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IPAA Capital Markets Seminar July 21, 2008. Tim Murray Managing Director GUGGENHEIM PARTNERS 1301 McKinney, Suite 3105 Houston, TX 77010 (713) 300-1300 main (713) 300-1339 fax. Introduction of Guggenheim Partners Mezzanine Lending Basics Energy Finance Market Credit Crisis Impact

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Ipaa capital markets seminar july 21 2008
IPAA Capital Markets SeminarJuly 21, 2008

Tim Murray

Managing Director

GUGGENHEIM PARTNERS

1301 McKinney, Suite 3105

Houston, TX 77010

(713) 300-1300 main

(713) 300-1339 fax



A private, global diversified financial services firm with $120+ BN under management

Wealth Management, Investment Management, Capital Markets

500+ professionals worldwide, 70 in Investment Management

Houston Energy Office opened in September 2005

7 professionals, including 3 petroleum engineers

Invested in 41 deals for an aggregate $2.1 BN

Total IRR of 25.5% as of March 31, 2008

Syndicated over $1.2 BN senior and second lien debt

Raised $230 MM of co-investment equity

Raising an Energy Opportunities Fund

Provide senior and mezzanine debt plus equity

Blend of financial and technical expertise is unique


50+ $120+ BN under management

50+

Wildcat

Wildcat

Wildcat

Wildcat

Drilling

Drilling

Drilling

Drilling

45

45

40

40

35

35

30

30

Equity

Equity

-

-

Linked and Equity Securities

Linked and Equity Securities

Target Rate of Return, %

Target Rate of Return, %

Equity

Equity

-

-

Linked and Equity Securities

Linked and Equity Securities

25

25

Targeted

Targeted

Project Equity

Project Equity

Project Equity

Project Equity

Investment Types for

Investment Types for

20

20

Guggenheim Energy

Guggenheim Energy

Opportunities Fund

Secured Loans, Mezzanine Debt,

Secured Loans, Mezzanine Debt,

Secured Loans, Mezzanine Debt,

Secured Loans, Mezzanine Debt,

15

15

and Second Lien Loans

and Second Lien Loans

and Second Lien Loans

and Second Lien Loans

10

10

Traditional Commercial Bank

Traditional Commercial Bank

Traditional Commercial Bank

Traditional Commercial Bank

5

5

Loans

Loans

Loans

Loans

----------

----------

Development/Exploitation

Development/Exploitation

------------

------------

----------

----------

Exploration

Exploration

-----------

-----------

0

0

(Engineering Risk)

(Engineering Risk)

(Geologic/Geophysical Risk)

(Geologic/Geophysical Risk)

PDP

PDP

PDNP

PDNP

PUD

PUD

Probable

Probable

Possible

Possible

Reserve Risk

Reserve Risk

Energy Financing Risk Profiles


Commercial Bank Debt $120+ BN under management

  • Traditional advance rates against mostly PDP, some PDNP+PUD (20-30%)

  • Borrowing base controls advances

  • First lien on collateral, recourse to the company

  • Covenants: TNW, CR, interest coverage, max debt/ebitda

  • Minimal fees

  • Pricing grid based on usage

  • Revolver and term loan

  • Hedging optional

Mezzanine Debt

  • High advance rates against PDP, often all PUD reserves

  • Advances against AFEs during development, borrowing base control also

  • First or second lien on development, non-recourse to company

  • Asset coverage/tail test, but few/no financial covenants

  • Fees up front and prepayment fees, plus an equity kicker (ORRI or NPI)

  • Fixed interest spread, 100-500 bp over bank debt (liquidity discount for large deals)

  • Advancing term loans

  • Monthly cash flow sweep to amortize

  • Hedging required


Private Equity $120+ BN under management

  • Focused strategy and use of proceeds

  • Equity investment a function of target return and leverage assumed

  • No collateral, but could have a liquidation preference

  • Performance covenants only

  • Hedging encouraged

  • Management must deliver a preferred return before backing in for their promote

  • No amortization

  • Equity investor controls most major decisions, including replacing management

Mezzanine Debt

  • Flexible use of proceeds

  • High advance rate against proven reserves

  • First or second lien on development assets but non-recourse to the company

  • Asset coverage/tail test, but few/no financial covenants

  • Hedging required

  • Fees up front and prepayment fees, plus an equity kicker (ORRI or NPI)

  • Fixed interest spread, 100-300 bp over bank debt (liquidity discount for large deals)

  • Advancing term loans

  • Monthly cash flow sweep to amortize

  • No management input or control


$/Bbl $120+ BN under management

Tristone Capital Q2/08 Survey and NYMEX (7/17/2008)


$/MM Btu $120+ BN under management

Tristone Capital Q2/08 Survey and NYMEX (7/17/2008)


  • Commercial Banks $120+ BN under management

  • Banks arechallenged to maintain and grow loans with new and aggressive competition, restrictive loan policies, and declining loan yields. Some banks continue to aspire to be investment banks.

  • Investment Banks

  • Investment Banks are expecting a more moderate M&A market and less receptive public markets in the energy sector. Some investment banks aspire to be commercial banks.

  • Private Equity

  • A record levels of private equity capital is competing for limited management teams in a moderating M&A market with high commodity pricing and rising F&D costs. Current investors may be challenged to realize the same level of returns as the predecessor funds.


  • Mezzanine Firms $120+ BN under management

  • New entrants and retooled teams have increased to more than a dozen firms, up from 3 or 4 survivors in 2001-02. Pressure to build portfolios has resulted in some of the same mistakes being made all over again.

  • Institutional Loan Investors

  • A record volume ofTerm B and Second Lien loan product was bought by hedge funds, mutual funds, and CLOs in 2006 and first half of 2007. For deals in the $100 million range that accessed this market, loan pricing was bid down and covenant-lite structures were over-subscribed overnight. Today, some firms that were heavily engaged in leveraged lending with a mark-to-market balance sheet are liquidating energy loans to meet investor demands for redemptions.

  • Clients

  • Energy clientshave never enjoyed such an abundance of capital. The challenge is to stay focused on your strategy and not pursue an idea just because you can raise the capital.


Energy Capital Provider Spectrum $120+ BN under management

Equity Mezzanine Senior

Guggenheim Energy

Energy “Mezzanine” Firms

GasRock;GE Energy; Laminar Direct; Macquarie;

NGP Capital Resources; Petrobridge; Prospect Energy; TCW;

Wells Fargo Energy Capital; Goldman Sachs E&P Capital

Resource Funds/Asset Aggregators

Merit Energy; Quantum Resources; Celero;

EnerVest; LimeRock; Sheridan Resources

Stretch Senior Debt Providers

American Capital; CIT; Foothill;

Fortress Capital; SilverPoint;

Power & Infrastructure/Alternative Assets

ArcLight Capital; D.E. Shaw; First Reserve; Haddington Ventures;

MetalMark Capital; Quantum Infrastructure Fund

Traditional Energy Banks

Amegy Bank; Bank of America;

Bank of Oklahoma/Texas; Bank of Scotland;

BNP Paribas; Capital One; Citigroup;

Comerica Bank; Compass Bank;

Deutsche Bank; Fortis; Frost Bank;

GE / Merrill Lynch; Guaranty Bank;

JPMorgan; Texas Capital; RBS; UBOC;

US Bank; Wachovia; Wells Fargo;

WestLB; Whitney Bank

Energy-Focused Private Equity Funds

Avista Capital; Carlyle / Riverstone; DB Zwirn;

EnCap Investments; Energy Spectrum; First Reserve;

Greenhill Capital; Kayne Anderson; Lime Rock Partners;

Pine Brook Road Partners; Post Oak Partners;

Quantum Energy; Natural Gas Partners; SCF Partners;

Warburg Pincus; Yorktown Partners


  • The Leveraged Finance capital markets experienced a major correction in the second half of 2007 through the first quarter of 2008.

    • Record forward calendar of committed transactions built through the first half of the year with aggressive structures and pricing weighed upon new issue underwritings

  • Problems started in the Leveraged Loan market following the collapse of structured vehicles that were a major driver of liquidity

    • Formation of new CLOs effectively stalled following sub-prime and asset-backed crisis and inability to syndicate AAA tranches and source equity

  • Energy credit availability since 2Q 2007, while more constrained in the second half of 2007 in sympathy with the broader market, remains one of only a few select industry sectors successfully accessing the leveraged markets across the credit spectrum

  • Since mid-December 2007, energy issuance has comprised the majority of the high yield calendar/high yield primary issuance


1,056 correction in the second half of 2007 through the first quarter of 2008.

614

427

419

418

249

199

182

Merrill Lynch High Yield desk


  • Fixed Income Market: correction in the second half of 2007 through the first quarter of 2008.during the first quarter, the 10 year note declined about 60 bps, while 3-month LIBOR declined approximately 200 bps.

  • Leveraged Loan Market: institutional issuance totaled $27 billion during the 1Q 2008, down 80% from the $138 billion issued during the 1Q 2007


  • Milagro Exploration

  • Background

    • Petrohawk Energy Corporation announced intention to sell its Gulf Coast Division, a significant portion of which were former Mission Resources assets and personnel

    • Guggenheim teamed with former Mission Resources management team, now Milagro Exploration, to bid on the divestiture

    • Attractive opportunity: 266 BCFE of proved reserves (68% developed) with 400 BCFE upside

  • Transaction

    • Milagro bid $825 MM funded with $260 MM of senior (L+2.25%) and $200 MM of second lien debt (L+6.25%), $27 MM of Management equity and $250 MM of new private equity, plus a $125 MM subordinated seller note (12% PIK)

    • 80% of PDP volumes were hedged prior to closing

  • Update

    • Proved reserves increased through drilling and the senior borrowing base increased by $60 MM to $375 MM

    • Seller note repurchased for $100MM, funded with increase in senior revolver and second lien term loan

    • Oil and Gas Investor Magazine named this “Financing Deal of the Year for 2007”


  • North Texas Development Milagro Exploration

  • Background

    • Client was awarded a substantial farm-in opportunity from a Major to develop Cleveland Sand acreage in North Texas

    • Attractive “resource play” opportunity with minimal geological risk

    • Improved completion techniques made for very attractive economics in the play

    • Well known management team with very strong track record

  • Transaction

    • Guggenheim committed $37 MM Advancing Term Loan (P+2.2%) to drill and complete 16 wells under the farm-in agreement

    • Upside participation came in the form of an ORRI (2% BPO, 8% APO)

  • Update

    • First 8 wells came in at or above expectations, after which Guggenheim was refinanced under the client’s traditional senior bank facility

    • Realized proceeds to date have generated better than a 20% IRR

    • Guggenheim’s ORRI is currently generating more than $80,000 per month


  • Bakken Shale Development

  • Background

    • Private equity sponsored team sought to acquire and develop Bakken Shale assets while minimizing management dilution

    • Guggenheim’s mezzanine facility allowed management team to leverage private-equity dollars to more efficiently acquire and develop assets

    • Strong management and operating team with experienced equity sponsor

  • Transaction

    • $50 MM Advancing Term Loan (L+6.5% with 4% ORRI BPO/10% NPI APO) to finance drilling and completion costs

    • $10 MM equity co-investment to participate as a working interest partner

  • Update

    • Mezzanine facility accelerated drilling program with 8 wells drilled and completed

    • Client was able to acquire and develop a larger acreage position by utilizing mezzanine capital for drilling and completion costs.


Private company focused on unconventional gas in multiple areas in North America and International. Company is leveraged 4 times EBITDA and experiencing liquidity problems.

Reserve replacement in 2005: downward revisions (13%) exceed additions; excluding reserve divestitures and acquisitions and price effect, proved reserves decline 5.5%. Proved reserve replacement in prior year was also not achieved.

New management team hired as founder/major shareholder left the business.

Company is acquired for about $3.00/MCFE Total Proved. The acquisition is funded with senior debt, a Second Lien term loan (42%), and equity (58%). Debt is approximately equal to SEC total proved PW10% at $10/MMBTU and $61/BBL.

Asset coverage covenant includes 50% credit for Probable reserves.

Second Lien term loan flexed down ½% to L+5 1/4%, but still oversubscribed four times over within a week of launch in March 2006.

A leveraged loan too far…


A leveraged loan too far
A leveraged loan too far… areas in North America and International. Company is leveraged 4 times EBITDA and experiencing liquidity problems.

$400 MM Debt

l


Will the tide continue to rise
Will the tide continue to rise? areas in North America and International. Company is leveraged 4 times EBITDA and experiencing liquidity problems.

A rising tide lifts all boats…

It’s only when the tide goes out that you discover who’s been swimming naked.


Ipaa capital markets seminar july 21 20081
IPAA Capital Markets Seminar areas in North America and International. Company is leveraged 4 times EBITDA and experiencing liquidity problems.July 21, 2008

Tim Murray

Managing Director

GUGGENHEIM PARTNERS

1301 McKinney, Suite 3105

Houston, TX 77010

(713) 300-1300 main

(713) 300-1339 fax


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