Joseph V. Rizzi Amsterdam Institute of Finance December, 2013.
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Transcript of Joseph V. Rizzi Amsterdam Institute of Finance December, 2013.
Joseph V. RizziAmsterdam Institute of FinanceDecember, 2013
22
• Cash Flow
Impacts default risk
• Balance Sheet
Determines Loss in Event of Default (LIED)
Liquidity
Valuation
Amsterdam Institute of Finance December, 2013
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• Business Risk: EBITDA Volatility◦ Industry Characteristics◦ Firm Characteristics
• Financial Risk: EBITDA Relative to Debt• Structural Risk
◦ Issues Priority of claim on assets and income Control
◦ Focus Covenants, Seniority, Security
Amsterdam Institute of Finance December, 2013
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• Quantitative◦ Capitalization
Cash Equity >25% Total Debt <6.0x Senior Debt (1) <4.5x First Lien <4.0x Second Lien <0.5x
◦ Cash Flow LTM EBITDA / PFI >2:1 7 x LTM FFOCF / TLA(2) >1:1
◦ Liquidity Cash + MS + RCA / P+I (3) > 1.5 : 1
1:- TLA usually >20% of senior debt and amortizes at least 30% by year 5
2:- FFOCF = LTM EBITDA - (WCI + CAPEX + Taxes + PF Interest)
3:- Liquidity tested day 1. MS (Marketable Securities). RCA (Revolving Credit Availability). Revolver usually set at 1 x EBITDA
Amsterdam Institute of Finance December, 2013
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• Debt capacity is derived from firm’s assets◦ Operating Cash Flows◦ Asset Sales / Asset Quality◦ Leveragability
• Market Conditions
• Target financing structure
Credit curve shifts over
time depending on the economy
Rating
Rate
s
2H07Crisis
Overheated 1H07
Amsterdam Institute of Finance December, 2013
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There are two different approaches to designing the capital structure:
20%
30%
50%
Cash FlowCash FlowModelModel
Balance SheetBalance SheetModelModel
Senior Debt
Sub Debt
Equity
3 - 4xEBITDA
4 - 6xEBITDA
Equity
Amsterdam Institute of Finance December, 2013
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• Ratio Approach
• Cash Flow
• Advance Rate
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Market◦ Maximum senior debt and total debt ratios◦ Vary over cycle
Peers◦ Identify◦ Rating Classification◦ Key Ratios
Rating Agencies◦ Credit Statistics
Amsterdam Institute of Finance December, 2013
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Peer XYZ XYZABC DEF GHI JKL MNO PQR STU Average Actual Pro-Forma
12 Months Ended 02/10/20xx 30/09/20xx 01/01/20xx 30/09/20xx 31/10/20xx 30/11/20xx 31/12/20xx 31/12/20xx 31/12/20xxSales 3073.8 8294.9 6165.2 852.4 2345.8 1682.1 2133.4 3506.8 3025.4 3205.3Gross Margin 25.6% 14.4% 16.3% 19.8% 22.0% 16.6% 17.1% 18.8% 17.8% 17.4%EBITDA 153.7 430.1 272.3 35.9 130.8 77.3 100.3 171.5 122.6 134.5 Margin 5.0% 5.2% 4.4% 4.2% 5.6% 4.6% 4.7% 4.8% 4.1% 4.2%Interest Expense 34.4 78.6 49.6 13.2 19.5 15.3 25.0 33.7 55.2 55.8Capex 32.1 40.7 37.1 9.8 25.8 11.3 27.8 26.4 10.7 10.7 % of Sales 1.0% 0.5% 0.6% 1.1% 1.1% 0.7% 1.3% 0.9% 0.4% 0.3%Total Assets 1482.0 3835.4 2790.1 360.5 1099.5 829.3 961.5 1622.6 950.5 952.3
Secured Bank Debt 455.4 0.0 0.0 117.8 0.0 0.0 0.0 211.9 83.2Unsecured Bank Debt 0.0 504.6 175.9 0.0 208.0 210.0 37.6 0.0 0.0Other Senior Debt 111.7 391.4 708.2 6.3 179.2 0.0 75.0 42.6 8.3 Total Senior Debt 567.1 896.0 884.1 124.1 387.2 210.0 112.6 254.5 91.5Subordinated Debt 0.0 197.6 0.0 0.0 0.0 0.0 143.7 289.2 289.2 Total Debt 567.1 1093.6 884.1 124.1 387.2 210.0 256.3 543.7 380.7Equity 419.9 1461.1 1293.3 150.2 473.8 414.4 262.5 (69.0) 96.4 Total Capitalization 987.0 2554.7 2177.4 274.3 861.0 624.4 518.8 474.7 477.1
Total Debt/EBITDA 3.7 2.5 3.2 3.5 3.0 2.7 2.6 3.0 4.4 2.8Senior Debt/EBITDA 3.7 2.1 3.2 3.5 3.0 2.7 1.1 2.8 2.1 0.7Total Debt/Capital 57.5% 42.8% 40.6% 45.2% 45.0% 33.6% 49.4% 44.9% 114.5% 79.8%EBITDA/Interest (incl. A/S) 4.5 5.5 5.5 2.7 6.7 5.1 4.0 4.8 2.2 2.4
Credit Ratings S&P BBB- A- A NR NR NR BB BB- Moody's NR A3 A2 NR NR NR Baa3 Ba2
Market Capitalization 468.2 1482.0 1295.8 104.4 510.9 249.2 177.9 612.6Enterprise Value 1035.3 2575.6 2179.9 228.5 898.1 459.2 434.2 1115.8Ent Value/EBITDA 6.74 5.99 8.01 6.36 6.87 5.94 4.33 6.32Ent Value/Sales 0.34 0.31 0.35 0.27 0.38 0.27 0.20 0.30Ent Value/Book Value 2.47 1.76 1.69 1.52 1.90 1.11 1.65 1.73Earnings per Share 1.78$ 1.73$ 2.83$ (0.06)$ 2.37$ 1.69$ 1.09$ 1.63$
Amsterdam Institute of Finance December, 2013
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Important: Loan Market Evolution from a bank to an institutional market(back to a bank market?)
Impact: Majority of syndicated loans are rated
Pricing: Affected by rating
Amsterdam Institute of Finance December, 2013
Category (x) BB+ BB BB- B+ B B-
__________________________________________________________________________________
Total Debt with Equity Credit/
Operating EBITDA 3.1 3.8 2.9 4.5 5.3 6.0
Long Term Secured Debt/
Operating EBITDA 0.0 0.8 1.0 1.1 2.6 2.6
Total Adjusted Debt/
Operating EBITDAR 3.5 3.9 3.3 4.9 5.4 7.0
FFO Adjusted Leverage3.7 4.2 3.7 5.1 6.4 6.7
FCF/Total Adjusted Debt 0.0 0.0 0.1 0.0 0.0 0.0
Operating EBITDA/
Gross Interest Expense5.5 4.1 5.3 3.2 2.5 1.8
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2013 LBO’s Funded by (YTD 17/09/13)
Amsterdam Institute of FinanceDecember, 2013 12
Bonds Only
Bonds + Drawn Bank
Debt
Bank Debt Only
Number of Deals in Sample 6 4 23
Ave. Transaction Size (M) € 789.9 € 2,957.0 € 1,228.4
Ave. PPM 8.5x 9.4x 8.6x
Ave. Equity Contribution 44.8% 29.9% 43.9%
Ave. HY Bond/Total Sources 54.9% 22.9% 0.0%
Ave. Bank Debt/Total Sources
0.0% 47.2% 52.8%
Ave Total Debt/Total Sources
54.9% 70.1% 54.5%
Ave. Debt/EBITDASource S&P Financial Services
4.9x 6.6x 4.6x
Characteristics LTM 2012 2011Total Volume (€ B) 7.15 1.74 3.17Total Deal Count 12 6 9Avg. Pro Rata Spread (E+) N/A 475.0 403.6Avg. Wtd. Avg. Inst. Spread (E+) 430.6 591.7 459.4Avg. Deal Size (€ MM) 595.5 289.2 352.5Avg. Pro Rata Term (Years) N/A 5.9 6.0Avg. Institutional Term (Years) 5.8 5.7 6.8
Avg. Pro Forma Trailing LTM 2012 2011Revenues (€ MM) 5,117.29N/A 466.5EBITDA (€ MM) 315.32 N/A 62.86Adj. EBITDA (€ MM) 320.35 N/A 62.86
Amsterdam Institute of FinanceDecember, 2013 13
Financial Ratios (Trailing Pro Forma) LTMAvg. Max. Min. St. Dev.
Debt/EBITDA 5.22 6.02 4.20 .77Sr. Debt/EBITDA 4.80 5.50 4.18 .64EBITDA/Cash Interest 3.55 4.21 2.76 .72EBITDA-Miant CapEx/Interest N/A N/A N/A N/AEBITDA-CapEx/Interest N/A N/A N/A N/A
Purchase Price Multiple N/A N/A N/A N/AEquity Contribution N/A N/A N/A N/A
Amsterdam Institute of FinanceDecember, 2013
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To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Wtd. Avg. ProRata spread is the average RC/TLA spread weighted by sizes of the RC and TLA tranches.Wtd. Avg. Institutional Spread is the average TLB/TLC spread weighted by the sizes of the TLB and TLC tranches.
Amsterdam Institute of Finance December, 2013
Europe USPro Rata Spread N/A L+252.9Weighted Avg Institutional Spread E+370.8 L+294.3Deal Size (€MM) 555.38 1,053.68 Pro Rata Term (in Years) 6.00 4.70 Institutional Term (in Years) 6.13 6.08 Revenues (€MM) N/A 2,932.44 EBITDA (€MM) 1,179.93 743.72 Pro Forma Debt/EBITDA 3.49x 3.65xPro Forma Senior Debt/EBITDA 3.36x 3.56xPro Forma Cash Interest Coverage N/A 7.80xObservations 4 107
Europe USPro Rata Spread E+449.7 L+356.8Weighted Avg Institutional Spread E+445.3 L+379.2Deal Size (€MM) 438.18 547.28 Pro Rata Term (in Years) 5.02 4.84 Institutional Term (in Years) 6.13 5.98 Revenues (€MM) 1,385.80 1,256.15 EBITDA (€MM) 209.97 252.16 Pro Forma Debt/EBITDA 4.92x 4.80xPro Forma Senior Debt/EBITDA 4.64x 4.71xPro Forma Cash Interest Coverage 4.19x 3.97xObservations 26 432
BB/BB-
B+/B
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RevolverTerm Loans
ABC
Second LienCov LiteMezzaninePIKPreferred Stock
17
Amsterdam Institute of Finance December, 2013
R/C T/La T/Lb T/Lc 2ndL 2013 (9 mo) 14% 22% 64% - - 2012 14% 30% 56% - - 2011 15% 28% 57% - - 2010 14% 32% 54% - - 2009 15% 31% 54% - - 2008 12% 31% 40% 17% - 2007 12% 19% 42% 17% 10% 2006 13% 28% 31% 3% 5% 2005 14% 40% 25% 20% 5% 2004 15% 40% 26% - - 2003 15% 45% 23% - - 2002 16% 46% 26% - - 2001 16% 54% 20% - - 2000 20% 50% 20% - - Source: Standard & Poor’s Financial Services
Amsterdam Institute of Finance
December, 2013 18
2013 (9 mo) 8.0 2012 8.9 2011 8.4 2010 8.6 2009 8.9 2008 9.3 2007 9.3 2006 8.4 2005 7.9 2004 7.2 2003 6.5 2002 6.6 2001 6.1 2000 6.9 Source: Standard & Poor’s Financial Services
Amsterdam Institute of FinanceDecember, 2013 19
Amsterdam Institute of FinanceDecember, 2013
2013 (9 mo) 43% 2012 50% 2011 47% 2010 50% 2009 50% 2008 45% 2007 35% 2006 35% 2005 35% 2004 36% 2003 38% 2002 39% 2001 39% 2000 38% Source: Standard & Poor’s Financial Services
Amsterdam Institute of FinanceDecember, 2013 20
Europe U.S.
RC 10.7% 16.1% T / LA 22.1% 1.1% T / LB 62.7% 71.7% T/ Lc - .2% 2nL - 10.9% Other 4.4% - Source Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of FinanceDecember, 2013 21
LTM 9/30/13 2012 Bank Debt 47.8% 38.4% 2nd L 1.8% 1.2% Secured HY 0.5% 1.7% Sen Unsecur HY 0.8% 0.6% Mez 0.5% 4.2% Vendor Note - 0.7% Shareholder Loan 1.4% 7.2% Rollover Eq 1.0% 3.8% Common Eq 44.3% 41.1% Total Eq 46.8% 52.7% Other 0.4% 1.2% Bridge to HY 1.5% Source: Standard & Poor’s Financial Services
Amsterdam Institute of FinanceDecember, 2013 22
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Maximum debt capacity formula:-MDC = f(operations, amortization, rate, asset sales)MDC = [EBIT / (i+ 1/n)] + AS + RF
EBIT - Earnings Before Interest and Taxesi - Interest Raten - Straight line loan amortizationAS - Proceeds from Asset Sales
RF - Refinancing
Amsterdam Institute of Finance December, 2013
Opening Balance Sheet Adjustments – from sources and uses – including
purchase price assumptions Proforma balance Sheet
◦ Income Statement◦ Cash Flow StatementCapitalization table/transaction structureDebt ScheduleTerm sheet(s)Valuation/maximum purchase priceReturns Analysis – IRR and MOC
24
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Issues◦ Adjustments (beware of solving for cash flows to justify price)◦ Normalization
Cyclicality Bad Management
Value Test◦ Projections implied price
Reverse Engineer - Management implied forecast◦ Firms◦ Peers
Tie Into◦ Compensation◦ Covenants
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Macro/Market Level◦ Determine rating target◦ Use target rating level financial characteristics
Funded Debt/EBITDA EBITDA/Interest Expense Funded Debt/Total Cap
Example:(A) Target Rating BB(B) EBITDA/Int for Target Rating c3.0x(C) Firm EBITDA $300mln(D) Interest Rate for Target Rating 10%(E) Maximum Debt Capacity = (C/B)/D
= (300/3)/10%= $1,000
Amsterdam Institute of Finance December, 2013
2013 ( 9 mo ) 9% 2013 7% 2013 12%2011 7%2010 9% 2009 5%
Source: Standard & Poor’s Financial Services
Amsterdam Institute of FinanceDecember, 2013 27
28To access the data points underlying the chart, double-click on the chart.
Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc.
Share of Credit Issue in Distress Based on Count Share of Credit Issue in DistressBased on Share of Sr. Par Issue
Distressed credits are issues rated D or restructuring.Charts reflect share of credits issued each year that eventually went into distress.
Year of Credit Issue Year of Credit Issue
11.3%
15.7%
24.8%
11.5%
4.9%
0.0%
2.8%
0%
6%
12%
18%
24%
30%
2005 2006 2007 2008 2009 2010 2011
16.3%17.2%
28.4%
17.9%
4.5%5.1%
0.0%0%
6%
12%
18%
24%
30%
2005 2006 2007 2008 2009 2010 2011
Amsterdam Institute of Finance December, 2013