bmo capital corporation mezzanine debt and equity for mid-market companies october 2008 eric k....
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BMO Capital CorporationMezzanine Debt and Equity for Mid-Market CompaniesOctober 2008
Eric K. Ehgoetz, CFAManaging Director
BMO Capital Corporation Who are we?BMO Capital is a well-established Canadian mid-market player:• Founded in 1996 with a national mandate and an exclusive focus on the mid-
market (offices in Vancouver, Edmonton, Calgary, Toronto, and Montreal)• Committed evergreen fund of $400 million - currently $220+ million invested in 43
companies• Closed over 150 transaction and deployed nearly $500 million since inception• Investments include both Mezzanine/Subordinated Debt and Equity
Our client approach brings unparalleled service:• Lower execution risk via working relationships with other BMO partners that we
can introduce to you (senior debt, asset based lending, M&A, etc.)• Welcome opportunities to work with a client’s existing financial partners – no
need to change established relationships
Mezzanine and Equity CharacteristicsWhat does an “average” BMOCC deal look like?Mezzanine Debt
• Typically $2 to $15 million financing
• Term typically up to 7 years
• Secured by a second charge and subordinated to senior lender
• Repayment is flexible, tied to cash flow and risk return of the instrument – today, typically a single bullet amount due at maturity
• Pricing made up of a mix of (some or all) current interest, deferred interest, fees and equity participation where appropriate
Equity
• Ownership positions up to 49% (not controlling)
• Exit mechanics are structured for maturity in 5 to 7 years
Typical Mezzanine/Equity OpportunityTransformational events often need junior capital …
Succession
Shareholder Take-Out
MBO/MBI
Growth
Acquisition
Recapitalization
Owner 55+ looking for liquidity options, diversifying net worth, dividend or equity strip
Removing dissenting shareholder(s) or those with different focus.
Management wants to acquire part/all ownership of a subsidiary/entire company (mgmt can be from inside/outside)
Working capital needs that cannot be funded by senior debt
History of growth by acquisitions or contemplating first
Owner looking to leverage (pre or post) transaction
Mezzanine and Equity InvestmentsWhere do they fit in the Capital Structure?
Equity• Minority• Control
Senior Debt• Operating Line• Senior Term Loan• Cashflow Loan
Mezzanine Debt• Straight sub debt• Sub with upside kicker• Convertible sub debt
Secured
Secured – but - subordinated security
Typically low asset coverage
Owner dilution
Traditional: up to 3x EBITDA
Expected Return: <10%
Typical: up to 1 - 1.5x more
Cumulative: 3.0 - 4.0x EBITDA
Expected Return: 15% - 20%
Expected Return: >20%
Typical Balance Sheet BMO Capital Corporation
Typical Company ProfileWhat type of Company are we looking for?
Revenues
Manufacturing, Industrial, Distribution and ServicesIndustry
Stable, sustainable or fast growth
EBITDA minimum $2 - $3MMProfitability
Consumer retail, fashion related, resource extraction, real estate
Yes No
Early stage: R&D, starting-up operations, ramping-up sales, emerging profits
Losses, Turnarounds (some exceptions), R&D companies
Established $10-15MM+
StructureWhat we are looking for at a micro level• Depth and breadth of management – number one issue
– Experience through a downcycle
– Vision & strong understanding of the competitive landscape
– Strong reporting & accounting controls and forecasting capabilities
– History of operating in leveraged environment
• Substantial sponsor/management investment – must have “skin in the game”
• Ability to withstand margin compression – pricing flexibility or a cost reduction focus
• Strong working capital and good operating flexibility
• Established “brand name” operation – i.e., industry leadership
• Cash flow predictability, sustainability, and quality – especially at the end of a long cycle
Case Study: Project BlueSkiesThe Business Case
The Business
The Opportunity
The Challenges
• Corporate travel management and business meetings
• Company had 7 shareholders from past mergers• Complex management and no consensus on future
direction• To grow the business further, 2 partners wanted to buy-
out 5 and re-invest in growth: organic and acquisitions
• Limited senior debt borrowing capacity – receivables only
• Funding gap – both at senior and mezzanine level• Alternative funding: lose control to an equity fund
Solution - Buyout of PartnersVision 2000 Travel Group
Subordinated DebtAugust 2006
$4,000,000
Common SharesAugust 2006
$1,500,000
Full Junior Capital Solution
Management Buy-Out of 5 of 7 business partners – One stop shop BMO Capital solution, no outside source of equity.
&
Case Study: Project RetirementThe Business Case
The Business
The Opportunity
The Challenges
• Assisted Living Facility
• Established and proven acquisition team looking to acquire an existing operation
• Proven track record of creating value in acquired businesses
• Acquirer sought additional equity capital to complete the acquisition without losing control
• Limits to traditional mortgage funding sources
Solution - Equity InvestmentAgeCare Health Services
Financedby
Equity
$2,300,000
has beenacquired by
and
September 2007
Mortgage
$17,325,000
RecapitalizationSubordinated Debenture
July 2007
$7,500,000
Growth CapitalSubordinated Term Loan
April 2007
$2,000,000
Recapitalization FinancingSubordinated Debenture
May 2007
$5,000,000Recapitalization Financing
Subordinated Debt & Equity
May 2007
$10,000,000Capital for GrowthSubordinated Debt
June 2007
$15,000,000
Acquisition Financing Subordinated Debenture
October 2006
$10,000,000Acquisition Financing
Subordinated Debenture
October 2006
$10,000,000
Western Canadian Western Canadian Based DistributionBased Distribution
CompanyCompany
Special Purpose Financing Subordinated Debenture
September 2006
$3,000,000
BC Based Holding BC Based Holding CompanyCompany
Management BuyoutSubordinated Debenture & Equity
August 2006
$5,500,000Acquisition Financing
Subordinated Debenture
June 2006
$3,000,000Growth Capital
Subordinated Debenture
June 2006
$3,000,000
Alberta Based Alberta Based ManufacturingManufacturing
CompanyCompany
Acquisition Financing Subordinated Debenture
May 2006
$3,400,000
Acquisition FinancingSubordinated Debenture
June 2007
$8,000,000Acquisition Financing
Subordinated Debenture
July 2007
$10,000,000
Leveraged RecapitalizationSubordinated Debenture
April 2006
$10,000,000Acquisition Financing
Subordinated Debenture
March 2006
$5,000,000
Management BuyoutSubordinated Debenture & Equity
June 2005 & February 2006
$6,000,000
Recapitalization Financing of Bellshire Limited and Van Wyck Packaging
with Mid Oaks Investments LLCSubordinated Debt & Equity
July 2007
$8,500,000
September 2007
Acquisition FinancingSubordinated Debt
April 2007
$5,000,000
Acquisition FinancingSubordinated Debt & Equity
December 2007
$8,360,000Acquisition Financing
Second Lien Loan
$10,000,000
January 2008
Ontario BasedOntario BasedFood ManufacturerFood Manufacturer
Acquisition & Growth CapitalSubordinated Debt
November 2007
$9,000,000
Western CanadianWestern CanadianAutomotive GroupAutomotive Group
Acquisition FinancingEquity
$2,300,000
September 2007
Acquisition Financing Subordinated Debenture & equity
June & October 2005
$5,540,000Acquisition Financing
Subordinated Debenture & equity
August 2004
$4,000,000
Healthcare CompanyHealthcare Company
Acquisition Financing Subordinated Debt
May 2007
$3,000,000Acquisition Financing
Mezzanine Debt & Debenture
October & September 2006
$4,850,000
Acquisition Financing Subordinated Debenture
October 2005
$4,750,000Acquisition Financing
Subordinated Debenture
July 2005
$8,000,000
Leveraged RecapitalizationEquity & Subordinated Debt
$12,900,000
March 2008
Recent Deals
Contact InformationEric K. Ehgoetz, CFAManaging Director BMO Capital [email protected]