PRODUCTS EXPANDED DEBT CAPACITY Affordability Products Amsterdam Institute

PRODUCTS: EXPANDED DEBT CAPACITY (Affordability Products) Amsterdam Institute of Finance Joseph V. Rizzi December, 2013

Expanding Debt Capacity Rising purchase price multiples and ROE concerns drove acquirers to seek ways to expand their debt capacity. Some of the most common techniques are: Adjusted (Increased) EBITDA - Operating improvements - Normalization Asset Sales - Bridges to asset sales - Liquidity is key in case bridge cannot be taken out Innovative Securities - Defer interest - Push out amortization - Increase flexibility Amsterdam Institute of Finance December, 2013 2

Debt Options Term Amortization Covenant Call Seniority Secured Revolver 5– 7 Bullet FULL YES YES Term Loan A 5– 7 40% in first 5 years FULL YES YES Institutional Term Loans 7 -8 1% per annum / bullet FULL YES YES Covenant Lite 8 - 10 1% per annum / Bullet LIGHT PREMIUM YES Mezzanine 10 + Bullet LIGHT PREMIUM NO Depends High Yield 10 + Bullet LIGHT PREMIUM NO NO Holding Company PIK 10 + Bullet LIGHT PREMIUM NO NO Bridge Term Loans 1 -3 Bullet FULL YES YES Securitization 1 -5 Revolver with Borrowing Base FULL YES YES Second Lien 8 -9 Bullet FULL YES YES Bifurcated Lien (cross lien) 8 -10 1% P. A. /Bullet Yes Yes Partial Unsecured 1 -10 1% P. A. /Bullet Yes Yes No OPCO/PROPCO 10+ Bullet Yes Yes Amsterdam Institute of Finance December, 2013 The above table shows the features of different debt options available to issuers The availability of the different options is subject to market conditions 3

Total Transaction Structure for Euro Buyouts Sr Only Sr + 2 L Sr + Mez Sr +2 L+Mez Sr + HYB 2013 (9 mo) 58% 2% 10% - 30% 2012 67% 3% 10% - 20% 2011 52% 3% 10% - 25% 2010 60% - 20% - 10% 2009 78% - 22% - - 2008 22% 3% 65% 10% - 2007 25% 20% 25% 27% 3% 2006 25% 10% 35% 27% 3% 2005 37% 10% 35% 15% 3% 2004 42% 5% 50% 3% - 2003 45% - 55% - - Source: Standard & Poor’s Financial Services Amsterdam Institute of Financer December, 2013 4

Innovative Securities Institutional Investors/Relative Value Considerations Innovative securities allow for the expansion of debt capacity by one or more of the following mechanisms: Reduce Annual Debt Service - Reducing cash interest expense - Lengthen duration (Reduce/Delay amortization) Increasing Flexibility - Covenants - Cash flow control - Bridging - Public Disclosure - Call Premium - Partial/fully Unsecured Tranching (sequential ordering of payment or priorities) - Holding Company instruments - Restricted Subsidiaries - Second lien/bifurcated collateral-crossing liens - Senior/Subordinated Cost – Second Lien vs Mez Amsterdam Institute of Finance December, 2013 5

Second Lien Loans ◦ Senior Secured, but with Junior or Second Lien ◦ Higher default ◦ Lower recovery Originally developed as Rescue Finance Competing with EURO Mezzanine Investors – hedge funds and CLO Formerly Attractive Pricing: Spread differential between Second Lien and First Lien 350 BP. Issues: - Inter-creditor - Standstill Agreement - Obligations - New Investors Behavior in a Workout - CLO Rating Impact Amsterdam Institute of Finance December, 2013 6

Covenant Lite Covenant Issues ◦ Creditor – preserve deal; recovery value ◦ Debtor - flexibility Covenant Lite – liquidity vs. structure ◦ Similar to Investment Grade ◦ One or No Financial Covenants Rating Agency impact on CLO Volume ◦ US – Returning ◦ Europe – Shut down 1 Q 08 difficult Amsterdam Institute of Finance December, 2013 7

Cov - Lite % of U. S. Buyouts New Issuance 2013 ( 9 mo ) 2012 2011 2010 2009 2008 2007 2006 2005 2004 Amsterdam Institute of Finance December, 2013 60% 30% 25% 8% 10% 5% 25% 8% 2% - 8

‘Op. Co Prop. Co’ Financing (1) By structuring the financing of a pool of assets with a credit quality stronger than the corporate credit as a whole, ‘Op. Co’ ‘Prop. Co’ financing can provide a cost effective source of (acquisition) financing. Example: ◦ Target company de-merged into ‘Prop. Co’, which owns the real estate assets, and ‘Op. Co’, the operating company. ◦ Banks finance ‘Prop. Co’ acquisition of properties at agreed Loan to Value ratio. ◦ ‘Prop. Co’ leases the real estate assets to ‘Op. Co’. ◦ ‘Prop. Co’ debt refinanced by traditional Property Lenders or via Commercial Mortgage Backed Securities (CMBS) market. ◦ ‘Op. Co’ required to service the acquisition debt not assumed by ‘Prop. Co’. Amsterdam Institute of Finance December, 2013 9

‘Op. Co Prop. Co’ Financing (2) Bid. Co Financing Approx. 100% Notes Approx. 100% Op. Co Prop. Co Rental Payments Amsterdam Institute of Finance December, 2013 10

Asset Securitization Requirements: ◦ Stable and resilient cash flows from business ◦ Control over cash flows through sale of assets or adequate legal structure ◦ Target investment grade rating to maximize access to investors and lower cost of capital Different leverage measurements Issues ◦ Favorable bankruptcy laws ◦ Inter-creditor issues ◦ Flexibility …ability: Difficult Post Crisis Amsterdam Institute of Finance December, 2013 11

High Yield Bonds • Longer Term Bonds q 7 -10 years and longer q 4/5 NC • Public or Private q q Usually issued in private form with exchange rights Pricing would step up if bonds not public within short period (say 180 days of close) • Usually issued as subordinated debt but can also be senior unsecured • Markets q US - $1 T size q Euro - € 100 B size Amsterdam Institute of Finance December, 2013 12

Key High Yield Terms • Registration Rights • Issuer • Status • Degree of Subordination • Limitations on liens • Limitations on indebtedness • Restricted payments • Asset sales • Change in control Amsterdam Institute of Finance December, 2013 13

European High Yield Issuance ( € Mln ) Amt % Secured 2013 ( 9 mo ) 60 40% 2012 30 50% 2011 35 40% 2010 45 50% 2009 24 30% 2008 5 2007 24 30% 2006 23 20% 0% Source: Standard & Poor’s Financial Services Amsterdam Institute of Finance December, 2013 14

European Mezzanine Terms Covenants * * Extensive (bank type) Maintenance basis (tested quarterly) Security * Second secured Call Provisions * Generally callable immediately (103, 102, 101) Maturity * Ten year Pricing * * LIBOR + 800 bps (400 cash, 400 PIK) Warrants for total return (15 -17%) Liquidity * Low Disclosure: * Limited Marketing * No research coverage, no roadshow Rating Requirements * None Amsterdam Institute of Finance December, 2013 15

Euro Mezzanine Amsterdam Institute of Finance December, 2013 16

Bifurcated Collateral (Crossing Liens) Trend: Increasing segmentation of loans with reduced covenant or collateral ◦ ◦ Percentage 1 H 07 2006 Breakdown 11% 6. 4% 23% 7% of institutional loans with impaired covenants or collateral 47%, 2 H 07 -Nil 24% 2007 1 H 07 47% Second Lien Bifurcated Covenant Lite Unsecured Bifurcated/Crossing Liens – See HCA for an example ◦ ◦ Asset backed revolving credit backed by first lien or receivables and inventory Term loans back by lien on other non-current assets Property, plant and equipment Stock pledge Pricing premium – 100 bps compared to revolver Inter-creditor complications Amsterdam Institute of Finance December, 2013 17

PIK • Pay if you can toggle • Eats up equity • Characteristics Amsterdam Institute of Finance December, 2013 PIK SLL Spread 825/900 Toggle 900 -1000 Term 7. 5 -10 9. 5 Call 5 x. NC n/a Leverage 6. 5 x+ 6 x+ 500 n/a (Source: LCD) 18

Stapled Financing Staple financing term sheet to deal book Be prepared to fund Establishes ceiling Conflicts of interest Amsterdam Institute of Finance December, 2013 19

ACCORDIAN LOAN Incremental Loan Facilities • Option allowing increase in principal under existing terms subject to certain conditions • Existing lenders can participate or new lenders can be sought Dilution of Lender Interest • Uncommitted – access requires lenders willing to provide • Suffer dilution if you elect not to participate and facility approved Amsterdam Institute of Finance December, 2013 20

Bridge Loans Equity ◦ Bank provides equity Find other equity investors later or keep Reduce PE equity Lowers need for club or larger deals ◦ Rationale – pay to play ◦ Bonds Amsterdam Institute of Finance December, 2013 21

Changing Nature of Leveraged Finance Capital Structures Increasing layers of debt Directed at different investors Intercreditors conflicts 2012 - Present • Common equity • Hybrid preferred (0. 5 x) 2004 + 2 H 07 - 2011 • Common equity • Unsecured/mezzanine (1 x) • Senior secured bank loan (4 x) - Amortizing T/LA – 40% - B/C tranches – 60% FDX – 5 x + PPX – 7. 5 + • PIK notes (0. 5 x) • Unsecured/mezzanine (1 x) • Carve-out collateral (1 x) - securitization - OPCO/PROPCO • Second lien loans (1 x) • Senior secured bank loan (4 x) - Amortizing T/LA – 20% - B/C tranches – 80% Amsterdam Institute of Finance December, 2013 FDX – 6 x + PPX – 8. 5 + 22

HCA: Structuring in Action HCA ◦ ◦ ◦ – 33 bln USD (corp rating B 2/B+) FDX – 6. 53 x (LTM) PPX – 7. 7 x Club – Bain, KKR, ML (5 bln) W/W – Bof. A, JPMC, Citi, ML Debt Package 1 st Lien Term - R/C 2. 000 bln 6 250 0 - ABL 2. 000 bln 6 175 0 - T/LA 2. 250 bln 6 250 50% - T/LB 9. 300 bln 7 250 7% - EUR T/L 1. 250 bln 7 250 7% 2 nd Lien Spread Amortization (3. 46 x) (cum. At maturity) (1. 33 x) - Cash 4. 200 bln 8 - PIK/T 1. 500 bln 8 9. 75% 10. 0 % 8% 8% Existing unsecured Equity ◦ ◦ 7. 470 bln 2009 4. 965 bln -- 7. 5 % -- --- EBITDA/I – 1. 9 x (2007 E) EBITDA – CAPEX/I – 1. 1 x (2007 E) Amsterdam Institute of Finance December, 2013 23

HCA Legal Structure Sponsors Management Healthtrust Holdings Equity Merge Acquisition Corp HCA, Inc Bank Loans Existing Notes Euro T/L European subs Sub A Unrestricted subs Amsterdam Institute of Finance December, 2013 Sub B Sub C Sub D Sub E Restricted subs (gurantors) 24