Amsterdam Institute of Finance Joseph V. Rizzi December, 2013 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 December,

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 3 Amsterdam Institute of Finance December, 2013

Sr OnlySr + 2LSr + MezSr +2L+Mez Sr + HYB 2013 (9 mo)58%2%10%-30% %3%10%-20% %3%10%-25% %-20%-10% %-22% %3%65%10% %20%25%27%3% %10%35%27%3% %10%35%15%3% %5%50%3% %-55%--  Source: Standard & Poor’s Financial Services 4 Amsterdam Institute of Financer December, 2013

55  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 December,

66  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 December,

77  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 Amsterdam Institute of Finance December,

2013 ( 9 mo )60% % % % % % % % % Amsterdam Institute of Finance December, 2013

99  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 December,

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

11 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 Amsterdam Institute of Finance December,

12 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 Amsterdam Institute of Finance December,

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 Amsterdam Institute of Finance December,

Amt% Secured 2013 ( 9 mo )6040% % % % % % % % Source: Standard & Poor’s Financial Services 14 Amsterdam Institute of Finance December, 2013

15 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 December,

16 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  % ◦ 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 December, 2013

18 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 December, 2013 (Source: LCD)

19  Staple financing term sheet to deal book  Be prepared to fund  Establishes ceiling  Conflicts of interest Stapled Financing 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

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 December,

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

23  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 December,

24 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 December,