Capital Strategies for Privately Held Businesses Track: Conventional Debt Funding for Privately Held Business Wednesday, March 237:45 – 8:30 a.m.Sponsored by Goldman, Sachs & Co.

Conventional Debt Funding for Privately Held BusinessModerator: • Robin Engelson, Lazard Middle Market LLC

Panel: • Stacy Eastland, Goldman Sachs & Co.• James Doyle, US Bank• Roger Stelle, Meltzer Purtill & Stelle LLP

Sponsored by:

ABL Pricing Continues to Improve for IssuersCommentary

Average LIBOR Margins on ABL Loans

Average Undrawn Pricing on ABL Loans

Recent ABL Syndicated Transactions

Market activity picked up in 4Q10, representing mostly

refinancings. Lenders will continue to be hungry for new deals

in early 2011 and, as a result, borrowers will see more

favorable pricing and terms.

Transactions with meaningful usage and/or other capital markets

fee opportunities are particularly sought after.

Pricing is routinely L+250 bps for broadly syndicated credits

and sometimes below for smaller, more “club” like transactions

or retailers

Five year tenors are typical

Most covenants spring once excess availability drops below a

certain threshold, most commonly 15% of the facility amount.

1.1x is the generally accepted fixed charge coverage level

Transactions below $100 million typically have a 1-2

covenants that are tested irrespective of excess

availability.

Syndicated U.S. ABL Issuance by Tenor

0.0

100.0

200.0

300.0

400.0

500.0

1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10(b

ps

)4Q10

Borrower Size Tenor Drawn Undrawn PurposeSteel Pipe Manufacturer $400 5 yrs L+225 bps 50.0 bps LBOBoat Manufacturer $300 5 yrs L+250 bps 50.0 bps RefinanceMetal Service Center $350 5 yrs L+225 bps 37.5 bps MTMChemical Manufacturer $540 5 yrs L+250 bps 50.0 bps LBOMetal Service Center $1,350 5 yrs L+225 bps 37.5 bps AmendmentRetailer $350 5 yrs L+250 bps 50.0 bps LBOJ Crew $250 5 yrs L+250 bps 50.0 bps LBODel Monte $750 5 yrs L+225 bps 50.0 bps LBOBuilding Products Supplier $175 5 yrs L+250 bps 50.0 bps RefinanceOffice Supplies Distributor $600 5 yrs L+250 bps 50.0 bps RefinanceNon-Ferrous Metals $160 4 yrs L+300 / 325 bps 50.0 bps RefinanceGrocery Retailer $600 5 yrs L+275 bps 62.5 bps RefinanceCommScope $400 5 yrs L+250 bps 37.5 bps RefinanceNon-Ferrous Metals $100 3.5 yrs L+225 bps 25.0 bps Amendment

Source: Reuters

Transaction volume begins to pick up, but is mostly refinance drivenQuarterly Syndicated ABL Loan Volume & Deal

Count

Syndicated U.S. ABL Volume by Purpose Pending ABL Maturities

Source: Thomson Reuters LPC and Moody’s Investor Service.

4Q10 Syndicated U.S. ABL Issuance by Industry

Retail26%

Manufacture8%

Wholesale20%

Other28%

Chem8%Bev.& Food

3%Textiles

3%

Auto4%

0

2

4

6

8

10

12

14

16

$18

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15

Ma

turin

g V

olu

me

($B

ns)

4Q15

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10

De

al V

ol.

($ B

ns)

0

10

20

30

40

50

60

70

80

90

100

De

al C

oun

t

Refinancings New Money ($Bils.) Deal Count

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010

% o

f T

ota

l AB

L Is

suan

ce

General Corp. Purp. Amend & Extends DIP/Exit Finance M&A Other

U.S. ABL Volume as Percentage of Leveraged Syndicated U.S. ABL Sponsored Issuance, 1Q05-4Q10

ABL has become an important part of the leveraged finance market; all-in cost compares favorably to cash flow pricing

Pricing Comparison: ABL vs. Cash Flow Syndicated U.S. ABL Pro Rata vs. BB Institutional Drawn Spreads

Source: Thomson Reuters LPC and Moody’s Investor Service.

ABL BB Rating (Lev) B Rating (Lev)

Coupon (3 mos LIBOR plus spread) 2.75-3.00% 3.00-3.25% 4.00-4.25%

LIBOR Floor 0 1.50-1.75 1.50-1.75

Amorized Up-Front Fee (see Note) 0.125% 0.25% 0.25-0.37.5

Annual Yield (all-in) 3.125 - 3.375% 4.75-5.25% 5.75-6.375%

Note: Assumes up-front fees are amortized over four years on a straight line basis

0

200

400

600

800

1,000

1,200

1,400

1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10

Dra

wn

Sp

read

(b

ps)

ABL Pro rata BB Inst. Spreads

4Q10

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2004 2005 2006 2007 2008 2009 2010

ABL Vol.

Over $164 Billion of Non-Sponsored and $65 Billion of Sponsored Loans Coming Due Over the Next Two Years

Middle Market Maturing Loan Volume

Source: Thomson Reuters LPC

$0

$5

$10

$15

$20

$25

$30

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16M

atu

rin

g L

oan

Vo

lum

e ($

bils

)

Non-sponsored Sponsored

Number of Middle Market Deals

239

372

399

326

136118

110

266

338326

299

101

56

114

0

50

100

150

200

250

300

350

400

450

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Standard & Poor’s LCD, MM Quarterly 4Q10

• Middle market transactions rebounded from 2009 trough of 56 deals to 114 deals in 2010• Activity remains well below 2004 – 2007 levels

Debt Multiples of Middle Market LBO Loans

4.8x 4.7x

4.1x 4.0x

3.4x

3.9x 3.8x

4.2x

4.7x 4.7x

5.6x

4.5x

3.3x

4.2x 4.1x

0.0x

2.0x

4.0x

6.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4Q10

FLD/ EBITDA SLD/ EBITDA Other Sr Debt/ EBITDA Sub Debt/ EBITDA

• Middle market LBOs in 2010 averaged 4.2x, well above the 2009 average of 3.3x

– Large LBOs in Q4 averaged 5.2x of total leverage – roughly in line with 2004/2005 levels and in between the 4.0x from 2009 and 6.2x in 2007

Source: Standard & Poor’s LCD, MM Quarterly 4Q10

Average LBO Statistics

2001-02 2003-05 2006-1H07Pre-Lehman

08Sep-Nov

09Dec 09 – Aug

10Sep 10 – Dec

10

Market Tone Cold Recovering Hot Lukewarm Ice Cold RecoveringReally

Recovering

FLD/EBITDA 2.60 3.08 4.09 3.78 3.22 3.26 3.84

Debt/EBITDA 4.01 5.05 6.01 5.50 4.23 4.54 4.97

Outer-Edge Leverage 4.75 6.26 8.05 7.34 4.84 5.79 6.24

% > 7x Leveraged 0.00% 1.90% 17.72% 14.29% 0.00% 0.00% 0.00%

LBO Loan All-In Spread 387 282 254 477 680 684 706

OID 99.30% 99.80% 98.90% 96.98% 97.93% 98.35% 98.68%

Equity 37.00% 32.60% 32.60% 40.80% 51.06% 44.23% 41.08%

Average LIBOR Floor 267 NA NA 327 218 179 168

% With Floor 7% NA NA 31% 100% 100% 100%

• In 2007, the average LBO leverage among high-fliers pushed over 8.0x, compared with 6.2x recently

• Pricing permanently higher• Equity contribution permanently higher

Source: Standard & Poor’s LCD, MM Quarterly 4Q10Note: LBO spread includes OID amortized over three years and excess current rate of

LIBOR floors

Number of Middle Market Dividend-Related Deals

11

3

7

2

111

4

11

12

9

11

5

10

11

14

161616

910

12

11

7

1

3

12

322

1

33

4

3

4

12

3

45

11

0

2

4

6

8

10

12

14

16

18

1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

Source: Standard & Poor’s LCD, MM Quarterly 4Q10

• 2010 saw a strong resurgence of dividends• Middle market dividend-related deals totaled 23, up from 2 in 2009

Middle Market Outstandings as a Percent of All Leverage Loans

4.6% 4.6%

5.3%

4.7% 4.7%5.0%

4.7%

5.5%

7.0%

5.2%

3.7%

3.1%3.4%

2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

• 2010 saw a strong resurgence of dividends• Middle market dividend-related deals totaled 23, up from 2 in 2009

Source: Standard & Poor’s LCD, MM Quarterly 4Q10

Use of the Grantor Retained Annuity Trust (“GRAT”):Gift Tax Free Transfer of Future Short-Term Appreciation and Part of the Current Entity Value to a Trust for the Benefit of the Grantor Family

Source: Goldman Sachs

Where significant appreciation is

expected, a GRAT can be used to shift some portion of that asset to

your beneficiaries, often with significant transfer tax savings.

GRATContributes assets (e.g.,

stock and/or private investments) which may

appreciate

At termination of GRAT, remainder of assets pass to beneficiaries (or trusts for

beneficiaries) free of additional gift or estate tax

Grantor

GRAT pays an annuity back to grantor for term of trust that is equal or nearly equal to value of

contributed assets

Beneficiaries

• Ideal vehicle for transferring hard to value assets, because annuity can be defined as a percentage of the fair market value of trust assets which avoids any gift tax “surprise”.

• Transfers appreciation in excess of IRS interest rate used to determine annuity to heirs without paying gift tax.

• Since only the appreciation is transferred, principal is retained by grantor.

• Can be funded with restricted stock.

• Grantor remains liable for income tax on sales or earnings within the GRAT, which can be an additional planning tool.

• If annuity is paid back “in kind” using contributed assets, no income tax consequences to grantor.

• Many clients use the annuity stream to fund additional GRATs, creating cascading GRATs.

Advantages Considerations

Coming Up Next . . .• Capital Strategies for Privately Held Businesses Track

(Betsy)• 8:45 - 9:30 a.m.

Beyond Borrowing: An overview of Three Tools for Funding Growth, Liquidity and Exits

• 10:00 – 11:00 a.m. Deciding Between One of Three Possible Ownership Outcome

• 11:15 a.m. – Noon The Family Business Alternative

• 2:00 – 3:00 p.m. The Sale Alternative

• Noon – 1:45 p.m. Lunch & Keynote with General Stanley McChrystal (Ret)Sponsored by Fifth Street Capital (Elizabeth Ballroom)