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www.sccreditadvisors.comSC Credit AdvisorsRecapitalization Advisory For the Middle MarketA Stone Carlie CompanyFinancing AcquisitionsUsing Debt CapitalFor Privately Held Middle Market Companies
Table of ContentsFinancing Acquisitions Using Debt CapitalFor Privately Held Middle Market Companies• Lenders Provide Ample Low Cost Debt for Acquirers 3• Case Study: Financing an Acquisition– Selling Company Profile 4– Two Alternative Capital Structures (Capital Breakdown;Capital Description; Debt Service; Net Income; Credit Ratios) 5• Basic Considerations in Evaluating Debt Capital 10• Capital Solutions for Different Types of Acquisitions 11• About SC Credit Advisors 13• Contact Information 15For questions or to discuss these financing alternatives, please contact SCCredit Advisors at email@example.com or 314-889-1197.2www.sccreditadvisors.com
www.sccreditadvisors.com 35.07x4.56x3.41x4.07x4.28x 4.28x5.44x0x1x2x3x4x5x6xDebt Multiples of Acquisition RelatedMiddle Market Loans1First Lien Debt/EBITDA Second Lien Debt/EBITDAOther Sr Debt/EBITDA Sub Debt/EBITDAIncreased leverage (left graph) and reduced borrowing costs (right graph) arecreating opportunities for companies to grow through leveraged acquisitions.Lenders Provide Ample Low Cost Debt for AcquirersSource for both charts: S&P LCD1)Lenders include: Banks, Finance Companies, Business DevelopmentCompanies, Insurance Companies, other Institutional Lenders.EBITDA: Earnings before interest, taxes, depreciation and amortization.L+L+200L+400L+600L+800L+1000All In Interest Rate Spread forInstitutional Loans BackingMiddle Market LBO’s2LIBOR spread Upfront Fee LIBOR Floor Benefit2)Rates on LBO (Leveraged Buyout) loans are proxies for rates on loans forleveraged acquisitions.
Selling CompanyAcquired for $100.0mm7.1x EBITDAPrice Allocated as Below:Other Assets /Goodwill$35MMFixed Assets$40MMAccountsReceivable &Inventory$25MMCase Study: Financing an Acquisition- Selling Company Profile4www.sccreditadvisors.comSelling Company Profile*- Selling Company is purchased for $100.0 millionthrough an asset purchase (allocation of purchaseprice at left)- The Seller’s annual EBITDA (Earnings Before InterestTaxes, Depreciation and Amortization) equals $14.0million- Annual Depreciation / Amortization equals $4.0million, Capital Expenditures equal $2.0 million- The acquisition multiple equals 7.1x ($100.0 millionacquisition price / $14.0 million EBITDA)- Note: Sale multiples for any given transaction will varyWith this starting point, we consider two (of many)alternative acquisition financing structures(next page)*Note: Assumes Selling Company’s assets, income and cash flows fully support the acquisition debt.
ABL Revolver$17MM @3%Case Study: Financing an Acquisition-Two Alternative Capital Structures (Capital Breakdown)*5www.sccreditadvisors.comYear 1Interest$510,000$940,000$2,340,000$3,790,000Year 1Interest$510,000$1,780,000$1,980,000$4,270,000ABL Revolver$17MM @3%Equity$40MMEquity$25MMSr. Term Loans$25MM@4%(blended rate)Sr. Term Loans$40MM@4.75%(blended rate)AccountsReceivable &Inventory$25MMOtherAssets /Goodwill$35MMFixed Assets$40MM2nd Lien Loan$18MM @11%Selling CompanyAcquired for $100mm7.1x EBITDAPrice Allocated as Below:Alternative 1(Average Leverage)$60.0mm Total Debt4.3x Debt to EBITDAAlternative 2(Higher Leverage)$75.0mm Total Debt5.4x Debt to EBITDA*Note: Assumes Selling Company assets, income and cash flows service the acquisition debt without acquirer support.For any given transaction, rates and terms may be more or less favorable than example above.Mezzanine interest includes Paid in Kind (PIK) interest (i.e., interest accrued and added to principal outstanding)Mezzanine Loan$18MM @13%
6www.sccreditadvisors.comCapital Item Brief DescriptionABL Revolver • Revolving Line of Credit with a commercial bank, availabilitybased on Accounts Receivable and Inventory (Asset Based Loan –ABL)Senior Term Loans • Senior Term Loans of varying amortization. In acquisitions, thesetypes of loans may be provided by a commercial bank, businessdevelopment company, finance company, insurance company orinvestment fund, depending on circumstancesMezzanine Loans • Primarily a cash flow based loan provided by a mezzanine fund2nd Lien Loan • Second lien loan (behind ABL and Senior Term Loans) provided bybusiness development company or investment fundEquity • If acquirer is an investment fund (Private Equity or other financialsponsor), this is an investment from it’s fund• If acquirer is an operating company (strategic acquirer), this is aninvestment from the acquiring entity from available cash or a(re)financing at the acquirer level• Capital structure will also depend on extent of operationalintegration into acquirer’s existing business(es)Case Study: Financing an Acquisition-Two Alternative Capital Structures (Capital Description)
Case Study: Financing an Acquisition-Two Alternative Capital Structures (Debt Service)7www.sccreditadvisors.com($ Millions)Alternative 1 Alternative 2(Average Leverage) (Higher Leverage)ABL Revolver Year 1 Interest $0.51 $0.51Senior Cash Flow Term LoansYear 1 Amortization 3.00 5.00Senior Cash Flow Term LoansYear 1 Interest 0.94 1.782ndLien Loan Year 1 Amortization n/a n/a2ndLien Loan Year 1 Interest n/a 1.98Mezzanine Loan Year 1 Amortization n/a n/aMezzanine Loan Year 1 Interest 2.34 n/aTotal Year 1 Debt Service $6.79 $9.27Debt
Alternative 1 Alternative 2(Average Leverage) (Higher Leverage)EBITDA $14.00 $14.00Depreciation & Amortization (4.00) (4.00)EBIT (Operating Income) $10.00 $10.00Interest Expense (3.79) (4.27)Pre-tax Income $6.21 $5.73Tax @35% (2.17) (2.01)Net Income $4.03 $3.72Case Study: Financing an Acquisition-Two Alternative Capital Structures (Net Income)8www.sccreditadvisors.com($ Millions)
Case Study: Financing an Acquisition-Two Alternative Capital Structures (Credit Ratios)9www.sccreditadvisors.com($ Millions)Alternative 1 Alternative 2(Average Leverage) (Higher Leverage)Total Debt Service (last line p. 7) $6.79 $9.27Cash Taxes 2.17 2.01Capital Expenditures 2.00 2.00Total Fixed Charges $10.97 $13.28Total Senior Debt $42.00 $57.00Total Debt $60.00 $75.00EBITDA $14.00 $14.00Basic Credit RatiosFixed Charge Coverage Ratio(EBITDA/Total Fixed Charges) 1.28x 1.05xTotal Senior Debt to EBITDA 3.00x 4.07xTotal Debt to EBITDA 4.29x 5.36x
Basic Considerations in Evaluating Debt Capital10www.sccreditadvisors.comConsideration Items to AddressCost • Minimize interest cost• Hedge interest rate risk• Minimize lender fees• Reasonable prepaymentpenalties (if any)• Reasonable ongoing fees• Performance/leverage-basedgrid pricingStructure (terms) • Covenants• Collateral• Debt service obligations(principal and interest) arecomfortably within projections• Ability to refinance unimpeded• Intercreditor agreements• Nature of external (acquirer)credit support (if any)Availability • Ample liquidity to fund currentoperations and future growth• Enough projected liquidity tomanage any variability infuture performance
Capital Solutions for Different Types of Acquisitions11www.sccreditadvisors.comSituation Considerations Debt Capital SolutionsConventional Acquisition(profitable, healthy seller)• Lowest cost of capital• Flexibility of terms• Minimizing risk exposure• Senior debt: asset based /cash flow• 2nd lien• Mezzanine• Unitranche• Hybrid (debt/equity)Distressed Acquisition(breakeven to negativeEBITDA, stressed existingcustomers, vendors, productissues, etc.)• Avoid legacy liabilities• Minimize buyer’s externalcredit support• Tie capital structure tooperational turnaround• Senior debt: asset based• Bridge financing• May need to over-equitize atpurchase and refinance withhigher leverage laterSeller is Outside of Buyer’sIndustry• Avoid new business strainingcore business• Avoid significant externalcredit support from Buyer• Senior debt: asset based /cash flow• 2nd lien• Mezzanine debt• Unitranche• Hybrid (debt/equity)
12www.sccreditadvisors.comSituation Considerations Debt Capital SolutionsBuyer Planning to MakeMultiple Acquisitions• Ability to act quickly for newopportunities• Minimize transactions costs• Consider Acquisition Facility• Senior debt: asset based /cash flow• Senior debt: delayed drawterm loan and/or revolver• 2nd lien• Mezzanine debtMost of the Value in anAcquisition is Cost Savings orSynergies• Ability to service existing andadditional debt in upside anddownside operating scenarios• Senior debt: asset based orcash flow• Mezzanine debt• Hybrid (debt/equity)• May need to over-equitize, atpurchase and recapitalizewith higher leverage laterCapital Solutions for Different Types of Acquisitions
About SC Credit Advisors: Overview• SC Credit Advisors, LLC (SCCA) assists private middle market companies withstructuring and raising capital through securities registered individuals*. We alsoprovide credit-related advisory services to companies, lenders, financial sponsorsand high-net-worth investors.• Our goal is to develop and implement creative and practical financing solutions forour clients, allowing them to focus on running their businesses.13Typical Client Profile for Capital RaisingOwnership PrivateRevenue $10 million to $300 millionCapital Needs $5 million to $50 million; growth or distressed situationsExisting CapitalStructureModerately to highly leveragedIndustries All industries, except development stage companieswww.sccreditadvisors.com*Securities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are alsoemployees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100
About SC Credit Advisors: Services14Corporate and Financial Sponsor• Assisting middle market companies and their shareholders in raising debt and equitycapital (structuring, sourcing, negotiating, funding)• Managing stressed lender and investor relationships, including facilitating thenegotiation of loan modifications with existing lender(s), forbearance agreements,waivers, loan amendments and debt to equity swaps• Providing operational assistance and/or leadership in turnaround situations, as neededLender• Providing borrowers with capital alternatives which complement and support a lender’sposition• Assisting the lender in exiting loans to troubled or distressed borrowers through arefinancing or full recapitalization• Providing operational assistance or functioning as the turnaround manager in distressedsituations to help borrowers improve operating practices and reduce lender riskHigh Net Worth Investor• Sourcing, structuring and/or evaluating complex debt and equity privateplacements• Evaluating existing investments for proper structure, risk, return and controlparameterswww.sccreditadvisors.comSecurities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are alsoemployees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100
Contact InformationHeadquarters101 South Hanley RoadSuite 800St. Louis MO 63105GREG PORTOOffice: 314.889.1197Mobile: 312.339.2857Email: firstname.lastname@example.orgGREG TOBBENOffice: 314.889.1196Mobile: 314.458.8186Email: email@example.comA Stone Carlie Company15www.sccreditadvisors.comSecurities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are alsoemployees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100