Loan Syndications

Himanshu Arora
 Loan Syndication Background & History

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and
administered by one or several commercial or investment banks known as Arrangers.

Arrangers serve the investment-banking role of raising investor dollars for an issuer in need of
capital.

The issuer pays the Arranger a fee for this service, and this fee increases with the complexity
and risk factors of the loan.

In the Mid-1980s when the larger buyouts needed bank financing, the syndicated loan market
became the dominant way for issuers to tap banks and other institutional capital providers for loans.

In the late 90s to early 2000s hundreds of Collateral Loan Obligation funds (CLOs) were
created and joined the loan syndication process. These funds were referred to as non-bank
institutions or institutional investors. These institutional investors played a key role in the exponential
growth of the Mega LBO deals seen in 2005-2007.

By 2007, nearly 75% of the loans were provided by non-banks, versus less than 20% 10 years
earlier.

The Fall of 2007 the end of liquidity in the U.S Syndication market Traditional Banks had to
step up in the months and years to follow the liquidity crisis The U.S Syndication market
completely changed.
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 Two Markets Served

Investment Grade Loan Market Leveraged Loan Market

Rated BBB- and Higher (Corporate)
Arrangers hold Higher Exposure ($200 million +)
The majority of the Syndicate are traditional banks
Rated BB+ and Lower (Corporate)
Arrangers hold Lower Exposure
thus the need to syndicate
The majority of the Syndicate are
non-banks (Financial institutions)

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 Two Markets Served

Investment Grade Loan Market Leveraged Loan Market

$692 Billion
$715 Billion

$245 Billion
$229 Billion

5
 Loan Syndication Market Overview (Continued)
Exponential Demand Surge of Syndicated Leveraged Loans Vs Bonds

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 Loan Syndication Market Overview (Continued)
The Exponential Surge in Supply of Syndicated Loans was driven by
large Leveraged Buyouts starting in 2005 thru the summer of 2007
$37.9
$40 Other
$33.0
$35 High Yield Hi Yield $11.25
$28.4
$30 Leveraged Loan
Hi Yield $11.3

$25 $22.3
$ in Billions

Hi Yield $13.22

$20 Other (CMBS)

$7.25

$15 $11.3 Leveraged Loan

$26.65
Hi Yield $6.03 Leveraged Loan
$10 $8.0 $21.7
Leveraged Loan
Hi Yield $3.0 Leveraged Loan $15.185
$5 Leveraged Loan
$11.3 Leveraged Loan
$9.0
$5.0
$0

28 Mar 05 20 Nov 05 24 Jul 06 2 Oct 06 26 Feb 07 30 Jun 07

Source: LoanConnector

Extremely high liquidity in the market gave banks confidence 7

to underwrite larger and larger deals
 Loan Syndication Market Overview (Continued)
Institutional Investors through June 2007 dominated the market

Loan Syndication Participants:

U.S. Banks Non-U.S. Banks
Finance Co. / Securities CLOs / Hedge Funds / High-Yield Funds
Insurance Co. % Banks

100% 100%
(% of Investor Base)

80% 80%

(% Investor Base)
60% 60%
40% 40%
20% 20%
0% 0%
94
95
96
97
98
99
00
01
02
03
04
05

6/ 6
7
0
/0
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Source: Deutsche Bank

M
LT
Over time, institutional investors have replaced banks as lenders with over 75% of demand 8
coming from institutional investors as of LTM 6/30/07
 Loan Syndication Market Overview (Continued)
The Leverage Loan Syndication Supply and Demand Imbalance

Before (LTM June 30, 2007(1)) After (2nd Half 2007(2)) As of 12/05/07
($ in Billions)
$620 $620

$95 (15%) Hedge Funds /

HY

$120 (19.3%) Other (3)

$95 (15%)
Banks Primary
Issuance
$620
CLOs
$310 (50%)

(2)
(2)
Demand Supply

Investor Landscape has changed

Sources:
(1) Standard & Poors Leveraged Lending Review 2Q07
(2) Demand assumptions: Banks and Other at 35% consistent with LTM 6/30/07; CLO, Hedge Fund and New Capital amounts Wall Street estimates
Supply assumptions: Primary Issuance based on current estimated forward calendar; Liquidation / Collateral Calls amounts Wall Street estimates
(3) Finance Companies, Insurance Companies, Prime Rate Funds 9
(4) Standard & Poors LCD News 12/5/07
(5) Grossed up for ordinary issuance
The Secondary Loan Market took a plunge as a result of
oversupply at the time of financial crisis.

New Issue Loans with LIBOR Floor,

higher Spread pricing and tighter
structures post 2007

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 Types of Loan Syndication Formats

Underwritten deal

Best-efforts syndication

Club deal

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 Types of Loan Syndication Formats (Continued)

Underwritten deal

Arrangers guarantee the entire commitment, then syndicate the loan to reduce their exposure.

If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference.

Reasons for Arrangers to underwrite:

Offering an underwritten loan can be a competitive tool to win mandates.

Underwritten loans usually require higher fees

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 Types of Loan Syndication Formats (Continued)

Best-efforts syndication

The Arranger commits to underwrite less than the entire amount of the loan.

If the loan is undersubscribed, the deal may not close unless the terms/pricing/structure are changed.

Best-efforts syndications were used for risky borrowers or for complex transactions.

As in the case of underwriting, for preferred customers, the banks tend to hold higher exposure
justifying it by additional products offered going forward (an important variable in the banks
profitability calculations (RAROC- ratio of risk adjusted return to economic capital).

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 Types of Loan Syndication Formats (Continued)

Club deal

Pre-marketed to a group of issuers or equity sponsors relationship lenders.

Typically a smaller loan (usually $25 million to $200 million but as high as $500 million)

The arranger is generally a first among equals, and each lender gets a full cut of the fees.

For preferred customers, the banks tend to hold higher exposure justifying it by additional
products offered going forward (an important variable in the banks profitability calculations
(RAROC).

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 The Loan Syndication Process

Lead Arranger Bank

Issuer /Company
Administrative Agent

Bookrunner Bank #1 Bookrunner Bank #2 Bookrunner Bank #3

First Tier
Syndication Agent Documentation Agent Documentation Agent

Co-Mgr Co-Mgr Co-Mgr Co-Mgr Co-Mgr Co-Mgr

Bank #1 Bank #2 Bank #3 Bank #4 Bank #5 Bank #6 Second Tier

Bank or Bank or Bank or Bank or Bank or

Institution Institution Institution Institution Institution

Bank or Bank or Bank or Bank or Bank or Retail Level

Institution Institution Institution Institution Institution

Bank or Bank or Bank or Bank or Bank or

Institution Institution Institution Institution Institution
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 The Loan Syndication Process (Continued)
The issuer or Company solicits bids from Arrangers.

Arrangers will outline their syndication strategy and their view on the way the loan will price in market.

Issuer gives the mandate to one or more Arrangers (Co-Arrangers)

The arranger will prepare an information memo (IM) describing the terms of the transactions.

The IM typically will include: As part of the

Executive Summary
syndication process
Investment Considerations
Summary of Terms and Conditions (Term Sheet) we will discuss in
Transaction Overview detailed these two
Company items following this
Management and Equity Sponsor Overview page.
Industry Overview
Financial Model
Timing for commitments, closing, as well as fees on level of commitments

Bank meeting is scheduled at which potential lenders hear the management and the Investor group.

A deadline is given for the banks to send their commitment levels subject to final documentation

Each Bank analyzes the deals credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.

The Arranger collects all commitments different amounts from each Bank

Allocations are given and Legal Documentation is sent for their final review.

If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced
If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.
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After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.
 The Loan Syndication Process (Continued)
Typical Internal Analysis Process by each bank

Internal Application sent to their respected investment/credit committees. This application

includes the following:

Requested amount that is within the rating parameters for each bank
Recommended amounts by Tranche (Revolving Credit / Term Loans)
Term and Conditions of the Loans (includes pricing, structure and covenants)
Profitability (RORA and RAROC)
Syndication strategy
Transaction discussion including Source and Uses and Capital Structure
Company discussion including historical performance and outlook
Corporate Structure
Management Biographies / Equity Sponsor Profile
Collateral Analysis
Industry Analysis
Financial Analysis (Projections Model)
Internal Rating Analysis This process will be
discussed following this
Internal Legal Review page

KYC (know-your-customer) and Compliance Review

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 The Loan Syndication Process (Continued)

Typical Internal Rating Analysis by each bank

Most banks internal ratings are in line with the Agencies external ratings, though the analysis is
done independently. This analysis is based on two approaches:
The Typical Scale is 1-10, 1 being
Quantitative Analysis with very limited risk to default and
Qualitative Analysis 10 the issuer being in bankruptcy
with no chance of recovery

The Quantitative Analysis for establishing the Internal rating which measures the probability
of default is based on the following parameters (each component is weighted at a specific level
of importance):
Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA)
Capitalization Ratio the relationship between the bank debt and the rest of the capital
(Capital Leases, Bonds, Equity)
Coverage Ratio - Issuers Cash Flow covering its debt obligations (interest and principal
payments)
Variance of Projections based on the projections, the model typically assumes a certain
haircut (10-30%) to the managements projections and it tests its ability to pay its debt
obligations.
The Quantitative approach adjusts up or down based on industry characteristics (Recession
resistance, cyclical, or event driven).

The Qualitative Analysis is subjective based on each banks internal policy. The Analysis
would include strength of management, support from the equity sponsor, recovery analysis 17
(asset collateral) and outlook.
 Typical Leveraged Deal Term Sheet / Credit Agreement

1. Parties to the Credit Agreement:

Borrower
Holding Company
Guarantor / Parent and Subsidiaries Guarantee
Agent Banks
Administrative Agent
Collateral Agent
Syndication Agent
Documentation Agent
Law Firms representing the Borrower and Agent Banks

2. Description of the Transaction / Purpose of the Loan (s)

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

3. Money Terms:

Amount / Tranches
Revolving Credit
Term Loans

Pricing Need 100% Vote from the syndicate

banks to amend these terms
Interest Rate / Margin over LIBOR
Commitment Fees on unfunded portion

Maturities

Amortization Schedule (set principal payments)

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

4. Non-Money Terms:

Financial Covenants
Need Majority Vote (typical 51%) from the
Negative Covenants syndicate banks to amend these terms

Affirmative Covenants

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

Typical Financial Covenants

Maximum Leverage Ratio (Total Debt / EBITDA)

Maximum Senior Leverage Ratio (Bank Debt / EBITDA
Minimum Coverage Ratio (EBITDA / Interest
Minimum Fixed Charge Ratio (EBITDA Capex Taxes ) / Interest + Principal Payments)
Maximum Capital Expenditures
Minimum Tangible Net Worth

Typical Negative Covenants

Limitations on Additional Debt

Limitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactions
Limitations of Dividends / Investments
Limitation on Liens / Negative Pledges
Excess Cash Sweep
Limitations of Change of Ownership
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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

5. Other Terms & Conditions:

Security / Liens / Guarantees

Mandatory Prepayments
Optional Prepayments / Call Protection
Financial Reporting / Maintaining Corporate Existence (Affirmative Covenants)
Representation and Warranties
Conditions Precedent at Closing
Events of Default
Assignments and Participations / Secondary Sales
Waivers and Amendments
Indemnification
Cross Default
Material Adverse Clause (MAC)

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

6. Pricing, Fees and Expenses on Separate Documents:

Fee Letter
Interest Rate (Applicable Margin and Leveraged Grids)
Expenses

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 Typical Leveraged Deal Term Sheet / Credit Agreement (Continued)

Other Terminology to the Credit Agreement

LIBOR Floor
Original Issuer Discount (OID)
Margin Spread

A typical calculation of Loan Yields in the secondary market for loans:

LIBOR or LIBOR Floor + Margin Spread + (100-OID)/4* years = Loan Yield

*market convention is to use 4 years as it represents the average life

i.e. LIBOR Floor = 3.00%

Margin Spread = 400 basis points (or 4.00%)
OID = 96

Then the Loan Yield is calculated to:

3.0% + 4.0% + [(100 96)/100]/4 = 7.0% + (4.0% / 4) = 7.0% + 1.0% = 8.0% Yield 26
Example of a Large Syndicated Loan
Harrahs Entertainment

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 Example of a Large Syndicated Loan
Harrahs Entertainment

TRANSACTION OVERVIEW

On December 19, 2006, Harrahs Entertainment Inc.

(Harrahs or the Company) announced that it had entered
into an agreement to be acquired by affiliates of Apollo
Management (Apollo) and TPG Capital (TPG) in a
transaction valued at approximately $31.2 billion (including
estimated fees and expenses)

Harrahs Entertainment, based in Las Vegas, Nevada, is the

worlds largest and most geographically diversified gaming
company, operating 50 casinos in six countries, with the #1
or #2 market share in almost every major gaming market in
the U.S.

At the time of the acquisition, Harrahs generated LTM

9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of
$10.6 billion and $2.9 billion, respectively.

Harrahs Operating Company (HOC) owns or manages 43

of the 50 Harrahs Entertainment casinos and generated
LTM 9/30/07 Net Revenues and Pro Forma Adjusted
EBITDA of $8.0 billion and $2.0 billion, respectively

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 Example of a Large Syndicated Loan
Harrahs Entertainment

TRANSACTION SOURCES & USES

SOURCES: USES:
TERM L+ RATE COMM $ AMT % CAP $ AMT
Revolver 6 3.00% 7.25% 2,000.0 0.0 0.0% Purchase Shares 17,291.0
New Term Loan-B 7 3.00% 7.25% 7,250.0 7,250.0 23.2% Extra Cash 642.0
Total Bank Debt 9,250.0 7,250.0 23.2%
Existing Senior Debt 8 6.70% 4,624.0 14.8% Refinance Existing Debt 7,582.0
CMBS 5 7.50% 6,500.0 20.8% Fees & Expenses 1,106.0
Senior Unsecured Notes 10 10.75% 5,275.0 16.9% Rollover Debt 4,624.0
Senior Unsecured Notes (PIK) 10 10.75% 1,500.0 4.8%
Total Senior Sources 25,149.0 80.5% Total Uses 31,245.0

Senior Sub Debentures 0 0.00% 0.0 0.0% Sources - Uses 0.0

Junior Sub Debentures 0 0.00% 0.0 0.0%
Total Junior Sources 0.0 0.0%

New Preferred Stock 10 10.00% 2,000.0 6.4%

New Common Equity 4,096.0 13.1%
Total Equity 6,096.0 19.5%
Total Sources 31,245.0 100.0%

ASSUMED LIBOR (1/2008) 4.25%

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 Example of a Large Syndicated Loan
Harrahs Entertainment

STRUCTURE TOO LEVERAGE??

Pro Forma Capitalization Pro Forma % of 2007

($ in MM) At Close Total Cap EBITDA
$2B Revolver $ - 0.0% 0.0x
Term Loan B 7,250.0 31.4% 3.6x
Bank Debt $ 7,250.0 31.4% 3.6x

Sr unsecured cash-pay 5,275 22.9% 2.6x

Sr unsecured PIK toggle 1,500 6.5% 0.7x
Total Senior Debt $ 14,025.0 60.8% 6.9x Aggressive Structure??

Rollover of existing debt 4,624.0 20.0% 2.3x

Total Debt $ 18,649.0 80.8% 9.2x

Contributed Equity 4,422.3 19.2%

Total Capitalization $ 23,071.3 100.0%
Source: SMBC analysis
Adjusted 2007 EBITDA $ 2,037.0

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 Example of a Large Syndicated Loan
Harrahs Entertainment

CORPORATE STRUCTURE

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 Example of a Large Syndicated Loan
Harrahs Entertainment

SUMMARY OF TERMS SENIOR CREDIT FACILITY

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 Example of a Large Syndicated Loan
Harrahs Entertainment

SYNDICATION GROUP

Lender

Bank of America (Joint Lead Arranger)

Deutsche Bank (Joint Lead Arranger)

Citibank (Joint Bookrunning Managers)

Credit Suisse (Joint Bookrunning Managers)

JP Morgan (Joint Bookrunning Managers)

Merrill Lynch (Joint Bookrunning Managers)

Bear Stearns (Co-Managers)

Goldman Sachs (Co-Managers)

Morgan Stanley (Co-Managers)

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 Example of a Large Syndicated Loan
Harrahs Entertainment

SYNDICATION PROCESS WRONG TIMING FOR AN UNDERWRITTEN DEAL???

The general syndication of Harrah's was launched 1/15/2008 with a bank meeting in New York.
Over 1,000 bankers attended the general syndication meeting with commitments requested by
1/29/2008.

Unfortunately, given the: i) global correction in the financial markets on the week of January 21,
2008, ii) dramatic widening of high yield credit spreads and iii) reduction in the 3-month Libor Rate by
at least 120 bps that followed, the secondary market loan prices pulled back materially and bank
investors started to demand a much higher All-In Yield (about L+ 500) on primary market
transactions, like Harrah's.

Investors were demanding All-In Yield of between L+ 450 - 500 to commit/purchase Harrah's
Term Loan B. Since the offered TLB margin spread was L+300, investors were demanding a
discount (OID) of between 92-93 (compared to the original OID offer of 96.5) from the
Underwriters/Arrangers.

Following the failed syndication, Arrangers in order to reduce their exposure, were offering
Harrah's TLB with an OID in the low 90's.

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 Example of a Large Syndicated Loan
Harrahs Entertainment

SYNDICATION PROCESS WRONG TIMING FOR AN UNDEWRITTEN DEAL?? (continued)

At the time, given such low demand, it was reported that Credit Suisse started to quietly
syndicate their exposure prior to the commitment deadline (1/29/2008), independent of the other
Arrangers.

As a consequence, each of the Arrangers started to syndicate their own exposure to their own
investors offering as low as 90's OID to syndicate their exposure.

After that incident, there was a new agreement made between the Arrangers called The
Memorandum of Understanding (MOU) where it prohibits one arranger to sell their exposure within an
agreeable period (6 months after the commitments are due) without the consent of the other
Arrangers.

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