ESOP Financing Discussion Topics INTRODUCTION TO ESOP FINANCING Presented by: Will Bloom Head of Capital Markets Chartwell Financial Advisory What are the general Types of FinancingAvailable? Are the capital market conditions favorable today? How do I know how much third-party capital to obtain? Is financing an ESOP-owned entity different from conventional ownership structures? Are there capital providers that know ESOPs? How do I prepare for a financing? Other questions from the audience? will.bloom@chartwellfa.com Employee Ownership as a Brand Advantage 2 1
Table of Contents I.Financing Overview II. The Capital Structure III. Current Capital Markets Environment IV. Debt Capacity V.Company Preparation Appendix I. FINANCING OVERVIEW A. Senior Debt B. Junior Capital C. Presenter Biography Employee Ownership as a Brand Advantage 3 2
ESOP Financing Overview Senior Debt (Banks / Non-Banks) o Asset Based Lending (ABL) Advance (%) against collateral (working capital, M&E, Real Estate, etc.) ESOP Financing Overview (continued) Junior Capital(Non-Banks) o Second Lien or Last-out Advance (%) against collateral (working capital, M&E, Real Estate, etc.) o Traditional Mezzanine/Subordinated Debt o Cash Flow Lending (Leveraged Finance) Multiple of cash flow (EBITDA) or % of Enterprise Value Typically available to issuers/companies with sustainable cash flow (EBITDA) greater than $5 million o Seller Notes o Longer-term friendly financing o Structured/Preferred Capital Require an equity-linked component, such as warrants, conversion option, etc. Employee Ownership as a Brand Advantage 5 Employee Ownership as a Brand Advantage 6 3
LOW HIGH LOW HIGH HIGH LOW 9/27/2017 The Capital Structure REVOLVER TERM LOAN A Cost to Issuer Risk to Investor Expected Return to Investor II. THE CAPITAL STRUCTURE SENIOR DEBT PRIVATE PLACEMENT NOTES (SECURED & UNSECURED) TERM LOAN B SENIOR SECURED NOTES 2 ND LIEN TERM LOAN LOAN MARKET SENIOR SECURED & UNSECURED NOTES BOND MARKET JUNIOR DEBT SENIOR & JUNIOR SUBORDINATED NOTES / MEZZANINE DEBT CONVERTIBLE DEBENTURES EQUITY PREFERRED STOCK EQUITY MARKET COMMON STOCK Employee Ownership as a Brand Advantage 8 4
Current Market Conditions Mid-Market Loan Volume Mid-Market Loan Spreads III. CURRENT CAPITAL MARKETS ENVIRONMENT $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 - Large MM Trad. MM Subordinated Deb Pricing 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% $200M or Less $201M - $350M $351M - $500M Mid-Market Leverage Multiples 20.0% 15.2% 15.7% 15.6% 14.6% 14.5% 14.6% 15.0% 10.0% 5.0% 2.7% 1.8% 12.6% 12.3% 2.2% 1.9% 2.1% 1.9% 11.4% 11.5% 11.4% 11.8% [TBU end of Aug Data just prior to presentation date] - 2012 2013 2014 2015 2016 2017 YTD Cash Coupon PIK Total Trad. MM : Deal Size <=$100M, Large MM: Deal Size >$100M to $500M Employee Ownership as a Brand Advantage 10 5
How much debt can I afford? IV. DEBT CAPACITY Calculate asset-based borrowing capacity o Apply market advance rates to working capital and PP&E Calculate senior and total leverage capacity on a cash flow multiple basis o If generating >$5mm of EBITDAannually, apply going market multiple (i.e.., 2.5x 3.0x) o Depending on industry and exposure to volatility in economic cycles, most borrowers may assume an additional 1.0x 1.5x of junior capital above the senior tranche Most importantly, measure your fixed charge coverage ratio quarterly (multiple of net cash flow to obligations) o ESOPtax savings should help! Calculate Borrowing Capacity Calculate Senior and Total Leverage FCCR: Measure Fixed Charge Coverage Employee Ownership as a Brand Advantage 12 6
Internal Preparation V. COMPANY PREPARATION Identify total financing needs (including excess availability) Prepare a five year business plan forecast Review state of accounting records and financial control systems Be prepared to market your company as you would your products and services Identify Financing Needs Prepare 5-year Forecast Review Financials Employee Ownership as a Brand Advantage 14 7
External Preparation Questions? Plan for and allow time to explore financing alternatives Seek financial institutions with industry and transaction experience Identify and hire advisors with transaction and market experience Identify Financing Needs Seek Institutions with Industry and Transaction Experience Identify and Hire Advisors with Transaction and Market Experience Will Bloom Chartwell Financial Advisory One North Wacker Drive UBS Tower, Suite 2180 Chicago, IL 60606 312-638-5651 will.bloom@chartwellfa.com Employee Ownership as a Brand Advantage 15 Employee Ownership as a Brand Advantage 16 8
APPENDIX MATERIAL SENIOR DEBT 9
Types of Senior Financing Commercial Bank Loan (< $10M of EBITDA) Investor Commercial banks Advantages Senior Debt Size Typically tied to working capital or hard assets Potential for cash flow loan Low cost Largest source of capital Relationship oriented Maturity 3 to 5 years Commercial Bank Loan Commercial Asset-based Loan Institutional Cash Flow Loan Second Lien Loan Amortization Pricing/Returns 1 Typical Covenants Straight line (typical) Potential excess cash flow recapture (if cash flow loan) Libor + 1.50 4.50% Prime plus/minus 25 bps Total senior leverage: 2.0-2.5xLTM EBITDA Minimum fixed charge coverage greater than 1.20x Considerations Limitation on leverage based upon collateral coverage Multiple financial covenants 1 Estimated and predicated based upon size and credit profile of issuer Employee Ownership as a Brand Advantage 19 Employee Ownership as a Brand Advantage 20 10
Commercial Bank Loan (>$10M of EBITDA) Commercial Asset Based Loan Investor Commercial banks Advantages Investor Commercial banks Advantages Size Tied to working capital assets/based on cash flow Maturity 5 years depending on industry Low cost Largest source of capital Relationship oriented Size Tied to appraisal of assets with applicable advance rates Maturity 5 years Higher advance rates on inventory and PP&E Lowest cost Limited covenants (FCC) Amortization Straight-line/back ended Potential excess cash flow recapture based on leverage Pricing/Returns 1 LIBOR + 1.00 4.00% Typical Covenants Total senior leverage: 2.5x 3.25x LTM EBITDA Minimum fixed charge coverage greater than 1.20x Maximum Capex Considerations Limitation on leverage Multiple financial covenants Amortization Straight line for term loans Bullet for revolved Pricing/Returns 1 Libor + 1.00 3.00% Typical Covenants Fixed charge coverage ratio of 1.10x Maximum Capex Minimum working capital Considerations Appraisal costs/field exams More reporting possibly weekly or daily Debt capacity tied to the balance sheet 1 Estimated and predicated based upon size and credit profile of issuer 1 Estimated and predicated based upon size and credit profile of issuer Employee Ownership as a Brand Advantage 21 Employee Ownership as a Brand Advantage 22 11
Institutional Cash Flow Loan/ Uni-tranche Second Lien Loan Investor Size Maturity 5 years Amortization Finance companies/clos Based on cash flow and enterprise value (minimum EBITDA of $5 million) Back-ended Pricing/Returns 1 Libor + 4.00 10.00% Typical Maximum Senior Leverage: Covenants 3.0 4.0x Maximum Total Leverage: 4.0 5.0x Minimum Fixed Charge Coverage: >1.20x Minimum EBITDA Maximum Capex 1 Estimated and predicated based upon size and credit profile of issuer Advantages Higher leverage Based on the enterprise value of the company Considerations Higher pricing LIBOR Floor More restrictive covenants Investor Finance companies/ CLOs/Alternative Size Maturity Amortization Based on appraised assets, cash flow and enterprise value 5 to 7 years Back-ended or bullet Pricing/Returns 1 Libor + 6.00-12.00% Typical Covenants Maximum total Leverage: 4.0 5.0x Minimum Fixed Charge Coverage: > 1.20x Maximum Capex 1 Estimated and predicated based upon size and credit profile of issuer Additional leverage capacity Advantages Lower cost compared to traditional mezzanine No warrants (typically) No governance requirements Considerations Higher pricing LIBOR Floor More restrictive covenants Employee Ownership as a Brand Advantage 23 Employee Ownership as a Brand Advantage 24 12
Types of Junior Capital Junior Capital JUNIOR CAPITAL Subordinated Debt (Mezzanine) Junior /Seller Subordinated Notes Convertible Preferred Employee Ownership as a Brand Advantage 26 13
Subordinated Debt (Mezzanine) Junior/Seller Subordinated Notes Investor Mezzanine funds Advantages Investor Mezzanine Funds Advantages Size Based on cash flow and enterprise value Maturity 5 to 7 years Bullet amortization Looser/almost no covenants Long Term capital Maximizes leverage Private Equity Selling Shareholders Size Based on cash flow, enterprise value, and equity value Fewer covenants Lower cash option Patient capital Amortization Bullet at maturity Considerations Maturity 6+ years Considerations Pricing/Returns 1 Cash: 10.00-12.00% Typical Covenants PIK: 2.00-4.00% Warrants: 1.00-3.00% All-in Return: 14.00-18.00% Maximum Total Leverage: 4.0 5.0x Higher cost of capital Prepayment penalty BOD observation rights Equity Dilution Amortization Pricing/Returns 1 Bullet at maturity Structure based on returns of 12% - 18% Current pay of 3% -12% (as permitted) PIK possible Warrants to achieve all-in return Equity dilution Prepayment penalty BOD governance rights Subordination rights differ for institutional junior subordinated notes 1 Estimated and predicated size and credit profile, may not require warrants for larger issuers 1 Estimated and predicated size and credit profile Employee Ownership as a Brand Advantage 27 Employee Ownership as a Brand Advantage 28 14
Convertible Preferred Investor Private equity groups (PEGs) Institutional investors Size Based on cash flow and enterprise value Maturity 7 to 10 years Amortization Bullet at maturity or conversion into equity Pricing/Returns 1 Cash 3% - 12% Advantages No covenants Lower cash option Patient capital Considerations Equity dilution Prepayment penalty BOD governance rights Only available to C-Corp PRESENTER BIOGRAPHY Conversation ratio based on all-in return of 18% - 25% 1 Estimated and predicated size and credit profile Employee Ownership as a Brand Advantage 29 15
William S. Bloom (Will) MANAGING DIRECTOR Will leads Chartwell s Chicago office. He is an investment banker for the firm s Corporate Finance practice and heads the firm s Capital Markets practice. Will has worked on both mergers and acquisitions as well as capital markets transactions within a variety of industries while executing high profile ESOP buyouts, terminations, and restructurings. In 2012, Will was recognized for his expertise and professional accomplishments when he received The M&AAdvisor s 40 Under 40Award and has participated as a guest lecturer for MIT s Sloan School of Management. Will is a current member of the ESOP Finance Committee and a Registered Representative with Chartwell affiliate, CCS Transactions, LLC and holds FINRASeries 7, 63, and 79 licenses. Prior to joining Chartwell, Will was an investment banker with Bank of America Merrill Lynch s (BAML) Transaction Development group, where he focused on executing sell-side, buy-side, and ESOP transactions for middle market clients between $200 million and $1 billion in enterprise value. Prior to joining BAML, Will spent considerable time as a member of ABN AMRO s Global Markets group, where he participated in originating and executing investment grade and high yield bond issuance, traditional senior private placements, securitizations, junior capital and underwriting and distributing second lien loans. Will also participated in establishing De Meer Asset Management, a division of ABN AMRO, Inc., where he acted as a principal investor in liquid and illiquid leveraged senior and junior loan assets as a part of multiple cash and synthetic collateralized loan obligation structures (CLOs). Will earned an MBA in Finance and Entrepreneurship from Northwestern s J.L. Kellogg School of Business and a Bachelor of Science in Finance from Miami University in Ohio. Employee Ownership as a Brand Advantage 31 16