raising capital

Raising Capital

Raising Equity

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 isn’t 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

Two Markets Served for both the Corporate Bond and Bank Debt

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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)

The Bond / Loan Syndication Process

Issuer /CompanyLead Arranger Bank

Administrative Agent

Bookrunner Bank #1

Syndication Agent

Bookrunner Bank #2

Documentation AgentFirst 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

“Retail” Level

Second Tier

Bookrunner Bank #3

Documentation Agent

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

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

Bank or Institution

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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

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 deal’s 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)

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As 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


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This 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 Analysis


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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 - Issuer’s Cash Flow covering it’s debt obligations (interest and principal payments)

Variance of Projections – based on the projections, the model typically assumes a certain haircut (10-30%) to the management’s projections and it tests it’s 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 bank’s 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 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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3. 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

Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

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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 Financial Covenants

Typical Negative 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

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


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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5. 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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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 Harrah’s Entertainment

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TRANSACTION OVERVIEW

On December 19, 2006, Harrah’s Entertainment Inc. (“Harrah’s” 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)

Harrah’s Entertainment, based in Las Vegas, Nevada, is the world’s 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, Harrah’s generated LTM 9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of $10.6 billion and $2.9 billion, respectively.

Harrah’s Operating Company (“HOC”) owns or manages 43 of the 50 Harrah’s 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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TRANSACTION SOURCES & USES

SOURCES: USES:TERM L+ RATE COMM $ AMT % CAP $ AMT

Revolver 6 3.00% 7.25% 2,000.0 0.0 0.0% Purchase Shares 17,291.0New Term Loan-B 7 3.00% 7.25% 7,250.0 7,250.0 23.2% Extra Cash 642.0 Total Bank Debt 9,250.0 7,250.0 23.2%Existing Senior Debt 8 6.70% 4,624.0 14.8% Refinance Existing Debt 7,582.0CMBS 5 7.50% 6,500.0 20.8% Fees & Expenses 1,106.0Senior Unsecured Notes 10 10.75% 5,275.0 16.9% Rollover Debt 4,624.0Senior Unsecured Notes (PIK) 10 10.75% 1,500.0 4.8% Total Senior Sources 25,149.0 80.5% Total Uses 31,245.0

Senior Sub Debentures 0 0.00% 0.0 0.0% Sources - Uses 0.0Junior Sub Debentures 0 0.00% 0.0 0.0% Total Junior Sources 0.0 0.0%

New Preferred Stock 10 10.00% 2,000.0 6.4%New Common Equity 4,096.0 13.1% Total Equity 6,096.0 19.5%Total Sources 31,245.0 100.0%

ASSUMED LIBOR (1/2008) 4.25%

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STRUCTURE – TOO LEVERAGE??

Pro Forma Capitalization Pro Forma % of 2007($ in MM) At Close Total Cap EBITDA$2B Revolver -$ 0.0% 0.0xTerm Loan B 7,250.0 31.4% 3.6x

Bank Debt 7,250.0$ 31.4% 3.6x

Sr unsecured cash-pay 5,275 22.9% 2.6xSr unsecured PIK toggle 1,500 6.5% 0.7x

Total Senior Debt 14,025.0$ 60.8% 6.9x

Rollover of existing debt 4,624.0 20.0% 2.3x

Total Debt 18,649.0$ 80.8% 9.2x

Contributed Equity 4,422.3 19.2%Total Capitalization 23,071.3$ 100.0%Source: SMBC analysis

Adjusted 2007 EBITDA 2,037.0$

Aggressive Structure??

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CORPORATE STRUCTURE

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SUMMARY OF TERMS – SENIOR CREDIT FACILITY

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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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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 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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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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raising capital

Documents