U. S. Loan Syndications

Chris DroussiotisFall 2010

Table of ContentsLoan Syndication Background & HistorySyndication Loan Market Overview Types of Loan Syndications FormatsLoan Syndication Process including a summary of Internal Rating AnalysisTypical Leverage Loan StructureTypical Leverage Loan Term Sheet / Credit AgreementExample of Large SyndicationLecturers Biography

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A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial or investment banks known as Arrangers.

Arrangers serve the investment-banking role of raising investor dollars for an issuer in need of capital.

The issuer pays the Arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan.

In the Mid-1980s when the larger buyouts needed bank financing, the syndicated loan market became the dominant way for issuers to tap banks and other institutional capital providers for loans.

In the late 90s to early 2000s hundreds of Collateral Loan Obligation funds (CLOs) were created and joined the loan syndication process. These funds were referred to as non-bank institutions or institutional investors. These institutional investors played a key role in the exponential growth of the Mega LBO deals seen in 2005-2007.

By 2007, nearly 75% of the loans were provided by non-banks, versus less than 20% 10 years earlier. The Fall of 2007 the end of liquidity in the U.S Syndication market Traditional Banks had to step up in the months and years to follow the liquidity crisis The U.S Syndication market completely changed.

Loan Syndication Background & History3

Two Markets Served4Investment Grade Loan Market Rated BBB- and Higher (Corporate) Arrangers hold Higher Exposure ($200 million +) The majority of the Syndicate are traditional banksLeveraged Loan Market Rated BB+ and Lower (Corporate) Arrangers hold Lower Exposure thus the need to syndicate The majority of the Syndicate are non-banks (Financial institutions)

Two Markets Served5Investment Grade Loan MarketLeveraged Loan Market$715 Billion$229 Billion$692 Billion$245 Billion

Loan Syndication Market Overview (Continued)Exponential Demand Surge of Syndicated Leveraged Loans Vs Bonds6

Extremely high liquidity in the market gave banks confidence to underwrite larger and larger dealsLeveraged Loan $5.0$8.0$11.3$22.3$28.4$33.0$37.9Hi Yield $3.0Leveraged Loan $11.3Leveraged Loan $9.0Hi Yield $6.03Other (CMBS) $7.25Leveraged Loan $15.185Hi Yield $13.22Leveraged Loan $21.7Hi Yield $11.3Leveraged Loan $26.65Hi Yield $11.2528 Mar 0520 Nov 052 Oct 0624 Jul 0626 Feb 0730 Jun 07Source: LoanConnectorLoan Syndication Market Overview (Continued)The Exponential Surge in Supply of Syndicated Loans was driven by large Leveraged Buyouts starting in 2005 thru the summer of 20077

Institutional Investors through June 2007 dominated the marketOver time, institutional investors have replaced banks as lenders with over 75% of demand coming from institutional investors as of LTM 6/30/07Source: Deutsche BankLoan Syndication Market Overview (Continued)Loan Syndication Participants:8

Loan Syndication Market Overview (Continued)The Leverage Loan Syndication Supply and Demand ImbalanceBefore (LTM June 30, 2007(1))After (2nd Half 2007(2)) As of 12/05/07Investor Landscape has changed($ in Billions)Sources:(1) Standard & Poors Leveraged Lending Review 2Q07(2)Demand assumptions: Banks and Other at 35% consistent with LTM 6/30/07; CLO, Hedge Fund and New Capital amounts Wall Street estimates Supply assumptions: Primary Issuance based on current estimated forward calendar; Liquidation / Collateral Calls amounts Wall Street estimatesFinance Companies, Insurance Companies, Prime Rate FundsStandard & Poors LCD News 12/5/07(5) Grossed up for ordinary issuance(3)Liquidation / Collateral CallsPrimary Issuance(5)CLOsBanksDemandSupply(3)Other$95 (15%)$120 (19.3%)$95 (15%)$310 (50%)$620$300$50$50 (14.3%)$50 (14.3%)$10 (3.5%)$620$620$350$162 B (46.3%)Capital Required to Absorb Excess Supply$350Hedge Funds / HY$33 (9.4%)Cross-over Investor / Distress Buyer / Opportunity Funds$45 (14.5%)(2)(2)(4)9

The Secondary Loan Market took a plunge as a result of oversupply at the time of financial crisis.10New Issue Loans with LIBOR Floor, higher Spread pricing and tighter structures post 2007

Underwritten deal

Best-efforts syndication

Club dealTypes of Loan Syndication Formats11

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)

Balancing between holding and syndicating exposure 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), though given the size of the facility, the banks are phased with the dilemma of successfully syndicating and holding their exposure. Types of Loan Syndication Formats (Continued)12

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).

Types of Loan Syndication Formats (Continued)13

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).

Types of Loan Syndication Formats (Continued)14

The Loan Syndication ProcessIssuer /CompanyLead Arranger BankAdministrative AgentBookrunner Bank #1Syndication AgentBookrunner Bank #2Documentation AgentFirst TierCo-MgrBank #1Co-MgrBank #2Co-MgrBank #3Co-MgrBank #4Co-MgrBank #5Co-MgrBank #6Retail LevelSecond TierBookrunner Bank #3Documentation AgentBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or InstitutionBank or Institution15

The issuer or Company solicits bids from Arrangers. Arrangers will outline their syndication strategy and 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) describing the terms of the transactions. The IM typically will include: Executive Summary Investment Considerations 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

Bank meeting is scheduled at which potential lenders hear the management and the Investor group.

A deadline is given for the banks to send their commitment levels subject to final documentation

Each Bank analyzes the deals credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.

The Arranger collects all commitments different amounts from each Bank

Allocations are given and Legal Documentation is sent for their final review.

If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.

After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.

The Loan Syndication Process (Continued)16As part of the syndication process we will discuss in detailed these two items following this page.

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

Internal Legal Review

KYC (know-your-customer) and Compliance Review

The Loan Syndication Process (Continued)17This process will be discussed following this page

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 AnalysisThe Loan Syndication Process (Continued)17The 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.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

Typical Leverage Loan Structure (Rated by S&P 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 yearsPublic 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):19

Typical Leveraged Deal Term Sheet / Credit Agreement1. 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 Banks2. Description of the Transaction / Purpose of the Loan (s)20

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 termsTypical Leveraged Deal Term Sheet / Credit Agreement (Continued)21

4. Non-Money Terms:

Financial Covenants

Negative Covenants

Affirmative CovenantsNeed Majority Vote (typical 51%) from the syndicate banks to amend these termsTypical Leveraged Deal Term Sheet / Credit Agreement (Continued)22

Typical Financial CovenantsTypical Negative CovenantsMaximum Leverage Ratio (Total Debt / EBITDA)Maximum Senior Leverage Ratio (Bank Debt / EBITDAMinimum Coverage Ratio (EBITDA / InterestMinimum Fixed Charge Ratio (EBITDA Capex Taxes ) / Interest + Principal Payments)Maximum Capital ExpendituresMinimum Tangible Net Worth

Limitations on Additional DebtLimitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactionsLimitations of Dividends / InvestmentsLimitation on Liens / Negative PledgesExcess Cash SweepLimitations of Change of OwnershipTypical Leveraged Deal Term Sheet / Credit Agreement (Continued)New Terminology in 2006 and 2007: Covenant Lite Structures (Covy lite) Incurrence Tests Vs Maintenance Tests

New Terminology in 2006 and 2007: Green Shoe

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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 DefaultMaterial Adverse Clause (MAC)24

Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)Pricing, Fees and Expenses on Separate Documents:

Fee Letter Interest Rate (Applicable Margin and Leveraged Grids) Expenses25

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% YieldTypical Leveraged Deal Term Sheet / Credit Agreement (Continued)26

Other Schedules Attached to the Credit Agreement Intercreditor Agreement Purchase Agreement Hedging Arrangement / Hedging Agreement

Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)27

Example of a Large Syndicated Loan Harrahs Entertainment28

Example of a Large Syndicated Loan Harrahs EntertainmentTRANSACTION 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, respectively29

Example of a Large Syndicated Loan Harrahs EntertainmentTRANSACTION SOURCES & USES30

Example of a Large Syndicated Loan Harrahs EntertainmentSTRUCTURE TOO LEVERAGE??Aggressive Structure??31

Example of a Large Syndicated Loan Harrahs EntertainmentCORPORATE STRUCTURE32

Example of a Large Syndicated Loan Harrahs EntertainmentSUMMARY OF TERMS SENIOR CREDIT FACILITY33

Example of a Large Syndicated Loan Harrahs EntertainmentSYNDICATION GROUP34

LenderBank 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)

Example of a Large Syndicated Loan Harrahs EntertainmentSYNDICATION 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 L+300, 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 EntertainmentSYNDICATION 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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37Chris Droussiotis, MBA, C.H.E.Chris Droussiotis has twenty three 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 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 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.Chris is also the president and founder of CSD&A, a financial consulting firm established in 1989 to assist companies with business plan development, quantitative analysis, financial modeling, enterprise valuation, Portfolio Anaysis, M&A, and debt and equity capital procurement.BIOGRAPHY OF THE LECTURER