1. Joseph V. Rizzi Amsterdam Institute of Finance October, 2014

2. 22 Cash Flow Impacts default risk Balance Sheet Determines Loss in Event of Default (LIED) Liquidity Valuation Amsterdam Institute of Finance October, 2014

3. 3 Business Risk: EBITDA Volatility ◦ Industry Characteristics ◦ Firm Characteristics Financial Risk: EBITDA Relative to Debt Structural Risk ◦ Issues  Priority of claim on assets and income  Control ◦ Focus  Covenants, Seniority, Security Amsterdam Institute of Finance October, 2014

4. 4 Quantitative ◦ CapitalizationROTPre Crisis Crisis  Cash Equity>25% <25% 40%+  Total Debt 6% <5%  Senior Debt (1) 5% <4%  First Lien 4% <4%  Second Lien 1% __ ◦ Cash Flow  LTM EBITDA / PFI>2:1  7 x LTM FFOCF / TLA (2) >1:1 ◦ Liquidity  Cash + MS + RCA / P+I (3) > 1.5 : 1 1:- TLA usually >20% of senior debt and amortizes at least 30% by year 5 2:- FFOCF = LTM EBITDA - (WCI + CAPEX + Taxes + PF Interest) 3:- Liquidity tested day 1. MS (Marketable Securities). RCA (Revolving Credit Availability). Revolver usually set at 1 x EBITDA Amsterdam Institute of Finance October, 2014

5. 5 Debt capacity is derived from firm’s assets ◦ Operating Cash Flows ◦ Asset Sales / Asset Quality ◦ Leveragability Market Conditions Target financing structure Credit curve shifts over time dependent on the economy, e.g., CCCSpreads 2007 500 2009 3,300 Current 750 Rating Rates 2H07 Crisis Overheated 1H07 Amsterdam Institute of Finance October, 2014

6. 6  There are two different approaches to designing the capital structure: 20% 30% 50% Cash Flow Cash Flow Model Model Balance Sheet Balance Sheet Model Model Senior Debt Sub Debt Equity 3 - 5x EBITDA 5 - 6x EBITDA Equity Amsterdam Institute of Finance October, 2014

7. 7 Ratio Approach Cash Flow Advance Rate Amsterdam Institute of Finance October, 2014

8. 8 Market ◦ Maximum senior debt and total debt ratios ◦ Vary over cycle Peers ◦ Identify ◦ Rating Classification ◦ Key Ratios Rating Agencies ◦ Credit Statistics Amsterdam Institute of Finance October, 2014

9. 9 Amsterdam Institute of Finance October, 2014

10. 10  Important:Loan Market Evolution from a bank to an institutional market (back to a bank market?)  Impact:Majority of syndicated loans are rated  Pricing:Affected by rating  Market Access AmountImpacted by rating Amsterdam Institute of Finance October, 2014

11. AAAAA ABBBBB BCCC EBITDA/I 2012 6 4 21.5<1 FD/EBITDANM 1 2 3 45+>6 SizeBig20B+15B+10B+5B+1B+NM 11 Amsterdam Institute of Finance October, 2014

12. 12  Maximum debt capacity formula:- MDC = f(operations, amortization, rate, asset sales) MDC = [EBIT / (i+ 1/n)] + AS + RF EBIT- Earnings Before Interest and Taxes i - Interest Rate n- Straight line loan amortization AS- Proceeds from Asset Sales RF- Refinancing Amsterdam Institute of Finance October, 2014

13.  Opening Balance Sheet  Adjustments – from sources and uses – including purchase price assumptions  Proforma balance Sheet ◦ Income Statement ◦ Cash Flow Statement Capitalization table/transaction structure Debt Schedule Term sheet(s) Valuation/maximum purchase price Returns Analysis – IRR and MOC 13 Amsterdam Institute of Finance October, 2014

14. 14  Issues ◦ Adjustments (beware of solving for cash flows to justify price) ◦ Normalization  Cyclicality  Bad Management  Value Test ◦ Projections implied price  Reverse Engineer - Management implied forecast ◦ Firms ◦ Peers  Tie Into ◦ Compensation ◦ Covenants Amsterdam Institute of Finance October, 2014

15. Comparison Corporate Private Equity Rating – I/G Maximum Debt Capacity – NIG Capital Market Access Temporary Permanent IRR EPS Control Flexibility – covenants, dividends Upside Pricing Value Transfer/Mispricing Reason Differing motivations 15 Amsterdam Institute of Finance October, 2014

16. Tradeoffs Amount Cost Flexibility Control Dilution Mispricing Issue Operationalize Ratings Target Comparative Credit Analysis Cash Flow Testing Market Conditions 16 Amsterdam Institute of Finance October, 2014

17. 17  Macro/Market Level ◦ Determine rating target ◦ Use target rating level financial characteristics  Funded Debt/EBITDA  EBITDA/Interest Expense  Funded Debt/Total Cap  Example: (A) Target RatingBB (B) EBITDA/Int for Target Ratingc3.0x (C) Firm EBITDA$300mln (D) Interest Rate for Target Rating10% (E) Maximum Debt Capacity= (C/B)/D = (300/3)/10% = $1,000 Amsterdam Institute of Finance October, 2014

18.  If EBIT > 5mlm – Debt Preferred  If EBIT < 5mlm – Equity Preferred 18 EPSEPS EBIT 0 5,000,000 10,000,000 Indifference Point Amsterdam Institute of Finance October, 2014

19. % 1H14 0 2013 0 2012 1 2011 2 2010 3 2009 1 2008 5 200723 200620 200512 Source: S&P Capital IQ 19 Amsterdam Institute of Finance October, 2014

20. UKFranceGermany Bank Debt46.4 50.1 43.8 2L 1.7 6.8 4.4 HYB --- --- 8.9 Equity50.1 39.5 40.2 MEZ 1.5 --- --- Other 0.4 3.6 0.7 Source: S&P Capital IQ 20 Amsterdam Institute of Finance October, 2014

21. BB/BB- Europe U.S. Pro Rata Spread N/A L+239.0 Weighted Avg Institutional Spread N/A L+297.3 Deal Size (€MM)397.58 924.06 Pro Rata Term (In Years) 5.00 4.81 Institutional Term (In Years) N/A 6.39 Revenues (€MM) N/A3,027.86 EBITDA (€MM) N/A 664.82 Pro Forma Debt/EBITDA N/A 3.76X Pro Forma Senior Debt/EBITDA N/A 3.74X Pro Forma Cash Interest Coverage N/A 6.89X Observations 6 111 Source: S&P Capital IQ 21 Amsterdam Institute of Finance October, 2014

22. B+/B Europe U.S. Pro Rata Spread E+343.8L+323.8 Weighted Avg Institutional Spread E+394.4L+378.2 Deal Size (€MM) 480.67 488.44 Pro Rata Term (In Years) 4.82 4.96 Institutional Term (In Years) 6.03 6.18 Revenues (€MM)2,974.901,578.91 EBITDA (€MM) 356.61 252.57 Pro Forma Debt/EBITDA 5.09X 4.92X Pro Forma Senior Debt/EBITDA 4.86X 4.88X Pro Forma Cash Interest Coverage 3.79X 4.50X Observations 39 381 Source: S&P Capital IQ 22 Amsterdam Institute of Finance October, 2014

23. PPX FD/EBITDAEquity % EUR/U.S.EUR/U.S.EUR/U.S. 1H1410/9.24.9/4.942%/38% 20139.7/8.84.7/4.742%/38% 20129.3/8.74.5/4.648%/38% 20118.8/8.84.4/4.445%/38% 20109.2/8.54.2/3.947%/45% 20098.9/7.74.1/4.145%/45% 20089.7/9.15.1/3.742%/40% 20079.7/9.75.9/4.930%/30% 20068.8/8.45.4/4.430%/30% Source: S&P Capital IQ 23 Amsterdam Institute of Finance October, 2014

24. Source of Funds Key TermsComments Bank Debt Typically 30 – 50% of capital structure Based on asset value as well as cash flow LIBOR-based (i.e., floating rate) term loan LIBOR floor; pricing grids 5-8 year maturity, with annual amortization often in excess of that which is required (average life 4-5 years) Up to 5X LTM EBITDA (varies with industry, ratings and economic conditions) Usually secured by assets and pledge of stock Maintenance and incurrence covenants; cash sweeps Bank debt will also include an unfunded revolving credit facility to fund working capital needs Can be split into Term A (shorter term, higher amortization) and Term B (longer term, nominal amortization, bullet payment) Generally, no minimum size requirement Amortizes over the life of the loans Generally, no prepayment penalty 2L Cov-Lite High-Yield Subordinated Debt Typically 20-30% of capital structure Generally unsecured Fixed coupon; PIK; PIK-T May be classified as senior, senior subordinated or junior subordinated Longer maturity than bank debt ( 7 - 10 years, with no amortization and a bullet payment) Incurrence covenants Holding company obligor Public and 144A high yield offerings are generally $150mm or larger; for offerings below this size, assume mezzanine debt. In some cases, it may be appropriate to include warrants such that the expected IRR is 17-19% to the bondholder Senior and senior subordinated offerings are generally cash-pay; junior subordinated offerings (which would generally be issued in combination with senior subordinated offerings) may be zero coupon and issued at a holding company Bullet payment (non amortizing) 24 Amsterdam Institute of Finance October, 2014

25. Source of Funds Key TermsComments Mezzanine Debt Can be preferred stock or debt Convertible into equity IRRs in the high teens to low twenties on 3-5 year holding period Occasionally used in place of high-yield debt Generally a combination of cash pay and PIK; can be both, or change over time Often includes warrants to enhance IRR to desired level above coupon rate Total Debt Typically 3.0x-7.0x LTM EBITDA Interest coverage at least 2.0x LTM EBITDA/first year interest Total debt varies by sector, market conditions, and other factors Common Equity Typically 20-35% of capital structure 20-30% IRR on about a 5-year holding period Exit multiple = entry multiple Management options of 5-10% Required IRR may be lower for larger or less risky transactions Exit: IPO, Trade, STS, Recap 25 Amsterdam Institute of Finance October, 2014

26. SourcesUses Excess Cash Debt assumed by the buyer Minority interest assumed Revolver Term Loan A Term Loan B Senior notes Mezzanine preferred stock Subordinated (high-yield) notes Mezzanine debt Seller notes Preferred stock Common equity (sponsor’s investment) Management equity roll-over Investor roll-over Equity Purchase Investor roll-over Fund target’s cash balance Assumed (roll over) debt Refinance short-term debt Refinance long-term debt Assume (roll over) minority interest Purchase (buy out) minority interest Transaction fees and expenses Financing fees 26 Amsterdam Institute of Finance October, 2014

27. 27 Bull Market Menu Bear Market Menu As the credit curve shifts, the menu that is available to Issuers / Arrangers changes Tranche Term Loans Covenant Light High Yield Debt Holding Company PIK Bridge Loans Second Lien Hybrid Preferred Cross Lien Facilities Asset Carve-outs OPCO/PROPCO Recapitalizations Stretch Senior Seller Notes Senior Notes Private Placements Equity R/C Lite Mezzanine Smaller floors Sweeps Prepayment penalties covenants Issuer Friendly Investor Friendly Bull Market Menu