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Strategies for Growth: Access to Capital in Volatile Capital Markets Stefan Shaffer, Managing Partner SPP Capital Partners, LLC.

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Presentation on theme: "Strategies for Growth: Access to Capital in Volatile Capital Markets Stefan Shaffer, Managing Partner SPP Capital Partners, LLC."— Presentation transcript:

1 Strategies for Growth: Access to Capital in Volatile Capital Markets Stefan Shaffer, Managing Partner SPP Capital Partners, LLC

2 2 T HESIS S TATEMENT Historically, Macroeconomic Conditions Dictate Market Conditions…..But Not Necessarily in December of 2010. Accordingly, Unique Borrowing Opportunities of Historic Proportions Currently Exist, and Most Likely will not Continue.

3 3 SPP C APITAL P ARTNERS A private investment bank specializing in the private placement of senior debt, mezzanine debt and equity capital. Formed in 1989, as SPP Hambro, a subsidiary of Hambros Bank plc. Reconstituted as SPP Capital Partners, LLC through an MBO in 1998. Since the firm’s inception, it has completed more than 400 transactions aggregating in excess of $18.0 billion. SPP manages the Private Capital Formation operations of 12 major banks and financial institutions in North America and Europe, through exclusive JV relationships, eight of these institutions are shareholders of SPP, including CoBank. Has extensive relationships throughout the equity sponsor community. Created SPP Mezzanine Partners in 2004 to make direct mezzanine investments. Currently approximately $50 million in assets under management through SPP Mezzanine Funding I & II.

4 4 Leveraged Finance / Debt Capital Markets Acquisitions and recapitalizations Asset-based and cash flow senior debt Uni-tranche “one-stop” solutions Subordinated / mezzanine debt Waiver and Amendment Advisory Out-of-court advisory for turn-around situations Amendments and waivers Solvency opinions Secondary securities sales / repurchases Credit ratings advisory P RODUCTS AND I NDUSTRIES



7 Effects of a Weak Economy

8 8 Flight to Quality Low Treasury Rates High Spreads Relative to Treasury Rates No Interest in Risk High Yield Activity Ceases to Exist “Risk Premium” for Leveraged Credits, Smaller Credits Exaggerated General “Lack of Access” to Capital Across the Board

9 9 Effects of a Weak Economy December 2007 – June 2009March 2001 – November 2001 U.S. 10-Y EAR T REASURY Y IELD G RAPH / C REDIT S PREADS FOR U.S. C ORPORATES, RATED BBB-A (P REVIOUS T WO R ECESSIONS ) Source: Bloomberg

10 10 Effects of a Weak Economy H IGH Y IELD P RICES AND Y IELDS

11 Current Economic Conditions

12 12 Current Economic Conditions Continued economic growth - 2009 Q4 growth in real GDP of 5.0% - 2010 Q1 growth in real GDP of 3.7% - 2010 Q2 growth in real GDP of 1.7% - 2010 Q3 growth in real GDP of 2.0% - Forecasted growth of 2.0% through 2011 Q4 Quarter-to-Quarter Growth in Real GDP Growth Source: ISI Weekly Economic Report Source: U.S. Bureau of Economic Analysis

13 13 Current Economic Conditions Unemployment hovering at 9.6% Disappointing Private Sector Hiring - 64,000 non-farm jobs added in September - 93,000 non-farm jobs added in August - 116,000 non-farm jobs added in July Seasonally Adjusted Unemployment Rate Source: Bureau of Labor Statistics, “Employment Situation – September 2010” Nonfarm Payroll Employment Over-the-Month Change Seasonally Adjusted

14 14 Current Economic Conditions Fed announces “QE2” on November 3 rd - Outlines plans to purchase $600 billion of Treasuries through June 2011 - Intended to lower interest rates and spur increased lending and investment - Large Banks, flush with new proceeds from Fed purchases will be anxious to make loans - Which will spur investment by corporate borrowers - Which will result in greater production and employment Possible Outcomes - Increased cash in the system and higher priced bonds with diminished yields could lead to allies in riskier asset classes and drive up commodity prices - Corporations could “sit” on cash—not deploy it - Could lead to increased inflation and a “fixed income bubble” - Material declines in the dollar

15 15 Cash on corporate balance sheets is at an all time high already Source: BofAML Credit Strategy Current Economic Conditions

16 Current Market Conditions

17 17 Current Market Conditions Generally, when U.S. Treasuries compress to such low levels, investors expand spreads to maintain a modicum of return. - In this market, while the Fed is essentially subsidizing long term treasuries to keep rates artificially low, investors are compressing spreads to entice borrowers. -In fact, for high quality issuers (the “Slam Dunks” - typically larger credits) are getting done across a wide range of maturities and are well oversubscribed with increasingly liberal covenant packages. Spreads on some of these deals have been in the mid to low 100’s. Low US Treasury rates are usually the result of a “flight to quality” with treasuries acting as a hedge to deteriorating credit conditions. - In this market, low US Treasures and potentially deteriorating credit conditions (a potential “double dip”), have not up-tiered investors portfolio needs. - To the contrary, because competition for high quality credits have driven returns to such low levels, investors are eagerly bidding transactions that have greater risk profiles in an attempt to gain some modest level of return.

18 18 Current Market Conditions U.S. 10-Y EAR T REASURY Y IELD G RAPH / C REDIT S PREADS FOR U.S. C ORPORATES, RATED BBB-A (11/2007 – 11/2010) Source: Bloomberg

19 19 Investment grade borrowing spreads are already at their lows Current Market Conditions

20 20 North American High Yield CDX Index Current Market Conditions H IGH Y IELD P RICES AND Y IELDS

21 21 Current Market Conditions High Yield Issuance Up Dramatically - Year to date, high yield bond issuance is $237,126 million, comprised of 487 issues - 97.2% increase from 2009 - Year to date, leveraged loan issuance is $298 billion -80% increase from 2009 Source: S&P Loan Stats Source: Volume of Institutional Loans and High-Yield Bonds Middle Market Leveraged Loan Volume (EBITDA < $50 million) Middle Market Issuance Up dramatically

22 22 Current Market Conditions Investors actively seeking risk Source: Piper Jaffray Debt Capital Markets Update

23 23 Current Market Conditions Mezzanine investors are extremely hungry Pricing consistently 14%-18% for Subordinated Notes - <$15MM EBITDA deals pricing 16%-18% - > $50 MM EBITDA deals pricing at 13%-15% Leverage tolerances in excess of 4X for deals commonplace on large end (> $20MM of EBITDA) of the market - 3.5X for Leveraged Recaps or “Storied” Credits; - Continued Competitive Landscape - Credit Opportunity Funds, BDCs all actively bidding deals - Insurance company participants creating pricing pressure; “Coupon only” deals readily available; Prepayment provisions highly negotiable, very investor specific. - Slight tightening of non-call provisions where investors are “cutting book” to attract assets Greater scrutiny on retail sector deals in light of potential weak 2010 Christmas expectations. Warrants routinely requested for - Storied credits - Greater than 4X TD/EBITDA - Recaps; Upfront fees average 1%-2%;

24 24 Current Market Conditions L EVERAGE C ASH F LOW M ARKET AT A G LANCE

25 25 Current Market Conditions T YPICAL S UBORDINATED D EBT T ERMSHEET Security Senior Subordinated Notes (the “Subordinated Notes”) Maturity Five years from Closing Pricing Aggregate Internal Rate of Return (“IRR”) of Approximately 14%-18% IRR Components: 12% cash interest, 2% - 6% PIK interest. Subordination Terms The Subordinated Notes will be subordinated to prior payment in full of the principal of, and premium, if any, and interest on any senior debt, and senior to any subsequently issued subordinated indebtedness, and any convertible indebtedness, upon any distribution of the assets of the Company upon any dissolution, winding up, total or partial liquidation or reorganization of the Company. Mandatory Prepayments No amortization; payable in full at maturity. Optional Prepayments Pre-payable per the following indicative schedule: Year 1: No Prepayment Year 2: 2% of the principal amount outstanding Year 3: 1% of the principal amount outstanding Year 4: par Covenants Free Cash Flow to Fixed Charge Ratio of 1.05x growing to 1.10x in later years Total Debt to EBITDA ratio of 4.50x, reducing to 4.00x in later year Default Provisions Cross Acceleration on all senior indebtedness of the Company

26 View of 2011 Market Conditions

27 27 View of 2011 Market Conditions SHORT TERM: Weak Growth, but Growth Nonetheless Weaker Dollar due to “QE2” Short Term: High commodity prices: “Yay For You!” Short Term: Continued Aggressive Risk Tolerance: “Yay For Me!” LONGER TERM: Gradual Restoration of a Traditional “Growth” Macroeconomic Conditions - Upward Sloping Yield Curve with Higher Interest Rates for Longer Maturities - Increased Employment - Higher Housing Values -Restoration of $12 Trillion Lost Value in American Household Wealth in Recession Unless, GDP goes negative, then its Run for the Exits For Everyone – - Flight to quality - Same market dynamics as December 2008 and 2009 Q1 - Starting Point is a nation that is net loss of $8 Trillion in Household Wealth

28 28 View of 2011 Market Conditions FOMC T ARGET F EDERAL F UNDS History has shown that the window of opportunity to arrange a financing when rates are favorable is actually quite narrow. When the FOMC makes a change in the target federal funds rate, there tends to be a series of subsequent changes that follow, and it happens very quickly In the past decade, the three largest changes have been approximately 500 bps and have occurred in roughly two years or less

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