Life Cycle of a Deal:

Understanding Origination, Underwriting & Syndication Processes

Presented by:
Glenn Stewart, Bank of America Merrill Lynch Rosemary Bell, Citigroup

Overview

Investment Banking Product Model What is a Syndicated Loan Pricing and Structuring a Loan Loans vs. Bonds

Investment Banking Product Model

Issuers Investors

Capital Markets/Structuring

Investment Banking/Client Management

Syndicate Desk Secondary Trading

Portfolio Management

Closing

Sales Desk

Risk Management Origination / Primary Market Closing / Secondary Market

What is a Syndicated Loan

Generally a senior debt instrument Dominant types include revolvers, term loans
Revolvers can be undrawn, partially drawn or fully drawn Term loans usually are fully drawn at close

Generally syndicated by a lead bank to a group of banks and/or institutional investors Usually floating rate Tenor can range from several months to 10+ years Generally have more covenants than a bond issue Four Key Loan Market Segments

4 Key U.S. Large Corporate Loan Market Segments

Investment grade loan market

Leveraged loan market

Loans to companies rated >= BBB-/Baa3 AND with a relatively low LIBOR spread 2007 lending: $658 billion 2008 lending: $319 billion 2009 lending: $229 billion

Loans to companies rated < BBB-/Baa3 or unrated & with a high spread* Divided into bank (pro rata) and non-bank segments 2007 lending : $689 billion 2008 lending : $294 billion 2009 lending: $239 billion

Institutional loan market

Secondary loan market

Leveraged loans with non-bank lenders (such as mutual funds, CLOs, insurance companies, hedge funds, etc) 2007 lending: $426 billion 2008 lending: $69.6 billion 2009 lending: $56 billion

Market in which loans trade following the close of primary syndication Most U.S. loan trading involves leveraged loans 2007 trading: $520 billion 2008 trading: $510 billion 2009 trading: $474 billion
*Traditionally LIB+150, increased to LIB+350 in 1Q09

Source: ThomsonReuters LPC for primary lending; LSTA for secondary trading

What is a Syndicated Loan - Capital Structure

Generally a senior debt instrument

If the company is non-investment grade (leveraged), the loan is usually senior to all other debt in capital structure If the company is investment grade, the loan often is pari passu (at the same level) with bonds
Investment Grade Capital Structure
Sr. Unsecd Loan Sr. Unsecd Bond

Leveraged Capital Structure

Sr. Secd Loan Sub. Unsecd Bond

Equity

Equity

What is a Syndicated Loan - Types

USAGE - Can be undrawn, partially drawn or fully drawn Dominant types include

Revolvers - behave like credit cards - Can draw down, repay and reborrow Term loans - behave like mortgages - Draw down once, repay in installments
Repay $10M

$100 million revolver

120

$100 million term loan

Repay $10M Repay $10M

Outstandings ($Mils.)

Draw down $100M

Repay $17.5M

Repay $25M

Draw down $20M

100 80 60 40 20 0 Day 1

Draw down $15M

Draw down $40M

Repay $25M

Yr. 1

Yr. 2

Yr. 3

Yr. 4

Yr. 5

Yr. 6

Repay $17.5M
Yr. 7

Draw down $10M

Repay $17.5M

Repay $35M

Repay $17.5M

What is a Syndicated Loan - Syndication

Generally syndicated broken into pieces and sold to lenders Lead arranger Underwrites/arranges loan and usually holds the a piece Syndicates remainder
$200 million loan

Lead arranger: Holds $40 million

Lender A: $30M Lender B: $30M Lender C: $30M Lender J: $10M Lender H: $10M

OTHER LENDERS

Lender G: $10M Lender D: Lender F: $20M $10M Lender E: HOLD $160M $10M

BETWEEN THEM

What is a Syndicated Loan - Margins

Usually floating rate

Generally with a spread (in basis points - 1/100 of 1% - or bps) over a base rate such as LIBOR (London Inter-Bank Offered Rate), Prime, Euribor, etc Example: Spread of 300 bps (or 3%) over base rates As base rate varies, so do interest costs Base rate reset periodically
Spread (300 bps) Spread (300 bps) Euribor (3.58%) Spread (300 bps) 6.58% LIBOR (5.38%) 11.25% 8.38% US Prime Rate (8.25%)

What is a Syndicated Loan - Tenor

Tenor can vary markedly from

several months (bridge loan) 364 days (standard investment grade revolver) 3 years (standard investment grade revolver) 5 years (standard investment grade & leveraged revolver) 6 years (leveraged term loan) 7 years (institutional term loan) 10 years and out (project finance loans)
7-year Term Loan

Project Finance Loan

Bridge Loan

364Day

3-year RC

5-year RC

6-year Term Loan

Pricing and Structuring a Loan

Legal Issues Impacting Loan Structure

Credit Issues
Industry Company history Leverage Quality of cashflow Asset coverage Deal structure Unique risks Ratings

Corporate Structure Transaction Structure Environmental Liabilities

Market Considerations
Comps Competition Secondary trading Relative Value

To Tranche or Not To Tranche

Revolving loan requirements Repayment capacity Relationship lender capacity Leverage levels

Ratings
Market technicals

Syndication Process

How are the potential investors selected? How are they contacted and how is information disseminated? What are the typical timelines from launch to close? How is pricing determined and communicated? What is Flex? How do arrangers accommodate public/private issues How do amendments differ from primary syndication? How does a loan move from the primary to the secondary market?

Loans vs. Bonds

Attributes Typical Size Range: Pricing: Bank Loans Varies Floating at LIBOR or a Base Rate + an applicable margin, cash interest. Senior Secured or Senior Unsecured. High Yield Bonds $150.0$500.0 Fixed rate (priced off relevant Treasury), cash or non-cash coupon plus warrants. Senior Secured, Senior Unsecured, Senior Subordinated or Subordinated. None, except at maturity. Incurrence. Usually required. Generally, none. Creates awareness in public capital markets and a benchmark to facilitate subsequent capital raising. Non-call period generally 4 to 5 years and then subject to a prepayment/call premium. 710 years. Disclosure required. CBOs, Mutual Funds, Prime Rate Funds, Hedge Funds

Ranking/Claim on Assets:

Amortization/Repayment Requirements: Financial Covenants: Ratings Agency Requirements: Collateral: Access to Capital Markets:

Interim payments generally required. Maintenance. Increasingly required on leveraged transactions. Assets and/or stock of subsidiaries. Minimal public market awareness.

Prepayment Flexibility:

Generally prepayable at any time.

Maturity: Public Disclosure: Principal Investors:

310 years. No disclosure required if private company. Commercial Banks, Institutional Funds

Issuers Perspective
ISSUERS prefer loans because:

Pricing is mostly floating rate Callability: Loans can be repaid at any time 2004-1H07: Lots of liquidity lenders and investors are hungry for assets Its a borrowers market issuers negotiate favorable packages Loans are changing boundaries are blurring between loans and bonds
Covenant-lite loans loans without maintenance covenants Second lien loans senior, but second lien on the collateral

2H07 credit crunch hits; loan issuance slows dramatically

What Happens Next?

Life Cycle of a Deal

Now that we know the final structure, we need to consider how we will close the deal

How many facilities will there be? Are there any foreign currencies? Will all the investors be pro rata against each tranche? Will all investors be signing the Credit Agreement?

Life Cycle of a Deal

Look carefully at the final facilities
Is that add on TL-B really an add on to an existing facility or is a brand new B1 facility?

If it is real add on and there are existing Libor contracts, does the deal team understand that existing Libor contracts will need to be broken?

Life Cycle of a Deal

The allocations from the syndication do not necessarily reflect who will be signing the Credit Agreement.

Institutional lenders rarely sign the Credit Agreement.

If theyre not signing, who will be? First determine who will actually sign and fund at close (check the Schedule to the Credit Agreement) and then consider how to bring the institutional lenders into the deal.

Life Cycle of a Deal

Sticking with the institutional lenders for a minute, how will that work?
Will one Arranger front for the other Arrangers or will each Arranger sign and fund for their ratable share?

If one Arranger fronts for the others, what will document that agreement?

Who will be preparing the Assignment docs?

If each Arranger signs and fronts for their share of the exposure, how will the buy backs work?

Life Cycle of a Deal

There is no substitute for reading the draft Credit Agreement!

Do Assignments require Borrower consent?

Sometimes there are drafting mistakes or the deal team might have drafted terms that would be difficult if not impossible to live with. Better to catch an error or a logistical issue when it can still be fixed easily. Figure out what the problems are and escalate! Youre the expert.

Life Cycle of a Deal

When your looking at the Draft Credit Agreement, think beyond the closing date.

Do you understand the pricing grids?

Is there a provision for the capture of excess cash flow? Does the cash get offered to everyone or just one class of lender? How does the prepayment effect the amortization schedule? Will it be applied to the next amortization payment, across all scheduled payments or only to the balloon at the end? Make sure it is clear.

Life Cycle of a Deal

What if your deal looks backwards?
Over the last year weve seen borrowers auctioning to buy back their debt. When the auction is over, youll be given allocations representing the amount each investor will be selling back.

Chances are that there will be investors that did not participate at all and others that were allocated less than they offered.
In either event, all lenders will have new shares in the deal.

Life Cycle of a Deal

Backwards, continued.
Understand the documentation. How will the buy back be documented? Will counsel be preparing the docs?

If the debt is retired, how will the pay down effect the scheduled amortization schedule? Dont assume anything. Check the Credit Agreement or the amendment, if one was needed.

Life Cycle of a Deal

Be prepared for new structures at any time.
As soon as you think youve seen it all, there will be a new complex structure.

Try to think outside the box and ask a million questions. Chances are they are all good ones that need to be asked.

Make suggestions and dont be afraid to say no if you have a good reason. Remember that you are the experts in your area even if the structuring people are experts in theirs.