Download - Foley’s M&A Briefing Series
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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500
Foley’s M&A Briefing SeriesAn Exchange to Power Your M&A Deals
For Audio Participation, Please Call 1.866.283.8243, pass code *1349975*
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©2009 Foley & Lardner LLP
Distressed M&A: Issues and Opportunities
12 p.m. – 1:30 p.m. Central April 28, 2009
Steven H. Hilfinger Daljit S. Doogal Geoffry S. Goodman Alexander Tracy
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3©2009 Foley & Lardner LLP
Housekeeping Issues
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4©2009 Foley & Lardner LLP
Today’s Presenters
Steven H. HilfingerFoley & Lardner LLP
Geoffrey S. GoodmanFoley & Lardner LLP
Daljit S. DoogalFoley & Lardner LLP
Alexander TracyMiller Buckfire & Co.
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5©2009 Foley & Lardner LLP
Topics We Will Address
M & A/Distressed M & A Market Update
Structuring Alternatives – Distressed Sales– – Inside vs. Outside of Bankruptcy
– – Bankruptcy: Section 363 vs. Plan of Reorganization
Perspectives of Buyers, Sellers, Creditors and Others in Distressed Sales in Bankruptcy
Cash Management and DIP Financing Issues
Purchase Agreement Issues
Questions and Answers
6©2009 Foley & Lardner LLP
M & A/Distressed M & A Market Update
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7©2009 Foley & Lardner LLP
Global Announced M&A VolumeAnnounced M&A Transaction Volume(1)
___________________________________(1) Source: Thompson Financial(2) 2009 Year-To-Date as of April 21, 2009
$0
$1
$2
$3
$4
$5
$6
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Volume ($tm)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
# of Deals (000s)
Volume Number of Deals
8©2009 Foley & Lardner LLP
Global Announced Market Volume by Target Industry
2008 - $3.1 Trillion 2009 YTD - $0.6 Trillion
23.6%14.9%
13.7%
6.4%4.4%
4.3% 3.9%
28.7%
TechnologyHealthcare
FinancialsEnergy and Power
Industrials
Consumer Staples
Real EstateMedia & Telecommunications
22.2%6.2%
7.0%
7.1%
11.1%
12.1%
15.9%
18.4%
Technology
Healthcare Financials
Energy and Power
Industrials
Consumer
Media &Telecommunication
Real Estate
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9©2009 Foley & Lardner LLP
Leveraged Loan Issuance(1)
___________________________________(1) Source: S&P LCD.
New-Issue Leveraged Loan Volume Institutional New-Issue Spreads
YTD Institutional New-Issue Volume Single B Secondary Trading Spreads
150
250
350
450
Dec-00 Nov-01 Oct-02 Sep-03 Aug-04 Jul-05 Jun-06 May-07 Apr-08 Mar-09
BB/BB- Spreads B+/B Spreads
Spread over Libor (bps)
BB+/BB/BB-, 3.1%
Split BB/B, 2.6%
Split BBB/BB, 8.8%
Not Rated, 85.5%
2,505
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Mar-09
Spread over Libor (bps)
139105 74
112 112159 149
8222
46
34 59 91
183
321387
71
24818
153
3$11
$153
$535
$480
$295$265
$166$139$139
$185
$46
$0
$100
$200
$300
$400
$500
$600
2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q08 1Q09
$ in billions
Pro Rata Institutional
10©2009 Foley & Lardner LLP
Institutional Loans by Type(1)
1Q09 Institutional Loans by Type1Q08 Institutional Loans by Type
___________________________________(1) Source: S&P LCD.
LBO45%
Other4%DIP
2%Refinancing
5%
M&A (non-LBO)23%
Exit Financing21%
Total: $26 billion
Exit Financing 11%
Refinancing5%
DIP74%
Corp Purpose10%
Total: $3 billion
Bankruptcy-related financing represented 85% of new issue-volume during 1Q 2009
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11©2009 Foley & Lardner LLP
Key Trends in Today’s M&A Market
Three principal M&A trends dominate the current market:
Default rates / Bankruptcies increase– Economy and business model failures– Capital structure and liquidity crises– Rescue sales and financings
Constrained companies forced to de-lever– Business restructurings and recapitalizations– Spin-offs / Split-offs / Carve-outs– Divestitures of non-core assets
Unconstrained companies “on the move”– Valuation declines create opportunistic buying– Unique opportunity for strategic acquisitions– Scale and synergies to weather currently lower earnings
12©2009 Foley & Lardner LLP
Default Rates Update
The default rate increased sharply during 1Q 2009 and is expected to double during 2009
The U.S. speculative grade default rate reached 5.7% on an issuer-basis at the end of February 2009, and 7.6% on a dollar-volume basis, nearly 8 times where it stood a year ago
Moody’s predicts that the U.S. speculative grade default rate will increase to 13.8% on an issuer basis by the end of 2009(1)
The default rate for leveraged loans rose to 4.79% on an issuer-basis and 8.02% on a dollar volume basis at February 2009
Trailing 12-Month Leveraged Loan Default Rates(3)Moody’s Speculative Grade Default Rates(2)
0%
1%
2%
3%
4%
5%
6%
Jul-05 Feb-06 Sep-06 Apr-07 Jan-08 Aug-08 Mar-09
Default Rate (Issuer Basis)
Issuer-Weighted Default Rates
___________________________________(1) Based on latest Moody’s predictions as of March 20, 2009. (2) Moody’s Global Credit Research, March 2009. Trailing 12-month speculative grade default rate equals the number of issuers defaulting on Moody’s rated debt divided by the number
of issuers that potentially could have defaulted on Moody’s-rated debt, adjusted to reflect the withdrawal from the market of some of those issues.(3) Source: S&P LCD.
0%
4%
8%
12%
16%
Oct-05
Aug-06
Jun-07
Apr-08
Feb-09
Dec-09
Actual Forecast
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13©2009 Foley & Lardner LLP
Historical Distress Ratios
___________________________________(1) Source: S&P LCD.(2) Distress ratio for loans defined as the percentage of performing loans trading below 80.(3) Source: Merrill Lynch Indices. (4) Distress ratio for bonds defined as the percentage of bonds in the Merrill Lynch High Yield Master II Index that trade at yield spreads of Treasuries + 1,000 bps or greater.
Excludes defaulted issues.
Distress Ratio for High Yield Bonds and Leveraged Loans(1)
63.3%
77.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Nov-99 Jan-01 Mar-02 May-03 Jul-04 Sep-05 Nov-06 Jan-08 Mar-09
Distress Ratio
S&P LSTA Index Distress Ratio Merrill Lynch High Yield Index Distress Ratio(2) (3)(4)
Distress ratios for loans (63.3%) and bonds (77.4%) declined during 1Q 2009 from nine-yearhighs at the close of 2008
14©2009 Foley & Lardner LLP
Maturing Indebtedness
Impending Debt Maturities(1)
___________________________________(1) Source: Deutsche Bank., April 2009.
Looming maturities and current financing conditions will extend this restructuring cycle
$6 $13 $29$76
$170
$221
$33$42
$55
$90
$91
$107
$137
$160
$116$48$68
$119
$167
$277
$358
$193
$116
$-
16%
32%
18%
15%
5%
0% 0% 0%
14%
$0
$50
$100
$150
$200
$250
$300
$350
$400
2009 2010 2011 2012 2013 2014 2015 2016 2017
$ A
mou
nt M
atu
rin
g (i
n B
illio
ns)
0%
5%
10%
15%
20%
25%
30%
35%
% of R
evolver Matu
ring
Term Loan High Yield Revolvers
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15©2009 Foley & Lardner LLP
Completed Date Target Acquiror
Value ($ Bln)
2006 Adelphia Communications Corp. Time Warner Inc. / Comcast Corp. $17.6
2009 IndyMac Federal Bank OneWest Bank Group LLC 13.9
2 2007 Yukos Corporation (Certain Assets) Rosneft Oil Company 6.8
3 2001 Trans World Airlines, Inc. AMR Corp. 4.2
4 2002 Budget Group, Inc. Cendant Group 3.1
5 2004 CrossCountry Energy LLC (Enron Corp.) General Electric Co. / Southern Union Co. 2.5
6 2003 ANC Rental Corp. Cerberus Capital Management LP 2.4
2008 Washington Mutual Bank FSB J.P. Morgan Chase & Co 1.9
7 2003 Bethlehem Steel Corp. International Steel Group, Inc. 1.5
8 2005 Refco, Inc. Man Group plc 1.3
2008 Lehman Brothers Inc. Barclays Bank plc 1.3
9 2007 Tower Automotive Cerberus Capital 1.1
0 2004 Pegasus Satellite Comm., Inc. (Broadcast Satellite Assets)
DirecTV Group, Inc. 1.0
Notable Bankruptcy Related M&A Deals(1)
___________________________________(1) Source: Bankruptcy Insider
16©2009 Foley & Lardner LLP
Structuring Alternatives –Acquiring Distressed Assets
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17©2009 Foley & Lardner LLP
Distressed Companies – Sale Options
A distressed company typically faces three options when it contemplates a sale of its assets:
– The company may sell its assets as part of a conventional transaction outside of bankruptcy
– The company may enter chapter 11 and pursue a sale of assets pursuant to Section 363 of the Bankruptcy Code
– The company may enter chapter 11 and seek to sell its assets as part of a Plan of Reorganization
18©2009 Foley & Lardner LLP
Advantages
DisadvantagesSubject to higher and better offers (buyer may be used
as a “stalking horse”)Auction procedures will be imposedBankruptcy Courts are often sympathetic to the Debtor
in the event of a dispute with the buyerMultiple constituencies have a voice in the case and
may delay or impede the sales process.Representations and warranties of the Debtor rarely
survive the closingPurchase Agreement may be limited or non-existentBreak-up fee or expense reimbursement provisions
may not be approved by the Bankruptcy Court in the amounts requested
The buyer may be deemed not to have standing to be heard in the bankruptcy case absent a direct impact on its rights
No benefit of a court order that the sale is free and clear of all liens and claims
Assumption or rejection of certain leases and contracts may be difficult or impossible
No protection against fraudulent transfer or preference challenges
No accessible forum to enforce rights without significant procedural hurdles
The Debtor’s assets can be acquired free and clear of liens and claims
The Debtor may assume and assign existing contracts and leases
Transaction can be consummated over creditor objections
Avoids risk of the transactions being characterized as a fraudulent transfer or a preference
Minimizes any risk of successor liabilityThe buyer has a convenient and accessible forum to
enforce its rights (i.e., the Bankruptcy Court)The process is typically transparent
Speed and flexibility determined by buyer and sellerDoes not necessarily require competitive biddingImmediate distribution of proceeds to stakeholdersMay avoid unnecessary disclosure and costsAbility to preserve value for equity holdersRepresentations and warranties of the seller can
survive the closing
In-Court (Bankruptcy)Out-of-Court
Distressed M&A Alternatives
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19©2009 Foley & Lardner LLP
Out-of-Court Sales
Major issues with out-of-court sales include:– Timing pressures– “Fire sale” valuation concerns
Cash maximization vs. mortgaging future earningsRetained liabilities
– Buyer’s comfort with seller indemnifications– Fraudulent conveyance
Will seller inevitably end up in bankruptcy?“Reasonably equivalent value” test (i.e., is the buyer paying a fair price for the assets)Is the seller insolvent?
– Successor liability concerns– Dealing with prior lienholders
Will proceeds be sufficient to pay secured debt?UCC Article 9 sales
20©2009 Foley & Lardner LLP
In-Court Sales
Significant considerations for in-court sales include:
– Form of consideration
– “Highest and best” standard
– Timing: 363 vs. Plan of Reorganization sale
– Creditor involvement and participation
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21©2009 Foley & Lardner LLP
Section 363 Sale vs. Plan
For sales in bankruptcy, a significant decision is whether to pursue a transaction through a “Section 363 sale”or through a sale pursuant to a chapter 11 Plan of Reorganization or Liquidation
22©2009 Foley & Lardner LLP
Section 363 Sales
Process– The Debtor files a motion to approve the sale
in the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code
– Auction procedures govern the marketing of the Debtor’s assets and competitive bidding
– All creditors receive notice and an opportunity to object and be heard, but do not vote on the proposed sale
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23©2009 Foley & Lardner LLP
Section 363 Sales (cont’d)
Advantages to Section 363 SalesNeed for Speed
– Section 363 sales can proceed much faster than a chapter 11 Plan process
– Not uncommon to have Section 363 sales consummated in 45-75 days from the filing of the sale motion
Sale Over Creditor Objections – The sale can be consummated over creditor objectionsLower Standard for Approval – The various requirements in the Bankruptcy Code for confirming a Plan need not be satisfied
24©2009 Foley & Lardner LLP
Section 363 Sales (cont’d)
Disadvantages to Section 363 SalesReluctance of Some Courts
– Some Bankruptcy Courts are reluctant to allow sales of substantially all of the Debtor’s assets outside of a Plan
– More common concern in jurisdictions not used to “mega” chapter 11 cases
Obstacles to Consensus Building – More difficult to direct the use of the sale proceeds in order to build consensus among chapter 11 constituencies
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25©2009 Foley & Lardner LLP
Chapter 11 Plan Sales
Process– The Debtor proposes to sell its assets as part of a
chapter 11 Plan of reorganization or liquidation filed in the Bankruptcy Court
– Auction procedures continue to govern the marketing of the Debtor’s assets and competitive bidding, with the sales process proceeding concurrently with the Plan confirmation process
– Creditors have the ability to vote to accept or reject the Plan (and thus the sale)
– Approval of the sale is dependent on confirmation of the underlying Plan
26©2009 Foley & Lardner LLP
Chapter 11 Plan Sales (cont’d)
Advantages to Sales Under a PlanFlexibility
– More flexibility in terms of form and timing of consideration
– Can help build consensus among constituencies in chapter 11 and result in a consensual deal
Comfort of Court – May provide more comfort to the Bankruptcy Court in approving the sale, particularly if the sales price is less than the amount of the Debtor’s senior secured debtNo Securities Registration – No need to register securities issued under the Plan
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27©2009 Foley & Lardner LLP
Chapter 11 Plan Sales (cont’d)
Disadvantages to Sales Under a PlanSlow Process
– The Plan confirmation process is time consuming – Both a disclosure statement (explaining the Plan) and the Plan itself
must be approved– Delays are virtually inevitable– Costs increase as the process drags on– Delays may be used strategically by the Debtor and other constituencies
to pursue refinancing options while keeping the buyer “locked up”
Higher Standard for Approval – In order to consummate the sale, the Debtor must satisfy all elements required under the Bankruptcy Code to confirm a Plan
Creditors Vote – Creditors have the right to vote on the sale as part of the Plan solicitation process
28©2009 Foley & Lardner LLP
Perspectives of Buyers, Sellers, Creditors and Others in Distressed Sales in Bankruptcy
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29©2009 Foley & Lardner LLP
Buyer Perspectives
Assets to be acquired and liabilities to be assumed
Due diligence
Financing considerations
Purchase price and adjustments
Escrows/other protections
Contract assumption issues/cure costs
Representations and warranties
Exclusivity
Funding of costs and break-up fees
30©2009 Foley & Lardner LLP
Seller Perspectives
Scope of the transaction and assumption of liabilities
Timing
Consideration requirements
Representations and warranties and survival post-closing
Carve-out or transition issues
Certainty of closing
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31©2009 Foley & Lardner LLP
Secured Creditor Perspectives
Speed – Request that the sale proceed as expeditiously as reasonably possible in order to avoid diminution in value of their liens and minimize costs expended funding the chapter 11 case
Focus on Stalking Horse – Substantial effort focused on locking in a “floor”of value through stalking horse bid
Get Paid at Closing – “Cash is king” and secured creditors often demand that the buyer transfer the purchase price directly to them at closing
Auction Procedures – Attempt to maintain voice in the auction process (i.e., not ceding total authority to the Debtor)
“It’s our Money” – Attempt to minimize consideration payable to other constituencies
32©2009 Foley & Lardner LLP
Unsecured Creditor Perspectives
Creditors’ Committee – Principal unsecured creditor voice in chapter 11 is the Official Committee of Unsecured Creditors
Stretch out the Process– The Committee often is in favor of a longer marketing/sales process in order to “kick the
tires” and try to generate additional value– Alternative bids or refinancing options always being explored
Aggressive Opposition to Unsatisfactory Bids– The Committee will typically fight break-up fees, expense reimbursements and other stalking
horse protections if the bid does not put unsecured creditors “in the money”– If not brought “on board” with the deal, the Committee will oppose the sale throughout the
process
Opposition to Lingering Liabilities– Unsecured creditors will strongly oppose any potential post-closing adjustments to the
purchase price – Take position that representations and warranties should not survive closing
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33©2009 Foley & Lardner LLP
Other Perspectives
Customers– Are customers supporting the sale?
– Does the business meet a critical business need?
– What resourcing or other customer alternatives available?
Suppliers– Are suppliers being paid on a current basis?
– Will the suppliers do business with buyer, and on what terms?
– What is status of A/P and what funding requirements at closing?
Management and Employees– Is management stable or at risk?
– What retention or incentive programs are in place/should be?
– Any union, WARN Act or other employment issues to consider?
34©2009 Foley & Lardner LLP
Cash Management and DIP Financing Issues
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35©2009 Foley & Lardner LLP
Managing Cash Pre-Bankruptcy
Selective payment of outstanding payables
Avoiding termination of contracts
Managing UCC Section 2-609 demands
Consider defensive draw under existing credit facility if no current defaults and borrowing availability exists
36©2009 Foley & Lardner LLP
Using Cash in Bankruptcy
Pre-bankruptcy liens do not continue in property acquired after the bankruptcy except as to proceeds of property subject to such prepetition liens (e.g. A/R, cash)
“Cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents subject to a lien
A debtor cannot use cash collateral post-petition without (i) the consent of the creditor who has a lien on such cash, or (ii) a court order entered after notice and hearing
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37©2009 Foley & Lardner LLP
Using Cash in Bankruptcy (cont’d)
The lender with an interest in the cash can request that the court condition or prohibit the use of cash collateral as is necessary to provide the lender “adequate protection” for the interest in the cash
Adequate protection can be cash payments, a replacement lien, an equity cushion or other “indubitable equivalent”
Because debtors need cash immediately, hearings are held for interim relief (amounts required to be used to avoid immediate and irreparable harm)
38©2009 Foley & Lardner LLP
DIP Financing
Cash collateral is unlikely to fully meet a debtor’s needs during its chapter 11
The debtor might need additional financing to continue operating its business and preserve going concern value of the company for secured and other creditors
As such, the Bankruptcy Code contains provisions that might serve to entice lenders to offer financing in bankruptcy
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39©2009 Foley & Lardner LLP
DIP Financing (cont’d)
Unsecured Credit– Unsecured credit in the ordinary course of business is
permitted, with repayment to be given administrative expense priority under 11 U.S.C. § 364(a) (e.g. trade debt)
Obtaining Credit on a Superpriority or Secured Basis– If the debtor is unable to obtain unsecured credit as an
administrative expense, the court may authorize the obtaining of credit or the incurring of debt
With superpriority over other administrative expense claims;Secured by a lien on unencumbered property; orSecured by a junior lien on encumbered property
– The debtor must be able to demonstrate that it has reasonably attempted, and failed, to obtain the credit on an unsecured basis (or without superpriority status)
40©2009 Foley & Lardner LLP
Selected Recent DIP PricingCOMPANY
FILING
DATE LENDER(S) /
AGENT DIP STRUCTURE MATURITY INTEREST RATE FEE(S)
4/20/09 GE Capital $63 million new money revolver $102 million new money TL
12 months L+1200 bps (LIBOR floor of 3.25%)
Upfront fee: 4.0% Administrative fee: $200,000
4/16/09 Pershing Square
Capital Management
$375 million new money TL 18 months
L+1,200 bps (LIBOR floor of 3.0%) Warrants: 4.9% of fully-diluted post-reorganization equity
Upfront fee: 4.0% Exit fee: 3.0%
3/20/09
Barclays
$75 million ABL revolver $150 million TL
12 months L+600 bps (LIBOR floor of 3.0%) L+600 bps (LIBOR floor of 3.0%)
Undisclosed
3/18/09 Citigroup $86.5 million roll-up revolver $63.5 million new money revolver $250 million new money TL
12 months L+350 bps L+750 bps L+750 bps
New money upfront fee: 3.0% New money exit fee: 3.0% Roll-up exit fee: 2.0%
3/11/09 GE Capital
Avenue Capital / DDJ Capital
$55 million roll-up ABL revolver $80 million TL 6 months
L+600 bps (LIBOR floor of 3.0%) L+1,500 bps (LIBOR floor of 4.00%)
Unused line: 100 bps Backstop fee: 4.0% Unused line: 300 bps
2/19/09 Deutsche Bank / Bank of America
$575 million roll-up ABL $500 million roll-up TL $500 million new money TL
12 months L+650 bps (LIBOR floor of 3.0%) 10% cash / 12% PIK L+1000 bps (LIBOR floor of 3.0%)
New TL upfront fee: 3.5% New TL exit fee: 3.5%
2/18/09 Bank of America /
MatlinPatterson Global Advisors
$95 million facility (roll-up of $39 million of pre-petition debt)
MatlinPatterson to arrange additional $50 million multi-draw term DIP facility
MatlinPatterson, stalking horse, may potentially credit bid for the company
6 months
14% paid in-kind
Upfront fee: $1.7MM Agent fee $375,000
2/11/09 Bank of New York
Mellon / DDJ / Wayzata
$75 million new money multi-draw TL
9 months L+1,200 bps (LIBOR floor of 4.0%)
Fees: Undisclosed Prepayment Premium: 5% of commitment
2/3/09
Wachovia
D.E. Shaw/ Avenue Capital/
Harbinger
$190 million new money revolver
$45 million new money ABL revolver
12 months
L+450 bps (LIBOR floor of 3.0%)
L+1,450 bps (LIBOR floor of 3.00%)
Upfront fee: 3.0% Exit Fee: 1.0% Exit Fee on TL: 5.0% if converted; 4.0% if repaid; 9.9% of reorganized equity if Spectrum is sold
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41©2009 Foley & Lardner LLP
Selected Recent DIP Pricing (cont’d)
COMPANY FILING
DATE LENDER(S) /
AGENT DIP STRUCTURE MATURITY INTEREST RATE FEE(S)
1/30/09 Wayzata
Investment Partners
$65 million TL 3 months
L+1,000 bps (LIBOR floor of 5.0%)
Upfront fees: 3.0% Exit fees: 3.0%
1/26/09
JP Morgan / Deutsche Bank /
GE Capital / Bank of America /
Foothill / Bank of Nova Scotia
$250 million ABL revolver (U.S. & CAN) $400 million TL (U.S.) $65 million ABL Revolver (U.S. & CAN) $35 million TL (CAN)
12 months Option of 2 three month extensions
L+650 bps (LIBOR floor of 3.5%)
− 100 bps per extension
− L+850 bps if both extensions exercised
Upfront fee: 1.0% 100 bps fee for each extension
1/12/09 Credit Suisse $125 million ABL revolver $35 million existing L/Cs roll up into new second lien DIP facility
12 months L+950 bps (LIBOR floor of 3.5%) Upfront fee: 3.0%
Unused line: 300 bps
1/06/09 Citigroup / UBS /
Apollo
$1.5 billion ABL revolver $3.25 billion new money term loan
$3.25 billion roll-up junior term loan
12 months
L+700 bps (LIBOR floor of 3.0%) L+1,000 bps (LIBOR floor of 3.00%)
L+350 bps (LIBOR floor of 3.25%)
Upfront fees: 2.0% Upfront fees: 3.5% with 3.0% exit fee
Upfront fees: 3.5% with 3.0% exit fee
12/01/08 Bank of Montreal $450 million priming ABL revolver $20 million L/C sub-limit
12 months Base Rate+800 bps Upfront fee: 2.5%
Unused line: 50 bps
11/10/08 GECC, Wells
Fargo / Bank of America
$1.1 billion revolving credit facility $350 million L/C sublimit By December 29, 2008, commitment is reduced to $900 million
12 months
L+400 bps 400 bps on L/Cs
Upfront fee: Undisclosed
Unused line: 75 bps
11/04/08 Wayzata, Trilogy,
AIG/ UBS, Agstar
$190 million triple-draw term loan $30 revolving credit facility 12 months
Fixed 16.5% L+700bps
Upfront fee: 2.0% Exit Fee: 5.0% of amount prepaid
10/20/08 Cerberus,
Centerbridge, D.E.Shaw / UBS
$73.6 million delayed draw term loan
$60 million L/C sublimit for term loan cash collateralized L/Cs
5 months
Base Rate (BR) +600 bps (BR floor of 5.25%)
Base Rate (BR) + 600 bps + 325 bps backstop fee (925 bps all-in)
Upfront fee: 300 bps Backend fee: sliding
scale from 200 bps to cap of 800 bps
42©2009 Foley & Lardner LLP
Current DIP Financing Market
Scarcity of third-party financing has led to “defensive DIPs”being arranged within pre-petition group
Increase in DIP pricing and fees relative to pre-credit crunch period
Decreased investor confidence has led to lower leverage / debt capacity and DIP size
Bifurcated collateral structure may create divergent goals between ABL and term lenders
Tension between “old money” desire to include roll-up DIP tranches and new money / company desire for “cleaner”structure
DIPs receiving increased ratings attention, as CLOs require new debt instruments to be rated
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43©2009 Foley & Lardner LLP
Control Through the DIP
Lenders use the DIP funds and covenants to control bankruptcy proceedings
More typical controls include:– Shorter DIP maturity
– Sale milestones
– Plan milestones
– Other covenants
– Managing “carve outs” for professional fees
– Payment of prepetition secured debt in full
44©2009 Foley & Lardner LLP
Purchase Agreement Issues
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45©2009 Foley & Lardner LLP
Purchase Agreement Issues
Section 363 of the Bankruptcy Code– Non-ordinary course transactions require Court approval– Free and clear of all liens, claims and encumbrances– Can “cherry pick” assets and liabilities
Identity of Purchaser– Newly formed entity?– What if there is a “breach”?
Deposit– Forfeiture events – Liquidated damages?
Purchased Assets/Excluded Assets– Need to be specific as to assets to be sold/retained– Consider transition/operating issues
46©2009 Foley & Lardner LLP
Purchase Agreement Issues (cont’d)
Contracts/Liabilities to be Assumed– Identify in Purchase Agreement at time of signing– Ability to identify additional contracts after signing of
Purchase Agreement or for a limited time period post-closing
– Must pay “cure amounts” for assumed contracts– Use rejection threat as leverage to re-negotiate– Third party consents
Purchase Price – Fixed purchase price– Working Capital adjustment– Limited duration escrow
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47©2009 Foley & Lardner LLP
Purchase Agreement Issues (cont’d)
Representations and Warranties– “As-Is”– Limited representations and warranties– Non-survival of representations and warranties
Conditions to Closing– MAC Condition– Due Diligence/Financing/Third Party Approval conditions (must be
removed prior to Auction)– HSR and other antitrust considerations
Termination Provisions– Need to be “tight” to ensure certainty– “Back-up Bidder”
Bidding Procedures/Auction Process– Time period for competitive bidding– Bidding increments
48©2009 Foley & Lardner LLP
Purchase Agreement Issues (cont’d)
Break-Up Fee for Stalking Horse Purchaser– Typically 3-5% of the purchase price – When payable?
Successor Liability– Tax, ERISA, product liability, environmental issues
– Generally, bankruptcy sales do not cut off all potential successor liability claims; although court decisions have been inconsistent
– Need to ensure that all potential claimants receive “notice”– Mitigate risk by including specific language in Purchase
Agreement and Sale Order– Specific finding in Sale Order that purchaser is not a successor– Consider larger escrow or purchase price reduction
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49©2009 Foley & Lardner LLP
Purchase Agreement Issues (cont’d)
No-Post Closing Indemnification– If there are any known issues, an escrow
should be established (or other security)
– Representations and warranties generally do not survive closing
Post-Closing Issues– Transition Services Agreements
– Continued use of employees/contractors
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Questions and Answers
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51©2009 Foley & Lardner LLP
Presenter Contacts
Steven H. Hilfinger(313) [email protected]
Daljit S. Doogal(313) 234-7122 [email protected]
Geoffrey S. Goodman(312) [email protected]
Alexander Tracy(212) [email protected]
52©2009 Foley & Lardner LLP
Mark Your Calendars
Please save the date for the remaining topics in the 2009 M&A Briefing Series:
June 23Due Diligence Considerations After the Recent Financial Crisis
July 30 Indemnification: Trends and Hot Topics
September 16Insurance in the M&A Industry
November 5Impact of the Transition to International Financial Reporting Standards on M&A
Please visit www.foley.com/mabs to register and for more details.
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Thank You
A copy of the PowerPoint presentation and a multimedia recording will be available on our website within 24 to 48 hours: http://www.foley.com/news/event_detail.aspx?eventid=2747
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