1. Life Cycle of a Deal

7/27/2019 1. Life Cycle of a Deal

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Life Cycle of a Deal:Understanding Origination,

Underwriting & Syndication Processes

Presented by:

Glenn Stewart, Bank of America Merrill LynchRosemary Bell, Citigroup


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Overview

Investment Banking Product Model

What is a Syndicated Loan

Pricing and Structuring a Loan

Loans vs. Bonds


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Closing / Secondary MarketOrigination / Primary Market

In

vestmentBankin

g/Client

Managemen

t

Ca

pitalMarkets/Str

ucturing

Closing

SecondaryTrading

PortfolioManagemen

t

Issuers Investors

Syndicate Desk

Sales Desk

Risk Management

Investment Banking Product Model


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What is a Syndicated Loan

Generally a senior debt instrument

Dominant types include revolvers, term loans

Revolvers can be undrawn, partially drawn or fully drawn

Term loans usually are fully drawn at close

Generally syndicated by a lead bank to a group of banksand/or institutional investors

Usually floating rate

Tenor can range from several months to 10+ years

Generally have more covenants than a bond issue

Four Key Loan Market Segments


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4 Key U.S. Large Corporate Loan Market Segments

Investment grade loan market Loans to companies rated >= BBB-/Baa3

AND with a relatively low LIBOR spread

2007 lending: $658 billion



Leveraged loan market Loans to companies rated < BBB-/Baa3 or

unrated & with a high spread*

Divided into bank (pro rata) and non-banksegments

2007 lending : $689 billion

2008 lending : $294 billion 2009 lending: $239 billion

Institutional loan market

Leveraged loans with non-bank lenders (such asmutual funds, CLOs, insurance companies,hedge funds, etc)

2007 lending: $426 billion 2008 lending: $69.6 billion


Secondary loan market

Market in which loans trade following the closeof primary syndication

Most U.S. loan trading involves leveraged loans

2007 trading: $520 billion 2008 trading: $510 billion

2009 trading: $474 billion

*Traditionally LIB+150, increased to LIB+350 in 1Q09Source: ThomsonReuters LPC for primary lending; LSTA for secondary trading


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What is a Syndicated Loan - Capital Structure

Generally a senior debt instrument

If the company is non-investment grade (leveraged), the loan is usually senior to all otherdebt in capital structure

If the company is investment grade, the loan often is pari passu (at the same level) with bonds

Sr. Secd

Loan

Sub. Unsecd

Bond

Equity

Leveraged

Capital Structure

Sr.

Unsecd

Loan

Equity

Investment Grade

Capital Structure

Sr.

Unsecd

Bond


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What is a Syndicated Loan - Types

USAGE - Can be undrawn, partially drawn or fully drawnDominant types include

Revolvers - behave like credit cards - Can draw down, repay and reborrow

Term loans - behave like mortgages - Draw down once, repay in installments

$100 million revolver

Draw down

$20M

Draw down

$40M

Repay

$25M

Draw down

$10M

Repay

$25M

Repay

$35M

Draw down

$15M0

20

40

60

80

100

120

Day 1 Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7

$100 million term loan

Dr

awdown$100M

Outstandings($Mils.)

Repay$17.5

M

Repay$10M

Repay$10M

Repay$10M

Repay$17.5

M

Repay$17.5

M

Repay

$17.5

M


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What is a Syndicated Loan - Syndication

Generally syndicatedbroken into pieces and sold to lenders

Lead arrangerUnderwrites/arranges loan and usually holds the a piece

Syndicates remainder

Lead arranger:

Holds $40 million

Lender A:

$30M

Lender B:

$30M

Lender C:

$30M

Lender E:

$10M

Lender D:

$20MLender F:

$10M

Lender G:

$10M

Lender H:

$10M

Lender J:

$10M

OTHER LENDERS HOLD $160M BETWEEN THEM

$200 million loan


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What is a Syndicated Loan - Margins

Usually floating rate

Generally with a spread (in basis points - 1/100 of 1% - or bps) over abase rate such as LIBOR (London Inter-Bank Offered Rate), Prime,Euribor, etc

Example: Spread of 300 bps (or 3%) over base rates

As base rate varies, so do interest costs

Base rate reset periodically

LIBOR

(5.38%)Euribor

(3.58%)

US

Prime

Rate

(8.25%)

Spread

(300 bps)

Spread

(300 bps)

Spread

(300 bps)8.38%

11.25%6.58%


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What is a Syndicated Loan - Tenor

Tenor can vary markedly from several months (bridge loan)

364 days (standard investment grade revolver)

3 years (standard investment grade revolver)

5 years (standard investment grade & leveraged revolver)

6 years (leveraged term loan) 7 years (institutional term loan)

10 years and out (project finance loans)

Bridge

Loan

5-yearRC

7-year

Term Loan

Project

Finance

Loan

364-

Day

3-year

RC

6-year

Term Loan


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Pricing andStructuring a Loan

Credit Issues

Industry

Company history

Leverage

Quality of cashflow

Asset coverage Deal structure

Unique risks

Ratings

Market Considerations

Comps

Competition

Secondary trading

Relative Value

Legal Issues ImpactingLoan Structure

Corporate Structure

Transaction Structure

Environmental Liabilities


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To Tranche or Not To Tranche

Revolving loan requirements

Repayment capacity

Relationship lender capacity

Leverage levels

Ratings

Market technicals


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Syndication Process

How are the potential investors selected?

How are they contacted and how is information disseminated?

What are the typical timelines from launch to close?

How is pricing determined and communicated?

What is Flex?

How do arrangers accommodate public/private issues

How do amendments differ from primary syndication?

How does a loan move from the primary to the secondarymarket?


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Loans vs. Bonds

Attributes Bank Loans High Yield Bonds

Typical Size Range: Varies $150.0$500.0

Pricing: Floating at LIBOR or a Base Rate + an

applicable margin, cash interest.

Fixed rate (priced off relevant

Treasury), cash or non-cash

coupon plus warrants.

Ranking/Claim on Assets: Senior Secured or Senior Unsecured. Senior Secured, Senior

Unsecured, Senior Subordinated

or Subordinated.

Amortization/Repayment

Requirements:

Interim payments generally required. None, except at maturity.

Financial Covenants: Maintenance. Incurrence.

Ratings Agency Requirements: Increasingly required on leveraged transactions. Usually required.

Collateral: Assets and/or stock of subsidiaries. Generally, none.

Access to Capital Markets: Minimal public market awareness. Creates awareness in public

capital markets and a benchmark

to facilitate subsequent capital

raising.

Prepayment Flexibility: Generally prepayable at any time. Non-call period generally 4 to 5years and then subject to a

prepayment/call premium.

Maturity: 310 years. 710 years.

Public Disclosure: No disclosure required if private company. Disclosure required.

Principal Investors: Commercial Banks, Institutional Funds CBOs, Mutual Funds, Prime Rate

Funds, Hedge Funds


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Issuers Perspective

ISSUERS prefer loans because:

Pricing is mostly floating rate

Callability: Loans can be repaid at any time

2004-1H07: Lots of liquiditylenders and investors are hungry for assets Its a borrowers market issuers negotiate favorable packages

Loans are changing boundaries are blurring between loans and bonds

Covenant-lite loansloans without maintenance covenants

Second lien loanssenior, but second lien on the collateral

2H07credit crunch hits; loan issuance slows dramatically


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What Happens Next?


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Life Cycle of a Deal

Now that we know the final structure, we need toconsider how we will close the deal

How many facilities will there be?Are there any foreign currencies?

Will all the investors be pro rata against each tranche?

Will all investors be signing the Credit Agreement?


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Look carefully at the final facilities

Is that add on TL-B really an add on to an existingfacility or is a brand new B1 facility?

If it is real add on and there are existing Liborcontracts, does the deal team understand that existingLibor contracts will need to be broken?


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The allocations from the syndication do notnecessarily reflect who will be signing the CreditAgreement.

Institutional lenders rarely sign the Credit Agreement.

If theyre not signing, who will be? First determine whowill actually sign and fund at close (check the Schedule tothe Credit Agreement) and then consider how to bring the

institutional lenders into the deal.


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Sticking with the institutional lenders for aminute, how will that work?

Will one Arranger front for the other Arrangers or will

each Arranger sign and fund for their ratable share? If one Arranger fronts for the others, what willdocument that agreement?

Who will be preparing the Assignment docs?

If each Arranger signs and fronts for their share of theexposure, how will the buy backs work?


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There is no substitute for reading the draftCredit Agreement!

Do Assignments require Borrower consent?

Sometimes there are drafting mistakes or the deal teammight have drafted terms that would be difficult if notimpossible to live with.

Better to catch an error or a logistical issue when it canstill be fixed easily. Figure out what the problems are andescalate! Youre the expert.


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When your looking at the Draft CreditAgreement, think beyond the closing date.

Do you understand the pricing grids?

Is there a provision for the capture of excess cash flow?Does the cash get offered to everyone or just one class oflender?

How does the prepayment effect the amortization

schedule? Will it be applied to the next amortizationpayment, across all scheduled payments or only to theballoon at the end? Make sure it is clear.


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What if your deal looks backwards?

Over the last year weve seen borrowers auctioning to buy

back their debt.

When the auction is over, youll be given allocationsrepresenting the amount each investor will be selling back.

Chances are that there will be investors that did not

participate at all and others that were allocated less thanthey offered.

In either event, all lenders will have new shares in the deal.


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Backwards, continued.

Understand the documentation. How will the buy backbe documented? Will counsel be preparing the docs?

If the debt is retired, how will the pay down effect thescheduled amortization schedule? Dont assume anything.

Check the Credit Agreement or the amendment, if one was

needed.


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Be prepared for new structures at any time.

As soon as you think youve seen it all, there will be anew complex structure.

Try to think outside the box and ask a million questions.Chances are they are all good ones that need to be asked.

Make suggestions and dont be afraid to say no if youhave a good reason. Remember that you are the experts in

your area even if the structuring people are experts intheirs.

1. Life Cycle of a Deal

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