance November, 2009

21 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  % ◦ Breakdown H07 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 Amsterdam Institute of Finance November, 2009

22 PIK Pay if you can togglePay if you can toggle Eats up equityEats up equity CharacteristicsCharacteristics PIKSLL Spread825/ Toggle n/a Term Call5xNCn/a Leverage6.5x+6x+ Amsterdam Institute of Finance November, 2009 (Source: LCD)

23  Staple financing term sheet to deal book  Be prepared to fund  Establishes ceiling  Conflicts of interest Stapled Financing Amsterdam Institute of Finance November, 2009

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 Amsterdam Institute of Finance November,

25  Increasing layers of debt  Directed at different investors  Intercreditors conflicts H07 - Present Common equity Unsecured/mezzanine (1x) Senior secured bank loan (4x) - Amortizing T/LA – 40% - B/C tranches – 60% FDX – 5x + PPX – – 1H07 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% FDX – 6x + PPX – Amsterdam Institute of Finance November,

26  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 1 st Lien (3.46x)TermSpread Amortization (cum. At maturity) - R/C bln - ABL bln - T/LA bln - T/LB bln - EUR T/L bln % 7% 2 nd Lien (1.33x) - Cash bln - PIK/T bln % 10.0 % 8% Existing unsecured bln %-- Equity bln-- ◦ EBITDA/I – 1.9x (2007E) ◦ EBITDA – CAPEX/I – 1.1x (2007E) Amsterdam Institute of Finance November,

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

Amsterdam Institute of Finance November,

29 Strategic Buyers Pricing Primarily a function of synergies Financial Buyers Pricing Primarily a function of Debt Capacity (FD/EBITDA)*EBITDA + Equity + Asset Sales Developing The Funded Debt Multiple: Maximum Debt Capacity = [EBITDA/(I + 1/N)] + Asset Sales + Refinancing Multiple =1/(I + 1/n) Increasing Debt Capacity: i = by decreasing interest expense (rates + spread) 1/n = by lengthening maturities through changes to the structure (bridges, hybrids, etc.) Amsterdam Institute of Finance November,

30 Purchase Price Matrix 10%15%20%25%30%35%40% 3.0x x x x x x x , x ,0001, x ,0001,0771, x ,0001,0711,1541,250 Assuming an acquisition where the Target’s EBITDA is $100 mln, the maximum purchase price that could be paid given the sponsor’s desired level of equity injection and the amount of leverage that the market will bear. Equity Contribution Leverage Multiple Amsterdam Institute of Finance November,

31 Purchase Price Matrix 10%15%20%25%30%35%40% 3.0x x x x x x x , x ,0001, x ,0001,0771, x ,0001,0711,1541,250 As can be seen below, when the leverage multiple decreases, the required equity contribution can increase significantly. Depending on the buyers internal rate of return requirements, this may or may not cause them to abort the transaction. Equity Contribution Leverage Multiple Amsterdam Institute of Finance November

32 Purchase Price Matrix The shaded area of the chart below reflects the financing gap that develops when leverage multiples do not keep up with increasing purchase price multiples. Innovative securities have been developed to close the financing gap. Debt Multiple Purchase Price Multiple (40)(90)(140) (50)100) (10)(60) (20) Amsterdam Institute of Finance November,

Disclosure This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources believed to be reliable, but such statements are made without any representation as to accuracy or completeness. Opinions expressed are current opinions as of the date appearing in this material only. These materials are subject to change, completion, or amendment from time to time without notice and CapGen Financial is not under any obligation to keep you advise of such changes. All views expressed in this presentation are those of the presenter, and not necessarily those of CapGen Financial. 33 Amsterdam Institute of Finance November,