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1
I r e l a n d
CIMA CPD PRESENTATIONDebt & Equity Finance
DON HARRINGTONDirector,
GOODBODY CORPORATE FINANCE
19 October, 2010
2
I r e l a n d
Macroeconomic Environment
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I r e l a n d
Key Irish deals include - AIB non-core disposals, Greenstar/Veolia, ESB purchase of NIE, Greencore sale of Malt division, C&C sale of spirits division to William Grant, Trintech sale of healthcare division, Acquisition of Skillsoft by PE consortiumH1 saw growth of 25% across Europe in M&A volumePredominantly cross border - companies acquiring for growth and market entry Industrials and chemicals, financial services & consumer most active sectorsMost PE retreating to mid-market – some up-tick in activity levels
Irish M&A market at low levels
Source: Ion Equity/NCB M&A Tracker Survey
Irish M&A Activity Value of Irish M&A Activity by Acquiror Type
Source: Ion Equity/NCB M&A Tracker Survey, Goodbody Analysis
Irish M&A Activity
5.86.7
5.3
10.4
7.9
14.6
4.5
1.7 1.5 2.0 2.2
0
2
4
6
8
10
12
14
16
H1 05 FY 05 H1 06 FY 06 H1 07 FY 07 H1 08 FY 08 H1 09 FY 09 H1 10
Valu
e of
Dea
ls (€
bn)
0
20
40
60
80
100
120
140
160
Volume
Value (€bn) Volume
Value of Irish M&A Transactions by Acquiror Type
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110
Valu
e of
Dea
ls (€
m)
Irish quoted plc Other Irish company Irish PE Overseas company Overseas PE
2,886
1,578
1,245
473
1,277
212
993820
479
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I r e l a n d
M&A Deal Issues 2010
Most deals < €200m
More MAC clauses (poor earnings, broader industry / economic issues)
Corporate capital/liquidity driving M&A deals
View last year was that strategic buyers would represent > 80%, PE is making a comeback
Tough to negotiate indemnification caps/baskets, MAC clauses, holdbacks, exclusivity/”Go Shops”
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Primary debt issuance moving off the lows
European Senior Loan Volume
Source: Standard & Poors
H2 pipeline for mid-market deals better than H1Some underwriting back in the marketMajority of facilities contain significant amortising portionMargins in the 400-500 bpsTenors in the 5-7 year rangeMost deals are in the mid-market, bilateral and club deals Covenant relief costing 75-100 bps and margin uplift of 150 bps + further equity from sponsors
Senior New Issuance Volume
0
20
40
60
80
100
120
140
160
180
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
€bn
Q1 Q2 Q3 Q4
34
60
74
4148
66
119131
166
54
5 7
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Leverage multiples & equity contributions
Pro Forma Debt/EBITDA Ratios - Europe Acquisition Capital Structure
Senior Leverage multiples in the 3-4x range, up from 2009 levels
Total leverage up to 4.5x
Equity contributions north of 50%
Mezzanine (if used) accounts for 5% - 15% of deal structures
Source: Standard & Poors Source: Standard & Poors
Average Leverage Levels
3.4 3.4 3.5 3.6 3.9 4.3 4.63.8
3.2 3.4
0.7 0.71
1.31.2
1.4
1.3
0.9 0.70.7
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
First Lien/EBITDA Other Debt/EBITDA
Sponsors take on a higher share of buyout financing
0x
2x
4x
6x
8x
10x
12x
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Debt/EBITDA Equity/EBITDA Other/EBITDA
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PLC equity issues – IPO vs. follow-on/secondaries
UK Equity Market Issues 2000 – 2010 ytd
Financial fundraisings accounted for 75% of all equity raised in 2009 and 32% 2010 ytd2010 deals include IPO of Betfair, Kabel, Amadeus, Promethean20 PE backed IPOs have been pulled ytd and 50% of listings priced below the rangePublic market values not attractive for IPOsOver next 12 months, IPO focus will be on growth stories in healthcare, technology, energyNASDAQ and Asian markets generally more attractive (given growth criteria)
Source: Bloomberg
8 94 3 4
1117 17
5 6
1013
84
10
10
1418
32 41
7
10
5
10
15
20
25
30
35
40
45
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010YTD
£(bn
)
IPO Funds Raised Additional Equity Raised
18
22
12
7
14
21
31
3537
42
13
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I r e l a n d
Public market valuations
10 Year Forward Based P/E Valuations
Source: Factset
Irish market underperforming UK/USUK market trading at 10-11x P/E – close to 10 year lowsSovereign issues, as well as fears of further economic pressures weighing heavily on markets
0x
5x
10x
15x
20x
25x
30x
Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10
Forw
ard
P/E
S&P 500 FTSE All-Share
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UK Survey of 150 CEOs/CFOs
Survey of 150 CEOs/CFOs in UK
Majority of people believed that the funding environment was static (i.e. not improving)
59% felt that majority of financing would come from internal cash-flows for next 12 months
85% of respondents said that no government funding has filtered down to UK business
Banks are conservative, want increased security and higher lending costs
Relationships with banks are strained, time spent with bank has increased, trying to diversify lenders, terms renegotiated
Trends - Asset backed financing/ID - more capital efficient for banks (move away from overdrafts as companies charged for undrawn commitments)
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Mergermarket Restructuring Survey
125 legal/financial advisors interviewed across US/Europe and asked about environment for restructurings
50% believe that restructuring activity will increase
Primary driver of restructurings over next 12 months will be driven by banks – refinancing debt
Non-core asset sales set to increase
Real estate, financial services and retail sectors continue to be the sectors which are most distressed
Corporates continue to try and increase maturities of bank facilities (as banks push for restructurings)
Time for strategic buyers is good – as financial buyers struggle to hit returns because of lack of leverage
Even healthy companies are finding it difficult to refinance
Vast majority of leverage loan proceeds have been for refinancing in Europe c. 46%
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0%
2%
4%
6%
8%
10%
12%
2002 2003 2004 2005 2006 2007 2008e 2009f 2010f 2011f
% o
f dis
posa
ble
inco
me
Source: CSO, Goodbody estimates
Title:Irish household savings ratio
Cash Conservation in Ireland
12
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Irish Complacency?
Government credibility
Public sector spend
Real interest rates
ECB rate rises
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Irish Budgets & Banking Oversight?
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The new face of banking!
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Lenders in recovery mode
Will not solve other banks’ problems
Vendor financing
PE underwriting
Portfolio mode
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The Business Decline Curve
Hea
lth
Time
Earnings
Management Denial
Balance Sheet Strain
Cash Crisis
insolvency
ChangeConsensual Enforced
Options
Source: A Practical Guide to Insolvency – Kavanagh Fennell
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The Solutions
Hea
lth
Time
Profits Improvement Consultancy
Turnaround Management
Restructuring
Moratorium
Liquidation
ChangeConsensual Enforced
Options
Source: A Practical Guide to Insolvency – Kavanagh Fennell
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Managing your banking relationship
• Keep the bank in the loop
• Understand what the bank wants
• Take responsibility for the problem – and the solution
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Debt Facility Variables
• Term
• Margin
• Debt Service Cover Ratio
• Debt to equity ratio
• Debt repayment profile
• Swaps / accreting swaps
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• Extend maturity date
• Modify covenants
• Interest only payments
• Defer principal and interest payments
• Reduction in interest rate
• Forgiveness of principal and past due interest
• Debt to equity conversions
Restructuring a loan – the options
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Equity
I r e l a n d
Company capital lifecycle
Start up Development/ Venture
Expansion/Growth
Maturity Decline
Capital Required
AngelsFounders/Promoters
E.I.Venture
International Venture
HNWsPre-IPO
Family OfficesFunds
InstitutionalRetailSWFs
BanksUK PE
BanksInstitutional
Capital Generated
Delta FountainKernel/SerobaDfJ EspritAtlantic BridgeBaldertonUB Diageo VF
Brokers• TVC • BES
Small cap funds BrokersPermira, Gresham
BoI,Ulster, Barclays, HSBC, Rabo(Food)
12
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I r e l a n d
Sources of equity
Friends & Family
HNW
BES
EI - HPSU
Delta, AIB Seed Capital Fund, Enterprise Equity, Kernel (inclSeroba), Fountain, DfJ Esprit, Atlantic Bridge
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I r e l a n d
Irish market
M&A levels still remain subduedSome domestic in-market consolidation (ESB/NIE, SWS/BG)Vendor financing increasingly evidentValue still an issue for sellers (resulting in pulled deals)
Some bank related restructurings (debt for equity swaps)Most banking is purely the refinancing of existing creditsBarclays/HSBC coming into syndicates in selective dealsInternationally focused companies in technology, pharma & medical devices sector more attractive for Banks to finance Number of providers of finance set to decrease (same new names appearing in the UK)
Domestic private buyout capital is seriously impairedGap presents itself in the market for those that are willing to commit capital to growth and buyout capital at smaller levelsGrowth capital deals with scale attractive to overseas investorsSome evidence that domestic VCs are active on earlier stage fundings
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I r e l a n d
Conclusions – look on the bright side
Take advice early
2011-2013 – challenges and opportunities
Markets will improve