Structuring & Negotiating Mezzanine, PIK, Second Lien And Unitranche

Transcription

1 Structuring & Negotiating Mezzanine, PIK, Second Lien And Unitranche Analysis of junior debt products - structuring issues, application, terms and pricing This course is presented in London on: 10 July 2018, 27 November 2018 This course can also be presented in-house for your company or via live on-line webinar The Banking and Corporate Finance Training Specialist

2 Course Objectives Participants will: Gain an introduction to the junior debt spectrum Explore the structuring parameters how much senior and how much junior debt is appropriate in a given structure Get to grips with the different types of mezzanine: its use and key issues Master the features of second lien finance Be taught about Course PIK Overview (PIYC, PIYW, Toggles) Develop an understanding of products within unitranche & direct lending Get to grips with relevant intercreditor issues and agreements among lenders ( AAL ) Learn about the draft ECB Guidance on Leveraged Transactions Course Overview Credit markets continue to provide copious amounts of liquidity across the funding spectrum from senior debt through second lien, mezzanine and PIK-style instruments driven by traditional funding sources and a significant increase in capital formation from alternative lenders. Although unitranche continues to comprise the most popular offering from alternative lenders, these funds adopt an eclectic approach to credit and are willing to provide established junior products such as mezzanine and PIK either in conjunction with senior debt or to complement their unitranche offering. The Second Lien market experienced a resurrection in July 2014 (after a nascent period post 2007) but, according to S&P, is expected to experience a renaissance in 2017, for a number of reasons. The appeal to borrowers is first, the ability to increase leverage from 2L to fund higher purchase price multiples; second, reduced public disclosure and need for credit ratings; third, lower pricing than senior/ mezzanine structures and finally, is easier to restructure in distress than high yield bonds. Lenders are keen to take the product as it provides higher margins than senior debt, includes some level of call protection, provides additional investment opportunities (given the relative dearth of senior paper) and is structured differently to first generation deals, so providing greater protection in distress. Mezzanine continues to face pressure from other cheaper products (2L in larger deals and unitranche in smaller deals), Despite this, global mezzanine funds have raised very large amounts of capital over the last year (GSO, Highbridge, Prudential and Crescent together raised nearly $20 billion). Competition from competing forms of capital means it is less likely these funds will be deployed in entirely conventional structures so these lenders have had to evolve new strategies to deploy their funds although there remains demand for the traditional senior / mezzanine structure. Despite the decline in mezzanine issuance, mezzanine continues to exert a strong influence on other junior debt products as many direct lenders had their roots in mezzanine and have been willing to apply the practices in that market to direct lending (e.g. the use of PIK and warrants) PIK itself continues to find a place in the sun for a wide range of purposes including LBOs and the 3.6 billion Schaeffler multi-tranche PIK in late 2016 (up-scaled from 2.5 billion) evidenced strong demand for that product notwithstanding the miserly pricing (275bps on the 5 year Euro). Many of these deals now tend to be issued in note, rather than loan, form. In current market conditions, PIK is expected to remain popular as lenders chase returns up the risk/reward curve. European direct lending funds reportedly have c $17 billion of capital to deploy. Unitranche continues to be the most dynamic product in that market however the offering has splintered from the original-classical structures to more structured bespoke products embracing a wider range of more complex structures including dual unitranche, first-in/ first-out. Banks, unwilling to be left on the sidelines, have also proved willing to fund both the bank-led facilities as well as some of the unitranche itself. The recent 475 million unitranche financing Bridgepoint s acquisition of Zenith illustrates that direct lending can compete with head-on high yield bonds

3 whilst the recent redemption of Soho Houses high yield bonds, with a 275 million unitranche, reinforces that notion. The large amounts of dry powder available to funds coupled with stiff competition from the traditional senior/junior loans has compressed pricing so lenders have had to find innovative/alternative ways of deploying their funds. Despite this, the recent ECB leverage guidance is expected to hamper banks and boost direct lending in general. Whilst junior debt offers attractive returns, this is not without risk and the lesson from the credit crisis is that these providers invariably ended up receiving little or nothing in distress (e.g. Imo Carwash, Stabilus). Against this background, junior lenders have sought ways to mitigate these risks and have been assisted by an updated LMA Intercreditor (2012). However, many, more sophisticated providers have sought other ways to improve their position, for example through the appointment of their own Facility and even Security Agents, although this is not without controversy. This programme examines the range of junior debt loan products available in the market, their use and application, the typical terms and conditions, market pricing and returns. The program also considers the various techniques junior lenders can adopt to structure their credit ab initio (via Intercreditor issues), how they can monitor their credit thereafter (and have advanced warning of impending distress) and finally how they can maximise recovery in distress. The course is highly practical and interactive and will include case studies which will first, require participants to devise appropriate junior debt structures and second, to consider the various Intercreditor and other matters which can protect their position in distress. The programme will review the impact of the draft ECB guidance on leveraged transactions. A model will be provided in advance of the programme and participants will be required to bring a laptop to the course with that model loaded. Course Content Introduction to the junior debt spectrum Overview of the market The role of direct lenders Review of the various products Mezzanine PIK, PIYC & Toggles Second Lien Unitranche Structuring parameters how much senior and how much junior debt Typical approaches to gauging debt capacity / capital structure What are the key criteria to consider Multiples vs Capital approach Key ratios (covenants where relevant) used to right-size the debt How Jurisdiction can affect debt capacity (and how to mitigate) Types of Mezzanine: use and key issues Main features of the mezzanine European vs US vs Asian mezzanine Warrantless mezzanine return structure Fixed vs floating rate Cash pay PIK Redemption premia stepped vs linear Other tools for achieving the target IRR OID to enhance returns Using Libor/Euribor floors

4 Fees Call protection - hard vs soft call protection Key issues for warranted mezzanine Key issues & pitfalls for warrantless mezz Dealing with recaps & refinancing The order of priority vis-a-vis PE loan notes Other variants of mezzanine Senior mezzanine Junior mezzanine Hybrid mezzanine Second Lien Use and application Market trends / recent deals Documenting the 2nd Lien - composite or separate facility agreement Typical terms, leverage, pricing and call protection Pros and cons of 2L vs unitranche, high yield bonds Other tools for achieving the target IRR PIK (PIYC, PIYW, Toggles) Pay-in-Kind (PIK) generally Different types PIK PIYW Toggle PIYC Typical terms, leverage and pricing Call protection - hard vs soft call protection Market trends / recent deals Unitranche & direct lending products The onward march of direct lenders in Europe o Market trends o Recent developments Where and how its used Review of different unitranche structures Classic product Clubbed Dual tranche Structured First out / last out Interaction with bank led finance & impact on bank lenders Typical terms & leverage Typical pricing Cash coupon PIK Warrants Other tools for achieving the target IRR Leverage how much and impact on returns Call protection Why it matters to lenders Hard vs soft call protection Pros & cons vs other types of products Senior / junior (mezz/2l) High Yield Bonds Intercreditor issues & Agreement Among Lenders ( AAL ) Typical inter-creditor issues enquiries@redcliffetraining.co.uk for junior debt +44 (0)

5 Turnover why and where this matters Option to purchase - Practical issues Key issues in distress Information rights Why going on the Board may not help Costs in distress Valuation in distress (q.v. IMO Carwash) Release of collateral (q.v. European Directories) The role of the Agents - how and why it matters in distress Appointing a separate Facility Agent Appointing a separate Security Agent key issues to consider Draft ECB Guidance on Leveraged Transactions Which lenders are affected Which deals are affected EBITDA calculation Ramifications for market players What Redcliffe s clients are saying about the course and our trainer Very useful course, a good overview of the PIK/ Mezz and second lien market Very well presented. Extremely knowledgeable presenter. 9:00-17:00 London Standard Price: VAT Membership Price: VAT

6 In-House Training Delivering this course in-house for a number of participants could be very cost effective. The venue and timing can be agreed to suit the client, as well as the selection of the trainer and the precise contents of the seminar. Tailored Learning All of our training courses can be tailored to suit your company s exact training needs. We will work closely with you to help develop a training programme with content that is unique for your organisation. Please us on enquiries@redcliffetraining.co.uk for more information E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact requirements.