Introduction to the Bank Debt Portfolio Group

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Introduction to the Bank Debt Portfolio Group

• Presentation to
• January 13, 2006

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Agenda

• Introduction
• Introduction to the Bank Loan Market
• The GS Bank Loan Franchise
• QA

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I. Introduction

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What is the Bank Debt Portfolio Group (BDPG)?
A joint venture between
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II. Introduction to the Bank Loan Market

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Bank Loan Market Overview

• Goldman Sachs (GS) is a major participant in the
  bank loan market
• GS originates both investment grade and
  non-investment grade bank debt
• The non-investment grade market for bank debt is
  called the Leveraged Loan Market
• GS originates leveraged loans for leveraged
  buy-out (LBO) and merger transactions, as well as
  for corporate borrowers
• Leveraged loans are typically senior secured
  obligations of the borrower
• GS syndicates leveraged loans to institutional
  investors such as loan funds (prime rate funds
  and CLOs) and hedge funds
• GS actively trades bank debt in the secondary
  market
• Par loans are loans that trade at or around 100
  cents on the dollar stressed and distressed
  loans trade at discounts to par (i.e., 70)

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U.S. Syndicated Loan Market


Source LPC
Source LPC and Bloomberg
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Leveraged Bank Loan Market Larger than U.S.
Equity Market
684bnInvestment Grade Loan Market
534bnLeveraged Loan Market
145bnU.S. Equity New Issue Market1
Source GS Debt and Equity Capital Markets, Loan
Pricing Corporation and Bloomberg (1) U.S. new
equity issuance
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Structural Considerations

• Loans are the most senior debt in the typical
  leveraged capital structure

of Total Capitalization
Liabilities
Assets

• Current Assets
• Cash
• Accounts Receivable
• Inventory
• Property
• Plant
• Equipment
• Intangibles
• Subsidiary Stock

40 - 60
Pledged to
Sr. Secured Loans (1st Lien) 2nd Lien/High
Yield(1) Equity
20 - 30
20 - 30
(1) 2nd lien loans have a second priority
interest in pledged collateral high yield bonds
are usually unsecured and/or subordinated.
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U.S. Leveraged Loan Investors
Canadian Banks 1.6
Asian Banks 1.1
Securities Firms 0.6
Canadian Banks 4.7
Thrifts 0.3
European Banks 6.5
Domestic Banks 14.4
Asian Banks 14.1
Securities Firms 1.4
Domestic Banks 32.8
CLOs Prime, Hedge High-Yield Funds 62.0
Loan Hybrid Funds 16.4
Finance Cos. 9.2
European Banks 19.1
Leasing Cos. 1.7
Insurance Cos. 4.6
Insurance Cos. 6.2
Finance Cos. 3.4
Banks 24 Non-Banks 76
Banks 71 Non-Banks 29
Source SP Leveraged Lending Review
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The Power of LeverageSimple Mortgage Example

• Use little equity and borrow funds (leverage) to
  buy asset
• Pay down debt over time
• All excess returns accrue to the equity

100
100
Today
5 years later
IRR 25
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Turbo-Charge the ReturnsValue Added by the
Equity Owners

• Align the Interests of
• Owners and Managers
• Improve the Asset
• Bigger House

200
100
Today
5 years later
IRR 43
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III. The GS Bank Loan Franchise

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The GS Bank Loan Franchise
Primary Market
Secondary Market
Risk Mgmt/Client Service

• Advise clients on strategic and financing
  alternatives
• Originate financing transactions
• Structure transactions (with Capital Markets)
• Negotiate and execute transactions (with BDPG)

• Monitor market trends and comparable new issues
• Determine likely price for loans
• Identify potential investors
• Market deal
• Execution/Closing

• Market primary new issue to investors
• Ongoing sales and marketing for secondary
  market
• Proprietary trading

• Borrower, Sponsor and Investor Relations
• Manage credit exposure and track operating
  performance
• Manage workouts
• Update sales and trading desk on company events
• Assist in negotiation and execution of loans
• Execute amendments, waivers, additional financings

Senior Bank Debt Operations
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BDPG Functionality
Bank Debt Portfolio Group (BDPG)
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BDPGs Principal Constituents
Investors
Legal
Sponsors
Counsel
Other
Borrowers
Advisors
Bank Debt
BDPG
Credit
Sales
Trading
Bank Debt
Legal
Cap. Mkts.
Leveraged
Operations
Finance
Other IBD
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BDPG Analyst Responsibilities

• Monitor portfolio credits
• Prepare in-depth analyses on companies in the
  portfolio
• Review company performance and quarterly covenant
  compliance
• Confer with management/sponsor
• Post internal and external clients on borrower
  performance/developments
• Post bank loan sales trading desk on
  developments with portfolio credits via e-mail
  and morning sales meetings
• Coordinate and dialogue with bank loan investors
  about company performance and amendment requests
• Write periodic credit updates for discussions
  with capital markets/sales trading, credit and
  leveraged finance
• Organize and participate in meetings and calls
  with bank loan investors
• Support other client service initiatives with
  portfolio companies, including ratings advisory,
  refinancing, and other matters

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BDPG Analyst Responsibilities, cont.d

• Help to structure and execute amendments/waivers
  (including refinancings and add-on financings)
  for portfolio credits
• Coordinate with external constituents (borrowers,
  sponsors and investors) and internal parties
  (capital markets, sales trading and credit) in
  connection with structuring and executing
  amendments and refinancings
• Participate and assist with new loan origination
  and execution
• Coordinate with counsel on preparation of
  documentation

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Bank Loan Execution Group

• The Bank Loan Execution Group (BLE) was
  initially established to help support, streamline
  and improve Goldmans loan negotiation and
  marketing process
• BLE has two elements
• Bank Loan Negotiation Team Works with
  borrowers, investors and co-arrangers to draft
  and negotiate commitment papers, credit
  agreements and associated items
• Bank Loan Transaction Team Works with clients,
  advisors and sponsors to build rating agency
  presentations, bank offering circulars, investor
  slides and internal sales memos
• BLEs mission has been expanded to coordinate
  bank loan execution efforts throughout the
  financing process
• Build and communicate investment rationale to the
  market
• Responsible for the marketing materials for new
  financings
• Serve as a common point of contact for issuers
  and investors
• Coordinate the efforts of capital markets,
  leveraged finance, credit and legal

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BDPG A Unique Opportunity

• Great learning opportunity
• Exposure to leveraged loans, LBOs, and primary
  and secondary sales and trading
• Opportunity to work directly with a variety of
  clients
• External clients financial sponsors, hedge
  funds, loan funds, well-recognized companies
• Internal clients industry investment banking
  teams, leveraged finance, sales and trading,
  capital markets, credit risk management
  advisory, PIA / merchant banking
• Small team
• Flat organizational structure work directly with
  senior people
• Exposure to numerous industries
• Broad range of experiences
• Build fundamental credit and analytical skills
• Coordinate disclosure between management teams,
  sponsors and investors
• Model different capital structures for a company
• Develop a view on what drives a company or an
  industry
• Blend of portfolio management and transactional
  experiences
• Execute new financing transactions

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BDPG Sample Portfolio Companies
Coleto Creek
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IV. QA