This document summarizes trends in the debt financing market based on a presentation by Locke Lord. It discusses the growth in leveraged lending in 2017 and changing players in the market. It provides an overview of different types of debt financing instruments and compares features of term loans, high yield bonds, unitranches, and deals for sponsors versus corporate issuers. Recent trends show borrower-friendly terms becoming more prevalent in middle market deals, though investors have pushed back on some provisions. Issues around replacing LIBOR are also discussed.

1. A Debt Market “Jungle Guide”:
Strategies for PE Portfolio Companies
and Public Issuers
Thursday, April 26, 2018
11:30 am - 1:00 p.m.
Locke Lord LLP
JPMorgan Chase Tower
600 Travis, 25th Floor
Houston, Texas
Locke Lord's High Noon
Knowledge Series

2. Locke Lord Debt Finance Contacts
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Tammi Niven, Partner
Houston
T: 713-226-1185
tniven@lockelord.com
George Ticknor, Partner
Boston
T: 617-239-0357
george.ticknor@lockelord.com
James Rubens, Partner
Boston
T: 617-951-2218
james.rubens@lockelord.com
Jason Ulezalka, Partner
New York
T: 212-912-2723
jason.ulezalka@lockelord.com
David Ruediger, Partner and Chair,
Securitization & Debt Finance Practice Group
Boston
T: 617-239-0266
david.ruediger@lockelord.com

3. Leveraged Lending Financing Trends
2017: A Few Statistics:
■ Total loan issuance - $2.5 trillion (up 21% from ‘16)
■ Refinancings - $1.7 trillion (up 35% from ‘16)
■ Middle market loan issuance - $170 billion (up 23% from ‘16)
■ Second lien debt issuance - $37 billion (up 74% from ‘16)
■ $119 billion raised by private debt funds in 2017
■ CLO issuance exceeded $117 billion
■ CLOs acquired 63% of leveraged loans issued in 2017
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4. The Players: Regulated Lenders,
Loan Funds & Direct Lenders
■ Continuing impact (if any) of Leveraged Lending Guidelines
on Regulated Lenders
■ Evidence that unregulated Direct Lenders are growing market
share at expense of Regulated Lenders and are moving
upmarket to serve larger sponsors and strategics
■ Private Equity Groups and Asset Managers continue to raise
money to invest in loan funds
These trends impact who sponsors and strategics should
select as Lead Arrangers and the types of debt products
they should consider as different lenders/investors gravitate
toward different debt products.
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5. Types of Debt Financing
MOST SECURE
LEAST EXPENSIVE
LEAST SECURE
MOST EXPENSIVE
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Revolving Lines of Credit
Term Loan A
Term Loan B
High Yield Debt/Senior Notes
Second Lien Debt
Unitranche Facilities
Subordinated/Mezzanine Debt
Facilities to be
Discussed

6. Term A Loans
■ Considered a “Pro-Rata” tranche with a Revolving Line of Credit
■ Typically provided by banks and non-bank direct lenders (if banks,
they are generally looking for additional revenue opportunities)
■ Floating interest rate (typically lower than Term B Loans)
■ LIBOR floor: Varies (often no floor if provided by banks)
■ Fees: Origination & Syndication typically 0.5% - 1.0%
■ Tenor: 5 – 6 years
■ Amortization: Straight Line (or Modified Straight Line)
■ Secured: Yes
■ Covenants: Yes, typically both leverage and debt service
maintenance covenants
■ Soft Call Protection: Sometimes
■ MFN Protection: Rarely
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7. Term B Loans
■ Typically arranged and sold to institutional investors (CLOs, prime
rate funds, private debt funds, hedge funds and asset managers)
■ Floating interest rate (typically higher than Term A Loans)
■ Fees: Origination & Syndication typically 0.5% - 1.0%
■ Tenor: 5 – 8 years
■ Amortization: Minimal (1% per year)
■ Holders reserve right to refuse prepayments
■ Secured: Yes
■ Covenants: Single maintenance or “Covenant Lite” (incurrence
covenants only)
■ Call Protection: Almost always
■ MFN Protection: Typically 50 bps with a 12 - 18 month sunset
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8. High Yield Debt
■ Underwritten and sold to institutional investors
■ Senior or Senior Subordinated
■ Generally 144A subject to 180 – 270 day mandatory registration of
exchange notes
■ Post registration issuer is a “reporting” entity under the Exchange Act
■ Guarantors are “registrants”
■ Fixed interest rate
■ Tenor: 8 – 10 years
■ Amortization: None; bullet at maturity
■ Secured: Rarely
■ Covenants: Incurrence covenants only
■ Call Rights: A no call period (3-5 years) followed by call premium
■ Redeemable in open market transactions or tender offer
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9. Second Lien Debt
■ Typically provided by banks and non-bank direct lenders; may be
arranged and sold to institutional investors
■ Floating interest rate (typically 100 – 200+ basis points above First
Lien Debt)
■ Tenor: 5 – 8 years (typically at least 91 days outside First Lien Debt)
■ Amortization: Varies, typically minimal
■ Secured: Yes, but second in priority to First Lien Debt (lien not claim
subordinated)
■ Covenants: Typically same as First Lien Debt with 10% (or 0.25x
EBITDA) “cushion”
■ Call Protection: Yes, typically
■ Complexity: Negotiation of intercreditor agreement between First
Lien and Second Lien lenders can be difficult, however, “market”
conventions have been adopted to cover many issues
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10. Unitranche Facilities
■ Typically arranged and held by non-bank direct lenders; first-out portion
sometimes provided by Banks
■ A synthetic first lien/second lien in same document
■ Blended floating interest rate (combines rates of first and second lien debt)
■ First-out lenders get repaid first and pay a share of interest (or skim) to last-out
■ Tenor: 4 – 8 years
■ Amortization: Varies, typically slower than First Lien but faster than Second Lien
■ Secured: Yes, a single secured tranche of debt with a payment “waterfall”
■ Covenants: Yes, a leverage maintenance covenant (may also include a debt
service, fixed charge or interest coverage maintenance covenant)
■ Call Protection: Varies
■ Complexity: Negotiation of “Agreement Among Lenders” between first out and
last out lenders can be difficult and there are fewer “market precedents”
■ Largely untested in bankruptcy; all lenders likely to be treated as a single class
of creditors and first out lenders may not be entitled to post-petition interest
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11. Comparison of
Term A Loans to Term B Loans
Term A Term B
“Relationship” Lenders Investors
Faster amortization Minimal amortization
Voluntary prepayments must be accepted Lenders may decline voluntary prepayments
Less expensive More expensive
Two maintenance covenants Single or no maintenance covenants
More restrictive on acquisitions, incremental debt,
EBITDA addbacks, restricted payments and debt
buy-backs
More flexible on acquisitions, incremental debt,
EBITDA addbacks, restricted payments and debt
buy-backs
Less active trading More robust trading of Term B Loans
Less apt to have call protection More apt to have call protection
Trading market more stable Trading market more volatile, tracks High Yield
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12. Comparison of
Term B Loans to High Yield
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Over the last 5 – 7 years there has been significant convergence of the terms and
features in Term B Loans and those in high yield bonds due, in large part, to strong
investor demand and the market’s appetite for greater flexibility. The key differences
that remain are as follows:
Term B High Yield
Shorter tenor (5 – 8 years) Longer tenor (8 – 10 years)
Minimal amortization (1% annual) No amortization
Floating interest rate Fixed interest rate
Lower transaction cost (probably) Higher transaction cost (probably)
Typically secured Rarely secured
Covenant structure (affirmative & negative)
somewhat more restrictive, may have a single ratio
maintenance covenant
Covenant structure (affirmative & negative) more
flexible with no maintenance covenants
Borrower consent required for assignments No Borrower consent required for assignments
May not permit right to reclassify debt to satisfy
incurrence baskets
Unlimited right to reclassify debt to satisfy
incurrence baskets
Frequently amended Very difficult to amend
Not required to be registered Cost of registration and securities law compliance

13. Comparison of
First Lien/Second Lien to Unitranche
First Lien/Second Lien Unitranche
Takes longer to close, requires separate
negotiations with First and Second Lien
Quicker to close, borrower only negotiates with one
party
May have syndication risk/market flex Committed financing; no syndication risk
Debt services costs may be higher or lower Blended costs may be lower or higher
More flexible refinancing options Must refinance entire facility
More flexible add on financing options 100% Lender approval for add on financing
Established market precedents Relatively new; few established precedents
Voting more transparent to Borrower Voting typically concealed from Borrower
Borrower may be able to leverage one tranche
against the other
Provides last-out with “hold-out” leverage
Uncertainty in bankruptcy
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14. Comparison of Sponsor Deals to
BB Rated Corporate Deals
■ Many top tier sponsors leave no stone unturned and are willing to pay higher
pricing and transactional costs for greater flexibility
■ Strategics are more cost and rate sensitive and value long standing
relationships with lenders
■ Sponsors push for extensive EBITDA addbacks without caps; strategic term
debt market not as receptive and strategics tend not to push hard for super
aggressive projected and proforma addbacks
■ Sponsors typically press for multiple and expansive debt incurrence baskets;
strategics often keep it simple with a “free and clear” basket and a single
ratio basket
■ Sponsors push for aggressive restricted payment baskets; strategics tend to
focus on specifically anticipated needs
■ Sponsors are more inclined to push for “Covenant Lite”; strategics are less
likely to push for maximum leverage and therefore “Covenant Lite” is not as
advantageous
■ Strategics are more concerned with minimizing overall cost of credit and
tend to be less concerned with covenant and leverage flexibility.
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15. April 2018 Debt Financing Trends
Borrower-friendly provisions (similar to those present in high yield bond
facilities and large-cap loan facilities) have infiltrated the middle market, but
in the last 60 days we have seen some pushback from Term B investors.
■ EBITDA addbacks for projected cost savings and synergies (to be
realized in 12 – 24 months) (uncapped or capped at 25% – 35% of
EBITDA); some recent deals have “flexed” back to 12 -18 months
and 20% - 25% of EBITDA
■ Netting of cash and cash equivalents (usually uncapped) against
leverage ratios
■ Change of Control exceptions for sales to strategics
■ Flexibility with respect to asset sale mandatory prepayments:
■ Typically required only above greater of a minimum dollar
threshold or a % of EBITDA
■ Often subject to leverage-based step-downs
■ Increased time to reinvest proceeds (12 to 18 months)
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16. April 2018 Debt Financing Trends (continued)
■ Excess Cash Flow sweeps:
■ Mandatory prepayments required only upon clearing the greater
of a minimum level of excess cash flow or a % of EBITDA
■ Ability to deduct cap ex and other debt repayments (including
incremental and refinancing facilities, and second lien debt) on a
dollar-for-dollar basis from the excess cash flow sweep
■ Increased flexibility to incur “substantially equivalent debt”
■ Increased flexibility to incur incremental debt for acquisitions (subject
only to limited conditions precedent) and for other purposes if certain
specified hurdles are satisfied including:
■ Specified “Free and Clear” dollar baskets
■ Leverage Ratios below specified levels
■ Leverage < Closing Date Leverage (for acquisition debt)
■ Leverage < Most Recent FQ End Leverage (for acquisition debt)
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17. April 2018 Debt Financing Trends (continued)
■ MFN carve outs for
■ debt maturing within two years
■ debt incurred under free and clear baskets
■ incremental loans to fund acquisitions
■ MFN thresholds of 75 basis points (historically 50 basis points)
■ MFN sunsets as long as 24 months (historically 12 to 18 months)
■ Ability to incur “sidecar” facilities (whereby the borrower uses its
incremental debt capacity to incur debt outside of the credit facility,
either on a pari passu or subordinated/unsecured basis)
■ Continued growth of “Covenant Lite” facilities
■ Unlimited restricted payments and investments subject to ratio tests
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18. LIBOR Phase Out
■ LIBOR expected to be phased out by end of 2021
■ Many expect LIBOR to be replaced with the Secured Overnight
Financing Rate (SOFR), an overnight rate based on U.S. Treasuries
that is, essentially, a risk free rate
■ Fed Reserve Bank of NY began publishing SOFR in April 2018
■ LIBOR includes a component for bank credit risk, however SOFR
does not; accordingly, if SOFR is substituted for LIBOR, spreads will
likely need to be increased to compensate for bank credit risk
■ For example, April 11, 2018 published rates for one month
LIBOR and SOFR were 1.89% and 1.76%, respectively
■ Recent loan documentation includes provisions permitting Agents to
select a successor rate to replace LIBOR
■ Older loan documentation, and substantially all derivatives
documentation, fails to include language to address the
cessation/replacement of LIBOR
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19. Q&A
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