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PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

Amsterdam Institute of Finance Joseph V. Rizzi June, 2010. PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products). Expanding Debt Capacity. Rising purchase price multiples and ROE concerns drove acquirers to seek ways to expand their debt capacity. Some of the most common techniques are:

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PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products)

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  1. Amsterdam Institute of Finance Joseph V. Rizzi June, 2010 PRODUCTS: EXPANDED DEBT CAPACITY(Affordability Products)

  2. Expanding Debt Capacity Rising purchase price multiples and ROE concerns drove acquirers to seek ways to expand their debt capacity. Some of the most common techniques are: • Adjusted (Increased) EBITDA - Operating improvements - Normalization • Asset Sales - Bridges to asset sales - Liquidity is key in case bridge cannot be taken out • Innovative Securities - Defer interest - Push out amortization - Increase flexibility 2 2 Amsterdam Institute of Finance June, 2010

  3. Debt Options The above table shows the features of different debt options available to issuers The availability of the different options is subject to market conditions 3 Amsterdam Institute of Finance June, 2010

  4. Innovative Securities Institutional Investors/Relative Value Considerations • Innovative securities allow for the expansion of debt capacity by one or more of the following mechanisms: • Reduce Annual Debt Service - Reducing cash interest expense - Lengthen duration (Reduce/Delay amortization) • Increasing Flexibility - Covenants - Public Disclosure - Cash flow control - Call Premium - Bridging - Partial/fully Unsecured • Tranching (sequential ordering of payment or priorities) - Holding Company instruments - Restricted Subsidiaries - Second lien/bifurcated collateral-crossing liens - Senior/Subordinated • Cost – Second Lien vs Mez 4 4 Amsterdam Institute of Finance June, 2010

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  7. Second Lien Loans • Senior Secured, but with Junior or Second Lien • Higher default • Lower recovery • Originally developed as Rescue Finance • Competing with EURO Mezzanine • Investors – hedge funds and CLO • Formerly Attractive Pricing: Spread differential between Second Lien and First Lien 350 BP. • Issues: - Inter-creditor - Standstill Agreement - Obligations - New Investors Behavior in a Workout - CLO Rating Impact 7 7 Amsterdam Institute of Finance June, 2010

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  10. Covenant Lite • Covenant Issues • Creditor – preserve deal; recovery value • Debtor - flexibility • Covenant Lite – liquidity vs. structure • Similar to Investment Grade • One or No Financial Covenants • Rating Agency impact on CLO • Volume • US • 1H07 – 104B (35% of loans) • 3H07 – Virtually 0 • Europe – Shut down 1Q08 • difficult 10 10 Amsterdam Institute of Finance June 2010

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  12. ‘OpCo \ PropCo’ Financing (1) By structuring the financing of a pool of assets with a credit quality stronger than the corporate credit as a whole, ‘OpCo’ \ ‘PropCo’ financing can provide a cost effective source of (acquisition) financing. • Example:- • Target company de-merged into ‘PropCo’, which owns the real estate assets, and ‘OpCo’, the operating company. • Banks finance ‘PropCo’ acquisition of properties at agreed Loan to Value ratio. • ‘PropCo’ leases the real estate assets to ‘OpCo’. • ‘PropCo’ debt refinanced by traditional Property Lenders or via Commercial Mortgage Backed Securities (CMBS) market. • ‘OpCo’ required to service the acquisition debt not assumed by ‘PropCo’. 12 12 Amsterdam Institute of Finance June, 2010

  13. ‘OpCo \ PropCo’ Financing (2) BidCo Notes Financing Approx. 100% Approx. 100% PropCo OpCo Rental Payments 13 Amsterdam Institute of Finance June, 2010

  14. Asset Securitization Requirements: • Stable and resilient cash flows from business • Control over cash flows through sale of assets or adequate legal structure • Target investment grade rating to maximize access to investors and lower cost of capital Different leverage measurements Issues • Favorable bankruptcy laws • Inter-creditor issues • Flexibility Closed: 2H07 to present 14 14 Amsterdam Institute of Finance June, 2010

  15. High Yield Bonds • Longer Term Bonds • 7-10 years and longer • 4/5 NC • Public or Private • Usually issued in private form with exchange rights • Pricing would step up if bonds not public within short period (say 180 days of close) • Usually issued as subordinated debt but can also be senior unsecured • Markets • US - $871B size • Euro - €65B size 15 15 Amsterdam Institute of Finance June, 2010

  16. Registration Rights Amsterdam Institute of Finance June, 2010

  17. Key High Yield Terms • Registration Rights • Issuer • Status • Degree of Subordination • Limitations on liens • Limitations on indebtedness • Restricted payments • Asset sales • Change in control 17 17 Amsterdam Institute of Finance June, 2010

  18. European Mezzanine Terms Covenants * Extensive (bank type) * Maintenance basis (tested quarterly) Security * Second secured Call Provisions * Generally callable immediately (103,102,101) Maturity * Ten year Pricing * LIBOR + 800 bps (400 cash, 400 PIK) * Warrants for total return (15-17%) Liquidity * Low Disclosure: * Limited Marketing * No research coverage, no roadshow Rating Requirements * None 18 18 Amsterdam Institute of Finance June, 2010

  19. Bifurcated Collateral(Crossing Liens) • Trend: Increasing segmentation of loans with reduced covenant or collateral • Percentage of institutional loans with impaired covenants or collateral • 1H07 47%, 2H07-Nil • 2006 24% • Breakdown 2007 1H07 47% • 11% Second Lien • 6.4% Bifurcated • 23% Covenant Lite • 7% Unsecured • Bifurcated/Crossing Liens – See HCA for an example • Asset backed revolving credit backed by first lien or receivables and inventory • Term loans back by lien on other non-current assets • Property, plant and equipment • Stock pledge • Pricing premium – 100 bps compared to revolver • Inter-creditor complications 19 Amsterdam Institute of Finance June, 2010

  20. PIK • Pay if you can toggle • Eats up equity • Characteristics (Source: LCD) 20 20 Amsterdam Institute of Finance June, 2010

  21. Stapled Financing Staple financing term sheet to deal book Be prepared to fund Establishes ceiling Conflicts of interest 21 21 Amsterdam Institute of Finance June, 2010

  22. Bridge Loans • Equity • Bank provides equity • Find other equity investors later or keep • Reduce PE equity • Lowers need for club or larger deals • Rationale – pay to play • Bonds 22 Amsterdam Institute of Finance June, 2010

  23. Changing Nature of Leveraged FinanceCapital Structures • 2006 – 1H07 • Common equity • Hybrid preferred (0.5x) • PIK notes (0.5x) • Unsecured/mezzanine (1x) • Carve-out collateral (1x) • - securitization • - OPCO/PROPCO • Second lien loans (1x) • Senior secured bank loan (4x) • - Amortizing T/LA – 20% • - B/C tranches – 80% • 2004 + 2H07 - Present • Common equity • Unsecured/mezzanine (1x) • Senior secured bank loan (4x) • - Amortizing T/LA – 40% • - B/C tranches – 60% FDX – 5x + PPX – 7.5 + FDX – 6x + PPX – 8.5 + • Increasing layers of debt • Directed at different investors • Intercreditors conflicts 23 23 Amsterdam Institute of Finance June, 2010

  24. HCA: Structuring in Action • EBITDA/I – 1.9x (2007E) • EBITDA – CAPEX/I – 1.1x (2007E) • HCA – 33 bln USD (corp rating B2/B+) • FDX – 6.53x (LTM) • PPX – 7.7x • Club – Bain, KKR, ML (5 bln) • W/W – BofA, JPMC, Citi, ML • Debt Package 24 24 Amsterdam Institute of Finance June, 2010

  25. HCA Legal Structure Sponsors Management Healthtrust Holdings Equity Merge Acquisition Corp HCA, Inc Bank Loans Existing Notes Sub D Sub E Sub A Sub B Sub C European subs Euro T/L Restricted subs (gurantors) Unrestricted subs 25 Amsterdam Institute of Finance June, 2010

  26. Disclosure This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources believed to be reliable, but such statements are made without any representation as to accuracy or completeness. Opinions expressed are current opinions as of the date appearing in this material only. These materials are subject to change, completion, or amendment from time to time without notice and CapGen Financial is not under any obligation to keep you advise of such changes. All views expressed in this presentation are those of the presenter, and not necessarily those of CapGen Financial. 26 Amsterdam Institute of Finance June, 2010

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