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Middle Market Capital Edge Q1 2013 SC Credit Advisors Recapitalization Advisory For the Middle Market A Stone Carlie Company www.sccreditadvisors.com
Cash Flow Loan Multiples Approach 2007 Highs Total Debt to EBITDA Multiples• The modest economic recovery, lender of Middle Market Loans liquidity and competition all increase (Issuers with EBITDA of $50 Million or Less) leverage multiples 6x – Recovery has improved borrower fundamentals 4.76 4.50 4.25 4.23 4.16 – Competition among banks and non bank 4x 3.66 senior lenders (Finance Companies, Business 3.41 Development Companies (BDCs), Unitranche funds) has increased leverage multiples• Leverage availability depends 2x significantly on size and credit quality of borrower: – Borrowers with predictable revenues and EBITDA, limited customer concentration and experienced management teams garner 0x higher leverage 2007 2008 2009 2010 2011 2012 4Q12 – Leverage is lower as EBITDA declines, with First Lien Debt/EBITDA Second Lien Debt/EBITDA limited cash flow loan options for borrowers Other Sr Debt/EBITDA Sub Debt/EBITDA with less than $10 million in EBITDA Chart Source: S&P LCD – Mezzanine (sub) debt is under pricing and term pressure from aggressive senior lenders www.sccreditadvisors.com 5
Corporate Cash Flow supports Higher Leverage Debt / EBITDA vs. Cash Flow Coverage 5.00x 3.60x• Cash flow coverage is very strong for high leverage cash flow loans: 3.40x EBITDA Capex / Cash Interest 4.50x 3.20x – Cash Flow Coverage [(EBITDA – Capex ) / Debt / EBITDA Cash Interest] is stronger than pre 3.00x recession 2007 levels, at 3.30x now vs. 4.00x 2.50x then 2.80x 3.50x 2.60x – Lenders are aggressive, but want to maintain essential underwriting parameters 2.40x 3.00x – Availability of cash flow loans declines as 2.20x cash flow coverage drops 2.50x 2.00x 2007 2008 2009 2010 2011 2012 4Q12 Debt/EBITDA [EBITDA - Capex]/Cash Interest Chart Source: S&P LCD www.sccreditadvisors.com 6
Lenders Act to Retain Borrowers and Maintain Pricing Percent of Institutional Term Loans with 35% Percent of Institutional Term Loans with Prepayment Penalties 30% Pricing Grids 68.3% 71.3% 71.8%75% 25% 23.2% 19.1% 20% 16.6%50% 44.6% 15% 11.3% 20.5% 21.4% 10% 7.0%25% 5.8% 5.7% 10.9% 5%0% 0% Source for both charts: S&P LCD • Prepayment penalties appear in almost 3 of 4 deals as lenders move to retain borrowers in a competitive environment • Pricing grids, which typically lower interest costs as leverage decreases, diminish as lenders move to preserve loan pricing in an already low rate environment www.sccreditadvisors.com 7
Asset Based Loan (ABL) Volume Backto Normal Levels ABL Volume and Deal Count 35 120 ABL Volumes are off their 2011 Deal Count (Syndicated Credits)• 30 100 highs, as the senior cash flow 25 Issuance ($) 80 market rebounds: 20 60 15 – Cash flow lending options were more 40 10 limited for the middle market in 2009- 5 20 2011 0 0 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 – ABL’s, however, are more important to borrowers with limited cash flow Chart Source: Thompson Reuters loan options Average Pro Rata Spreads for – Key factors driving the ABL market: Asset-Based Deals • Significant liquidity among L+500 lenders L+400 • Limited demand due to moderate economic growth L+300 • Relatively low volume in the L+200 M&A market, a traditional source L+100 of new ABL deals L+0 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 – ABL interest rates mimic the rate declines in the overall credit markets Chart Source: S&P LCD www.sccreditadvisors.com 8
Business Development Companies (BDC’s) fill the Gap in Middle Market Financing Portfolio Breakdown by Investment Type For a Sampling of BDC’s Senior Subordinated/ Preferred, Common Structured BDC Debt Mezzanine Debt Equity, Warrants Products, Other American Capital1 24% 31% 46% N/A Ares Capital2 79% 7% 13% 1% Apollo Investment Corp 40% 48% 12% 0% Fifth Street Finance3 70% 26% 4% 0% Hercules Technology Growth4 99% N/A Warrants w/ debt N/A Main Street Capital 78% - 88% N/A N/A N/A• Data is from publically disclosed information for each of the respective BDC’s. Data for American Capital, Ares Capital, Fifth Street Finance , Hercules Technology Growth, Main Street is as of 9/30/12; Data for Apollo Investment Corp is as of 12/31/12.• Notes:1) American Capital includes Private Finance Assets only. Senior Debt includes revolving credit facilities and senior term debt2) For Ares Capital, Senior Debt includes a co-investment facility with GE Capital in first lien loans to middle market companies3) For Fifth Street Finance, second lien loans are included in the Subordinated/Mezzanine total4) Hercules Technology Growth provides venture debt (senior debt with warrants) to high growth venture capital backed companies• BDC’s are investment companies with a wide range of investments: Senior Secured Loans, Second Lien Loans, Mezzanine Debt, Convertible Debt, Preferred and Common Stock, and Structured Products• Each BDC has its own investment criteria and targeted borrower profile• When bank lenders pull back, BDC’s can step in as senior lenders; when bank lenders are aggressive, BDC’s can supply junior capital www.sccreditadvisors.com 9
Business Development Companies (BDC’s) fill the Gap in Middle Market Financing (continued) Invested Capital for a Representative Sample of BDCs at Year End ($s Millions) $30,000 40% Total Investments $25,000 Annual Percent Change 31% 30% 20% 20% $20,000 10% $15,000 0% 13% 0% $10,000 -19% -10% $5,000 -20% $18,289 $14,845 $14,789 $19,363 $21,974 $26,353 $0 -30% 2007 2008 2009 2010 2011 2012* • Data is from publically disclosed information for a sample of BDC’s including: Ares Capital, American Capital, Apollo Investment, BlackRock Kelso, Full Circle Capital, Golub Capital, GSV Capital, Hercules Technology Growth Capital, Main Street Capital, Medley Capital, PennantPark Floating Rate Capital, PennantPark Investment Corp., Prospect Capital, Solar Capital, TCP Capital, Triangle Capital. Note: Not all BDC’s have data available prior to 2011.• After being hard hit by portfolio losses during the recession, BDC’s have seen significant growth in loan and equity investments since 2009• Invested capital for the BDC sample in the chart above increased by 20% in 2012 alone. BDC’s are flush with cash and aggressively seeking investments www.sccreditadvisors.com 10
Secondary Buyouts become more important with M&A Deal Volume at Low Levels Total Capital Invested and Number of Deals Closed Secondary Buyouts as % of All Buyouts Middle Market LBOs 30%900 3,084 3,500 25%800 Capital Investest 3,000700 # of Deals Closed 20% 2,286 2,500600 15%500 2,000 1,440 2,042400 1,943 1,214 1,500 10%300 1,000 5%200100 500 0% $826 $359 $150 $337 $354 $190 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 0 2007 2008 2009 2010 2011 3Q12 2008 2009 2010 2011 2012Source for both Charts: PitchBook • The decreasing number of middle market M&A transactions has increased the frequency of secondary buyouts (Private Equity group portfolio company selling to other Private Equity groups) • Meanwhile, surveys show the Private Equity industry is sitting on nearly $500 billion in unused capital, a figure which has only declined slightly in the last three years – there is capital to put to work www.sccreditadvisors.com 11
Purchase multiples at 5 year highs, supported by an abundance of Private Equity Purchase Price Breakdown* Equity Contribution as (For Issuers with EBITDA of $50 Million or less) a Percent of Total Capital*10x 9.30 50% 8.28 8.40 8.59 9x 8.18 7.89 8x 40% 6.61 7x 6x 30% 5x 4x 3x 20% 2x 1x 10% 0x 2007 2008 2009 2010 2011 2012 4Q12 0% Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others 2007 2008 2009 2010 2011 2012 4Q12*Total Sources/adjusted Pro Forma Trailing EBITDA. Equity component *Includes only new equityrepresents total equity (new + rollover)Source for both charts: S&P LCD • The economic recovery, return of leverage multiples, low cost of funding, scarcity of middle market deals and substantial Private Equity capital is supporting historically high purchase price multiples • Equity contribution levels, while declining slightly from multi year highs, are above pre recession levels, reflecting the competition for deals and more stringent debt underwriting standards www.sccreditadvisors.com 12
Capital Options for Companies with Less than $10 Million of EBITDA Pricing Leverage Senior Cash • Varies • Up to 2.50x total senior leverage Flow Loans • Available only for strongest borrowers • Available only for strongest borrowers • Generally no restrictions on leverage Asset Based • L + 250 and up -75%-95% of Accounts Receivable • Loan amounts: - Loans • LIBOR Floor: varies - 75%-95% of Accounts Receivable (<5% dilution) - 50% to 70% of Inventory (blended for RM, WIP, FG) • Varies widely depending on lender (institutional Second Lien vs.high net worth) vs. high net worth) • Total Leverage of 3.0 - 4.0x Loans • L + 1000 (or fixed rate) and higher • Equity participation possible Unitranche • 11% - 12% • Total Leverage of 3.0 - 4.0x • 11% - 14% current interest Subordinated / • 2% - 4% PIK • Total Leverage of 3.0 - 4.0x Mezzanine Debt • Equity warrants possible Private Equity • N/A • 35-50% equity contribution Source: SC Credit Advisors, LLCTrends:• Borrower size and credit quality greatly • Looser lender restrictions on dividend influence terms payments / distributions• More ABL alternatives than cash flow loan • Growing frequency of second lien loans from options are available in this segment high net worth investors• BDC’s move aggressively into this market • Senior loan pricing varies greatly according to• Fewer loan covenants type of lender (Bank, Finance Company, BDC) www.sccreditadvisors.com 13
Capital Options for Companies with More than $10 Million of EBITDA Pricing Leverage • 3.0 - 4.0x (Senior leverage) Senior Cash • L + 400 and up • 4.5 - 5.0x (Total leverage) Flow Loans • Strong borrowers with higher EBITDA - up to 6.0x • Generally no restrictions on leverage Asset Based -75%-95% of Accounts Receivable • Loan amounts: - • L + 150 and up Loans - 75% - 95% of Accounts Receivable (<5% dilution) - 50% - 70% of Inventory (blended for RM, WIP, FG) Second Lien • L + 800 and up • Total Leverage of 3.5 - 5.0x Loans Unitranche • 10%+ • Total Leverage of 3.5 - 5.0x • 10% - 12% current interest Subordinated / • Up to 2% PIK • Total Leverage of 3.5 - 5.0x Mezzanine Debt • Equity warrants less prevalent Private Equity • N/A • 35-50% equity contribution Source: SC Credit Advisors, LLCTrends:• Borrower size and credit quality greatly • More EBITDA addbacks (e.g. for restructuring influence terms costs) for covenant calculations• Lighter loan covenants • ABL revolver plus cash flow term loans are a• Equity cures for financial covenant defaults popular combination• Flexibility on cash flow sweeps • BDC’s very active and aggressive across all• Dividends / distributions allowed subject to loan segments loan compliance • Unitranche lenders active, but under pricing pressure www.sccreditadvisors.com 14
About SC Credit Advisors• SC Credit Advisors, LLC (SCCA) assists private middle market companies with structuring and raising capital through securities registered individuals. We also provide credit-related advisory services to companies, lenders, financial sponsors and high-net-worth investors.• We develop and implement creative and practical financing solutions for our clients, allowing them to focus on running their businesses.Typical Client Profile for Capital RaisingOwnership PrivateRevenue $10 million to $300 millionCapital Needs $5 million to $50 millionExisting Capital Moderately to highly leveragedStructureIndustries All industries, except development stage companies www.sccreditadvisors.com 15
Contact Information Headquarters 101 South Hanley Road Suite 800 St. Louis, MO 63105 GREG PORTO GREG TOBBEN Office: 314.889.1197 Office: 314.889.1196 Mobile: 312.339.2857 Mobile: 314.458.8186 Email: firstname.lastname@example.org Email: email@example.com A Stone Carlie Company Securities transactions conducted through StillPoint Capital, LLC Member FINRA/SIPC www.sccreditadvisors.com 17