Raising Capital

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Raising Capital
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• Raising Equity

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Selling Securities to the Public

• Management must obtain permission from the Board
  of Directors
• Firm must file a registration statement with the
  SEC
• The SEC examines the registration during a 20-day
  waiting period
• A preliminary prospectus, called a red herring,
  is distributed during the waiting period
• If there are problems, the company is allowed to
  amend the registration and the waiting period
  starts over
• Securities may not be sold during the waiting
  period
• The price is determined on the effective date of
  the registration

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Underwriters

• Services provided by underwriters
• Formulate method used to issue securities
• Price the securities
• Sell the securities
• Price stabilization by lead underwriter
• Syndicate group of investment bankers that
  market the securities and share the risk
  associated with selling the issue
• Spread difference between what the syndicate
  pays the company and what the security sells for
  initially in the market

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Firm Commitment Underwriting

• Issuer sells entire issue to underwriting
  syndicate
• The syndicate then resells the issue to the
  public
• The underwriter makes money on the spread between
  the price paid to the issuer and the price
  received from investors when the stock is sold
• The syndicate bears the risk of not being able to
  sell the entire issue for more than the cost
• Most common type of underwriting in the United
  States

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Best Efforts Underwriting

• Underwriter must make their best effort to sell
  the securities at an agreed-upon offering price
• The company bears the risk of the issue not being
  sold
• The offer may be pulled if there is not enough
  interest at the offer price. In this case, the
  company does not get the capital, and they have
  still incurred substantial flotation costs
• Not as common as it previously was

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Dutch Auction Underwriting

• Underwriter accepts a series of bids that include
  number of shares and price per share
• The price that everyone pays is the highest price
  that will result in all shares being sold
• There is an incentive to bid high to make sure
  you get in on the auction but knowing that you
  will probably pay a lower price than you bid
• The Treasury has used Dutch auctions for years
• Google was the first large Dutch auction IPO

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Green Shoes and Lockups

• Green Shoe provision
• Allows the syndicate to purchase an additional
  15 of the issue from the issuer
• Allows the issue to be oversubscribed
• Provides some protection for the underwriters as
  they perform their price stabilization function
• Lockup agreements
• Restriction on insiders that prevents them from
  selling their shares of an IPO for a specified
  time period
• The lockup period is commonly 180 days
• The stock price tends to drop when the lockup
  period expires due to market anticipation of
  additional shares hitting the street

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IPO Underpricing

• May be difficult to price an IPO because there
  isnt a current market price available
• Private companies tend to have more asymmetric
  information than companies that are already
  publicly traded
• Underwriters want to ensure that, on average,
  their clients earn a good return on IPOs
• Underpricing causes the issuer to leave money on
  the table

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• Raising Debt
• An overview of the at
• Bank Loan Syndication Process

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Two Markets Served for both the Corporate Bond
and Bank Debt

• Investment Grade Bond / Loan Market
• Rated BBB- and Higher (Corporate)
• Arrangers hold Higher Exposure (200 million )
• The majority of the Syndicate are traditional
  banks

• HY Bond / everaged Loan Market
• Rated BB and Lower (Corporate)
• Arrangers hold Lower Exposure
• The majority of the Syndicate are non-banks
  (Financial institutions)

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The Bond / Loan Syndication Process
Lead Arranger Bank Administrative Agent
Issuer /Company
Bookrunner Bank 1 Syndication Agent
Bookrunner Bank 2 Documentation Agent
Bookrunner Bank 3 Documentation Agent
First Tier
Co-Mgr Bank 1
Co-Mgr Bank 2
Co-Mgr Bank 3
Co-Mgr Bank 4
Co-Mgr Bank 5
Co-Mgr Bank 6
Second Tier
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Retail Level
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
Bank or Institution
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The Loan Syndication Process (Continued)

• The issuer or Company solicits bids from
  Arrangers.
• Arrangers will outline their syndication
  strategy for both the Bond and Loan markets
  their view on the way the loan will price in
  market.
• Issuer gives the mandate to one or more
  Arrangers (Co-Arrangers)
• The arranger will prepare an information memo
  (IM) / Red Hearing describing the terms of the
  transactions.
• The IM typically will include
• Executive Summary
• Investment Considerations and Risks (bond)
• Summary of Terms and Conditions (Term Sheet)
• Transaction Overview
• Company
• Management and Equity Sponsor Overview
• Industry Overview
• Financial Model
• Timing for commitments, closing, as well as
  fees on level of commitments

As part of the syndication process we will
discuss in detailed these two items following
this page.
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The Loan Syndication Process (Continued)

• 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
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The Loan Syndication Process (Continued)

• 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.

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Typical Leverage Loan Structure (Rated by SP as
BB or lower)

• Bank Debt Facilities (typically represented
  30-35 of Total Capital)
• Revolving Credit (Typically, Commercial Banks
  provide this facility)
• Commitment Amount
• Typical maturities of 5-6 years
• Funded Versus Unfunded Amount
• Funded Pricing and Unfunded Pricing (Commitment
  Fee)
• Letters of Credit
• Term Loans (typically, Non-Bank institutions
  provide this facility)
• Funded Amount sometimes structured as Delayed
  Draw Down
• Typical Maturities of 6-8 years

• Public Bonds / Notes (typically represented
  20-25 of Total Capital)
• Typical maturities of 9-11 years
• Unsecured Debt

Private Equity (typically represented 30-45 of
Total Capital)
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Typical Leveraged Deal Term Sheet / Credit
Agreement

• 1. Parties to the Credit Agreement
• Borrower
• Holding Company
• Guarantor / Parent and Subsidiaries Guarantee
• Agent Banks
• 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)
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Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)

• Money Terms
• Amount / Tranches
• Revolving Credit
• Term Loans
• Pricing
• Interest Rate / Margin over LIBOR
• Commitment Fees on unfunded portion
• Maturities
• Amortization Schedule (set principal payments)

Need 100 Vote from the syndicate banks to amend
these terms
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Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)

• 4. Non-Money Terms
• Financial Covenants
• Negative Covenants
• Affirmative Covenants

Need Majority Vote (typical 51) from the
syndicate banks to amend these terms
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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
New Terminology in 2006 and 2007 Green Shoe
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
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Typical Leveraged Deal Term Sheet / Credit
Agreement (Continued)

• Other Terms Conditions
• Security / Liens / Guarantees
• 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)

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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
• i.e. LIBOR Floor 3.00
• Margin Spread 400 basis points (or 4.00)
• OID 96
• Then the Loan Yield is calculated to
• 3.0 4.0 (100 96)/100/4 7.0 (4.0
  / 4) 7.0 1.0 8.0 Yield

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Example of a Large Syndicated Loan Harrahs
Entertainment
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Example of a Large Syndicated Loan Harrahs
Entertainment

• TRANSACTION OVERVIEW
• On December 19, 2006, Harrahs Entertainment Inc.
  (Harrahs or the Company) announced that it
  had entered into an agreement to be acquired by
  affiliates of Apollo Management (Apollo) and
  TPG Capital (TPG) in a transaction valued at
  approximately 31.2 billion (including estimated
  fees and expenses)
• Harrahs Entertainment, based in Las Vegas,
  Nevada, is the worlds largest and most
  geographically diversified gaming company,
  operating 50 casinos in six countries, with the
  1 or 2 market share in almost every major
  gaming market in the U.S.
• At the time of the acquisition, Harrahs
  generated LTM 9/30/07 Net Revenues and Pro Forma
  Adjusted EBITDA of 10.6 billion and 2.9
  billion, respectively.
• Harrahs Operating Company (HOC) owns or
  manages 43 of the 50 Harrahs Entertainment
  casinos and generated LTM 9/30/07 Net Revenues
  and Pro Forma Adjusted EBITDA of 8.0 billion and
  2.0 billion, respectively

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Example of a Large Syndicated Loan Harrahs
Entertainment
TRANSACTION SOURCES USES
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Example of a Large Syndicated Loan Harrahs
Entertainment
STRUCTURE TOO LEVERAGE??
Aggressive Structure??
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Example of a Large Syndicated Loan Harrahs
Entertainment
CORPORATE STRUCTURE
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Example of a Large Syndicated Loan Harrahs
Entertainment
SUMMARY OF TERMS SENIOR CREDIT FACILITY
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Example of a Large Syndicated Loan Harrahs
Entertainment
SYNDICATION GROUP
Lender
Bank of America (Joint Lead Arranger)
Deutsche Bank (Joint Lead Arranger)
Citibank (Joint Bookrunning Managers)
Credit Suisse (Joint Bookrunning Managers)
JP Morgan (Joint Bookrunning Managers)
Merrill Lynch (Joint Bookrunning Managers)
Bear Stearns (Co-Managers)
Goldman Sachs (Co-Managers)
Morgan Stanley (Co-Managers)

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Example of a Large Syndicated Loan Harrahs
Entertainment
SYNDICATION PROCESS WRONG TIMING FOR AN
UNDERWRITTEN DEAL???

• The general syndication of Harrah's was
  launched 1/15/2008 with a bank meeting in New
  York. Over 1,000 bankers attended the general
  syndication meeting with commitments requested by
  1/29/2008.
• Unfortunately, given the i) global
  correction in the financial markets on the week
  of January 21, 2008, ii) dramatic widening of
  high yield credit spreads and iii) reduction in
  the 3-month Libor Rate by at least 120 bps that
  followed, the secondary market loan prices pulled
  back materially and bank investors started to
  demand a much higher All-In Yield (about L 500)
  on primary market transactions, like Harrah's.
• Investors were demanding All-In Yield of
  between L 450 - 500 to commit/purchase Harrah's
  Term Loan B. Since the offered TLB margin spread
  was L300, investors were demanding a discount
  (OID) of between 92-93 (compared to the original
  OID offer of 96.5) from the Underwriters/Arrangers
  .
• Following the failed syndication, Arrangers
  in order to reduce their exposure, were offering
  Harrah's TLB with an OID in the low 90's.

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Example of a Large Syndicated Loan Harrahs
Entertainment
SYNDICATION PROCESS WRONG TIMING FOR AN
UNDEWRITTEN DEAL?? (continued)

• At the time, given such low demand, it was
  reported that Credit Suisse started to quietly
  syndicate their exposure prior to the commitment
  deadline (1/29/2008), independent of the other
  Arrangers.
• As a consequence, each of the Arrangers
  started to syndicate their own exposure to their
  own investors offering as low as 90's OID to
  syndicate their exposure.
• After that incident, there was a new
  agreement made between the Arrangers called The
  Memorandum of Understanding (MOU) where it
  prohibits one arranger to sell their exposure
  within an agreeable period (6 months after the
  commitments are due) without the consent of the
  other Arrangers.

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