Clearwater Debt Advisory

Clearwater Debt Advisory

B A C k g r o u n D t o C l E A r w A t E r Clearwater International is an award winning mid market corporate finance advisory firm operating from 4 offices across the uk. we have a market leading research and origination capacity. Based on the latest 2012 figures, we are ranked no.3 most active adviser in Europe (thomson reuters) and the majority of our uk led M&A transactions are cross border. Importantly, we are totally independent of any larger investment bank or professional services firm. our debt advisory team is made up of experienced corporate bankers with a wealth of knowledge of the debt & capital markets. Clearwater has completed 126 deals in last 4 years Aggregate deal value of 2.9bn Dedicated Project Finance resource Equal split between Corporate and Private Equity related transactions 2 D E B t A D V I S o r Y

Chris Smith Partner Mark taylor Partner Direct tel: +44 (0) 845 052 0308 Direct Fax: +44 (0) 845 052 0303 Mobile: +44 (0) 7766 442770 Email: chris.smith@cwicf.com Direct tel: +44 (0) 845 052 0350 Direct Fax: +44 (0) 845 052 0341 Mobile: +44 (0) 7795 542207 Email: mark.taylor@cwicf.com Chris joined Clearwater in 2009 to start up the Debt Advisory team having spent the previous 11 years at HBoS. At HBoS Chris was responsible for some of the bank s highest profile investment deals, including Vue Cinemas and David lloyd leisure. In his final two years as a banker he concentrated on complex restructurings including McCarthy and Stone, Park resorts and Focus DIY. Chris is based in our london office. recent clients include Day lewis plc, london Square, Volker wessels uk and Clode retail Finance. Mark joined Clearwater from Ernst & Young in 2012 to jointly head up the Debt Advisory team. He is an experienced Corporate Banker having spent over 20 years with rbs. the majority of this time was spent within their dedicated large Corporate team where his portfolio included SSl International PlC, British nuclear Fuels and Manchester united. Mark is based in our Manchester office. Past Debt Advisory clients include Daisy Communications PlC, Euro garages ltd and All Saints. D E B t A D V I S o r Y 3

tombstones 4 Day Lewis Pharmacy Clode Retail Finance London Square 75m refinance of family owned chain of community pharmacies 41m funding package to support growth of independent point of sale consumer finance provider 50m development finance package for start-up london regional housebuilder Volker Wessels UK Cloud XL Harrington Brooks 25m working capital facility for uk civil engineering contractor refinance of leading provider of It and network managed services to uk SMEs Debt funding to support MBo of leading uk debt solutions provider Tom Martin & Company Ltd Everest Excelsior Technologies Limited Debt funding for MBo of leading uk non-ferrous metal recycler 25m investment in uk consumer home improvements brand 13m refinance of the uks largest flexible packaging manufacturer DEBt ADVISorY

B A C k g r o u n D t o C l E A r w A t E r o u r t E A M I n t H E u k 15 experienced deal leaders 10 research and origination professionals total headcount of 54 people 13 partners 2 dedicated debt advisory partners 7 sector teams 2 managing partners and a non executive chairman Annual intern programme across 4 offices 8 support staff D E B t A D V I S o r Y 5

F I n A n C I A l S P o n S o r S A n D t H E D E B t M A r k E t S P r I V A t E E q u I t Y P r E - C r E D I t C r I S I S growth of the European leveraged loan market Significant growth was witnessed in the leverage loan market over 15 years to 2007, with lending increasing from 28 billion in 1997 to 391 billion in 2007. growth was particularly evident in European lbos and recapitalisations driven by a rapid increase in private equity funds and the introduction of the Euro. the emergence of institutional investors All time low default rates, healthy returns, an expanded geographic profile and increased demand in both primary and secondary markets, led to a marked increase in the number and type of investors participating in the leveraged loan markets. Structural and pricing trends Senior debt, second lien, mezzanine and high-yield securities were structured to both meet investor demand and finance increasing acquisition multiples. the uk market was extremely friendly to uk borrowers. this resulted in borrowers often securing:- relatively high levels of debt when measured against underlying profitability and/or asset values Few controls being insisted upon by funders Attractive pricing 6 D E B t A D V I S o r Y

F I n A n C I A l S P o n S o r S A n D t H E D E B t M A r k E t S t H E I M P A C t o F t H E C r E D I t C r I S I S the Crunch From 2007 onwards (with the commencement of the us sub-prime credit crisis) markets globally suffered from a dramatic liquidity squeeze and rise in funding costs for financial institutions. withdrawal of investor liquidity Smaller and more expensive transaction dynamics Average lbo senior debt deal size fell from 559m in 2007 to just 233m in H1 2009 Institutionalised investors accounted for 25% of primary issuance in 2009 vs. over 50% in 2007 Pools of investor liquidity that had underpinned the growth in both private equity investment and the leveraged loan markets disappeared overnight. European lbo loan volumes Volume of deals $bn 40 35 30 25 20 15 10 5 0 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 2008 2009 2010 2011 70 60 50 40 30 20 10 0 Average margin on syndicated loans 600 500 400 300 200 100 0 Mar 2003 Sep 2003 Mar 2004 Sep 2004 Mar 2005 Sep 2005 Mar 2006 Sep 2006 Mar 2007 Sep 2007 Mar 2008 Sep 2008 Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep 2012 Deal value Deal count number of deals leveraged & Highly leveraged Investment grade D E B t A D V I S o r Y 7

F I n A n C I A l S P o n S o r S A n D t H E D E B t M A r k E t S r E g u l A t I o n, C l o S A n D I M P l I C A t I o n S F o r P E Pressure on funder balance sheets Funders own elevated cost of funding has increased and as at February 2012 the average CDS spread for the main uk banking group was 224bps. Increased regulatory pressure is being directed at both uk and European financial institutions, including: Basel III Project Merlin Sir John Vickers report the Basel committee has suggested that private equity has a risk weighting of 150% or higher for banks, suggesting a significant regulatory constraint for lending to the private equity sector. Funding shortfall in the leverage loan market Collateralised loan obligations have been a material source of investor funding in European leverage finance in recent years. this may come to an end as a significant proportion of underlying loans in Clo transactions are scheduled to mature in 2014-16 and are likely to require refinancing. ItrAXX European Financials 5-year Credit Default Swap Spread Index correlates with 9 largest banks underlying cost of funds 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 European lbo loans Due to Mature uk France germany netherlands Italy Denmark Spain Sweeden Belgium Ireland greece Portugal other Europe 0 20 40 60 80 100 120 140 160 180 2012 2013 2014 2015 2016 Deal value $bn 8 D E B t A D V I S o r Y

F I n A n C I A l S P o n S o r S A n D t H E D E B t M A r k E t S C o r P o r A t E S E C t o r D E - l E V E r A g I n g uk companies continue to deleverage, while sponsor backed companies remain slow to catch up with the trend the uk corporate sector has spent the last few years rebuilding balance sheet strength. the country s biggest listed companies have reduced their overall debt burden by 57bn during two years - cutting gearing to its lowest level since 1993. In contrast, sponsor backed companies have mainly focused on moving the problem down the road and continue to be burdened by high levels of debt. whilst the banks have been prepared to refinance leveraged loans to date, new regulations and higher levels of capital will result in renewed pressure on sponsors as banks and investors look to clean up their balance sheets and exit non-core business Expected timeframe for European banks to deleverage their balance sheets to desired level less than 3 years 3 years 4 years 5-7 years 8-10 years More than 10 years 0% 20% % of respondents 40% 60% How this balance sheet deleveraging will be achieved natural run-off Divestments Constraining asset growth write-offs/provisions 0% 10% 20% 30% 40% 50% 60% % of respondents D E B t A D V I S o r Y 9

k E Y M A r k E t t H E M E S restructuring the Credit Crunch exposed distinct structural and financial imbalances at all levels. the impact on lenders has been much publicised with the most direct results being: A reduction in the number of active funders. Funders utilising their balance sheets carefully and requiring increased levels of return. wall of Maturity Funders are restricting new facilities, preferring to extend debt with relatively short tenors. this, coupled with the maturity of longer term facilities put in place ahead of the Credit Crunch, could result in a refinancing wall hitting the uk over the next 12/24 months. A Flight to quality traditional funders have a preference to allocate their balance sheets to high quality/investment grade credits reducing capacity and options for more conventional borrowers. Similarly, strong and larger entities will have access to the specialist capital markets.unfortunately; this route is not available to everybody. Consolidation large Corporates who have deleveraged or have borrowing capacity will be in a dominant position to acquire market capacity. this causes an issue for mid market entities where access to capital may be difficult. 10 D E B t A D V I S o r Y

M A r k E t u P D A t E F o r 2 0 1 3 50% of respondents to a recent Debtwire survey expect sub-investment grade company restructurings to increase in 2013, with the uk the top country. largely due to improvements in liquidity and outlook for the Eurozone, investment in distressed assets is expected to rise in 2013. However, market uncertainty is a key deterrent to investing in distressed assets. two-thirds of PE Houses are expecting to inject additional equity in to their portfolio companies on the back of improved portfolio performance. likely buyers of bank loan portfolios Private equity /investment firms Banks- outside Europe Banks-Europe 0% 10% 20% 30% 40% 50% 60% % of respondents D E B t A D V I S o r Y 11 7

k E Y t I P S F o r r E F I n A n C I n g B E g I n t H E P r o C E S S E A r ly, B E P r E P A r E D A n D B E o n t H E F r o n t F o o t Preparation this remains key to maximise the options available to borrowers and ensure they are not last in the queue Develop relationships with core funders and review their appetite for a future refinance Information flow to prospective funders needs to be perfect! Presentation of a deliverable debt structure is critical do not expect funders to over deliver or meet your expectations without prompting Allow time to complete Market conditions mean refinances take longer timing recent global events mean business planning is more challenging this makes the optimal time to refinance all the more difficult to determine Securing liquidity should be the primary objective Avoid triggers watch out for triggers that are likely to accelerate a refinance - trading, seasonal covenants or covenant uplifts Avoid maturities falling just prior to a financial year end, bringing forward the refinance Borrowers should avoid funders taking control of the refinancing process the upcoming wall of refinancing banks are facing means it is worth starting the process 18 months before facilities mature. Determine the appropriate debt structure and develop competitive tension between key funders All borrowers should expect heavy negotiations! 12 D E B t A D V I S o r Y

S u M M A r Y Funder appetite for financial sponsor backed transactions has clearly reduced over recent times both from a leveraged perspective and with regard to the quantum of debt funders will hold. Similarly, the number of active funders has also reduced limiting the number of traditional options available. Dual track processes should therefore be the norm with alternative funding packages considered. the above points are proving to be pertinent given multiples have reduced over recent times and investors have to hold investments for longer periods, with refinance exercises undertaken more frequently. Management incentivisation also needs to be considered specifically where PE provided loan notes are increasing in value due to rolling yield arrangements. underlying risk margins and arrangement fees have increased considerably to borrowers attached to financial sponsors irrespective of the underlying leverage of the borrowing counterparty. D E B t A D V I S o r Y 13 7

D E B t A D V I S o r Y C A P A B I l I t Y As a firm, Clearwater recognises the difficulties clients are facing around debt raising, refinancing and the lack of predictability now inherent in debt markets. to help our clients navigate through to a successful debt raise or refinancing we have an established Debt Advisory team: two dedicated partners leading experienced team national coverage Experienced practitioners, both in the Corporate and Private Equity environments Sector specialists who know your market Detailed understanding of the traditional Banks and lenders Pre qualification of funders Competitive pricing and realistic covenant suites objective independent approach Close relationships with specialist and niche funders well versed in originating and delivering bespoke facilities Early engagement with our team will prove to be of real benefit to ensure: the borrower presents itself in the best possible way to the lending market A realistic debt structure is presented Management can concentrate on running the business An efficient process and conclusion are achieved 14 D E B t A D V I S o r Y

w H E r E C A n C l E A r w A t E r A S S I S t? restructuring or renegotiating debt Covenant renegotiations, trading downturns, facility amendments and extensions refinancing Existing debt facilities, new debt markets, syndicated and club facilities, diversification or expansion of funder base, access to sophisticated and specialised debt packages that international finance markets provide Acquisitions, disposals and mergers Change of ownership transactions or value release growth and development finance Development finance for real estate, raising new debt capital for investment on-going Advice Sector insight, banking market updates, exit strategy planning we are delighted to have agreed our new debt facility and develop a long term funding partnership with rbs and the Co-operative Bank. Historically Day lewis dealt with these matters in house, however we found Clearwater s advice and support during the process invaluable in navigating what has become a complicated and challenging debt market. I wouldn t hesitate in recommending Clearwater to other company s considering a refinance and intend to use Clearwater to advise Day lewis on future transactions. kirit Patel CEo, Day lewis PlC we are delighted to have completed the refinancing of Cloud Xl and to have brought on board a high quality banking partner. Despite difficult debt markets Clearwater s process ensured Cloud Xl received several competing financing offers, allowing us to select the right partner to support our plans for the business. Philip Shapiro Managing Partner, Synova Capital Clearwater advise and project manage, driving the process from initial feasibility through to successful completion D E B t A D V I S o r Y 15 7

www.clearwaterinternational.com 9 Colmore row Birmingham B3 2BJ tel: +44 845 052 0360 Fax: +44 845 052 0361 62-65 Chandos Place london wc2n 4Hg tel: +44 845 052 0300 Fax: +44 845 052 0303 50 Brown Street Manchester M2 2Jt tel: +44 845 052 0340 Fax: +44 845 052 0341 16 the ropewalk nottingham ng1 5Dt tel: +44 845 052 0380 Fax: +44 845 052 0381