financing acquisitions using debt capital

www.sccreditadvisors.com

SC Credit Advisors Recapitalization Advisory For the Middle Market

A Stone Carlie Company

Financing Acquisitions Using Debt Capital

For Privately Held Middle Market Companies

Table of Contents

Financing Acquisitions Using Debt Capital For 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 15

For questions or to discuss these financing alternatives, please contact SC Credit Advisors at [email protected] or 314-889-1197.

2 www.sccreditadvisors.com

mailto:[email protected]

www.sccreditadvisors.com 3

5.07x

4.56x

3.41x

4.07x 4.28x 4.28x

5.44x

0x

1x

2x

3x

4x

5x

6x

Debt Multiples of Acquisition Related Middle Market Loans1

First Lien Debt/EBITDA Second Lien Debt/EBITDA

Other Sr Debt/EBITDA Sub Debt/EBITDA

Increased leverage (left graph) and reduced borrowing costs (right graph) are creating opportunities for companies to grow through leveraged acquisitions.

Lenders Provide Ample Low Cost Debt for Acquirers

Source for both charts: S&P LCD

1)Lenders include: Banks, Finance Companies, Business Development Companies, Insurance Companies, other Institutional Lenders.

EBITDA: Earnings before interest, taxes, depreciation and amortization.

L+

L+200

L+400

L+600

L+800

L+1000

All In Interest Rate Spread for Institutional Loans Backing

Middle Market LBO’s2

LIBOR spread Upfront Fee LIBOR Floor Benefit

2)Rates on LBO (Leveraged Buyout) loans are proxies for rates on loans for leveraged acquisitions.

Selling Company Acquired for $100.0mm

7.1x EBITDA Price Allocated as Below:

Other Assets / Goodwill $35MM

Fixed Assets $40MM

Accounts Receivable &

Inventory $25MM

Case Study: Financing an Acquisition - Selling Company Profile

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Selling Company Profile*

- Selling Company is purchased for $100.0 million through an asset purchase (allocation of purchase price at left)

- The Seller’s annual EBITDA (Earnings Before Interest Taxes, Depreciation and Amortization) equals $14.0 million

- Annual Depreciation / Amortization equals $4.0 million, Capital Expenditures equal $2.0 million

- The acquisition multiple equals 7.1x ($100.0 million acquisition price / $14.0 million EBITDA)

- Note: Sale multiples for any given transaction will vary

With 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)*

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Year 1

Interest

$510,000

$940,000

$2,340,000

$3,790,000

Year 1

Interest

$510,000

$1,780,000

$1,980,000

$4,270,000

ABL Revolver $17MM @3%

Equity $40MM

Equity $25MM

Sr. Term Loans $25MM @4%

(blended rate)

Sr. Term Loans $40MM

@4.75% (blended rate)

Accounts Receivable &

Inventory $25MM

Other Assets / Goodwill $35MM

Fixed Assets $40MM

2nd Lien Loan $18MM @11%

Selling Company Acquired for $100mm

7.1x EBITDA Price Allocated as Below:

Alternative 1 (Average Leverage)

$60.0mm Total Debt 4.3x Debt to EBITDA

Alternative 2 (Higher Leverage) $75.0mm Total Debt 5.4x 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%

6


Capital Item

Brief Description

ABL Revolver • Revolving Line of Credit with a commercial bank, availability based on Accounts Receivable and Inventory (Asset Based Loan – ABL)

Senior Term Loans • Senior Term Loans of varying amortization. In acquisitions, these types of loans may be provided by a commercial bank, business development company, finance company, insurance company or investment fund, depending on circumstances

Mezzanine Loans • Primarily a cash flow based loan provided by a mezzanine fund

2nd Lien Loan • Second lien loan (behind ABL and Senior Term Loans) provided by business development company or investment fund

Equity • If acquirer is an investment fund (Private Equity or other financial sponsor), this is an investment from it’s fund

• If acquirer is an operating company (strategic acquirer), this is an investment from the acquiring entity from available cash or a (re)financing at the acquirer level

• Capital structure will also depend on extent of operational integration 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)

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($ Millions)

Alternative 1 Alternative 2

(Average Leverage) (Higher Leverage)

ABL Revolver Year 1 Interest $0.51 $0.51

Senior Cash Flow Term Loans

Year 1 Amortization 3.00 5.00

Senior Cash Flow Term Loans

Year 1 Interest 0.94 1.78

2nd

Lien Loan Year 1 Amortization n/a n/a

2nd

Lien Loan Year 1 Interest n/a 1.98

Mezzanine Loan Year 1 Amortization n/a n/a

Mezzanine Loan Year 1 Interest 2.34 n/a

Total Year 1 Debt Service $6.79 $9.27

Debt



EBITDA $14.00 $14.00

Depreciation & Amortization (4.00) (4.00)

EBIT (Operating Income) $10.00 $10.00

Interest Expense (3.79) (4.27)

Pre-tax Income $6.21 $5.73

Tax @35% (2.17) (2.01)

Net Income $4.03 $3.72

Case Study: Financing an Acquisition -Two Alternative Capital Structures (Net Income)

8


($ Millions)

Case Study: Financing an Acquisition -Two Alternative Capital Structures (Credit Ratios)

9


($ Millions)



Total Debt Service (last line p. 7) $6.79 $9.27

Cash Taxes 2.17 2.01

Capital Expenditures 2.00 2.00

Total Fixed Charges $10.97 $13.28

Total Senior Debt $42.00 $57.00

Total Debt $60.00 $75.00

EBITDA $14.00 $14.00

Basic Credit Ratios

Fixed Charge Coverage Ratio

(EBITDA/Total Fixed Charges) 1.28x 1.05x

Total Senior Debt to EBITDA 3.00x 4.07x

Total Debt to EBITDA 4.29x 5.36x

Basic Considerations in Evaluating Debt Capital

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Consideration

Items to Address

Cost • Minimize interest cost • Hedge interest rate risk • Minimize lender fees • Reasonable prepayment

penalties (if any)

• Reasonable ongoing fees • Performance/leverage-based

grid pricing

Structure (terms) • Covenants • Collateral • Debt service obligations

(principal and interest) are comfortably within projections

• Ability to refinance unimpeded • Intercreditor agreements • Nature of external (acquirer)

credit support (if any)

Availability • Ample liquidity to fund current operations and future growth

• Enough projected liquidity to manage any variability in future performance

Capital Solutions for Different Types of Acquisitions

11


Situation

Considerations

Debt Capital Solutions

Conventional 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 negative EBITDA, stressed existing customers, vendors, product issues, etc.)

• Avoid legacy liabilities • Minimize buyer’s external credit support

• Tie capital structure to operational turnaround

• Senior debt: asset based • Bridge financing • May need to over-equitize at purchase and refinance with higher leverage later

Seller is Outside of Buyer’s Industry

• Avoid new business straining core business

• Avoid significant external credit support from Buyer

• Senior debt: asset based / cash flow

• 2nd lien • Mezzanine debt • Unitranche • Hybrid (debt/equity)

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Situation

Considerations

Debt Capital Solutions

Buyer Planning to Make Multiple Acquisitions

• Ability to act quickly for new opportunities

• Minimize transactions costs

• Consider Acquisition Facility • Senior debt: asset based / cash flow

• Senior debt: delayed draw term loan and/or revolver

• 2nd lien • Mezzanine debt

Most of the Value in an Acquisition is Cost Savings or Synergies

• Ability to service existing and additional debt in upside and downside operating scenarios

• Senior debt: asset based or cash flow

• Mezzanine debt • Hybrid (debt/equity) • May need to over-equitize, at purchase and recapitalize with higher leverage later

Capital Solutions for Different Types of Acquisitions

About SC Credit Advisors: Overview

• 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.

• Our goal is to develop and implement creative and practical financing solutions for our clients, allowing them to focus on running their businesses.

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Typical Client Profile for Capital Raising

Ownership Private

Revenue $10 million to $300 million

Capital Needs $5 million to $50 million; growth or distressed situations

Existing Capital Structure

Moderately to highly leveraged

Industries All industries, except development stage companies


*Securities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are also employees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100

About SC Credit Advisors: Services

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Corporate and Financial Sponsor • Assisting middle market companies and their shareholders in raising debt and equity capital (structuring, sourcing, negotiating, funding)

• Managing stressed lender and investor relationships, including facilitating the negotiation 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 needed Lender • Providing borrowers with capital alternatives which complement and support a lender’s position

• Assisting the lender in exiting loans to troubled or distressed borrowers through a refinancing or full recapitalization

• Providing operational assistance or functioning as the turnaround manager in distressed situations to help borrowers improve operating practices and reduce lender risk

High Net Worth Investor • Sourcing, structuring and/or evaluating complex debt and equity private placements

• Evaluating existing investments for proper structure, risk, return and control parameters


Securities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are also employees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100

Contact Information

Headquarters

101 South Hanley Road

Suite 800

St. Louis MO 63105

GREG PORTO Office: 314.889.1197 Mobile: 312.339.2857 Email: [email protected]

GREG TOBBEN Office: 314.889.1196 Mobile: 314.458.8186 Email: [email protected]

A Stone Carlie Company

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Securities transactions conducted through registered representatives of StillPoint Capital, LLC Member FINRA/SIPC who are also employees of SC Credit Advisors, LLC. StillPoint Capital: 13051 Linebaugh Ave., Suite 101, Tampa, Florida 33636. ph: 813-891-9100

financing acquisitions using debt capital

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