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Drafting Preferred Stock Provisions and Expected Developments in the New Environment Structuring Liquidation and Distribution Preferences, Conversion Rights, Anti-Dilution Protection, and Tax Provisions Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. THURSDAY, MAY 14, 2020 Presenting a live 90-minute webinar with interactive Q&A Hillary H. Holmes, Partner, Gibson, Dunn & Crutcher, Houston Eric M. Scarazzo, Of Counsel, Gibson, Dunn & Crutcher, New York

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Page 1: Drafting Preferred Stock Provisions and Expected Developments …media.straffordpub.com/products/drafting-preferred-stock... · 2020. 5. 13. · Drafting Preferred Stock Provisions

Drafting Preferred Stock Provisions and

Expected Developments in the New EnvironmentStructuring Liquidation and Distribution Preferences, Conversion Rights, Anti-Dilution Protection, and Tax Provisions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

THURSDAY, MAY 14, 2020

Presenting a live 90-minute webinar with interactive Q&A

Hillary H. Holmes, Partner, Gibson, Dunn & Crutcher, Houston

Eric M. Scarazzo, Of Counsel, Gibson, Dunn & Crutcher, New York

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Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-877-447-0294 and enter your Conference ID and PIN when prompted.

Otherwise, please send us a chat or e-mail [email protected] immediately

so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the ‘Full Screen’ symbol located on the bottom

right of the slides. To exit full screen, press the Esc button.

FOR LIVE EVENT ONLY

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Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

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Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the link to the PDF of the slides for today’s program, which is located

to the right of the slides, just above the Q&A box.

• The PDF will open a separate tab/window. Print the slides by clicking on the

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Drafting Preferred Stock

Provisions and Expected

Developments

Strafford Live CLE

May 14, 2020

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Today’s Panelists

Hillary H. Holmes is a partner in the Houston office of Gibson,Dunn & Crutcher and Co-Chair of the firm’s Capital Marketspractice group. Ms. Holmes advises companies in all sectors ofthe energy industry on long-term and strategic capitalplanning, disclosure and reporting obligations under U.S.federal securities laws, and corporate governance. Sherepresents issuers, underwriters, MLPs, financial advisors,private investors, management teams and private equity firmsin all forms of capital markets transactions. Her extensiveexperience comprises IPOs, registered offerings of debt andequity securities, private placements of debt and equitysecurities, structured preferred equity, joint ventures andprivate equity investments. She frequently advises boards ofdirectors, special committees, and financial advisors in M&Atransactions involving conflicts of interest or uniquecomplexities.

Ms. Holmes is Band 1 ranked by Chambers USA in CapitalMarkets: Central United States, and in Energy / Oil & GasTransactions: Nationwide and Corporate / M&A: Texas.

Ms. Holmes received her J.D. from the University ofPennsylvania Law School and her B.A., cum laude, from DukeUniversity.

Contact:Office - 346.718.6602Email - [email protected]

https://www.gibsondunn.com/lawyer/holmes-hillary-h/

Eric Scarazzo is Of Counsel in the New York office ofGibson, Dunn & Crutcher. He is a member of the firm’sCapital Markets, Securities and Regulation and CorporateGovernance, Power and Renewables, Global Finance, andMergers & Acquisitions Practice Groups. Mr. Scarazzo’spractice covers both the conduct of securities offeringsand service as clients’ outside corporate counsel. Headvises in a wide range of areas, such as capital raisingtransactions, reporting obligations under the ExchangeAct (including significant advisory work with respect toacquisition reporting), prospective and remedial stockexchange compliance, and beneficial ownershipreporting matters (particularly complex Section 13 and16 disclosure matters). As day-to-day outside counsel healso assists clients in communicating with investors andthe U.S. stock markets, and ensuring that they fulfill theirdisclosure obligations with the Securities and ExchangeCommission. Additionally, he has been a certified publicaccountant for nearly 20 years.

Mr. Scarazzo received his J.D. from UCLA and his Mastersin Accounting and his B.S. from the University of Virginia.

Contact:Office - 212.351.2389Email - [email protected]://www.gibsondunn.com/lawyer/scarazzo-eric/

Gibson Dunn

Special appreciation to Gibson Dunn associates Louis Matthews and Alina Iarve for their assistance with this presentation.

6

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1. Market Context

2. Preferred Equity as a Flexible Tool

3. Key Structuring Characteristics

4. Rating Agency Treatment of Preferred Equity

5. New Developments Expected in Light of Market Conditions

Agenda

7

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1. Market Context

7

8

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Select Structured PIPEs During COVID

EXPE USFD CAKE OUT W EVOP

Date Announced

4/23/2020 4/21/2020 4/20/2020 4/16/2020 4/6/2020 3/29/2020

Size ($mm) $1,176 $500 $200 $400 $535 $152 (includes OID;

$150 gross proceeds)

StructurePerpetual Preferred +

WarrantsConvertible Preferred Convertible Preferred Convertible Preferred Convertible Bond Convertible Preferred

Maturity / Investor Redemption

Perpetual; Upon CoC@105, 103, 102, 101,

par thereafter

Perpetual; Upon CoC@105 prior to year 5,

par thereafter

7.5 years; Upon CoC, greater of 101 and as-

converted valuePerpetual

5 years; Upon CoC, @ par

Perpetual; Upon CoC@150 if prior to year 3,

par thereafter

Issuer Redemption

Callable at any time; 105, 103, 102, 101, par

thereafter

NC5, 105, 103, par thereafter

NC5, 120,par thereafter

NC7, par thereafterNC3, 100 if CS >= 276% of the then Conv. Price

After 10 years @100

YieldYears 1-5: 9.50%

Years 6-8: + 1.00% p.a.Years 9-10: + 1.50% p.a.

7.00% 9.50%7.00%; increases 0.75% p.a. at the end of year 8

and thereafter2.50%

6.00%; 7.00% if no Shareholder approval; 8.00% after 10 years

PaymentsCash or In-Kind; Cash

after year 61st year In-Kind; Cash or

In-Kind thereafterCash or In-Kind

Cash or In-Kind; Cash after year 8

In Kind (semi-annually) In Kind (semi-annually)

Conversion Price / Premium (1)

Warrants: $72.00;13.6%

$21.50; 23.6% $22.23; 17.4% $16.00; 30.4%$72.50; 1.4% (43.2% to

previous day)$15.80; 13.3%

Forced Conversion

n/aAfter 3 years,

FC@200%After 3 years,

FC@200%After 3 years, FC@150 n/a

NC0, 180, 170, 160, 150

% of PF Market Cap

Warrants: 6.2% 9.6% 16.7% 17.3% 7.8% 11.7%

Investor(s) Apollo, Silver Lake KKR Roark Capital Providence, AresGreat Hill, Charlesbank,

Spruce HouseMadison Dearborn

Board2 Seats (1 per investor);

as long as 50% of position retained

1 Seat1 Seat; as long as 25% of position retained

1 Seat2 Seats (1 per investor);

as long as 50% of position retained)

2 Seats (1 new); as long as hold 15% of shares

outstanding

Use of Proceeds

Enhance liquidity Enhance liquidity Enhance liquidity Enhance liquidity Enhance liquidityRepay debt on RCF,

GCP____________________Source: PrivateRaise(1) Premium to Closing Price at Announcement.

9

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$0.7 $2.6 $2.1 $4.0 $2.3 $2.4

$0.5$0.4

$0.3

$0.1$2.3

$2.3

$0.3

$0.9

$0.6 $1.2

$2.3

$1.6

$5.0

$2.5

$1.8$2.2

$0.2

$0.5 $0.8

$10.6

$1.5$5.5

$7.0

$8.4 $8.5

$15.5

$7.3

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

$20.0

$22.0

2015 2016 2017 2018 2019 2020 YTD

PIPE Volume ($bn)

Common Stock Common Stock with Warrants Convertible Note Convertible Preferred Non-Convertible Debt / Preferred

Sponsor PIPE Issuance Over time

$10bn OXY PIPE

An

nu

alized

$20.6

____________________Source: Private Raise as of 5/8/2020.Includes Unregistered Sponsor PIPEs, closed or in definitive agreement, of at least $100mm in size and at least 5% of market cap since 2015. Security types include Common Stock, Preferred Stock, Convertible Preferred, Convertible Debt, Non-Convertible Preferred and Non-Convertible Debt.

14 20 29 28 24 48Deal Count:

Vo

lum

e ($

bn

)

7

10

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Precedent Sponsor PIPE TransactionsConvertible Note

Announ.

Date Company Industry Security Type

Market

Cap ($mm)

Deal Size

($mm)

Deal Size

as a % of

Mkt Cap

Dividend /

Coupon

Conversio

on

Premium

(Discount)

% Investors Use of Proceeds

5/5/2020 Norwegian Cruise Line Holdings Ltd. Consumer/RetailExchangeable Senior

Notes$3,098 $400 12.9% 7.0% N/A L Catterton Working capital and other general corporate purposes

4/6/2020 Wayfair Inc. TechnologyAccreting Convertible

Senior Notes4,778 535 11.2% 2.5% 43.2%

Great Hill Partners LLC;

Charlesbank Capital Partners LLC;

Spruce House Investment

Management

Working capital and other general corporate purposes

1/30/2020 Farfetch Limited TechnologyConvertible Senior

Notes3,628 250 6.9% 5.0% 8.1% Dragoneer Investment Group Working capital and other general corporate purposes

12/16/2019 Equinox Gold Corp. Basic MaterialsSecured Convertible

Debenture876 130 14.8% 4.8% 25.8% Mubadala Investment Company Working capital and other general corporate purposes

11/13/2019 KLDiscovery Inc. Technology Convertible Debentures 403 200 49.7% 8.0% 81.5%MGG Investment Group; OTPP;

Manulife Financial Working capital and other general corporate purposes

9/11/2019 LexinFintech Holdings Ltd. Financial Institutions Convertible Notes 2,026 300 14.8% 2.0% 22.1% PAG Working capital and other general corporate purposes

10/2/2018 ExlService Holdings, Inc. TechnologyConvertible Senior

Notes2,220 150 6.8% 3.5% 13.3% Orogen Group

Repay a portion of Issuer's outstanding Revolving Credit

Facility and for general corporate purposes

9/14/2018 AMC Entertainment Holdings, Inc. MediaSenior Unsecured

Convertible Notes2,564 600 23.4% 3.0% 2.0% Silver Lake Partners

Repurchase a portion of Issuer's outstanding Class B

Common Stock held by Dalian Wanda Group Co., Ltd. and

pay a special cash dividend on Issuer's outstanding Class A

and Class B Common Stock, as well as for transaction

expenses and general corporate purposes

7/9/2018 Secoo Holding Limited TechnologyConvertible Notes and

Warrants677 175 25.8% 4.0% 44.9% L Catterton Working capital and other general corporate purposes

11/8/2017 Cornerstone OnDemand, Inc. Technology Convertible Notes 2,048 300 14.7% 5.8% 12.6% Silver Lake Partners

Repay existing convertible debt and repurchase Common

Stock as well as for working capital and other general

corporate purposes

Average $2,232 $304 18.1% 4.5% 28.2%

Median $2,134 $275 14.8% 4.4% 22.1%

____________________Source: Private Raise as of 5/8/2020.Includes Unregistered Sponsor PIPEs, closed or in definitive agreement, of at least $100mm in size and at least 5% of market cap since 2017.

7

11

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7

Precedent Sponsor PIPE TransactionsConvertible Preferred Stock (1 of 2)

Announ.

Date Company Industry Security Type

Market

Cap ($mm)

Deal Size

($mm)

Deal Size

as a % of

Mkt Cap

Dividend /

Coupon

Conversio

on

Premium

(Discount)

% Investors Use of Proceeds

5/7/2020 CenterPoint Energy, Inc. EnergySeries C Mandatory Convertible

Preferred Stock$8,239 $725 8.8% 0.0% (6.6%)

Elliott Management Corporation;

Bluescape Group

Deleverage Issuer's balance sheet and provide working

capital

4/30/2020 Covetrus, Inc. HealthcareSeries A Convertible Preferred

Stock1,296 250 19.3% 7.5% (4.2%) Clayton, Dubilier & Rice, Inc.

Repay a portion of Issuer's borrowings under its Revolving

Credit Facility and for working capital and other general

corporate purposes

4/21/2020 US Foods Holding Corp. Consumer/Retail Convertible Preferred Stock 4,147 500 12.1% 7.0% 24.0% KKR & Co. L.P. Working capital and other general corporate purposes

4/20/2020Cheesecake Factory

Incorporated Consumer/Retail

Series A Convertible Preferred

Stock851 200 23.5% 9.5% 18.8% Roark Capital Group Working capital and other general corporate purposes

4/16/2020 OUTFRONT Media Inc. Real EstateSeries A Convertible Perpetual

Preferred Stock1,920 400 20.8% 7.0% 38.8%

Ares Management Corp.;

Providence Equity Partners LLCWorking capital and other general corporate purposes

3/29/2020 EVO Payments, Inc. IndustrialSeries A Convertible Preferred

Stock1,193 150 12.6% 6.0% 11.7% Madison Dearborn Partners, LLC Working capital and other general corporate purposes

12/5/2019 NN, Inc. IndustrialSeries B Convertible Preferred

Stock and Warrants332 100 30.1% 10.6% 0.0%

Corre Partners Management, LLC;

Legion Partners Asset

Management, LLC

Working capital and other general corporate purposes

12/4/2019 Verint Systems Inc. TechnologySeries A Convertible Perpetual

Preferred Stock2,820 200 7.1% 5.2% 12.5% Apax Partners LLP Working capital and other general corporate purposes

12/4/2019 Verint Systems Inc. TechnologySeries B Convertible Perpetual

Preferred Stock3,178 200 6.3% 5.2% 12.5% Apax Partners LLP Working capital and other general corporate purposes

10/18/2019Kennedy-Wilson Holdings,

Inc.Financial Institutions

Series A Cumulative Convertible

Perpetual Preferred Stock3,291 300 9.1% 5.8% 14.3% Eldridge Industries, LLC

Fund the repayment of unsecured indebtedness and for

working capital and other general corporate purposes

6/10/2019 Comstock Resources, Inc. EnergySeries B Convertible Preferred

Stock614 175 28.5% 10.0% (9.9%) Arkoma Drilling, L.P.

Provide partial consideration for the acquisition of Covey

Park Energy LLC

4/15/2019 Catalent, Inc. HealthcareConvertible Preferred Stock and

Warrants6,620 650 9.8% 5.0% 26.2% Leonard Green & Partners, L.P.

Provide partial funding for Issuer's acquisition of Paragon

Bioservices, Inc.

2/4/2019 Papa John's International, Inc. Consumer/RetailSeries B Convertible Preferred

Stock1,215 200 16.5% 3.6% 30.0% Starboard Value LP

Repay outstanding indebtedness and for working capital and

other general corporate purposes

11/8/2018CommScope Holding

Company, Inc.Telecommunications

Series A Convertible Preferred

Stock4,588 1,000 21.8% 5.5% 12.3% Carlyle Group, LP

Provide partial funding for Issuer's planned acquisition of

ARRIS International plc and for working capital and other

general corporate purposes

6/26/2018 NuStar Energy L.P. EnergySeries D Cumulative Convertible

Preferred Units2,143 590 27.5% 9.8% 3.5%

FS Investment Solutions, LLC; EIG

Management Company, LLCWorking capital and other general corporate purposes

5/29/2018 Kimbell Royalty Partners, LP EnergySeries A Cumulative Convertible

Preferred Units391 110 28.2% 7.0% (4.6%) Apollo Management, L.P.

Provide partial funding for Issuer's acquisition of the mineral

and royalty interests held by Haymaker Minerals &

Royalties, LLC and Haymaker Resources, LP

1/16/2018USA Compression Partners,

LPIndustrial

Series A Convertible Perpetual

Preferred Units and Warrants1,050 500 47.6% 9.8% 15.3%

EIG Management Company, LLC;

FS Investment Solutions, LLC;

Triloma Energy Advisors

Provide partial funding for Issuer's acquisition of CDM

Resource Management LLC and CDM Environmental &

Technical Services LLC from Energy Transfer Partners, L.P.

1/16/2018 SemGroup Corporation EnergySeries A Convertible Preferred

Stock2,274 350 15.4% 7.0% 12.8%

Tortoise Capital Advisors, LLC;

Canadian Imperial Bank of

Commerce; Warburg Pincus LLC

Repay amounts outstanding under Issuer's Revolving Credit

Facility and for general corporate purposes

12/4/2017 Carvana Co. Technology Class A Convertible Preferred Stock 322 100 31.1% 5.5% 10.0% Dundon Capital Partners LLC Working capital and other general corporate purposes

____________________Source: Private Raise as of 5/8/2020.Includes Unregistered Sponsor PIPEs, closed or in definitive agreement, of at least $100mm in size and at least 5% of market cap since 2017.

12

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8

Precedent Sponsor PIPE TransactionsConvertible Preferred Stock (cont’d 2 of 2)

Announ.

Date Company Industry Security Type

Market

Cap ($mm)

Deal Size

($mm)

Deal Size

as a % of

Mkt Cap

Dividend /

Coupon

Conversio

on

Premium

(Discount)

% Investors Use of Proceeds

11/27/2017 Black Stone Minerals, L.P. EnergySeries B Cumulative Convertible

Preferred Units3,509 300 8.5% 7.0% 20.0% Carlyle Group, LP

Provide partial funding for Issuer's acquisition of certain

mineral and royalty assets from Noble Energy, Inc.

11/26/2017 Meredith Corporation MediaSeries A Convertible Preferred

Stock and Warrants2,966 650 21.9% 8.5% 0.0% Koch Industries Inc.

Provide partial funding for Issuer's acquisition of Time Inc.

(NYSE: TIME)

9/22/2017 Phillips 66 Partners LP EnergySeries A Perpetual Convertible

Preferred Units5,852 750 12.8% 5.0% 12.7%

Stonepeak Partners L.P.; First

Reserve Corporation; Tortoise

Capital Advisors, LLC

Provide partial funding for Issuer's planned acquisition of a

25% interest in each of Dakota Access, LLC and Energy

Transfer Crude Oil Company, LLC and a 100.0% interest in

Merey Sweeny, L.P. as well as for general corporate

purposes

8/24/2017 Beacon Roofing Supply, Inc. IndustrialSeries A Cumulative Convertible

Participating Preferred Stock3,849 400 10.4% 6.0% 4.1% Clayton, Dubilier & Rice, Inc. Working capital and other general corporate purposes

8/2/2017 Genesis Energy, L.P. Energy Class A Convertible Preferred Units 3,273 750 22.9% 8.8% 12.0%Blackstone Group Inc.; KKR & Co.

L.P. Working capital and other general corporate purposes

6/22/2017 NextEra Energy Partners, LP Energy Series A Convertible Preferred Units 2,130 550 25.8% 4.5% 11.6% BlackRock, Inc.; KKR & Co. L.P.

Provide funding to allow Issuer's operating subsidiary,

NextEra Energy Operating Partners, LP, to acquire assets

and for general operating subsidia

5/24/2017 FGL Holdings Financial Institutions

Series A Cumulative Convertible

Preferred Stock and Ordinary

Shares (see Investor Warrants)

1,565 270 17.2% 7.5% (6.9%) Blackstone Group Inc.

Provide partial funding for Issuer's initial Business

Combination with Fidelity & Guaranty Life (NYSE: FGL) and

the related acquisition of certain reinsurance companies

from HRG Group, Inc.

5/11/2017 Surgery Partners, Inc. HealthcareSeries A Convertible Perpetual

Participating Preferred Stock434 310 71.4% 10.0% 6.4% Bain Capital Inc.

Provide partial funding for Issuer's planned acquisition of

National Surgical Healthcare

5/11/2017WildHorse Resource

Development CorporationEnergy

Series A Perpetual Convertible

Preferred Stock1,141 435 38.1% 6.0% 23.4% Carlyle Group, LP Working capital and other general corporate purposes

5/3/2017 Virtusa Corporation TechnologySeries A Voting and Series A-1 Non-

Voting Convertible Preferred Stock924 108 11.7% 3.9% 16.7% Orogen Group

Repay approximately $81 million under Issuer's Senior Term

Loan, fund a Common Stock repurchase program and for

general corporate purposes

3/23/2017Superior Industries

International, Inc.Industrial

Series A Perpetual Convertible

Preferred Stock465 140 30.2% 9.0% 12.4% TPG Capital

Provide partial funding for Issuer's planned acquisition of

UNIWHEELS AG

2/23/2017Natural Resource Partners

L.P.Energy

Class A Convertible Preferred Units

and Warrants533 250 46.9% 12.0% (10.0%)

Blackstone Group Inc.; Goldentree

Asset Management LP; Louisiana

State Employees' Retirement

System

Provide partial funding for the redemption of $90.0 million of

9.125% Senior Notes due 2018 and repay amounts under

Issuer's Revolving Credit Facility

Average $2,359 $375 22.4% 6.9% 10.3%

Median $1,920 $300 20.8% 7.0% 12.3%

____________________Source: Private Raise as of 5/8/2020.Includes Unregistered Sponsor PIPEs, closed or in definitive agreement, of at least $100mm in size and at least 5% of market cap since 2017.

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9

Precedent Sponsor PIPE TransactionsNon-Convertible Preferred / Debt

Announ.

Date Company Industry Security Type

Market

Cap ($mm)

Deal Size

($mm)

Deal Size

as a % of

Mkt Cap

Dividend /

Coupon

Warrant

Coverage Investors Use of Proceeds

4/29/2020 Cimpress plc IndustrialNon-Convertible Senior Secured

Second Lien Notes and Warrants$1,908 $294 15.4% 12.0% 22.5% Apollo Management, L.P. Working capital and other general corporate purposes

4/23/2020 Expedia Group, Inc. TechnologySeries A Non-Convertible Perpetual

Preferred Stock and Warrants9,382 1,176 12.5% 9.5% 43.9%

Apollo Management, L.P.; Silver

Lake PartnersWorking capital and other general corporate purposes

9/26/2019 NGL Energy Partners LP EnergyClass D Non-Convertible Preferred

Units and Warrants1,400 200 14.3% 9.0% 60.2%

Grosvenor Capital Management,

L.P.; EIG Management Company,

LLC; FS Investment Solutions, LLC

Provide partial funding for Issuer's planned acquisition of

Hillstone Environmental Partners, LLC and related entities

7/2/2019 NGL Energy Partners LP EnergyClass D Non-Convertible Preferred

Units and Warrants1,869 400 21.4% 9.0% 63.1%

Grosvenor Capital; EIG

Management, LLC; FS Investment

Provide partial funding for Issuer's planned acquisition of

certain assets from Mesquite Disposals Unlimited, LLC and

Mesquite SWD Inc.

4/30/2019Occidental Petroleum

CorporationEnergy

Series A Non-Convertible

Cumulative Perpetual Preferred

Stock and Warrants

34,402 10,000 29.1% 8.0% 48.1% Berkshire Hathaway Inc. Provide partial funding for Issuer's planned acquisition of

Anadarko Petroleum Corporation

10/30/2018 McDermott International, Inc. EnergyNon-Convertible Redeemable

Preferred Stock and Warrants1,495 290 19.4% 12.0% 19.4% Goldman Sachs Group, Inc. Working capital and other general corporate purposes

3/14/2018 Seaspan Corporation IndustrialNon-Convertible Senior Notes and

Warrants1,576 250 15.9% 5.5% 87.1% Fairfax Financial Holdings Limited Working capital and other general corporate purposes

1/3/2018 Seaspan Corporation IndustrialNon-Convertible Senior Notes and

Warrants870 250 28.7% 5.5% 109.2% Fairfax Financial Holdings Limited Working capital and other general corporate purposes

11/29/2017 Melinta Therapeutics, Inc. HealthcareSenior Secured Non-Convertible

Loan Facility and Warrants418 148 35.4% 11.8% 38.5%

Deerfield Management Company,

L.P.

Provide funding for Issuer's acquisition of the infectious

disease business of The Medicines Company (NASDAQ-

GS: MDCO) and the retirement existing indebtedness

6/28/2017 Carrizo Oil & Gas, Inc. EnergyNon-Convertible Redeemable

Preferred Stock and Warrants886 243 27.4% 8.9% 18.2% Blackstone Group Inc.

Provide partial funding for Issuer's planned acquisition of

properties in the Delaware Basin from ExL Petroleum

Management, LLC

4/4/2017 Endologix, Inc. HealthcareNon-Convertible Secured Term Loan

and Warrants600 120 20.0% 6.9% 39.0%

Deerfield Management Company,

L.P.

Repurchase $53.1 million in aggregate principal amount of

Issuer's outstanding 2.25% Convertible Senior Notes due

2018 and for working capital and general corporate purposes

Average $4,982 $1,215 21.8% 8.9% 49.9%

Median $1,495 $250 20.0% 9.0% 43.9%

____________________Source: Private Raise as of 5/8/2020.Includes Unregistered Sponsor PIPEs, closed or in definitive agreement, of at least $100mm in size and at least 5% of market cap since 2017.

14

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2. Preferred Equity as a Flexible Tool15

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Preferred Equity: Overview

• Preferred equity is a separate class of stock entitling holders to certain preferences and rights over common stockholders

• Issuing preferred equity provides a capital raising opportunity for companies with limited/restricted capital or high-leverage metrics

• The terms of the preferred equity are flexible and bespoke

• Most preferred equity issued today is:

o issued to institutions in private placements and

o tailored to the circumstances, the issuer and the investor

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• Preferred equity is an attractive investment because:

o Fixed income returns

o Less volatility than common equity

o Capital appreciation

o Down-side protection superior to common stock

o Potential protection with targeted governance rights

o Transaction or commitment fees that reimburse investor’s expenses

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Preferred Equity: Investor Benefits

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• Preferred equity is an attractive source of capital to issuers when:

o Private equity is unavailable or unattractive

o There is limited market or demand for common equity

o Debt financing is less attractive or unavailable

o There are institutional or affiliated sources of capital

Preferred Equity: Company Benefits

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• Provides flexibility

o Terms

o Debt-like features for investors while compliant with debt covenants

o Partial equity treatment for issuer (see S&P guidance in July 2019)

o May reduce dilution

• Has been a useful tool for companies in energy, pharmaceuticals, telecommunications, and restaurant chain industries

o Registered offerings of retail marketed preferred stock/units are no longer in use

Preferred Equity: Company Benefits (cont’d)

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• Potentially raise more capital than in PIPE of common equity

o Lack of market for public equity or extreme dilution at low stock price

• Potentially issued at cheaper cost of capital than private equity or common equity

• Current management can maintain control while raising large amount of capital

o Investor use targeted governance rights to protect investment

o Particularly relevant for asset development financing

• Customize terms to meet the needs of the issuer and investor

Preferred Equity: General Considerations

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• However…

o Coupon payments likely higher than debt

➢ PIK option may be important

o Cross-default provisions may cause issues

o Approval rights or other terms can limit flexibility when addressing balance sheet issues (e.g., refinancing debt or selling assets)

o Dilution of current investors if convertible

o Could have ratings implications on the capital structure if treated as a debt security

o Does not improve liquidity long-term

o Process is longer than a public offering➢ Negotiating terms can be lengthy

➢ Obtaining consents may increase cost

➢ May involve registration of underlying common or stockholder vote (after the company receives the capital)

Preferred Equity: General Considerations (cont’d)

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• 20% Rule: Shareholder consent required if voting power of preferred stock sold at a below market price is greater than 20% of voting shares outstanding or if purchasers include officers or directors

o Correct structuring may allow for capital raise above this limitation

o Employ “Bridge To Common”

➢ Investor receives convertible preferred that converts into:

• Preferred equity with negotiated characteristics automatically upon shareholder approval OR

• Common equity or preferred equity with 19.99% voting power, plus enhanced terms to the preferred equity if shareholder approval not received

o Shareholder approval may also be required if insufficient authorized and unissued shares available

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Preferred Equity: Special Public Company Considerations

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• NYSE issued COVID-19 related temporary waivers effective through June 30, 2020

• Waivers aim to help companies meet urgent liquidity needs during pandemic

o 20% Rule:

➢Waives shareholder approval for all private placements for cash so long as the price in such transaction is greater than or equal to the “Minimum Price”

• Minimum price determined by calculating lower of (a) last closing price before transaction is signed or (b) average closing price for 5 days before transaction.

➢ Transaction must be approved by audit committee

➢Waiver does not modify shareholder approval requirements under other provisions, such as the change of control rule

o Related Party Transactions:

➢ Shareholder approval requirement waived for sales to officers and directors, exceptin certain acquisition funding circumstances where the transaction involves another company in which such related party has >5% interest

➢ RPT waiver brings NYSE requirements in line with currently existing NASDAQ requirements

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Preferred Equity: NYSE Temporary Waiver

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Cons:

• Investors may seek Restrictive Covenants or Governance Rights

• Dilution of Common if Convertible

• Cross-Default Provisions may cause Issues

• Coupon Payments may be Higher than Debt

• More Complicated Process than Common Issuance

• May Require Shareholder Approval

Pros:

• Customization of Terms

• Avoid Dilution of Common at Issuance

• May be Available when Common is not Marketable

• Maintain Compliance with Debt Covenants

• Potential Cheaper Cost of Capital than Debt

• Relatively Quick Execution

Preferred Equity: General Considerations Summary

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• Accounting

o Debt versus equity classifications and allocations under GAAP

o Embedded derivatives

o Beneficial conversion features

o Implications of transaction structure on future reported earnings and financial condition

Selected Accounting Considerations

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• Tax

o Debt versus equity classification

o Phantom income / OID considerations

o Capital gain versus ordinary income

o Impact on net operating losses (“NOLs”)

Selected Tax Considerations

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3. Key Structuring Characteristics27

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• The structure of preferred equity is highly negotiated, and the terms will be driven by the company and the investors.

• Considerations in structuring preferred equity include:

Key Structuring Considerations

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o dividend payments

o liquidation preference

o redemption rights

o voting power and negative covenants

o board representation

o information rights

o conversion rights

o tag-along and drag-along rights

o preemptive rights

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• Preferred stock may or may not provide for the payment of dividends.

• Issues relating to the dividend payment provisions include:

o the dividend rate (e.g., fixed vs. floating rate, whether the rate may escalate)

o the frequency in which dividends will be paid (e.g., quarterly, semi-annually, annually or upon the occurrence of a liquidity event)

o the form in which dividends will be paid (e.g., cash, payment-in-kind (PIK) of equity of the company or other property or a combination thereof)

Dividend Payments

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o whether the dividends are cumulative (i.e., the dividend accrues if the company does not or cannot pay a dividend) or non-cumulative(i.e., the dividend is lost if the company does not or cannot pay a dividend)

o any restrictions on payments (e.g., prohibiting payment of cash dividends on junior preferred stock if dividends on senior preferred stock have not been paid for the current period and all past dividend periods).

Dividend Payments (cont’d)

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• Preferred equity is generally considered “preferred” in relation to a company’s liquidation.

o Without a preference, may be invalidated under state law.

• Therefore, before any distribution or payment can be made to the holders of common equity or any junior preferred equity, the preferred equityholders are entitled to be paid the liquidation preference plus any accrued and unpaid dividends.

o The initial liquidation price is generally the purchase price, but may be adjusted.

Liquidation Preference

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• The preferred equityholders may be entitled to receive an additional liquidation payment, depending on whether the preferred equity is “participating” or “non-participating.”

o Participating: After payment in full to the preferred equityholders, the preferred equityholders participate on an as-converted basis in the remaining assets along with the common equityholders.

o Non-Participating: After payment in full to the preferred equityholders, the preferred equityholders do not receive any additional payments and the remaining assets of the company are distributed among the common equityholders and holders of junior preferred equity.

Liquidation Preference (cont’d)

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• Preferred equity may be redeemable at certain times or upon the occurrence of certain events.

• Alternatively, preferred equity may be non-redeemable (“perpetual”).

• For non-convertible preferred stock, a holder of preferred equity may be able to select cash or stock as the form of payment upon an optional redemption.

Redemption Rights

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• Issues relating to redemption rights include:

o whether redemption is mandatory (i.e., at a certain time or upon the occurrence of certain events) or optional (i.e., the company has the right over a given period at a specified price)

o whether the redemption price is fixed or floating

o whether or to what extent a premium will be required

o the triggering events for optional redemption

o whether the company’s redemption obligation is phased over a number of years or capped in each year

Redemption Rights (cont’d)

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• Preferred equity may have full voting rights or only separate protective voting rights with respect to certain corporate actions.

• Issues relating to granting voting rights include:

o whether the preferred equity carries a fixed number of votes per share/unit or a variable number of votes per share/unit

o whether the preferred equity votes as a separate class or togetheras one class with the common equity

Voting Power and Negative Covenants

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• If preferred equityholders are granted protected voting rights, the affirmative vote of at least a majority or two-thirds of the outstanding preferred stock will be required for the company to engage in certain actions, such as:

o amending its organizational documents

o authorizing any senior or pari passu preferred stock

o change in control transactions or material acquisitions

o purchase or redemption of junior preferred equity or common equity unless the full dividend on all shares/units of the preferred equity has been paid

Voting Power and Negative Covenants (cont’d)

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• Investors making significant preferred equity investments may seek board representation. Alternatively, holders of preferred equity, voting as a separate class, may have the right to elect a specific number of directors.

o The number of seats is dependent on the size of the investment:

➢Sometimes one seat for 5-10% investment, two seats for 10-20%, and proportional representation for >20% investment.

o The company may grant a springing right for the investors to appoint additional directors if the company misses dividend payments or fails to timely redeem shares according to the terms of the preferred stock.

o Stock exchange voting-rights rules prohibit governance rights from being disproportionate from the size of investment.

Board Representation

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• Parties should be aware that a director appointed by the preferred stockholders may be deemed a representative of those investors, meaning that communication between the director and the preferred equityholders could be deemed to:

o violate fiduciary duties that a director owes to the other stockholders; or

o transmit confidential information, which limits the trading ability of the preferred stockholders due to insider trading laws.

• A common alternative to board designation rights is board observer rights.

• The company and investors may enter into confidentiality agreements that permit sharing of information.

Board Representation (cont’d)

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• Depending on the size of the investment, the investor may be granted information rights, which allow the investor (which is distinct from any directors it may have appointed) the right to access confidential information of the company on an ongoing basis (e.g., financial statements, projections, business plans, other information reasonably requested by the investor).

o Not all investors desire these rights, as the exercise of these rights ordinarily results in the investor holding inside information, which can then prevent the investor from trading.

Information Rights

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• Preferred equity may be structured as convertible into shares of a company’s common equity (or other securities) based on a specified conversion rate or formula.

• Conversion provisions often include anti-dilution adjustments, which provide for changes in the conversion price or conversion ratio if certain corporate events occur (e.g., dilutive equity issuances, stock splits).

Conversion Rights

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• Issues relating to conversion rights include:

o whether the conversion rate is fixed (e.g., based on the initial purchase price) or floating (e.g., based on the market price of the underlying common equity at the time of the conversion, typically with a conversion discount)

o whether the conversion rate is adjustable (e.g., if the market price of the underlying common equity falls below a certain price for a period of time)

o whether conversion is optional or mandatory

Conversion Rights (cont’d)

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• The preferred equity may be mandatorily convertible (i.e., at the holder’s option).

• The preferred equity may also be optionally convertible (i.e., the company has the right to force preferred equityholders to convert their preferred equity into common equity).

o The company is typically limited in the circumstances in which it may force preferred equityholders to convert their preferred equity, such as an IPO (for private companies), if the price of the underlying common equity drops below a certain threshold for a certain number of days (for public companies) and if a registration statement covering the common equity has become effective.

Conversion Rights (cont’d)

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• Common equityholder consent may be required if:

o the preferred equity is convertible into, or if the voting power of the preferred equity is, greater than 20% of the voting power outstanding;

o shares/units of preferred equity are sold at a below market price to directors or officers of the company; or

o there are insufficient authorized and unissued shares/units of common equity for the conversion.

Conversion Rights (cont’d)

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• A “tag-along” provision is a right that provides the minority investors the right to join a transaction in which the majority equityholder is selling its equity, and the minority investors are entitled to receive the same price and conditions as the majority investor when the shares are sold.

• A “drag-along” provision is a right that provides the majority investors the right to sell the company without consent from minority shareholders.

Tag-Along and Drag-Along Rights

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• Preemptive rights for preferred equity typically provide that if the company subsequently issues additional equity securities, the preferred equityholder is entitled to purchase a number of new securities that maintain its existing ownership percentage, as calculated on a fully diluted basis.

• Preemptive rights can last for a fixed period of time or remain open-ended. With respect to pre-IPO companies, almost always terminate prior to an IPO.

Preemptive Rights

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• Preemptive rights are not usually transferable and will terminate after the preferred equity is converted, exchanged or redeemed.

• Investors should seek inclusion of the preemptive rights in the company’s certificate of formation or certificate of designation (rather than as a covenant in the preferred securities purchase agreement) because breaches of the company’s charter or certificate of designation are more serious than a breach of contract.

Preemptive Rights (cont’d)

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• Other negotiated provisions of preferred equity issuances include:

o whether the use of proceeds will be limited to certain corporate purposes

o whether the investor will be subject to a standstill

o whether the investors will be locked up from transferring the preferred equity for a period of time following the date of issuance

o whether the investors will receive registration rights

o whether the investment will include an equity “kicker” (e.g., warrants)

o Whether the investor’s expenses will be reimbursed and/or whether the investor will receive a placement fee

Other

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4. Rating Agency Treatment of

Preferred Equity48

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• It is desirable from the issuer’s perspective if the rating agencies classify the preferred stock as equity, even if it provides debt-like benefits to the holders.

• Rating agencies typically assess the characteristics of the instrument and the business prospects of the issuer and, based on those factors, will consider a portion of the instrument as equity and a portion as debt

Rating Agency Treatment of Preferred Stock

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Debt Equity

Regular cash payments in the form of interest Dividends, regular or irregular

Legally guaranteed return of amount borrowed Residual interests in the assets

Higher priority in liquidation Lesser priority in liquidation

Stated maturity date No maturity date

No voting rights Voting rights

Positive and/or negative covenants No covenants

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• S&P established its framework for assessing the equity-like features of hybrid instruments in its July 1, 2019 guidance (“Hybrid Capital: Methodology and Assumptions”):

o An instrument may be considered to have high, intermediate, or no equity content, depending on the degree to which a hybrid instrument has equity-like features.

o The assessment first focuses on the terms and conditions.

➢The key principles underpinning S&P’s view of a hybrid instrument’s equity content are (a) its ability to absorb losses or conserve cash, if and when needed; and (b) its availability to absorb losses or conserve cash, based on the hybrid instrument or its replacement remaining outstanding for a sufficiently long period.

Rating Agency Treatment of Preferred Stock (cont’d)

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o The assessment also assesses issuer intent in determining whether the hybrid instrument would be available for loss absorption or cash conservation, if and when needed.

➢The hybrid instrument will be classified as having no equity content if there is material uncertainty regarding whether the issuer will (a) keep it (or its replacement) outstanding for a sufficiently long period and (b) use it to absorb losses or conserve cash when needed.

➢S&P considers factors including, but not limited to, public statements regarding replacement, as well as its view of the issuer’s capital strategy, and the issuer’s past behavior concerning hybrid issues.

Rating Agency Treatment of Preferred Stock (cont’d)

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Rating Agency Treatment of Preferred Stock (cont’d)

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5. New Developments Expected in Light of

Market Conditions53

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• Market conditions are conducive to preferred stock

o Volatility in equity values are offset by bond-like nature of preferred stock

o Common equity may be undervalued

o Low trading prices mean common stock issuances are dilutive

o PIPE context can provide cash quickly to reduce debt

• Economic downturn means issuers need liquidity

o Debt covenants in outstanding debt may call for additional capital, as a result of decreased revenues and income and increased expenses

• Attractive to a broader base of potential issuers

o Going forward, we may see a wider diversity of companies issuing preferred equity, not only historical consumers (eg, energy)

• Temporary relief from shareholder approval requirements increases flexibility

o Both for issuances greater than 20% of shares outstanding and targeted issuances to related parties

New Developments Expected in Light of Market Conditions

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• Provide immediate liquidity to issuer and provide bond-like instrument (with additional protections) to investor

• Structuring and execution trends reflecting urgent liquidity needs

o Condensed deal timelines to compete with public markets ~2-3 weeks

o Placement with previous or current sponsor backers

o Placements contingent on or completed alongside bank amendments

o Terms of preferred stock will reflect this context (see next slide)

New Developments Expected in Light of Market Conditions

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• Key terms:

o Convertible to provide option for upside when equity markets strengthen

o Increased use of downside protection features, like redemption or forced conversion

o Percentage of market cap at 10-20%

o 1-3 private equity or hedge fund investors; not broadly marketed

o Investor receives board seats, subject to ownership requirements

o Use of proceeds is to enhance liquidity

o Perpetual or matures 3-5 years

o Noncallable for at least 3-5 years

o Forced conversion after 3 years

o Option to pay interest in-kind or cash

o Change of control mandatory redemption

New Developments Expected in Light of Market Conditions

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Thank you.

Email or call with follow-on questions.

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