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Structuring Corporate Loans

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Title: Structuring Corporate Loans


1
Structuring Corporate Loans for Small and
Middle Market Companies Chris Droussiotis
2013
2
Table of Contents
  • Corporate Loans an overview (Small and Middle
    Market transactions in the U.S.)
  • Market Overview in the U.S.
  • Loan Terms and Conditions (Money and Non-Money
    terms)
  • Credit and RAROC Loan Analysis
  • Marketing and Structuring a primary
    syndicate/club deal with other banks
  • Structuring a Loan Debt Capacity, Leverage,
    Coverage and Collateral analysis
  • Case Studies for Debt Capacity using Cash Flow
    and Asset Coverage
  • Lecturers Biography

1
3
U.S. Corporate Loans An Overview Two Markets
Served
  • Investment Grade Loan Market
  • Rated BBB- and Higher (Corporate)
  • Arrangers hold Higher Exposure (200 million )
  • The majority of the Syndicate are traditional
    banks
  • Leveraged Loan Market
  • Rated BB and Lower (Corporate)
  • Arrangers hold Lower Exposure thus the need
    to syndicate
  • Leverage Ratios (Debt/EBITDAgt3.0x)

Large Cap Market (Rated) EBITDA gt 100mm
Middle Market (Rated/NonRated) 5mm gt EBITDA lt
100 mm
Small Business (Non-Rated) 200,000 gt EBITDA lt 5
mm
2
4
U.S. Middle Market Loan Overview
Total Year 2012
3
5
U.S Small Business Loan Market Overview
4
6
Typical Leveraged Deal Term Sheet / Credit
Agreement
  • 1. Parties to the Credit Agreement
  • Borrower
  • Holding Company
  • Guarantor / Parent and Subsidiaries Guarantee
  • Agent Banks (for middle market deals)
  • Administrative Agent
  • Collateral Agent
  • Syndication Agent
  • Documentation Agent
  • Law Firms representing the Borrower and Agent
    Banks

2. Description of the Transaction / Purpose of
the Loan (s) Use of Proceeds
5
7
Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)
  • Money Terms
  • Amount / Tranches
  • Revolving Credit / Line of Credit
  • Term Loans
  • Equipment Loans
  • Real Estate Loans
  • Pricing
  • Interest Rate / Margin over LIBOR/Prime
  • Commitment Fees on unfunded portion
  • Maturities (months/years)
  • Amortization Schedule (set principal payments) /
    monthly mortgage like payments (PI) for Small
    Loans and Quarterly for Middle Market Loans
  • Collateral

In a middle market, the company needs 100 Vote
from the syndicate banks to amend these terms
6
8
Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)
  • 4. Non-Money Terms
  • Financial Covenants
  • Negative Covenants
  • Affirmative Covenants / Management Covenants

Need Majority Vote (typical 51) from the
syndicate banks to amend these terms
7
9
Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)
New Terminology in 2006 and 2007 Covenant
Lite Structures (Covy lite) Incurrence Tests
Vs Maintenance Tests
Typical Financial Covenants
Maximum Leverage Ratio (Total Debt /
EBITDA) Maximum Senior Leverage Ratio (Bank Debt
/ EBITDA Minimum Coverage Ratio (EBITDA /
Interest Minimum Fixed Charge Ratio (EBITDA
Capex Taxes ) / Interest Principal
Payments) Maximum Capital Expenditures Minimum
Tangible Net Worth Maximum Total Liabilities to
Tangible Net Worth (Small Business Loans)
Typical Negative Covenants
Limitations on Additional Debt Limitations on
Asset Sales / Mergers Acquisitions /
Sale/leaseback transactions Limitations of
Dividends / Investments Limitation on Liens /
Negative Pledges Excess Cash Sweep Limitations of
Change of Ownership
8
10
Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)
  • Other Terms Conditions
  • Security / Liens / Guarantees
  • Borrowing Base
  • Mandatory Prepayments
  • Optional Prepayments / Call Protection
  • Financial Reporting / Maintaining Corporate
    Existence (Affirmative Covenants)
  • Representation and Warranties
  • Conditions Precedent at Closing
  • Events of Default
  • Assignments and Participations / Secondary
    Sales
  • Waivers and Amendments
  • Indemnification
  • Cross Default
  • Material Adverse Clause (MAC)

9
11
Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)
Other Terminology to the Credit Agreement
  • LIBOR Floor
  • Original Issuer Discount (OID)
  • Margin Spread
  • A typical calculation of Loan Yields in the
    secondary market for loans
  • LIBOR or LIBOR Floor Margin Spread
    (100-OID)/4 years Loan Yield
  • market convention is to use 4 years as it
    represents the average life
  • Example
  • LIBOR Floor 1.00
  • Margin Spread 400 basis points (or 4.00)
  • OID 98
  • Then the Loan Yield is calculated to
  • 1.0 4.0 (100 98)/100/4 5.0 (2.0
    / 4) 5.0 0.5 5.5 Yield

10
12
Types of Loan Syndication Formats for Middle
Market Deals
  • Underwritten deal
  • Best-efforts syndication
  • Club deal

11
13
Types of Loan Syndication Formats for Middle
Market Deals (Continued)
  • Underwritten deal
  • Arrangers guarantee the entire commitment,
    then syndicate the loan to reduce their exposure.
  • If the arrangers cannot fully subscribe the
    loan, they are forced to absorb the difference.
  • Reasons for Arrangers to underwrite
  • Offering an underwritten loan can be a
    competitive tool to win mandates.
  • Underwritten loans usually require higher
    fees
  • New Terms
  • Flex Language
  • Memorandum of Understanding (MOU)

12
14
Types of Loan Syndication Formats for Middle
Market Deals (Continued)
  • Best-efforts syndication
  • The Arranger commits to underwrite less than
    the entire amount of the loan.
  • If the loan is undersubscribed, the deal
    may not close unless the terms/pricing/structure
    are changed.
  • Best-efforts syndications were used for
    risky borrowers or for complex transactions.
  • As in the case of underwriting, for preferred
    customers, the banks tend to hold higher exposure
    justifying it by additional products offered
    going forward (an important variable in the
    banks profitability calculations (RAROC).

13
15
Types of Loan Syndication Formats for Middle
Market Deals (Continued)
  • Club deal
  • Pre-marketed to a group of issuers or
    equity sponsors relationship lenders.
  • Typically a smaller loan (usually 25
    million to 200 million but as high as 500
    million)
  • The arranger is generally a first among
    equals, and each lender gets a full cut of the
    fees.
  • For preferred customers, the banks tend to hold
    higher exposure justifying it by additional
    products offered going forward (an important
    variable in the banks profitability calculations
    (RAROC).

14
16
Internal Application for Approval Process
  • Typical Internal Analysis Process by each bank
  • Internal Application sent to their respected
    investment/credit committees. This application
    includes the following
  • Requested amount that is within the rating
    parameters for each bank
  • Recommended amounts by Tranche (Revolving
    Credit / Term Loans)
  • Term and Conditions of the Loans (includes
    pricing, structure and covenants)
  • Profitability (RORA and RAROC)
  • Syndication strategy
  • Transaction discussion including Source and
    Uses and Capital Structure
  • Company discussion including historical
    performance and outlook
  • Corporate Structure
  • Management Biographies / Equity Sponsor
    Profile
  • Collateral Analysis
  • Industry Analysis
  • Financial Analysis (Projections Model)
  • Internal Rating Analysis

This process will be discussed following this page
15
17
Risk Assessment Analysis
  • Typical Internal Rating Analysis by each bank
  • Most banks internal ratings are in line with
    the Agencies external ratings, though the
    analysis is done independently. This analysis is
    based on two approaches
  • Quantitative Analysis
  • Qualitative Analysis

The Typical Scale is 1-10, 1 being with very
limited risk to default and 10 the issuer being
in bankruptcy with no chance of recovery
  • The Quantitative Analysis for establishing the
    Internal rating which measures the probability of
    default is based on the following parameters
    (each component is weighted at a specific level
    of importance)
  • Leverage Ratio - the relationship between debt
    and earnings (i.e. DEBT / EBITDA)
  • Capitalization Ratio the relationship between
    the bank debt and the rest of the capital
    (Capital Leases, Bonds, Equity)
  • Coverage Ratio - Issuers Cash Flow covering
    its debt obligations (interest and principal
    payments)
  • Variance of Projections based on the
    projections, the model typically assumes a
    certain haircut (10-30) to the managements
    projections and it tests its ability to pay its
    debt obligations.
  • The Quantitative approach adjusts up or down
    based on industry characteristics (Recession
    resistance, cyclical, or event driven).
  • The Qualitative Analysis is subjective based on
    each banks internal policy. The Analysis would
    include strength of management, support from the
    equity sponsor, recovery analysis (asset
    collateral) and outlook.

16
18
Structuring a Loan Small Business Debt
Capacity, Leverage, Coverage and Collateral
analysis
Terms Conditions 1. Loan Amounts SBA 7a Up
To 2,000,000.002. Loan Amounts SBA 504 Up To
5,000,000.003. Interest Rate Prime Rate
Spread Which Is Adjusted Quarterly4. Term
Maximum 25 Years Amortization5. LTV (Loan To
Value) Up To 906. Debt Coverage 1.20x7.
Assumption Yes8. Recourse Yes9. Minimum 30
day closing but probably longer10. Down Payment
10-20 on acquisitions11. Borrower must occupy
at least 51 of the property12. Minimum FICO
Score Of 65013. Minimum Loan Amount 500,000.00
17
19
Structuring a Loan Small Business Three Factors
determining Eligibility for SBA loan
1. Loan to Value Different SBA lenders and
different SBA loans have different equity
requirements. Many loans require the borrower to
retain 10 to 20 percent of the equity in the
business. 2. Personal Guarantees Many SBA
loans call for personal guarantees. Some of the
guarantees bind the borrower's personal credit to
the loan others call for the borrower to pledge
personal assets to the loan. In some cases, SBA
loans even require the collateral assignment of
life insurance death benefits so that if the
borrower passes away, the loan will be repaid.
3. Creditworthiness Contrary to popular belief,
SBA loans are not for borrowers with poor credit
or no business plan. The borrower must posses a
valid business plan, good credit and committed
capital in the business.
18
20
Structuring a Loan Middle Market (Case
Study) Debt Capacity, Leverage, Coverage and
Collateral analysis
LBO Opportunity Ares Venture Management Group
(Ares) decided to purchase ABC hotel property
and its land in Austin Texas for 10,000,000. In
addition, Areas will spend 2,000,000 for
Renovations including new furniture and
equipment. Capital Raising Bank Debt Amount
of Loan 3.0x ABCs First Years EBITDA
Interest Rate LIBOR 4.5 Term 7
years Schedule Principal Payments
Mezzanine Amount of Loan Up to 4.0x of
ABCs First Year EBITDA (Equity - not be less
than 35 of total Capital) Interest Rate
9.00 Term 10 years Schedule Principal
Payments Years 1-9 0 Year 10 The
Balance Equity Ares equity contribution to the
purchase will be 35 or up to total leverage of
4.0x dictated by the Mezzanine Loan
requirements.
19
21
Structuring a Loan Middle Market (Case
Study) Debt Capacity, Leverage, Coverage and
Collateral analysis
20
22
Structuring a Loan Middle Market (Case Study) -
(Continued) Debt Capacity, Leverage, Coverage and
Collateral analysis
21
23
Structuring a Loan Middle Market (Case
Study) Debt Capacity, Leverage, Coverage and
Collateral analysis
22
24
Structuring a Loan Middle Market (Case
Study) Debt Capacity, Leverage, Coverage and
Collateral analysis
23
25
BIOGRAPHY OF THE LECTURER
Chris Droussiotis, MBA, C.H.E.
Chris Droussiotis has twenty five plus years of
banking experience working in the investment
banking divisions of major New York money center
banks, such as Bank of America, CIBC Oppenheimer,
Sumitomo Mitsui Banking Corp., Mitsui Nevitt
Merchant Bank, Mizuho Financial Group and Bank of
Tokyo-Mitsubishi, specializing in the financing
and structuring of merger acquisition,
leveraged buyout and recapitalization
transactions.
Chris is currently an Executive Director and the
Head of the Leveraged and Sponsor Finance Group
at Sumitomo Mitsui Banking Corporation managing a
1.4 billion investment portfolio of leveraged
loan investments. Duties include portfolio
analysis, valuation, financial projections,
credit assessment, as well as interaction with
issuers, broker-dealers, investment banks,
Private Equity firms and bank management. Prior
to his banking career, Chris taught mathematics
and business statistics at FDUs Sullivan
Business School in Rutherford, NJ. He holds a
B.Sc. in business, an MBA from FDUs Sullivan
School of Business, was credit trained at Bank of
America, and completed advanced professional
development courses in corporate taxation at New
York University. Chris is also an Adjunct
Professor of certain finance courses for
undergraduate and graduate programs at Baruch
College and FDU including Investment Analysis,
Quantitative Analysis in Business, Managerial
Accounting, Business Statistics, Derivatives,
Debt Fixed Income Markets and Advanced New
Venture Management.Chris has given various
lectures on various subjects including Leveraged
Buyouts, Credit Markets, Capital Markets for
Baruch College, as well as companies such as
Cendant Corporation, Wyndham Worldwide,
Travelocity and the Industrial Bank of Japan. .
24
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