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Corporate
Bankingand Investment
IPAA’s 2007 Private Capital Conference:Managing Leverage in a Volatile Commodity Market
Second Lien Term Loans
January 18, 2007
Evans Swann
Director
BNP Paribas
2
Corporate
Banking
and Investment
1. E&P Bank Lending Overview
2. Overadvance and Second Lien Bank Facilities
3. About BNP Paribas
Table of Contents
Corporate
Bankingand Investment
1. E&P Bank Lending Overview
4
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Banking
and Investment
Energy Industry Risk & Return Paradigm
Institutional Second Liens &
High Yield Debt
Bank Debt
Bank Overadvances & Second Liens
Mezzanine Capital
Convertible Debt
Private and Public Equity
5-10%
10-15%
20-30%
30% +
Total
Returns
Controlled Risks Uncontrolled Risks
PDP
Reserves
Proven
Reserves
Exploration
Activity
Engineering
and
Operations
Risks
Geological and
Geophysical
Risks
Management Sponsorship
Capitalization Hedging
R/P F&D
5
Corporate
Banking
and Investment
Energy Bank Lending Parameters
Lend against proven reserve value - primarily PDP
Third party reserve estimates - usually risked somewhat
Loan value determined by advance rates
Cash flow model validates the analysis
Conservative price deck employed
Full value given to hedged volumes and prices
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Banking
and Investment
BNP Paribas utilizes the following advance rate guidelines to determine the borrowing base.
PDP Reserves 50-70%
PDNP Reserves 30-50%
PUD Reserves 20-40%
BNP Paribas’ currently uses the following Base Case commodity price assumptions.
Tristone Capital publishes quarterly a comprehensive review and summary of active oil and gas lender price decks…upcoming releases may be interesting if commodity prices continue to “drift”.
Current Engineering Metrics
Year NYMEX Crude NYMEX Gas
2006 $50.00 $6.75
2007 $50.00 $6.50
2008 $45.00 $6.00
2009 $40.00 $5.50
7
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and Investment
Current Bank Market Conditions
Strong Commodity Prices Bolster Cash Flow
Debt reduction & Share repurchases
“Hot Sector” syndrome
Significant loan appetite
Defaults are non-existent
Bank Price Deck divergence
Private Equity
Public “Headaches”
Sarbanes Oxley
Overadvance and Second Lien Facilities can optimize equity returns
Public Equity
Popular exit strategy
Corporate
Bankingand Investment
2. Overadvance and Second Lien Bank Facilities
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Corporate
Banking
and Investment
Bank Market Second Lien Basics
BNP Paribas opened the Second Lien E&P market in 2003 with a refinancing transaction for Quicksilver
Have arranged and agented the majority of the subsequent Second Lien Facilities transacted in the bank market
Several recent transactions for private companies
Bank and institutional participants
Navigated intercreditor issues
True underwriting capacity
Competitive alternative to High Yield
10
Corporate
Banking
and Investment
Drivers for Incremental Senior Debt Needs
Evolution of acquisition metrics
Development of commodity derivative markets
Inability of bank price decks to match growth of futures prices
Expansion of market capacity
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Corporate
Banking
and Investment
Overadvance Facility vs. Second Lien RBL Facility
Overadvance Facility Second Lien Facility
Purpose: Bridge/Development Facility Intermediate Term Funding
Tenor: 6-18 Months 3-5 Years
Priority: Pari passu Second Lien
Premium to Revolver: 25-50 bps, with escalation 250-325 bps
Distribution: Bank Participants Banks & Institutions
Market Depth: Moderate Significant
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Corporate
Banking
and Investment
Second Lien Fundamentals
Structure based upon conventional RBL parameters Engineering Review Cash Flow Analysis (based on bank price deck) Asset Coverage Test (PV / Total Debt) Financial Covenants Semi-Annual Redetermination
Transaction Criteria Management Reserve Integrity Hedging Capitalization
Standardized Documentation
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Banking
and Investment
Two Second Lien Markets
Bank
Debt Enhancement Product
Smaller deals: $15-100MM
Provided by Banks & Long Term Institutional Holders
Pricing: LIBOR + 4 to 6%
Covenants: PV / Debt and Debt / EBITDA
Prepayment Flexibility
Institutional
Debt Maximization Objective
Larger market capacity - $100+MM
Paper is Liquid and Trades with Reasonable Frequency
Premium Pricing for Larger Loan Capacity: LIBOR + 5% and higher
Covenants Less Onerous
Higher Prepayment Penalty
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Corporate
Banking
and Investment
Bank Second Lien Advantages
Capacity enhancement to conventional borrowing
Longer maturity profile than standard overadvance bank facilities
Ability to enhance equity returns by reducing lower-tiered capital contributions - private equity
Compared to the High Yield alternative:
+ True underwriting+ Lower minimum issuance size+ Lower placement costs+ Easily upsized+ Prepayment flexibility+ “Relationship Lending” intangibles
- More covenanted
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Corporate
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and Investment
Basic Bank Second Lien Terms
Amount - $15 - $100 MM
Maturity - 3 to 5 years
Pricing - LIBOR + 4 - 6%
Covenants
Asset Coverage Ratio (PV / Total Debt)
Debt Service Coverage
PDP / Proven Ratio
Execution Timing - 2 to 6 weeks
Corporate
Bankingand Investment
3. About BNP Paribas
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Corporate
Banking
and Investment
BNP Paribas
3rd largest bank in the world, with total assets of $1.3 Trillion
Energy practice is largest revenue contributor globally
Highly rated with S&P (AA) and Moody’s (Aa2)
Worldwide presence: 500+ offices in 85 countries
15,000+ employees in the U.S.
BNP Paribas’ activities are organized into four core businesses:
Corporate and Investment Banking
Private Equity
Retail Banking
Private Banking and Asset Management
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Corporate
Banking
and Investment
BNP Paribas’ Energy Finance Group
BNP Paribas has a global approach to the Energy sector:
Reserve-Based and Corporate Lending
Senior Bank Debt
Second Liens
VPP’s
Commodity Derivative market maker
OTC
NYMEX
500 Energy Specialists in Houston, New York, Geneva, Paris, London and Singapore
Global Capital Markets Capabilities
High Yield
Equity – Linked Securities
Common Equity
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Corporate
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and Investment
BNP Paribas’ Houston office focuses on the upstream sector
Primarily oriented toward independent producer financings
$8 Billion portfolio with over 130 clients
Seamless financing for commodity derivative products
Dedicated marketer of commodity derivatives located in Houston office
Demonstrated international transaction capabilities
BNP Paribas’ Commitment to the Upstream Sector
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and Investment
2006 Oil & Gas Lead Arranger Rankings
Rank Bank Holding Company Volume # of Deals Rank Bank Holding Company Volume # of Deals1 JP Morgan 38,235,000,000 78 1 JP Morgan 38,235,000,000 782 Bank of America 22,149,100,000 51 2 Bank of America 22,149,100,000 513 Credit Suisse 16,645,000,000 15 3 Wachovia Securities 11,775,000,000 304 Citigroup 15,331,000,000 21 4 BNP Paribas 11,260,000,000 275 UBS AG 13,749,475,000 5 5 Citigroup 15,331,000,000 216 Wachovia Securities 11,775,000,000 30 6 Wells Fargo & Company 5,150,350,641 177 BNP Paribas 11,260,000,000 27 7 Credit Suisse 16,645,000,000 158 Royal Bank of Scotland Plc 7,900,000,000 7 8 Union Bank of California 2,987,200,000 109 Wells Fargo & Company 5,150,350,641 17 9 SunTrust Bank 2,710,000,000 9
10 Barclays Bank Plc 4,050,000,000 2 10 RBC Capital Markets 1,596,001,382 911 Union Bank of California 2,987,200,000 10 11 Royal Bank of Scotland Plc 7,900,000,000 712 SunTrust Bank 2,710,000,000 9 12 General Electric Capital Corporation 906,136,842 613 Goldman Sachs & Company 2,048,316,000 4 13 UBS AG 13,749,475,000 514 RBC Capital Markets 1,596,001,382 9 14 Lehman Brothers 1,450,000,000 515 Lehman Brothers 1,450,000,000 5 15 Fortis Bank 1,275,000,000 516 Fortis Bank 1,275,000,000 5 16 BMO Capital Markets 1,110,000,000 517 BMO Capital Markets 1,110,000,000 5 17 Goldman Sachs & Company 2,048,316,000 418 TD Securities 1,091,001,382 3 18 Scotia Capital 775,000,000 419 General Electric Capital Corporation 906,136,842 6 19 TD Securities 1,091,001,382 320 Scotia Capital 775,000,000 4 20 Barclays Bank Plc 4,050,000,000 2
2006 U.S. Oil & Gas Lead Arranger - Volume 2006 U.S. Oil & Gas Lead Arranger - # of Deals
BNP Paribas’ rank by Volume fell from 5
th in 2005 to 7
th in 2006 due to Credit Suisse
and UBS being significantly affected by $24 billion Anadarko financing.
However, with its focus on smaller, independent producers, BNP Paribas ranked 4
th
in # of Deals.
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and Investment
2006 Oil & Gas Agent Only Rankings
BNP Paribas’ rank by Volume fell from 4
th in 2005 to 5
th in 2006 as several banks
benefited from substantial financings by Anadarko ($24 billion) and Conoco Phillips (5
deals totaling $27.5 billion).
As measured by # of Deals, BNP Paribas retained its 3
rd place ranking in 2006,
thereby demonstrating the breadth of its market penetration.
Rank Bank Holding Company Volume # of Deals Rank Bank Holding Company Volume # of Deals1 Citigroup 79,382,000,000 44 1 JP Morgan 76,903,000,000 1062 JP Morgan 76,903,000,000 106 2 Bank of America 63,741,600,000 843 Bank of America 63,741,600,000 84 3 BNP Paribas 37,656,000,000 604 Royal Bank of Scotland Plc 45,849,002,765 28 4 Wachovia Securities 31,318,316,000 455 BNP Paribas 37,656,000,000 60 5 Citigroup 79,382,000,000 446 UBS AG 32,965,800,000 10 6 Wells Fargo & Company 14,433,825,641 327 Credit Suisse 31,447,002,765 16 7 Royal Bank of Scotland Plc 45,849,002,765 288 Wachovia Securities 31,318,316,000 45 8 BMO Capital Markets 13,735,000,000 239 Mitsubishi UFJ Financial Group 28,522,000,000 16 9 Fortis Bank 13,406,856,041 23
10 Barclays Bank Plc 18,350,000,000 9 10 SunTrust Bank 13,480,000,000 2111 Wells Fargo & Company 14,433,825,641 32 11 Union Bank of California 8,604,400,000 1812 BMO Capital Markets 13,735,000,000 23 12 Credit Suisse 31,447,002,765 1613 SunTrust Bank 13,480,000,000 21 13 Mitsubishi UFJ Financial Group 28,522,000,000 1614 Fortis Bank 13,406,856,041 23 14 RBC Capital Markets 7,297,002,765 1515 Union Bank of California 8,604,400,000 18 15 Credit Agricole SA 8,164,400,000 1216 Credit Agricole SA 8,164,400,000 12 16 Scotia Capital 6,138,858,805 1217 RBC Capital Markets 7,297,002,765 15 17 UBS AG 32,965,800,000 1018 Societe Generale 6,180,000,000 10 18 Societe Generale 6,180,000,000 1019 Scotia Capital 6,138,858,805 12 19 Barclays Bank Plc 18,350,000,000 920 Deutsche Bank 6,050,000,000 8 20 Deutsche Bank 6,050,000,000 8
2006 U.S. Oil & Gas Agent Only - Volume 2006 U.S. Oil & Gas Agent Only - # of Deals
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and Investment
This presentation is only an expression of our interest in connection with the proposed transaction and nothing contained in this presentation should in any way be construed as an offer or a commitment by BNP Paribas to extend or to provide any financing of any type, either on behalf of itself or any other entity.
This presentation has been prepared by BNP PARIBAS for informational purposes only. Although the information in this presentation has been obtained from sources which BNP PARIBAS believes to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This presentation does not constitute a prospectus and is not intended to provide the sole basis for any evaluation of the securities discussed herein. All estimates and opinions included in this presentation constitute our judgement as of the date of the presentation and may be subject to change without notice. Changes to assumptions may have a material impact on any recommendations made herein.
BNP PARIBAS or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this presentation, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager or lender) for any company, institution or person referred to in this presentation and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. BNP PARIBAS will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission.
This presentation is confidential and is being submitted to selected recipients only. It may not be reproduced (in whole or in part) to any other person without the prior written permission of BNP PARIBAS. Any U.S. person receiving this presentation and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker dealer. BNP Paribas Securities Corp. is a U.S. registered broker/dealer.
© 2005 BNP PARIBAS. All rights reserved.