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IPAA’s 12 th Annual Private Capital Conference Capital Markets Update “Mezzanine Capital” Paul Beck Macquarie Energy Capital.

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Presentation on theme: "IPAA’s 12 th Annual Private Capital Conference Capital Markets Update “Mezzanine Capital” Paul Beck Macquarie Energy Capital."— Presentation transcript:

1 IPAA’s 12 th Annual Private Capital Conference Capital Markets Update “Mezzanine Capital” Paul Beck Macquarie Energy Capital

2 Mezzanine – Historical Perspective  Started in early/mid 80’s with RIMCO and TCW  Encap entered in the late 80’s  MG Trade Finance and Enron in early 90’s  Then the heyday in mid 90’s through early 2000’s  ~$1b per annum market size  Primary Players:  Aquila, Cambrian, Duke, Enron, Mirant, Shell, TCW  Following Enron and Merchant Sector collapse, all but TCW ceased to exist

3 Traditional Mezzanine Structure  Senior Secured Loan  Always “Project” Focused  High Interest Rate (~10% vs. Prime @ ~5%)  Equity Kicker  Concurrent ORRI  After Loan payout NPI or ORRI  Control via Loan Covenants  Returns of 20%+  Exit Issues

4 Mezzanine Today  Now a Plethora of Players  AIG Financial Products Corp., ARC Financial, BlackRock Energy Capital, Cerberus/AbleCo., Constellation Commodities Group, GasRock Capital, GE Capital, Goldman Sachs E&P Capital, Guggenheim Partners, Laminar Direct Capital, Lehman Bros, Macquarie Bank Limited, Morgan Stanley, Municipal Energy Resources, NGP Capital Resources, Petrobridge Investment Management, Prospect Energy, Prudential Capital Corp, Royal Bank of Scotland, Sowood Capital Management, TCW, Wells Fargo Energy Capital  But Market Size is Fraction of Before

5 What is Mezzanine Today?  Same as before, BUT  Interest Rates relatively Lower  Real Property Equity Kickers are lower, incorporate step-downs to bridge reserve estimate differences  Warrants – willing to place bet on Market  Sophisticated Players using fewer, smarter Control Covenants  Better Engineering at Lender – less 3 rd Party Dependence  IRRs in the low teens for relatively higher risk  New Structures with Seamless Exits

6 New Mezzanine Structures  Senior Secured Project Loan  Development Funding as Needed - Advance Line of Credit  Cash Sweep for Debt Service  Subordinated Debt  Lower Cost of Capital by Blending Commercial Bank and “Mezzanine” Monies  Structure to Enhance Interim Financial Flexibility  High-grade non-PDP to Increase Bank Borrowing Base  Structure to Facilitate Exit Strategy  Nonconforming Corporate Loan  Aggressive Borrowing Base Revolver  Yield Enhancement via Warrants

7 New Mezzanine Structures  Nonconforming Corporate Loan  “MEGA” Structure  Aggressive Borrowing Base Revolver  PDP PW10% or greater  Tiered Pricing Structure  L+2% to 7% depending on usage  Yield Enhancement via Warrants  Seamless “Conforming Loan” Transition  Post Near-term Development

8 Energy Investment Risk/Reward RISKRISK REWARD Percent of Reserves Exploitation Based - 0% - 100% Prime Rate Low Teens 25%+ Commercial Banks VPPs and “B” Loans Private Equity and Industry Mezzanine Capital “MEGA” Structure (Revolver)

9 Mezzanine vs Equity Comparison  Project - Offshore Acquisition in late 2002  PDP PW10% - $10 million  PDNP PW10% - $3.5 million  PUD PW10% - $7 million  Probable PW10% - $0.5 million  Total PW10% - $21 million  Purchase Price - $15 million  Near-term Development Capex - $4 million  Purchase Price ~ $1/Mcfe

10 Mezzanine vs Equity Comparison Traditional SeniorMezzanine Up-front Loan$9 million$13.5 million Development Loan$0$4 million Equity – Upfront$6 million$1.5 million Equity - Development$3 million$0 Interest7%10% After-payout NPI025% Sweep for Debt Service50%90% RESULTS Lender IRR7.0%19.4% Lender Cash Flow$0.8 million$7.6 million Client IRR35.4%68.5% Client Cash Flow$12.1 million$5.3 million Client CF PW10%$7.3 million$3.5 million

11 Mezzanine vs Equity Comparison Client Risk Capital - $1.5m Client Risk Capital - $10m

12 Macquarie Group  Overall  Australian Based Financial Service Co.  7,000 Employees in 23 countries  >US$85b Assets under Management  Energy Focus  Macquarie Energy Capital  Macquarie Energy Markets  Price Risk Management  Recent Acquisition of Cook Inlet  Macquarie Securities (USA) Inc.  Capital and M&A Advisory

13 Macquarie Energy Capital  Business Unit affiliated with Metals & Energy Capital Division  World Leader in Natural Resource Investment  Macquarie Bank - Energy Capital Provides a Wide Array of Debt and Equity Capital for the Upstream Oil and Gas Industry  Conforming Senior Debt  Senior “B” Loans  Volumetric Production Payments (“VPPs”)  Structured and Project Finance (“Mezzanine”)  Subordinated Debt  Corporate Restructurings and Recapitalization  Convertible Debt  Public and Private Equity Capital  Deal Size - $10 million to $100 million  Domestic and International

14 Macquarie Energy Capital

15 Texas Rep Office - Houston Paul Beck Brian Hughes Steve Shatto Jerry Thompson Ray Weems Tel: +1 (713) 986 3600 London Andrew Sinclair Thomas Wagenhofer Tel: + 44 20 7065 2489 Sydney Gavin Bradley Vanessa Lenthall Tel: +61 2 8232 4248

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