Bank debt vs. bond and the European syndicated loan market

Giles BortenHead of European Leveraged FinanceUBS Investment Bank

13 May 2008—5th Annual Caesarea Center Summit

STRICTLY CONFIDENTIAL

1

Agenda

Section: 1 Understanding the instruments

♦ Bank debt vs. Bond

♦ Comparing the tools

Section 2: Understanding the market

♦ Volumes and key players

♦ Recent activity

♦ UBS case studies

Section 3: Syndicated loans

♦ Key facts and drivers

♦ Reasons for success

♦ The implications of higher liquidity

Section 4: What’s next?

♦ Recent market developments

♦ Outlook

SECTION 1

Understanding the instruments

3

European Bank Debt: an overview

Investment grade

♦ Capital sourced by banks, not extensively traded, can be rated

♦ First ranking

♦ Unsecured

♦ 1–7 year maturity

♦ Cash interest–floating

♦ Can be bullet or amortising

♦ Some financial and few operational covenants

♦ No prepayment penalties

Sub-investment grade

♦ Capital sourced by banks, not extensively traded and most likely not rated

♦ First ranking

♦ Secured

♦ 5-9 year maturity

♦ Cash interest–floating but usually with hedging requirements (min. 50%)

♦ Can be bullet or amortising

♦ Comprehensive operating and financial covenants

♦ No prepayment penalties

Bank debt is the most flexible source of financing

Definition

Ranking

Security

Interest

Maturity

Repayment

Covenants

Prepayment terms

4

Investment grade High Yield

European Bond: an overview

♦ “Public capital”— listed and traded and usually requires a formal credit rating

♦ Pari passu with other senior debt

♦ Usually unsecured

♦ Usually 5–10 year maturity

♦ Cash interest—fixed/floating rate (annual coupon)

♦ Usually non-amortising

♦ Limited covenants package

♦ Usually non-callable through the life of the instrument (although floaters might have redemption provisions)

♦ “Public capital”— listed and traded and usually requires a formal credit rating

♦ Contractually (and frequently structurally) subordinated to senior debt

♦ Limited security package (e.g. share pledge)

♦ 7–10 year maturity

♦ Cash interest—fixed rate (semi-annual coupon)

♦ Non-amortising

♦ More restrictive “incurrence” covenants, although limited when compared to senior debt

♦ Not suitable for early prepayment—heavy penalties in first 3–5 years

Bond is a longer term and more stable source of funds

Definition

Ranking

Security

Interest

Maturity

Repayment

Covenants

Prepayment terms

5

Who invests in the instruments?

♦ Investment Banks (sub-underwriting phase)

♦ Commercial banks

♦ Institutional Investors

– Pension funds

– Mutual funds

– Insurance funds

♦ Commercial Banks

♦ Hedge funds

♦ Private Banks/Retail Investors

♦ Commercial Banks

♦ Institutional investors

– Pension funds

– Mutual funds

– CDOs/CLOs

♦ Hedge Funds

♦ Institutional Investors

– Pension funds

– Mutual funds

– Insurance funds

♦ CDOs

♦ Hedge funds

Investment grade

Sub-investment grade

Bank debt Bond

6

Bank debt vs. bond—comparing the tools

♦ Liquid market with limited volatility

♦ Quick source of financing to raise, involving a relatively easy process

♦ Limited penalties in case of early repayment

♦ Generally cheaper cost of borrowing

♦ Flexible documentation

♦ No need for public disclosure

♦ Issued with restrictive covenants

♦ Offers security over assets in case of borrower’s default

♦ Less restrictive covenants, usually triggered by specific occurrences

♦ Usually no security for the lender in case of default

♦ Longer term and more “stable” source of financing

♦ Fixed rated instrument

♦ Historically highly volatile market in terms of pricing/liquidity

♦ Requires substantial public disclosure of information

♦ Usually requires a formal credit rating process, which can be time and money consuming

♦ Restrictive prepayment conditions as usually non redeemable for the first five years

Bank debt

Bond

Positives Negatives

SECTION 2

Understanding the market

8

The EMEA loan market

Total loan volumes in EMEA—1997 to YTD Yearly split of EMEA Loans by deal type

Source: Loananalytics Source: Loananalytics

Investment-grade issuances historically constitute the bulk of the EMEA loan market...

…although the 2006/2007 LBO spur has radically increased the volumes related to leveraged transactions

0

500

1,000

1,500

2,000

2,500

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD

(US$

bn)

Deal value (US$bn) No. of deals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD

Investment grade Leveraged/highly leveraged

9

The EMEA bond market

Source: DCM Analytics Source: DCM Analytics

Investment Grade – 2002 to 2008 YTD

Highly-rated governments, corporates and financial institutions remain the driving force of the bond market

Total bond volumes in EMEA – 1997 to YTD EMEA Bonds Bookrunners league table by volume

High Yield– 2002 to 2008 YTD

0

2

4

6

8

DB

Barc

lays

Citi

HSB

C

JPM

BNPP

UBS

AB

N

Com

mer

z

Dre

sdn

er

MS

SG

Uni

cred

it

CS

ML

RBS GS

Cal

yon

Nat

ixis LB

(€bn

)0

50

100

150

200

(No. of deals)

Deal value (€bn) No. of deals

0

200

400

600

800

1,000

1,200

1,400

DB

Barc

lays

Citi

HSB

C

JPM

BNPP

UBS

AB

N

Com

mer

zD

resd

ner

KM

S

SG

Uni

cred

it

CS

ML

RBS GS

Cal

yon

Nat

ixis LB

(€bn

)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

(No. of deals)

Deal value (€bn) No. of deals

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD

(€bn

)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

(No. of deals)

Deal value—Investment grade Deal value—high yield No. of deals

10

Israel International market activity: 2000–2008 YTD

Israeli Loans 2000 to 2008YTD—Volumes issued and number of transactions, by type of deal

Israeli Bonds 2000 to 2008YTD—Volumes issued and number of transactions, by type of deal

♦ Volumes driven largely by sovereign bonds issued by the State of Israel, with a limited corporate presence

♦ Larger borrowers are Israel Electric Corporation (Investment Grade) and Delek & Avner (High-Yield)

Commentary

Commentary

♦ Significant volume increase since 2004 despite limited impact of LBOs

♦ Few issuers, mostly investment grade (Israel Chemical,

City Pass) with a limited presence of leveraged names (Partner Communications, Delek Petroleum)

Source: DCM Analytics, Dealogic

Source: Dealogic

Investment grade volumes (€m) High yield volumes (€m)

Number of deals—Investment grade Number of deals—HY

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008YTD

0

1

2

3

4

5

6

1,013 863

432

3,5723,259

958 1,172

169

0

500

1,000

1,500

2,000

2,500

2000 2001 2004 2005 2006 2007 2008YTD012345678

Investment grade volumes (€m) Leveraged volumes (€m)

Number of deals - Investment grade Number of deals - Lev

826

253424

1,277924

1,974

192

SECTION 3

Syndicated loans

12

Syndicated loan - drivers

Key advantages for the borrower♦ Generally cheaper cost of borrowings

♦ Strong availability of non-volatile liquidity

♦ Structure (different tranching and amortisation profiles)

♦ Feasible pre-payments (particularly useful in case of early refinancing/disposals)

♦ Flexibility of documentation (can be amended from time to time)

♦ Preserves confidentiality of financial information (no need to be disclosed to the public)

♦ Institutional investors have granted access to deeper pockets of liquidity

♦ Preserves banking relationships

♦ Minimises negotiation time/costs as only needs to deal with one/few arranger/arrangers

Benefits for arrangers♦ Substantial underwriting fees

♦ Risk diversification

♦ Standardised process

♦ Increasing liquidity minimizes individual exposures

♦ Ancillary business

Appealing features for investors♦ Seniority

♦ Maintenance covenants

♦ Frequency of reporting (monthly vs quarterly for bond)

♦ Developing secondary market

♦ Ancillary business

13

Syndicated loan market: investment grade

♦ Sentiment in investment grade has been cautious since 2H07

♦ However, the dominance of banks (rather than institutional investors) as debt providers has shielded the market to a large extent. Recent events contributed towards a "reality check", in terms of conditions, pricing, leverage multiples, and possibly lending appetite for off-market transactions

♦ The credit market volatility experienced during the summer and again in November resulted in higher margins and less aggressive structures, thus terms are expected to be more conservative for deals

Source: LoanConnector

Source: LoanConnector

Margins

Investment grade annual volumes and number of deals

Banks’ balance sheets, despite challenging conditions, have provided a solid liquidity platform albeit at higher spreads

0

200

400

600

800

1,000

1,200

1,400

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08

Volumes (US$bn) No. of deals

0

10

20

30

40

50

60

01-Mar-01 07-Jul-02 12-Nov-03 19-Mar-05 25-Jul-06 30-Nov-07

(bps

)

AA A BBB

14

0

10

20

30

40

50

60

70

80

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

(€bn

)

Syndicated Loan Market: Sub-Investment Grade

Quarterly volume Pricing on pro rata/TLb/TLc

Sub-prime crisis has impacted LBO volumes and commanded higher spreads to attract the thin liquidity available

Source: UBS Source: UBS

LBO Non-LBO

0

10

20

30

40

50

60

70

80

2004 2005 2006 2007 1Q08

(%)

Standard (E+225/275/325) Above standard

15

Flexing prices up or down? Large levels of available liquidity in the European leveraged loan market have fuelled a large number of oversubscriptions and consequent downward flexing during 2006 and 2007

Source: UBS

0

25

50

75

100

125

150

2003 2004 2005 2006 2007 1Q08

Flexed up Flexed down

16

UBS Experience: BHP-Billiton

… for the $55 billion Multicurrency Facility supporting BHP Billiton’s bid for the shares in Rio Tinto

♦ On 6 February 2008, BHP Billiton announced a tender offer for all shares in Rio Tinto, a leading mining group

♦ The terms of the acquisition, which offer Rio Tinto shareholders 3.4 BHP Billiton shares for each Rio Tinto share, value Rio Tinto equity at approximately $174 billion, and together with approximately US$45 billion existing net debt, implies an enterprise value of US$219 billion

♦ The acquisition is supported by committed debt financing totalling $55 billion of credit facilities, partly used to refinance a credit facility already in place and partly to contribute to the funding of the proposed share buy back and general corporate purposes

♦ BHP is the world’s largest diversified resources company, Australia’s largest listed company by market capitalization and is the industry leader in major commodity businesses including aluminium, base metals, iron ore, metallurgical and energy coal, manganese, stainless steel materials, and substantial interests in petroleum and diamonds

♦ Rio Tinto is a leading international mining group headquartered in the UK, with listings on the LSE and NYSE and ASX (group market capitalisation of US$147.9 billion). It has operations worldwide with strong representation in Australia and North America

In February 2008, UBS acted as Joint Mandated Lead Arranger and Bookrunner …

SECTION 4

What's next?

18

0

30

60

90

120

150

180

Mar-07 May-07 Jun-07 Aug-07 Sep-07 Oct-07 Dec-07 Jan-08 Mar-08 Apr-08

(bps

)

Series 7 Series 8 Series 9

A year in review - Investment GradeThough to a lesser extent than leveraged markets, the Investment Grade space has also been severely impacted by large volatility in the system and need for risk re-pricing

iTraxx Europe —one year trend

Change from 20 Sept 07 to 17 Mar 08: +323%

Change from 20 Mar 08 to date:

(44.8)%

19

Drivers for the current instability of leveraged marketsA number of developments have led to instability and dramatic repricing of risk in the credit markets

iTraxx Europe Crossover—one year trend

50

100

150

200

250

300

350

400

450

500

550

600

650

25-Apr 7-Jul 18-Sep 30-Nov 11-Feb 24-Apr

bps

Sub-primefall outbegins togainmomentum

Hedge fundfailures begin

LBO pipeline hitsrecord levels:- TXU (US)- Alliance Boots (UK)

A few largetransactions pulledfrom the market

ECB pumps>€100bn into the inter-bank market

Fed lowers discount rate by 50 bps, affecting the inter-bank market

BoE injects £4.4bn of liquidity

Bad news flow relating to US economy

Fears of recession strike the equity market

Fed cuts interest rates by 75bp to 3.50%

Massive buying of protection

Bear Stearns liquidity crisis

Interbank andmoney marketbegin to destabilise

Goldman Sachs injects US$3bn into its Global Equity Fund

Fed cuts interest rates by 50bp to 4.75%

Equity sell-off and concerns on US economy

Over €60bn of liquidity injected by central banks

Talks on monolinerescues

Banks sells low and high yield exposure in the market

Large banks announcerights-issue to restructuretheir B/S

20

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1-Jan 14-Jan 27-Jan 9-Feb 22-Feb 6-Mar 19-Mar 1-Apr 14-Apr 27-Apr

(%)

UK interbank 3-month UK Treasury bill discount 3-month

LevX Senior—1 Jan 2008 to date (pricing as % of par)

Source: Bloomberg

UK: 3M Interbank vs. 3M T-bill—1 Jan 2008 to date

Source: Datastream

> 2%c.1.3%

Recent tension in the financial institution world has significantly widened LIBOR over base rate, impacted even the most senior and liquid loans

Drivers for the current instability of leveraged markets

889092949698

100102

1-Jan 20-Jan 8-Feb 27-Feb 17-Mar 5-Apr 24-Apr

Pric

e in

€

Series1 Series2

21

Outlook

♦ Banks will continue to be more selective in the way they deploy their capital

♦ Tightening of CDS spreads will translate into greater stability of trading levels/margins, fuelling increasing trust in the system

♦ Corporate M&A could increase on the basis of lower valuations and could lead to potentially higher volumes

♦ Recapitalisation of banks’ balance sheets will also allow for greater capital deployment

♦ Although slightly improving, market conditions will remain challenging throughout 2008

♦ Size (€1bn) will continue to be a limiting factor, although larger deals are coming to the market (CHC, Biffa, Expro) but still remain to be tested

♦ Club-style syndication will continue to be the preferred solutions by many arrangers as financial institutions will continue to be the main providers of liquidity

♦ Liquidity from institutional investors still to be very thin throughout 2008, limiting the effective comeback of the leveraged market

♦ Rich underwriting fees and pricing to cater for high volatility in the secondary market

♦ Relative-value trades still available in the secondary markets continue to limit interest in primary issuances

Investment grade

Sub-investment grade

22

Contact information

UBS Limited1 Finsbury AvenueLondon, EC2M 2PPTel. +44-20-7567 8000

www.ubs.com

UBS Investment Bank is a business group of UBS AGUBS Limited is a subsidiary of UBS AG