1. Amsterdam Institute of Finance
Acquisition Finance Products Expanded Debt Capacity Structuring The Deal
Joseph V. Rizzi
Amsterdam Institute of Finance
10-12 October, 2016
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2. PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)
Amsterdam Institute of Finance
Joseph V. Rizzi
October, 2016

3. Expanding Debt Capacity
Rising purchase price multiples and ROE concerns drive 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 October, 2016 3 3

4. Debt Options
Term
Amortization
Covenant
Call
Seniority
Secured
Revolver
5 – 7
Bullet
FULL
YES
Term Loan A
40% in first 5 years
Institutional Term Loans
7 - 8
1% per annum / bullet
Covenant Lite
8 - 10
1% per annum / Bullet
LIGHT
Mezzanine
10 +
PREMIUM NO
Depends
High Yield
NO&YES
Holding Company PIK
Bridge Term Loans
1 - 3
Second Lien
8-9
Unitranche
Yes
Unsecured
1-10
1% P.A./Bullet No
OPCO/PROPCO
10+ 1L
The above table shows the features of different debt options available to issuers
The availability of the different options is subject to market conditions 4
Amsterdam Institute of Finance
October, 2016

5. Tranches in the LBO Structure
Source of Funds
Key Terms
Comments
Bank Debt
Typically 30 – 50% of capital structure
Based on asset value as well as cash flow
LIBOR-based (i.e., floating rate) term loan LIBOR floor; pricing grids
5-8 year maturity, with annual amortization often in excess of that which is required (average life 4-5 years)
Up to 5X LTM EBITDA (varies with industry, ratings and economic conditions)
Usually secured by assets and pledge of stock
Maintenance and incurrence covenants; cash sweeps
Bank debt will also include an unfunded revolving credit facility to fund working capital needs
Can be split into Term A (shorter term, higher amortization) and Term B (longer term, nominal amortization, bullet payment)
Generally, no minimum size requirement
Amortizes over the life of the loans
Generally, no prepayment penalty 2L
Cov-Lite
High-Yield
Subordinated
Debt
Typically 20-30% of capital structure
Generally unsecured
Fixed coupon; PIK; PIK-T
May be classified as senior, senior subordinated or junior subordinated
Longer maturity than bank debt ( years, with no amortization and a bullet payment)
Incurrence covenants
Holding company obligor
Public and 144A high yield offerings are generally $150mm or larger; for offerings below this size, assume mezzanine debt. In some cases, it may be appropriate to include warrants such that the expected IRR is 17-19% to the bondholder
Senior and senior subordinated offerings are generally cash-pay; junior subordinated offerings (which would generally be issued in combination with senior subordinated offerings) may be zero coupon and issued at a holding company
Bullet payment (non amortizing)
Amsterdam Institute of Finance October, 2016

6. Tranches in the LBO Structure
Source of Funds
Key Terms
Comments
Mezzanine
Debt
Can be preferred stock or debt
Convertible into equity
IRRs in the high teens to low twenties on 3-5 year holding period
Occasionally used in place of high-yield debt
Generally a combination of cash pay and PIK; can be both, or change over time
Often includes warrants to enhance IRR to desired level above coupon rate
Total Debt
Typically 3.0x-7.0x LTM EBITDA
Interest coverage at least 2.0x LTM EBITDA/first year interest
Total debt varies by sector, market conditions, and other factors
Common Equity
Typically 20-35% of capital structure
20-30% IRR on about a 5-year holding period
Exit multiple = entry multiple
Management options of 5-10%
Required IRR may be lower for larger or less risky transactions
Exit: IPO, Trade, STS, Recap
Amsterdam Institute of Finance October, 2016

7. Buyout Financing Scenarios
Expected Best Case Future Cash Flows Base Case Downside Worst Case Bank Debt T/LB HYB Other R/C + T/LA Biblical Bad 5 – 7 yrs 8 yrs 10 yrs
Amsterdam Institute of Finance
October, 2016

8. Sponsor Based Debt Financing Allocations and Capital Providers
Providers of Capital
Banks,
Commercial Banks, Securities Firms
Institutional Investors
Private Equity
Funds and
Co-Investors
Hedge,
Mutual,
Pension
Funds
CLOs
Insurance
Companies
Others (e.g., Financing
Companies)
(BDO)
Private Debt
Funds 1L 2L
Equity
Other Debt
Capital
Structure
Facilities
Revolving
Credit Facility
Term A
Loan
(Tla)
Special Purpose Facilities (e.g., Acquisition Line
Term B
Loan
(TLb)
Second
Lien
High
Yield
Bonds
(incl)
PIK
Mezzanine
Unitranche
Warrants
Preferred
Equity
Common
Equity
Leveraged Loans – Pro Rata Tranche
Asset Backed Loans
Leveraged Loans- Institutional Tranche
Leveraged Loans – Pro Rata Tranche
Senior
(Including Cov – Lite)
Junior Debt
Equity
Based on amended HBS case exhibit
Amsterdam Institute of Finance October, 2016

9. Complex Corporate Structure
Equity #1
Equity #2
Equity
European
Holding Company #1
European
Holding Company #2
Preferred Stock
NEWCO
High Yield/Sub Notes
Collapsed
After Closing
Bank Deal with Upstream Guarantee
Local Target
Guarantee
Due to the structural nature of
Subordination in Europe, bank
Debt would be placed at the
Operating subsidiary level.
Domestic
Operating
Subsidiary
Domestic
Operating
Subsidiary
Domestic
Operating
Subsidiary
Foreign
Operating
Subsidiary*
* Tax limitations surrounding guarantees from foreign subs.
Amsterdam Institute of Finance October, 2016

10. Innovative Securities and 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) – A/S
- Holding Company instruments
- Restricted Subsidiaries
- Second lien/bifurcated collateral-crossing liens
- Senior/Subordinated
Cost – Second Lien vs Mez 10 10
Amsterdam Institute of Finance October, 2016

11. LBO Transaction Structures
H16
Bank Debt % 41.6% 48.8% 52.1% 48.9%
Unsecured Debt % 1.3% 0.6% 0.3% 0.8%
Sr. Unsec’d Debt % 5.8% 6.9% 2.9% 2.4%
Public/144a High Yield % 0.7% 0.4% 0.0% 0.0%
Bridge Loan % 0.3% 0.0% 0.3% 0.0%
Mezzanine % 5.1% 2.9% 0.6% 1.0%
HoldCo Debt/Seller Note 0.3% 0.5% 0.3% 0.0% 0.0%
Preferred Equity % 0.9% 0.3% 0.2% 0.9%
Common Equity 30.4% 30.0% 37.4% 40.3% 42.1%
Rollover Equity % 2.4% 1.6% 1.9% 2.9%
Other % 1.4% 0.6% 1.3% 0.6%
Total Senior Debt 60.1% 48.7% 56.3% 55.4% 52.2%
Total Sub Debt % 6.1% 3.3% 0.9% 1.0%
Total Equity 32.9% 43.8% 39.7% 42.4% 45.9%
FD/EBITDA x 4.2x 4.5x x
SD/EBIITDA x 3.9x 4.1x x
PPX x x x 10x
Source: S&P Capital IQ
Amsterdam Institute of Finance October, 2016

12. Country Financing Styles Average Sources of Proceeds of Buyouts – By Country LTM 6/16
Europe Western Europe U.K France Germany
Bank Debt % % 48% 48% %
2nd-Lien Debt % % % 2% %
Secured HY % % 0% 2% %
Sr Unsec HY % % % 1% %
Mezzanine % % % 0% %
Bridge Loan/Public High Yield % % % 0% %
Vendor Note % % % 0% %
Total Debt % % 52% % %
Source: S&P Global
Amsterdam Institute of Finance October, 2016

13. Non Investment Grade Loan Market
Bank Oriented
Revolver
T/LA
Institutional Investor
T/LB 2L
Regulatory Leverage “Test”: <6X EBITDA
Amsterdam Institute of Finance
October, 2016

14. Second Lien Loans – 1H16
Senior Secured, but with Junior or Second Lien-Lower recovery
Competing with EURO Mezzanine
Investors – hedge funds and CLO
Spread differential between Second Lien and First Lien currently around 325 BP
1H16 (Depressed)
Volume: U.S. $5.4B
EUR $1.9B
Issues:
- Inter-creditor
- Standstill Agreement
- Obligations
- New Investors Behavior in a Workout
bought at discount
- CLO Rating Impact
% limit on 2L paper
Amsterdam Institute of Finance October, 2016 14 14

15. Unitranche Hybrid Senior/Mezzanine/2L Combination
Separate Revolver: Usually Banks with an Inter-Creditor Agreement
Unitranche Term Position: Alternative Nonbank Providers
Middle Market Oriented
Bank Risk Appetite Supplement
Size: Usually <€150 mln
First Appeared in Increased Popularity Following Crisis When 2L and CLO Stalled
Blended Rate: Target Returns Around 7%
PIK Portion
Amsterdam Institute of Finance October, 2016

16. 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 – Now dominant form >90%
Europe – 30% (€8B)
Almost no incremental yield over first lien loans with financial covenants
Amsterdam Institute of Finance October, 2016 16 16

17. ‘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’.
REIT 17 17
Amsterdam Institute of Finance October, 2016

18. ‘OpCo \ PropCo’ Financing (2)
BidCo
Financing
Notes
Approx.
100%
Approx.
100%
OpCo
PropCo
Rental Payments 18
Amsterdam Institute of Finance October, 2016

19. High Yield Bonds Longer Term Bonds Public or Private
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)
HYB New Issue (€ B) – YTD End of August 2016 v 2015
Issuance €55B €30B
Market Size 480B 470 B
Amsterdam Institute of Finance
October, 2016 19 19

20. Key High Yield Terms Issuer Status Degree of subordination
Registration rights
Issuer
Status
Degree of subordination
Limitations on liens
Limitations on indebtedness
Restricted payments
Asset sales
Change in control
Minimal financial maintenance covenants
Amsterdam Institute of Finance
October, 2016 20 20

21. European Mezzanine Terms (Currently dead due to HYB, 2L and Unitranche loan competition)
Covenants * Extensive (bank type)
* Maintenance basis (tested quarterly)
Security * Second secured
Call Provisions * Generally callable immediately (103,102,101)
Maturity * Ten year
Pricing * LIBOR +
* Warrants for total return
* TBD
Liquidity * Low
Disclosure * Limited
Marketing * No research coverage, no roadshow
Rating Requirements * None 21 21
Amsterdam Institute of Finance October, 2016

22. PIK Spread 825/900 Toggle 900-1000 Term 7.5-10 Call 5xNC Leverage
Pay if you can toggle
Ratings – NR or CCC
Eats up equity
Holding Company Issuer
Characteristics
Spread
825/900
Toggle
Term
7.5-10
Call
5xNC
Leverage
6.5x+
End of August 2016: 500 mln (all toggle) 2 deals
Amsterdam Institute of Finance
October, 2016 22 22

23. Stapled Financing Staple financing term sheet to deal book
Be prepared to fund
Establishes ceiling
Conflicts of interest
Amsterdam Institute of Finance
October, 2016 23 23

24. 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
October, 2016

25. 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
October, 2016 25

26. Changing Nature of Leveraged Finance Capital Structures
Joe Rizzi Presentation for AIF - October 2006
Changing Nature of Leveraged Finance Capital Structures
Increasing layers of debt
Directed at different investors
Intercreditors conflicts
Pre-Crisis
Common equity < 35%
Hybrid preferred (0.5x)
PIK notes (0.5x)
Unsecured/mezzanine (1x)
Carve-out collateral (1x)
- OPCO/PROPCO
Second lien loans (1x)
Senior secured bank loan (4x)
- Amortizing T/LA – 20%
- B tranches – 80%
Post Crisis
Common equity > 35%
Unsecured/mezzanine (1x)
Senior secured bank loan (4x)
- Amortizing T/LA – 40%
- B tranches – 60%
FDX – 5x +
PPX – 9x +
FDX – 6x +
PPX – 9 +
Amsterdam Institute of Finance
October, 2016 26 26