Acquisition Financing Trends for Private Equity Sponsors and Strategic Buyers: Commitment Letters, Documentation and More

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Acquisition Financing Trends for Private Equity Sponsors and Strategic Buyers: Commitment Letters, Documentation and More Evaluating Current Financing Options, Negotiating and Structuring Loan Terms WEDNESDAY, AUGUST 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Lawrence F. Flick, II, Partner, Blank Rome, New York Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek, Uniondale, N.Y. S. Randy Lampert, President, Lampert Debt Advisors, New York Brian Schofield, Managing Director, Lampert Debt Advisors, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 L A M P E R T D E BT A D V I S O R S Lampert Debt Advisors is a boutique investment bank specializing in arranging debt financing for privatelyowned, sponsor-backed and publicly-traded companies Randy Lampert President randy.lampert@lampertdebtadvisors.com 30 years of experience, over $15 billion of debt financings completed for over 60 clients Experience across a broad array of industries including technology, telecommunications, financial services, industrial, and consumer/retail Co-founder of Debt Capital Markets Group and Head of Business Development at Morgan Joseph Founder and Head of Leveraged Finance at Nomura Securities Brian Schofield Managing Director brian.schofield@lampertdebtadvisors.com Completed over $2 billion of transactions as either principal or advisor Vice President ICON Capital Corp., originated, structured and underwrote private debt investments in numerous industries and special situations Highly developed lender/investor network capable of investing across the capital structure Founder of Schofield Realty Group, a real estate finance, development, and brokerage company August

6 M I D D L E M A R K E T ACQUISITION F I N A N C I N G OV E RV I E W Uber-competitive environment for attractive assets is driving valuations to all time highs Purchase Price Multiple and resulting in leverage levels not seen since the halcyon days of 2007 or is it the other way around?? Leverage Multiples 9.3x 8.3x 8.4x 8.2x 7.9x 8.8x 9.6x 9.8x 9.7x 5.6x 4.5x 4.2x 4.3x 4.5x 4.8x 5.3x 5.1x 5.2x 6.6x 3.3x H15 2Q H15 2Q15 FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA August

7 TO O M U C H C A P I TA L, C H A S I N G TO O F E W D EA L S Dry powder abounds for both private equity sponsors and lenders, alike; however acquisition-related volume has been relatively soft A lack of M&A activity has led to weak year-over-year acquisition related loan volume creating a favorable pricing environment for borrowers Pro Rata and Institutional Leveraged Loan Volume Pro Rata and Institutional Spreads $3.0 $ in billions L+700 $2.5 L+600 $2.0 $1.5 L+500 L+400 L+300 $1.0 L+200 $0.5 L+100 $0.0 Institutional Pro Rata L H15 2Q15 Pro Rata Institutional August

8 A S S E T - B A S E D LOA N S R E M A I N A K E Y C O M P O N E N T Intense competition amongst banks for asset-based facilities has resulted in extraordinarily favorable pricing for borrowers ABL volume increased significantly in the 2Q15 reaching $5.5 billion 2Q15 spreads averaged L bps, Commitment fees ticked up slightly in 2Q15 to 33 bps Volume and Number of Deals ($ in billions) Average ABL Spreads (bps) (1) $35 $33 90 L+500 $30 $25 $20 $15 $10 $5 $21 $16 $13 $25 $19 $20 $20 $9 $ L+450 L+400 L+350 L+300 L+250 L+200 L+150 L+100 L+050 $ H15 2Q15 Volume Number of Deals 0 L+000 Footnotes: (1) Data for 3Q14 unavailable; (2) Data for 4Q14 unavailable August

9 P R E VA I L I N G T R E N D S The prevalence of non-bank lenders, such as BDCs and private debt funds, combined with regulatory constraints impacting commercial banks, has underpinned the shift away from traditional bifurcated debt structures Observation Commentary Unitranche becoming more commonplace Ease of execution combined with attractive pricing make unitranches very competitive AAL rather than intercreditor Pricing of L depending on the credit Forcing junior capital (2 nd lien / mezz) providers to be more flexible in order to win mandates Tighter pricing, fees 30-35% covenant cushions Greater intercreditor flexibility Covenant flexibility Cushions of 25%+ for first lien and unitranche Availability of delayed draw facilities for Acquisitions Typically limited to months for banks, longer for non-bank lenders Net neutral impact on pro forma leverage Conditioned on prenegotiated metrics, e.g. purchase multiple, line of business, geography, etc. August

10 P R E VA I L I N G T R E N D S The prevalence of non-bank lenders, such as BDCs and private debt funds, combined with regulatory constraints impacting commercial banks, has underpinned the shift away from traditional bifurcated debt structures Observation Commentary Impact of leveraged lending guidelines Tangible impact on banks appetite for leveraged credits 3.0x senior / 4.0x total leverage for domestics 3.5x 4.0x senior / 5.0x 6.0x total for foreign banks Required Due Diligence Quality of Earnings from reputable firm is almost universally required LDA has recommended clients engage the accounting firm early in the process to accelerate the closing timeline August

11 L DA D E BT F I N A N C I N G AU C T I O N P R O C E S S Structure Implement optimal structure based on real-time knowledge of current market terms and requirements and the company s needs Identification and mitigation of credit and transaction-related risks Specific covenants and inter-creditor terms established upfront to avoid eleventh hour negotiations Solicitation Rapid deployment and comprehensive solicitation of investors for each financing layer Concentrated management meetings minimize distraction from running the business Successfully secure multiple proposals and commitments to enhance degrees of freedom throughout the process Closing Seamless transition from commitment to closing Reduction in closing surprises and elimination of drift in terms Increased likelihood of successful closing August

12 S E L EC T R EC E N T LY C O M P L E T E D T R A N SAC T I O N S $430,000,000 Business Combination $250,000,000 Refinancing Undisclosed Acquisition Financing $78,500,000 Acquisition Financing Undisclosed has merged with A Monomoy Capital Partners Portfolio Company has acquired has acquired has acquired Exclusive Financial Advisor and Placement Agent Co-Manager Exclusive Financial Advisor and Placement Agent Exclusive Financial Advisor and Placement Agent Exclusive Financial Advisor and Placement Agent $38,000,000 Recapitalization $75,000,000 Recapitalization $77,200,000 Recapitalization $66,000,000 Recapitalization $45,000,000 Acquisition Financing PAQ, Inc. & QSI, Inc. Operator of: A Monomoy Capital Partners Portfolio Company 2100 Trust, LLC has acquired Exclusive Restructuring Advisor and Placement Agent Exclusive Financial Advisor and Placement Agent Exclusive Restructuring Advisor and Placement Agent Exclusive Financial Advisor and Placement Agent Exclusive Financial Advisor and Placement Agent August

13 Acquisition Financing: Strategies for Deal Counsel Evaluating Financing Options, Structuring the Deal, Addressing Loan Documentation and Intercreditor Issues Lawrence F. Flick, II, Partner, Blank Rome, New York Jeffrey A. Wurst, Partner, Ruskin Moscou Faltischek

14 Structuring the Transaction Cash Flow vs. ABL; Layers of Financing During downturn, cash flow loans largely disappeared and traditional cash flow lenders became ABL lenders. Amend/extends often accompanied by conversion to ABL structure and/or additional covenants. Strongest borrowers were able to extend existing loans, reduce covenant hurdles, and upsize facilities to continue growth. More cash flow deals getting done, but ABL deals still very common, especially in lower middle market. Important to understand real availability in ABL structures. Increasing lender discretion in borrowing base criteria versus borrower's desires for certain of access to capital. Split collateral package loans. Increase in sponsors providing mezz/sub debt or even senior debt in order to more quickly deploy capital; to be determined whether there will be an adequate supply of traditional lender loans to refinance sponsor financing. Use of holding companies Important to understand lender's requirements around org chart early in process. Most lenders require pledge of equity in borrower/operating company to facilitate transfer of control in default situation (exercise of pledge rights vs. foreclosure on operating assets) 14

15 Fraudulent transfer issues Traditional lenders increasingly focused on issue, particularly as leverage levels increase. Many approaches: Target as borrower, acquisition entity as borrower with target assuming obligations immediately upon closing, new strategies to limit loans made to operating subsidiaries, stronger solvency representations. Does not seem to be a standard approach at this time. Intercreditor issues Many possible intercreditor issues, affecting subordinate and second lien lenders, sponsors (relating to management fees), holders of seller notes and earnout recipients. 15

16 Focus on when and to what extent subordinated lenders can exercise enforcement rights and the extent of the senior lender's ability to make decisions binding on subordinated lenders in enforcement proceedings. Subordinated lenders focused on an exit strategy, a seat at the table during enforcement proceedings, and objective asset valuations. Seller notes and earnouts are often deeply subordinated, which is a key issue to be handled; different approaches on timing of these discussions. Seller notes and earnouts often subject to refinancing indebtedness, further prolonging the lifecycle. 16

17 Investors/ Sponsor Equity Investment by way of Loan Notes Equity Investment by way of subscription for Share of Parent (including Preference Shares) Rollover equity Mezzanine/High Yield Lenders 2 nd Lien Lenders Warrants (if applicable) Subordinated Loan/Bond/Note 2 nd Lien Loan/Note (if applicable) Parent (Top Co) Sub-Holding Company Senior Borrower (Purchaser) Subscription for Share of Sub-Holding Company and Structural Intra Group Loan Equity pledge Downstreaming of funds Senior Loan (Term Facilities A, B and C plus Revolver) Equity pledge Senior Lenders Acquisition Target Company Subsidiary 1 of Target Subsidiary 2 of Target Subsidiary 3 of Target 17

18 Challenges of Borrower s Counsel 18

19 ? Mezzanine/High Yield Lenders 2 nd Lien Lenders Equity Investment by way of Loan Notes Warrants (if applicable) Rollover equity Subordinated Loan/Bond/Note Payment of Notes to Seller(s) 2 nd Lien Loan/Note (if applicable) Investors/ Sponsor Parent (Top Co) Sub-Holding Company Equity Investment by way of subscription for Share of Parent (including Preference Shares) Subscription for Share of Sub-Holding Company and Structural Intra Group Loan Equity pledge Downstreaming of funds Management Fees, Tax Senior Borrower distributions, etc (Purchaser) Now Merged Target Company Senior Loan (Term Facilities A, B and C plus Revolver) Equity pledge? Senior Lenders Dividends Subsidiary 1 of Target Subsidiary 2 of Target Subsidiary 3 of Target 19

20 Commitment Letter Issues SunGard provisions Market flex provisions Increased sponsor resistance given increased competition among lenders. Certainty of deal terms and shifting some or all of the syndication risk to lenders is critical for many sponsors. 20

21 Documentation Issues Financial covenant definitions Increased sponsor focus on covenant compliance and cash-flow sweep provisions (extensive negotiations on EBITDA add-backs and other inputs driving covenant compliance and cash-flow sweep numbers). Sponsor demands for flexibility to contribute additional capital without mandatory pre-pays, undertake equipment and other operational financing options, and to execute growth strategy through add-on acquisitions. Trend towards negotiating definitions at term sheet/commitment letter stage. Permitted acquisitions Often a critical negotiating point for sponsors, but rarely will lenders provide self-executing carveouts from negative covenants for material transactions. Focus on issues other than the basket: can process be streamlined, amendment fees agreed to up front or waived, etc. For negative covenants generally, sponsor focus on avoiding yet another costly amendment: certainty on covenant compliance, flexibility for growth/ordinary course event, tying together negative covenants so that an exception to one is an exception to all, predetermined amendment fees for non-default amendments. Permitted distributions Rarely will pure dividends be permitted, but important to negotiate rights to make tax distributions. Need to look up the org chart to understand the complete picture around tax distributions. Consider need for carveouts in respect of dividend accruals on preferred stock, management fees, earnouts, and equity repurchases from departing employees. 21

22 Equity cure rights Sponsors have different strategies. If included, negotiations around amount of cure permitted, number of cures permitted, and time frame over which cure amounts included in covenant calculations. Solvency representations Defaulting lender provisions Typical remedies. Lead lender(s) commitment to make loans for defaulting lenders. Impact on availability of swingline loans. Consents to assignments Sponsor focus on the "relationship" and have approval right on new agent or material change in inter-lender provisions. Limitations on syndication. Assignments during default. 22

23 Foreign subsidiaries Lender remedies rights to credit bid 23