Joseph V. Rizzi Amsterdam Institute of Finance November, 2012

22 Cash Flow Impacts default risk Balance Sheet Determines Loss in Event of Default (LIED) Liquidity Valuation Amsterdam Institute of Finance November, 2012

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 November, 2012

4 Quantitative ◦ Capitalization  Cash Equity>25%  Total Debt<6.0x  Senior Debt (1) <4.5x  First Lien<4.0x  Second Lien<0.5x ◦ 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 November, 2012

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 depending on the economy Rating Rates 2H 07 Cris is Overheated 1H07 Amsterdam Institute of Finance November, 2012

6  There are two different approaches to designing the capital structure: 20% 30% 50% Cash Flow Model Balance Sheet Model Senior Debt Sub Debt Equity 3 - 4x EBITDA 4 - 6x EBITDA Equity Amsterdam Institute of Finance November, 2012

7 Ratio Approach Cash Flow Advance Rate Amsterdam Institute of Finance November, 2012

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 November, 2012

9 Amsterdam Institute of Finance November, 2012

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 Amsterdam Institute of Finance November, 2012

11 U.S. Leveraged Market Quarterly – June 23, 2012 Median Credit Ratios – First Quarter 2012 Amsterdam Institute of Finance November, 2012

12 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Wtd. Avg. ProRata spread is the average RC/TLA spread weighted by sizes of the RC and TLA tranches. Wtd. Avg. Institutional Spread is the average TLB/TLC spread weighted by the sizes of the TLB and TLC tranches. Amsterdam Institute of Finance November, 2012

13 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Analysis is based upon First Lien tranches only. Deal Count excludes amendment transactions and counts First Lien and Second Lien portfolios of the same transaction as one event. Average Deal Size excludes Amendment and Add-on transactions and combines First Lien and Second Lien portions of the same transaction. Amsterdam Institute of Finance November, 2012

14 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Amsterdam Institute of Finance November, 2012

Revolver Term Loans A B C Second Lien Cov Lite Mezzanine PIK Preferred Stock 15 Amsterdam Institute of Finance November, 2012

16 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Chart reflects initial sponsor acquisitions and MBOs. The remaining category excluded from this chart includes tranches such as acquisition loans, Capex and Guarantee facilities. Based on Volume. B A RC C 2nd Amsterdam Institute of Finance November, 2012

17 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Excluding Platform Acquisitions and Other Sponsor Driven Transactions. Includes only transactions for which Sources/Uses were made available. Amsterdam Institute of Finance November, 2012

18 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Equity includes shareholder loans, common equity and preferred stock down streamed to the operating company as common equity as well as vendor note proceeds. Includes only transactions for which Sources/Uses were made available. Amsterdam Institute of Finance November, 2012

19 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. EuropeUS Excludes Platform Acquisitions and other sponsor driven transactions. Based on Volume. Europe: Other includes Bridge Loans, Capex, Acquisition, Restructuring and Guarantee Facilities Amsterdam Institute of Finance November, 2012

20 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Total Equity: 47.7% LTM 30/06/12 Observations: 26 Average Sources: €1,147.4M Average Senior Loan Size: €499.2M Excluding Platform Acquisitions and Other Sponsor Driven Transactions. Includes only transactions for which Sources/Uses were made available. Total Equity: 47.2% 2011 Observations: 36 Average Sources: €842.0M Average Senior Loan Size: €368.5M Amsterdam Institute of Finance November, 2012

21 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Total Equity: 43.7% Observations: 3 Average Sources: €591.2M Average Senior Loan Size: €143.7M Germany * Excluding Platform Acquisitions and Other Sponsor Driven Transactions. Includes only transactions for which Sources/Uses were made available. Total Equity: 41.4% Observations: 3 Average Sources: €473.3M Average Senior Loan Size: €241.7M Netherlands *Data reflects LTM 31/03/12, due to not enough observations for LTM 30/06/12 Amsterdam Institute of Finance November, 2012

22  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 November, 2012

 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 23 Amsterdam Institute of Finance November, 2012

24  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 November, 2012

25  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 November, 2012

26 To access the data points underlying the chart, double-click on the chart. Copyright© 2012 by Standard & Poor’s Financial Services LLC (S&P) a subsidiary of The McGraw-Hill Companies, Inc. Share of Credit Issue in Distress Based on CountShare of Credit Issue in Distress Based on Share of Sr. Par Issue Distressed credits are issues rated D or restructuring. Charts reflect share of credits issued each year that eventually went into distress. Year of Credit Issue Amsterdam Institute of Finance November, 2012

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29 This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources believed to be reliable, but such statements are made without any representation as to accuracy or completeness. Opinions expressed are current opinions as of the date appearing in this material only. These materials are subject to change, completion, or amendment from time to time without notice and CapGen Financial is not under any obligation to keep you advise of such changes. All views expressed in this presentation are those of the presenter, and not necessarily those of CapGen Financial. Amsterdam Institute of Finance November, 2012