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Capital Markets. Looking at the Bank Loan Syndication Process. Two Markets Served. Investment Grade Loan Market Rated BBB- and Higher (Corporate) Arrangers hold Higher Exposure ($200 million +) The majority of the Syndicate are traditional banks. Leveraged Loan Market

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Capital markets

Capital Markets

Looking at the Bank Loan Syndication Process


Two Markets Served

  • Investment Grade Loan Market

  • Rated BBB- and Higher (Corporate)

  • Arrangers hold Higher Exposure ($200 million +)

  • The majority of the Syndicate are traditional banks

  • Leveraged Loan Market

  • Rated BB+ and Lower (Corporate)

  • Arrangers hold Lower Exposure

  • The majority of the Syndicate are non-banks (Financial institutions)

4


The Loan Syndication Process

Lead Arranger Bank

Administrative Agent

Issuer /Company

Bookrunner Bank #1

Syndication Agent

Bookrunner Bank #2

Documentation Agent

Bookrunner Bank #3

Documentation Agent

First Tier

Co-Mgr

Bank #1

Co-Mgr

Bank #2

Co-Mgr

Bank #3

Co-Mgr

Bank #4

Co-Mgr

Bank #5

Co-Mgr

Bank #6

Second Tier

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

“Retail” Level

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

13


The Loan Syndication Process (Continued)

  • The issuer or Company solicits bids from Arrangers.

  • Arrangers will outline their syndication strategy and their view on the way the loan will price in market.

  • Issuer gives the mandate to one or more Arrangers (Co-Arrangers)

  • The arranger will prepare an information memo (IM) describing the terms of the transactions.

    • The IM typically will include:

      • Executive Summary

      • Investment Considerations

      • Summary of Terms and Conditions (Term Sheet)

      • Transaction Overview

      • Company

      • Management and Equity Sponsor Overview

      • Industry Overview

      • Financial Model

      • Timing for commitments, closing, as well as fees on level of commitments

  • Bank meeting is scheduled at which potential lenders hear the management and the Investor group.

  • A deadline is given for the banks to send their commitment levels subject to final documentation

  • Each Bank analyzes the deal’s credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.

  • The Arranger collects all commitments – different amounts from each Bank

  • Allocations are given and Legal Documentation is sent for their final review.

    • If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced

    • If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.

  • After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.

  • As part of the syndication process we will discuss in detailed these two items following this page.

    14


    The Loan Syndication Process (Continued)

    Typical Internal Analysis Process by each bank

    • Internal Application sent to their respected investment/credit committees. This application includes the following:

      • Requested amount that is within the rating parameters for each bank

      • Recommended amounts by Tranche (Revolving Credit / Term Loans)

      • Term and Conditions of the Loans (includes pricing, structure and covenants)

      • Profitability (RORA and RAROC)

      • Syndication strategy

      • Transaction discussion including Source and Uses and Capital Structure

      • Company discussion including historical performance and outlook

      • Corporate Structure

      • Management Biographies / Equity Sponsor Profile

      • Collateral Analysis

      • Industry Analysis

      • Financial Analysis (Projections’ Model)

      • Internal Rating Analysis

    • Internal Legal Review

    • KYC (know-your-customer) and Compliance Review

    This process will be discussed following this page

    15


    The Loan Syndication Process (Continued)

    Typical Internal Rating Analysis by each bank

    • Most banks’ internal ratings are in line with the Agencies’ external ratings, though the analysis is done independently. This analysis is based on two approaches:

      • Quantitative Analysis

      • Qualitative Analysis

    The Typical Scale is 1-10, 1 being with very limited risk to default and 10 the issuer being in bankruptcy with no chance of recovery

    • The Quantitative Analysis for establishing the Internal rating which measures the probability of default is based on the following parameters (each component is weighted at a specific level of importance):

      • Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA)

      • Capitalization Ratio – the relationship between the bank debt and the rest of the capital (Capital Leases, Bonds, Equity)

      • Coverage Ratio - Issuer’s Cash Flow covering it’s debt obligations (interest and principal payments)

      • Variance of Projections – based on the projections, the model typically assumes a certain haircut (10-30%) to the management’s projections and it tests it’s ability to pay its debt obligations.

      • The Quantitative approach adjusts up or down based on industry characteristics (Recession resistance, cyclical, or event driven).

  • The Qualitative Analysis is subjective based on each bank’s internal policy. The Analysis would include strength of management, support from the equity sponsor, recovery analysis (asset collateral) and outlook.

  • 16


    Typical Leverage Loan Structure (Rated by S&P as BB or lower)

    • Bank Debt Facilities (typically represented 30-35% of Total Capital):

      • Revolving Credit (Typically, Commercial Banks provide this facility)

        • Commitment Amount

        • Typical maturities of 5-6 years

        • Funded Versus Unfunded Amount

        • Funded Pricing and Unfunded Pricing (Commitment Fee)

        • Letters of Credit

      • Term Loans (typically, Non-Bank institutions provide this facility)

        • Funded Amount – sometimes structured as Delayed Draw Down

        • Typical Maturities of 6-8 years

    • Public Bonds / Notes (typically represented 20-25% of Total Capital):

      • Typical maturities of 9-11 years

      • Unsecured Debt

    Private Equity (typically represented 30-45% of Total Capital):

    17


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)

    • 1. Parties to the Credit Agreement:

      • Borrower

      • Holding Company

      • Guarantor / Parent and Subsidiaries’ Guarantee

      • Agent Banks

        • Administrative Agent

        • Collateral Agent

        • Syndication Agent

        • Documentation Agent

      • Law Firms representing the Borrower and Agent Banks

    2. Description of the Transaction / Purpose of the Loan (s)

    18


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    • Money Terms:

      • Amount / Tranches

        • Revolving Credit

        • Term Loans

      • Pricing

        • Interest Rate / Margin over LIBOR

        • Commitment Fees on unfunded portion

      • Maturities

      • Amortization Schedule (set principal payments)

    Need 100% Vote from the syndicate banks to amend these terms

    19


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    • 4. Non-Money Terms:

      • Financial Covenants

      • Negative Covenants

      • Affirmative Covenants

    Need Majority Vote (typical 51%) from the syndicate banks to amend these terms

    20


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    New Terminology in 2006 and 2007:

    Covenant Lite Structures (“Covy lite”)

    Incurrence Tests Vs Maintenance Tests

    Typical Financial Covenants

    Maximum Leverage Ratio (Total Debt / EBITDA)

    Maximum Senior Leverage Ratio (Bank Debt / EBITDA

    Minimum Coverage Ratio (EBITDA / Interest

    Minimum Fixed Charge Ratio (EBITDA – Capex – Taxes ) / Interest + Principal Payments)

    Maximum Capital Expenditures

    Minimum Tangible Net Worth

    New Terminology in 2006 and 2007:

    “Green Shoe”

    Typical Negative Covenants

    Limitations on Additional Debt

    Limitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactions

    Limitations of Dividends / Investments

    Limitation on Liens / Negative Pledges

    Excess Cash Sweep

    Limitations of Change of Ownership

    21


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    • Other Terms & Conditions:

      • Security / Liens / Guarantees

      • Mandatory Prepayments

      • Optional Prepayments / Call Protection

      • Financial Reporting / Maintaining Corporate Existence (“Affirmative Covenants”)

      • Representation and Warranties

      • Conditions Precedent at Closing

      • Events of Default

      • Assignments and Participations / Secondary Sales

      • Waivers and Amendments

      • Indemnification

      • Cross Default

      • Material Adverse Clause (MAC)

    22


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    • Pricing, Fees and Expenses on Separate Documents:

      • Fee Letter

      • Interest Rate (Applicable Margin and Leveraged Grids)

      • Expenses

    23


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    Other Terminology to the Credit Agreement

    • LIBOR Floor

    • Original Issuer Discount (OID)

    • Margin Spread

      A typical calculation of Loan Yields in the secondary market for loans:

      LIBOR or LIBOR Floor + Margin Spread + (100-OID)/4* years = Loan Yield

      *market convention is to use 4 years as it represents the average life

      i.e. LIBOR Floor = 3.00%

      Margin Spread = 400 basis points (or 4.00%)

      OID = 96

      Then the Loan Yield is calculated to:

      3.0% + 4.0% + [(100 – 96)/100]/4 = 7.0% + (4.0% / 4) = 7.0% + 1.0% = 8.0% Yield

    24


    Typical Leveraged Deal Term Sheet / Credit Agreement lower)(Continued)

    Other Schedules Attached to the Credit Agreement

    • Intercreditor Agreement

    • Purchase Agreement

    • Hedging Arrangement / Hedging Agreement

    25


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    26


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    • TRANSACTION OVERVIEW

    • On December 19, 2006, Harrah’s Entertainment Inc. (“Harrah’s” or the “Company”) announced that it had entered into an agreement to be acquired by affiliates of Apollo Management (“Apollo”) and TPG Capital (“TPG”) in a transaction valued at approximately $31.2 billion (including estimated fees and expenses)

    • Harrah’s Entertainment, based in Las Vegas, Nevada, is the world’s largest and most geographically diversified gaming company, operating 50 casinos in six countries, with the #1 or #2 market share in almost every major gaming market in the U.S.

    • At the time of the acquisition, Harrah’s generated LTM 9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of $10.6 billion and $2.9 billion, respectively.

    • Harrah’s Operating Company (“HOC”) owns or manages 43 of the 50 Harrah’s Entertainment casinos and generated LTM 9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of $8.0 billion and $2.0 billion, respectively

    27


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    TRANSACTION SOURCES & USES

    28


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    STRUCTURE – TOO LEVERAGE??

    Aggressive Structure??

    29


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    CORPORATE STRUCTURE

    30


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    SUMMARY OF TERMS – SENIOR CREDIT FACILITY

    31


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    SYNDICATION GROUP

    32


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    SYNDICATION PROCESS – WRONG TIMING FOR AN UNDERWRITTEN DEAL???

    • The general syndication of Harrah's was launched 1/15/2008 with a bank meeting in New York. Over 1,000 bankers attended the general syndication meeting with commitments requested by 1/29/2008.

    • Unfortunately, given the: i) global correction in the financial markets on the week of January 21, 2008, ii) dramatic widening of high yield credit spreads and iii) reduction in the 3-month Libor Rate by at least 120 bps that followed, the secondary market loan prices pulled back materially and bank investors started to demand a much higher All-In Yield (about L+ 500) on primary market transactions, like Harrah's.

    • Investors were demanding All-In Yield of between L+ 450 - 500 to commit/purchase Harrah's Term Loan B. Since the offered TLB margin spread was L+300, investors were demanding a discount (OID) of between 92-93 (compared to the original OID offer of 96.5) from the Underwriters/Arrangers.

    • Following the failed syndication, Arrangers in order to reduce their exposure, were offering Harrah's TLB with an OID in the low 90's.

    33


    Example of a Large Syndicated Loan lower)

    Harrah’s Entertainment

    SYNDICATION PROCESS – WRONG TIMING FOR AN UNDEWRITTEN DEAL?? (continued)

    • At the time, given such low demand, it was reported that Credit Suisse started to quietly syndicate their exposure prior to the commitment deadline (1/29/2008), independent of the other Arrangers.

    • As a consequence, each of the Arrangers started to syndicate their own exposure to their own investors offering as low as 90's OID to syndicate their exposure.

    • After that incident, there was a new agreement made between the Arrangers called The Memorandum of Understanding (MOU) where it prohibits one arranger to sell their exposure within an agreeable period (6 months after the commitments are due) without the consent of the other Arrangers.

    34


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