1. Joseph V. Rizzi Amsterdam Institute of Finance December, 2013 Copyright © Joe Rizzi, 2013

2. Strategic Issues Do I make the acquisition? Valuation How much do I pay? Financing How do I pay? Integration Implementation of acquisition Tactics How do I make the offer? Amsterdam Institute of Finance December, 2013 2

3. Accounting Tax Corporate Law Securities Regulatory and Antitrust Contract Business Plan Transaction Characteristics Financial Preferences Market Conditions Deal Competing Bidders Creditors Rights Amsterdam Institute of Finance December, 2013 3

4. Financial Preferences: Dilution Control Risk Tolerance Flexibility Exit Needs Market Conditions: Depth Pricing Requirements Structural Needs Cycle Liquidity Business Considerations: Strategic Plans Growth Plans Management Business Risk (Cash Flow Volatility) Financial Characteristics: Sources and Uses Operating Cash Flows Leverage Liquidity Seasonality Timing Deal Maturity Amortization Seniority Security Covenants Prepayment Cost Liquidity Size What do you want? How to get what you need! What can you get? Amsterdam Institute of Finance December, 2013 4

5. Bull Market Menu Bear Market Menu As the credit curve shifts, the menu that is available to Issuers / Arrangers changes Holding Company PIK Tranche Term Loans Covenant Light High Yield Debt 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 Issuer Friendly Investor Friendly Amsterdam Institute of Finance December, 2013 5

6. Left Hand Side Financing Right Hand Side Financing Based on the cash flow of a specific asset pool. Some examples include: Asset Based Lending Factoring Leasing Project Finance Securitization Based on the cash flow of the entire company. Some examples include: Bank Debt Public Bonds Mezzanine Preferred Stock Common Stock Amsterdam Institute of Finance December, 2013 6

7. Financial Flexibility Target Credit Rating Determine Capital Structure HedgeNo Action Bank Funding Acquisition Bridge Takedown Credit Rating Fixed Income Asset Carveout Securitization \ Prop Co Bank Financing Equity / Near Equity Refinance Bridge Fixed- Rate Floating- Rate Advisory / OriginationUnderwriting Product Execution Amsterdam Institute of Finance December, 2013 7

8. 8 Purchase/Sale Nondisclosure Agreement Offering Memorandum Data Room Letter of Intent Sale and Purchase Agreement Financing Commitment Letter Term Sheet Credit Agreements Intercreditor Agreements Amsterdam Institute of Finance December, 2013

9. 9 Commitment Letters Mac Due Diligence Syndication Flex Marketing Periods Fraudulent transfers Loan Documentation Intercreditor Covenants Amsterdam Institute of Finance December, 2013

10.  Rule of Thumb Measures ◦ Balance Sheet Model ◦ Cash Flow Model  Detailed Model ◦ Matching markets to the need ◦ Reverse inquiry ◦ Projections (amortization capability) Amsterdam Institute of Finance December, 2013 10

11. Deal Financial Arithmetic Amsterdam Institute of Finance December, 2013 11

12.  Purchase Price ◦ Minimum/Maximum ◦ Recapitalization Dividend  Debt Refinancing ◦ Callability ◦ Premiums ◦ Tax Issues  Expenses  Other Uses Amsterdam Institute of Finance December, 2013 12

13.  Revolver oTied to advance against current assets oCrossing liens  Term Loan A oMacro: Ratio of 3-4x EBITDA oMicro: Amortization analysis tied to cash flow in years 1-7  Term Loan B oSenior debt ratio less Term Loan A amortization Second Lien oMacro: 0.5-1x EBITDA oLimited amortization oLonger term oCan also be covenant lite Senior/Subordinated Unsecured  Other Debt oTotal Debt/EBITDA less Senior Debt/EBITDA  Equity oFunding need less Total Debt/EBITDA Senior Secured First Lien Amsterdam Institute of Finance December, 2013 13

14.  Current Asset approach ◦ Use standard advance rates  Accounts Receivable 80%  Inventory 60%  PP&E 40% ◦ Consider the following factors  Seasonal Needs  Future Working Capital Growth  Unexpected Liquidity Needs Amsterdam Institute of Finance December, 2013 14

15.  Term Loans = Maximum Senior Debt - Revolver  Focus is on Free Operating Cash Flow  Market conditions also dictate the maximum tenor of the loan and the amount required to be amortized in the first five years  Acceptable asset coverage is also a consideration in determining the size of the term loans Amsterdam Institute of Finance December, 2013 15

16.  Typical bank financings as structured as follows: Revolving Credit Term Loan A (amortising) Term Loans B & C (bullet/balloon) Large unfunded revolvers are seldom used today due to the fact that it is capital unfriendly to banks and companies don’t like to pay for unused commitments. In the interest of keeping flexibility for the long term, additional indebtedness baskets should be negotiated upfront. This allows companies to access either the bank or bond markets under their existing credit agreements and saves the costs of having to refinance. Amsterdam Institute of Finance December, 2013 16

17.  Long Term Debt = Max Total Debt - Max Senior Secured Debt ◦ Senior unsecured ◦ Sub Debt  Equity: ◦ Equity = Total Uses - Max Total Debt ◦ Common ◦ Hybrids Amsterdam Institute of Finance December, 2013 17

18. Senior lenders are concerned with the implications of having high yield investors at the table during a restructuring. EURO High Yield investors to date have not been as vocal as senior bank lenders, viewing the issue as one of pricing rather than principle. All other things being equal, sophisticated investors will probably price structural subordination at 60-120 bps. Amsterdam Institute of Finance December, 2013 18

19. Holding Company Intermediate Holding Company Operating Company Operating Company 100% Equity Interest Issues High Yield Bonds Subordination Agreement Senior Secured Loan Amsterdam Institute of Finance December, 2013 19

20. Holding Company Intermediate Holding Company Operating Company Operating Company 100% Equity Interest Issues High Yield Bonds Support Package Senior Secured Loan Amsterdam Institute of Finance December, 2013 20

21. Business Legal Entity Basis Bankruptcy Payment Priorities Provisions Reps/Warranties: What are the facts? Operating Covenants: Stop digging Financial Covenants: Preserve deal Remedy Structures to reduce credit risk Guarantees Pledges of Stock Subordination 21 Amsterdam Institute of Finance December, 2013

22.  There are no standard covenants.  They must be tailored to fit each deal and loan structure.  The steps in structuring the covenants are: o Identify the risks (business, financial and structural) o Select Covenants to monitor the risks Need to prioritize the risks to monitor because it will be impossible to monitor every risk The time and cost to monitor the covenants must be considered (i.e., sometimes one covenant can cover multiple risks) o Set Appropriate Levels Want the covenants to trigger a warning before any principal or interest payments become delinquent. Need to factor in any seasonal needs to the covenant levels. 22 Amsterdam Institute of Finance December, 2013

23. 2013 ( 9 mo) 2.920063.9 20123.620054.2 20113.720044.1 20103.720034.2 20093.620024.2 20083.720014.3 20073.520004.2 Major Covenants (financial maintenance) – Industry Variation CAPEX Debt Service Fixed Charge Funded Debt Reason for Decline Institutional Loan Investors High Yield Market Competition 23 Amsterdam Institute of Finance December, 2013

24. IssueImpact Disclosure Public issues require disclosure of sensitive information RatingsRatings impact of financing over existing debt TimingUrgency favors private relationship sources (e.g. Banks) CovenantsImpact operating flexibility SeniorityImpacts intercreditor issues SecurityConsider impact on other creditors (incl. suppliers) CurrencyMatch with assets MaturityLong-term versus short-term mix Amsterdam Institute of Finance December, 2013 24

25. IssueImpact AmortizationAffects duration of debt CallabilityFlexibility ObligorRaises intercreditor issues AccountingOn- or Off-balance sheet Tax ImplicationsInstrument and location of interest tax shield DiversificationInvestor appetite Fixed / FloatingInterest Rate Risk (IRR) LiquidityDefault Risk Amsterdam Institute of Finance December, 2013 25