October 2014

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market

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Welcome to the second issue of the Deloitte Alternative Lender Deal Tracker that has now been extended to cover 34 leading In this issue alternative lenders with whom Deloitte is tracking primary mid-market deals across Europe with up to €350m of debt. Deloitte Alternative Lender Deal Tracker 2 The number of deals covered in this edition has increased to over 228 transactions across the past 21 months. Key Trends in the alternative lending market 3 In this edition, we have included an alternative lender “101” guide. We have also included the key outputs of the Deloitte Q2 Alternative lenders increasingly targeting deals in Western Europe 4 2014 CFO survey. Alternative lenders continue to increase their deal flow … 5 Key headlines of the Alternative Lender Deal Tracker … providing bespoke structures for mainly “event financing” situations 5 • Continued strong momentum in private debt fund raising and alternative deal flow. Results from Deloitte’s CFO survey, Q2 2014 6

• Excess liquidity and increased appetite from banks to provide flexible terms have resulted in lower pricing for borrowers. Alternative lender “101” guide 7 Deloitte Debt Advisory Team 8 • A higher proportion of transactions in the deal tracker relate to M&A (59% of total deals in Q2 14 vs low point of 38% in Q2 13). Debt Advisory Credentials 9

• The UK remains the largest market for alternative lenders with 47% of the transactions, followed by 25% in France and 12% in Germany.

• There is a clear distinction in the market between established private debt lenders with significant deal flow and smaller newly set up funds.

• An increasing number of CFOs and management teams are considering alternative lenders as a funding source. Important Notice Disclaimer Deloitte (“Deloitte”) treats survey responses with professional care. Responses provided by the Alexander Olgers Fenton Burgin participants of the survey are included within the Deloitte Alternative Lender tracker and distributed Partner - Head Debt Advisory Partner - Co Head Debt Advisory free of charge to survey participants only. Please ensure, in providing this information, that you do not breach any existing confidentiality arrangements you may have entered into. Please note that Deloitte may also use the survey data for other purposes. Accordingly, information derived from the Tel: +31 (0) 88 288 6315 Tel: +44 (0) 20 7303 3986 responses to this Survey may be shared by us with other companies. We are not responsible for the E-mail: [email protected] E-mail: [email protected] subsequent use made of such information by such companies or for any further disclosure they might make. Deloitte has no liability for any information supplied to Deloitte in breach of any existing confidentiality agreement. Karel Knoll Floris Hovingh This Deal Tracker ('the Deal Tracker') has been prepared by Deloitte with input from participants to Senior Manager – Debt Advisory Director – Head of Alternative Lender Coverage the Deal Tracker. As such it is the property of Deloitte. Tel: +31 (0) 88 288 4483 Tel: +44 (0) 20 7007 4754 Recipients of the Deal Tracker should not assume that the Deal Tracker is appropriate for their E-mail: [email protected] E-mail: [email protected] purposes. In the absence of formal contractual agreement to the contrary, Deloitte expressly disclaim any responsibility to you, or any other party who gains access to the Deal Tracker. Any form of disclosure, distribution, copying, reference to, or use of this Deal Tracker or the information in it or in any attachments is strictly prohibited and may be unlawful. If you have received this Deal Willem Reddingius Nedim Music Tracker in error, please notify Deloitte, delete the Deal Tracker and destroy any copies of it. Manager – Debt Advisory Assistant Director – Alternative Lender Coverage For the avoidance of doubt, in the absence of formal contractual agreement to the contrary, neither Deloitte nor their partners, principals, members, owners, directors, staff and agents and in all cases Tel: +31 (0) 88 288 5847 Tel: +44 (0) 20 7303 4429 any predecessor, successor or assignees shall be liable for losses, damages, costs or expenses E-mail: [email protected] E-mail: [email protected] arising from or in any way connected with your use of the Deal Tracker. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ("DTTL"), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and Thomas Schouten independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal Senior Consultant – Debt Advisory structure of DTTL and its member firms. Deloitte is the United Kingdom member firm of DTTL. © 2014 Deloitte Touche Tohmatsu Limited. All rights reserved. Tel: +31 (0) 88 288 7926 E-mail: [email protected]

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 2 Key trends in the alternative lending market

Key Trends – General Alternative lender outlook • The European alternative lender market continues to grow. The Deal Tracker records a 6% year on year increase in Q2 deal flow compared to 2013. Based on our analysis, we predict a number of key European market developments that will occur in the second half of 2014, specifically: • We have recorded 228 transactions completed by 34 alternative lenders in our survey since October 2012. • The number of alternative lender transactions will continue to increase, • In response to increasing alternative lender liquidity, a small number of European banks have increased their flexibility to provide and but at a slower phase than in 2013 underwrite structures that are similar to those provided by alternative lenders. • More debt funds will be able to attract leverage at fund level which will • Increased liquidity from mainly leveraged US funds entering the European alternative lender market combined with banks’ ability in enable them to provide lower pricing 2014 to lend on more flexible terms has resulted in more competitive unitranche yields for the better credits with increasing numbers • The hold size of loans by funds will continue to increase of transactions being structured below L+700bps. • Increased TLB issuance in the mid-market • In Q2 2014, the trend for non-amortising, senior 'Term Loan B' debt structures (interest only) at premium senior pricing (c. L+550bps) has continued with a number of banks providing this product alongside alternative funds which has taken some market share away • More funds targeting the smaller end of the mid-market from the unitranche product. • Increased deal origination in the European market • There is reported strong momentum in fund raisings for newly set up private debt teams including, amongst others, CVC, Crescent, • Stronger collaboration between banks and alternative lenders EQT, Fortress, Muzinich, Pemberton, Park Square and TPG. • A number of larger funds being able to provide an underwritten option • Funds which can differentiate in terms of (i) scale, (ii) geographic reach (iii) niche sector or (iv) flexible capital have a competitive advantage. • Continued inflow of US liquidity

• High profile transactions have significantly raised awareness of the Unitranche product in mainland Europe, including reported • More debt funds looking to diversify outside of Europe, transforming transactions for the French registered international industrials company Flexitallic Group, Italy's global fan manufacturer Nicotra into global private debt players Gerbhardt and the Netherlands based international Dutch Ophthalmologic Research Centre (DORC). As a result, over the next six months, we expect a number of funds to continue to augment their European origination resource. Evolution of the US leveraged debt market • Importantly, a higher proportion of transactions in Q2 2014 relate to M&A (59% of total deals compared to a low point of 38% in Q213) and we anticipate that this trend will continue over the next six months. 100% 90% • The UK remains the largest market for alternative lenders with 48% of the transactions, followed by 25% in France and 12% in 80% Germany. 70% Key Trends – Dutch market 60% 50% • Although no new deals from Private Debt Funds were closed in the Netherlands during Q2 this year, awareness for alternatives to 40% banks is increasing and not only within the PE market. • In addition, several alternative lenders have increased their origination effort in the Netherlands, amongst other via local origination 30% teams. 20% • As pricing is coming down and valuations are still increasing, the window for alternative lenders in the Dutch market is still widening. 10% • Q3 got off to a good start with Delta Lloyd Mezzanine Fund closing a highly visible transaction with Verwater, a Dutch tank terminal engineering company, supporting buyer Infestos. 0%

• Furthermore and in response to increasing alternative lender liquidity, we notice banks moving into more competitive and flexible

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

structures with non-amortising senior Term Loan tranches and even junior tranches. As an example, the recent Uniekaas MBO was 1994 Q1'14 structured including a Mezzanine tranche. Bank funding Non Bank funding

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 3 Alternative lenders increasingly targeting deals in Western Europe

Deal volume main geographies • UK, France and Germany cover 84% of the deal flow.

• 47% of the transactions were in the UK, 25% in France and 12% in Germany.

• Out of the 34 lenders surveyed only 2 lenders have not completed a deal and a further 3 lenders have not completed deals outside of the UK. 1 3 3 • Unitranche product (46% of deals) is more popular in UK, while on the continent the senior product (40%) is dominant. 5 4 • In the UK of transactions were related to LBO financing, in line with number of deals in Europe. 42% 108 6 1 27 • 10% of deals in Europe relate to bolt on M&A compared to 5% in the UK. 1 1 57 5 3

Structures (UK & Europe) Deal purpose (UK & Europe) 3

60,0% 70,0%

50,0% 60,0% 50,0% 40,0% 40,0% 30,0% 30,0% 20,0% 16% 20,0% 10,0% 10,0% 12% 47% 0,0% 0,0% Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 25%

Senior Unitranche Other* M&A Refinancing Other*

* Other includes 2nd lien, Mezzanine and PIK / other. * Other includes dividend recapitalisation and . UK France Germany Rest of Europe

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 4 Alternative lenders continue to increase their deal flow…

Alternative Lender Number of deals completed Survey participants Number of completed per lender Uneven 6% increase Deal Tracker 31% of the deals distribution with 60 in deal flow • The most active alternative 40 top 3 funds • Covers 34 leading alternative Q2’14 lender participated in 34 participating in lenders, who have participated 50 compared to transactions. 35 in 108 UK and 120 European Q2’13 31% of the 40 • The top 3 lenders by deal flow 30 mid market deals in the last 7 transactions. 30 have participated in 31% of quarters. 25 30 the transactions included in 10 20 • Only primary mid market UK 22 19 our survey. 20 19 and European deals with debt 10 15 • Only 25% of transactions up to £300m or €350m are 10 25 10 10 21 involved multiple alternative included in the survey. 13 13 13 15 8 lenders. 5 0 • Q4 2013 had the highest deal 0

Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 • 24% of the participating funds

#2 #3 #4 #5 #6 #7 #8 #9

flow with 51 deals. #1

#11 #12 #13 #14 #15 #16 #17 #18 #19 #20 #21 #22 #23 #24 #25 #26 #27 #28 #29 #30 #31 #32 #33 #34 UK Euro have completed 2 or less Uk Euro #10 transactions in the last 7 quarters.

…providing bespoke structures for mainly “event financing” situations

Deal purpose Deal purpose overview Structures Deal structure overview 77% of the 49% of the transactions are • The majority of the deals are 50,0% transactions • “Unitranche” is the dominant 50,0% 46,2% structured as LBO related, with both 42% of involve M&A. structure, with (46% of UK 41,7%41,7% 40,5% first lien Senior UK and Euro deals being used 40,0% and 33% of Euro) of the 40,0% or Unitranche. to fund a buy out. transactions classified as a 33,3% 33,3% 28,7% Unitranche structure. • 29% of UK and 28% of Euro 30,0% 28,3% 30,0% deals surveyed related to • Alternative lenders are mainly refinancing, while only 12% of 20,0% competing with banks, as 77% 20,0% 17,5% 13,7% UK and 7% of Euro related to 12,0% 13,0%13,3% of the transactions are 10,0% a divided recap. structured as a first lien 7,9% 10,0% 6,7% 10,0% 4,6% structure (Senior / 3,4% 3,4% • Of the 228 deals, 47 deals did Unitranche). 0,8% not involve a 0,0% 0,0% sponsor. LBO Dividend Refinancing Bolt-on M&A Growth • Subordinated structures Senior Unitranche Second lien Mezz PIK/other recap capital UK Euro represent only 23% of the transactions. 77% first lien

• The mezzanine product is UK Euro more popular outside UK.

• Second lien volume remained * For the purpose of the deal tracker, we classify senior only deals with pricing low. L + 650bps or above as Unitranche. Pricing below this hurdle is classified as senior debt

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 5 Results from Deloitte’s CFO survey, Q2 2014 Great optimism Easy credit

Despite less financial and economic uncertainty, Chart 1. Business confidence Financing conditions improved further. Credit Chart 4. Cost and availability of credit the net percentage of CFOs who are more is seen as being cheaper. optimistic about the financial prospects for their companies decreased from 41 percent in the first Credit is also more easily available than at any quarter of 2014 to 25 percent now. time since the beginning of this CFO Survey in 2009 Q1. Dutch CFOs‘ counterparts in the UK were also less optimistic, but for the second consecutive quarter.

Optimism among North American CFOs came in at 26 percent – down from 46 percent a year ago. Dutch CFOs are now at par with their peers Net % of CFOs who are more optimistic about the financial in the UK and North America. prospects for their company now than three months ago Net % of CFOs reporting that funding for corporates is cheap or expensive, and funding is easily available or hard to get

The optimism that had surfaced amongst Chart 2. Uncertainty The good availability of credit is reflected in Chart 5. Favoured source of corporate funding CFOs since the third quarter of 2013 sources of funding. continues its positive trend. Some 44 percent Corporate debt is seen as the most attractive rate the current financial and economic source of funding. Some 67 percent of CFOs situation as normal (38.6 percent) or even indicate that corporate debt is the most below normal (5.6 percent). favoured source of corporate funding, followed 56 percent now rate the level of financial and by bank borrowing (44 percent) and equity economic uncertainty facing their business as issuance (12 percent). above normal, high or very high – the lowest reading since the start of this survey more than five years ago. % of CFOs who rate the external financial and economic uncertainty Net % of CFOs reporting the following sources of funding as facing their business as normal, or below normal (un)attractive

The percentage of CFOs who expect their Chart 3. Change in cash flows over the next 12 Risk appetite went up one year ago and has Chart 6. Risk appetite months cash flow to increase grew from 69 percent to remained stable since then. Some 33 percent 81 percent compared to one year ago. of CFOs believe that now is a good time to be However, compared to last quarter, 56 percent taking greater risk onto their balance sheet. of CFOs now believe that the cash flows of About 67 percent of CFOs are more risk- their companies will remain unchanged, averse. versus 25 percent in Q1 14.

The percentage of CFOs expecting their cash flows to increase by more than 10 percent dropped from 53 percent to 25 percent compared to the previous quarter. % of CFOs who expect their companies’ operating or free cash % of CFOs reporting that now is a good time to be taking greater flows to increase/decrease over the next 12 months balance sheet-related risks

Note: The 2014 Q2 survey took place between 2 July 2014 and 22 July 2014. A total of 36 corporate CFOs completed our survey, representing a net turnover per company of approximately EUR 2.0 billion. The responding companies can be categorized as follows: less than 100 million (14%), 100-499 million (31%), 500-999 million (14%), 1-4.9 billion (25%), more than 5 billion (12%), and unknown (6%). Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 6 Alternative lender “101” guide

Who are the alternative lenders and why are they becoming more relevant? What type of alternative lenders are active in the European mid market?

Alternative lenders consist of a wide range of non-bank institutions with different strategies including Number of private debt, mezzanine, opportunity and distressed debt. funds targeting the European These institutions range from larger asset managers diversifying into alternative debt to smaller funds Type of fund Type of loans Typical yield requirement mid market newly set up by ex-investment professionals. Most of the funds have structures comparable to those Leveraged private debt funds Senior / Unitranche loans Below L + 7.0% < 10 seen in the private equity industry with a 3-5 year investment period and a 10 year life with extensions options. The limited partners in the debt funds are typically , pension, private wealth, banks or Unlevered private debt funds Senior / Unitranche loans Above L + 7.0% > 40 sovereign wealth funds. Mezzanine funds Subordinated loans Coupon of 10% -15% > 30 Over the last two years a significant number of new funds have been raised in Europe. Increased Quasi equity funds Senior and subordinated loans Target IRR of 15% -20% > 30 supply of alternative lender capital has helped to increase the flexibility and optionality for borrowers. Special situations / distressed funds Senior and subordinated loans Target IRR of 10% -20% > 30

Key differences to bank lenders? Hedge funds Senior and subordinated loans Varies with risk profile > 40 • Access to non amortising, bullet structures. Unitranche structure compared to traditional LBO structures • Ability to provide more structural flexibility (covenants, headroom, cash sweep, dividends, portability, etc.). Senior Debt Unitranche Mezzanine Equity • Access to debt across the via senior, second lien, unitranche, mezzanine and 10x quasi equity.

• Increased speed of execution, short credit processes and access to decision makers. 8x

• Potentially larger hold sizes for leveraged loans (€30m up to €200m). 6x • Deal teams of funds will continue to monitor the asset over the life of the loan. Subordinated However, 4x

• Funds are not able to provide clearing facilities and ancillaries. 2x First lien First lien First lien • Funds will target a higher yield for the increased flexibility provided. EBITDA of multiple EV 0x • Untested behaviour of funds throughout the cycle. Senior Unitranche Senior & Mezzanine

Three key questions to ask when dealing with alternative lenders: Key differences of Unitranche compared to traditional LBO structures 1. What type of fund am I dealing with and what strategy do they employ? • Unitranche debt is senior plus mezzanine debt combined into one tranche with a blended pricing.

2. What is the track record, sustainability of the platform, and reputation of the fund and the • Banks typically require the senior debt to carry 30 – 40% amortisation whereas Unitranche has a individuals working within the fund? bullet maturity.

3. What is the current stage of the fund’s lifecycle? • Unitranche increases the total debt capacity to c. 5 – 5.5x EBITDA without having the complexity of a subordinated mezzanine tranche.

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 7 Deloitte Debt Advisory Team

UK & NL Senior team USA Alternative lender coverage

Fenton Burgin Alexander Olgers James Douglas Chris Skinner John Gregson Nigel Birkett John Deering Floris Hovingh Nedim Music Henry Pearson Partner Partner Partner Partner Partner Partner Managing Director Head of Alternative Debt Assistant Director Manager +44 (0) 20 7303 3986 ++31 (0) 88 288 6315 +44 (0) 20 7007 4380 +44 (0) 20 7303 7937 +44 (0) 20 7007 1545 +44 (0) 16 1455 8491 +1 704 333 0574 +44 (0) 20 7007 4754 +44 (0) 20 7303 4429 +44 (0) 20 7303 2596 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] .uk

Deloitte Debt Advisory NL is your national and principal partner and empowers global access to funding recourses Deloitte Debt Advisory UK is our and your partner with highest expertise, joint execution power and access to UK markets

Deloitte Debt Advisory - entrance to global liquidity and local execution resources

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 8 Deloitte Debt Advisory Team

Independent Debt Advisor with an unrivalled global reach Typical Debt Advisory moments

Completely independent • Because we are completely independent from Acquisitions, disposals & • Acquisition financing financiers, our objectives are always fully mergers • Merger financing transparent and aligned with those of our clients • Stapled financing

Growth- and refinancing • Maturing debt facilities Extensive network of • Our team of high profile senior ex-bankers and contacts within career debt advisors provides in-depth knowledge • Syndicated borrowings (inter)national financiers and understanding of the debt markets, • Asset based financing underpinned by an extensive network of contacts • Off balance sheet financing within (inter)national financiers Restructurings and • Covenant waiver and reset negotiations Integrated solutions • We provide advice to borrowers across the full renegotiations • Trading downturns spectrum of debt markets and instruments; a.o. strategic analysis of optimum capital structures and • Credit rating downgrades available sources of • Facility extensions and amendments • We work fully integrated with our M&A, tax, audit • New money requests and debt buy backs and consulting teams, realising tailor-made, comprehensive and integrated debt solutions Alternative Lending

Unrivalled global reach • One of the leading teams in the Netherlands with a global network of Debt Advisory professionals Market Leader • Deloitte Debt Advisory is the market leader for mid spanning 32 countries, giving us unrivalled global market alternative lender transactions, having reach completed over 20 alternative lender transactions in UK since 2012 Integral part of Deloitte • Independent advice and world class execution • We provided unparalleled access to global liquidity Corporate Finance resource across the full spectrum of debt markets through our dedicated global Alternative Lender and instruments coverage teams in key financial centres

Our clients • Our clients include public and private companies, private equity firms and their investee companies and financial institutions

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 9 Recent Debt Advisory Credentials 2014

Struik Foods Europe Boels Vreugdenhil Humares Triacta/Vingino Attema WestCord Hotels

Financing Financing Refinancing Refinancing Acquisition finance Refinancing Refinancing NL Debt Advisory deals Advisory Debt NL

Rutland Partners Tarsus Group plc Mitie plc HgCapital Chiltern WH Smith Plc Equistone

Dividend recap Amend & Extend Refinancing Refinancing Acquisition financing Refinancing Acquisition financing

Deals Debt Advisory Advisory Debt DMGT Plc Baxters Food Group Inflexion Bridgepoint Shanks Group Cape Plc HgCapital

Refinancing Refinancing Refinancing Refinancing Refinancing & retail bond Refinancing Refinancing Selection of UK of UK Selection

Extensive experience across a range of industries and debt structures

Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 10 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

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Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market | 11