23 annual cfo roundtable & tax director workshop …file/current-state-of...23rd annual cfo...

23rd Annual CFO Roundtable & Tax Director Workshop

Las Vegas, Nevada

September 24-26, 2017

2017 Credit Discussion Presented by:

Shahrokh Shah – MD/Group Head, Engineering & Construction – BMO Financial Group

Matthew Gibbons – MD/Group Head, Construction & Engineering – CIBC

23rd Annual CFO Roundtable and Tax Director Workshop


Agenda

Loan Market Update

Interest Rate Market Update

Other Observations

BMO and CIBC



A Leading Commercial & Investment Bank

BMO Financial Group

Organization

Key

Metrics1

A Leading Global Financial Institution

Global Banking Operations

Strong, Stable Partner

Moody’s

Institution Senior Debt Rating Credit Rating Outlook

Bank of Montreal A1 Negative

US Bank A1 Stable

Wells Fargo A2 Stable

JP Morgan Chase A3 Stable

PNC A3 Stable

Bank of America Baa1 Stable

Citigroup Inc. Baa1 Stable

Huntington Bank Baa1 Stable

Capital One Baa1 Stable

Fifth Third Bank Baa1 Stable

Key Bank Baa1 Stable

8th Largest North American Financial Institution

• Commercial, Retail and Private

Bank services

• Leveraging industry, business, and

wealth expertise

• Strong Midwest footprint with

offices in 25 states

• Leading full-service investment and

corporate bank

• Focused on large and mid-size

companies

• Deep industry knowledge across all

major sectors

• Canada's first bank established in 1817

• Offers broad range of retail banking, wealth management

and investment banking services

• One of the largest diversified financial services providers

in North America

Market Capitalization $49.2 billion

Total Assets $569.03 billion

LTM Revenue $16.9 billion

Employees 46,173

Tier 1 Capital Ratio 12.9%

1. Figures in $USD, 07/31/2017

BMO is a leading global investment & corporate bank backed by one of the world’s largest and most

well-capitalized diversified financial services firm



Organizational Footprint – North America

Premier North American financial institution with local, national & global reach

Saskatchewan Manitoba Alberta British

Columbia

Ontario

Quebec

Newfoundland

and

Labrador

PEI

New Brunswick

Nova Scotia

New York

Massachusetts

Wisconsin

Illinois

Missouri

Yukon

Nebraska Iowa

Minnesota

Georgia

Florida

Texas

Washington

Nevada

California

Arizona

Utah Colorado

Northwest Territories

Nunavut

Virginia

Kansas

Ohio

Montana

Michigan

Oregon

BMO Bank of Montreal (Canada) & BMO Harris Bank (U.S.)

BMO Private Bank

BMO Capital Markets

Beijing

Delhi

Dublin

Guangzhou

Hong Kong

London

Melbourne

Mexico City

Mumbai

Paris

Rio de

Janeiro

Shanghai

Taipei

Zurich

• 594 U.S. branches

• 942 Canadian branches

• Offices across five continents:

Beijing

Delhi

Dublin

Guangzhou

Hong Kong

London

Melbourne

Mexico City

Mumbai

Paris

Rio de Janeiro

Shanghai

Taipei

Zurich



Design / Construction Management / Architectural Clientele

Specialty Contractor Clientele

Engineering, Construction & Building Products Industry Expertise Industry Leading Coverage with Significant Expertise…

• Team of professionals dedicated solely to the Engineering, Construction and

Building Products industries

• In-depth industry knowledge developed from established relationships with

over 200 companies throughout all industry segments

• Over $6 billion in lending commitments to the industry in North America

Construction / Integrated Clientele

Leading Lender & Advisor within the Engineering, Construction and Building Products industries

Cross-Border and International Capabilities…

• Headquartered in Chicago, with additional offices in the U.S., Canada,

Europe, Asia and Australia

Superior Execution…

• Senior-level deal attention with a track-record of successful transaction

execution

Building Products Clientele

http://www.ihs.com/



Engineering, Construction & Building Products Industry Expertise

• Team of professionals dedicated solely to the Engineering, Construction, and related industries

• In-depth industry knowledge developed from established relationships with over 200 companies throughout all industry segments

• Over $6 billion in lending commitments to the industry in North America

• Lead bank for over 70% of our portfolio

ENGINEERING AND CONSTRUCTION BANK LOAN INVESTOR UNIVERSE (SELECT PUBLIC PLAYERS)

Total

13

11

11

11

9

9

7

7

6

5

5

3



BMO Capital Markets is a brand name under which Bank of Montreal, BMO Harris Bank N.A. and BMO Capital Markets Corp. operate in the U.S.

Select Engineering, Construction and Building Products Transactions

Debt

Cash

Mgmt

Equip

Finance

Sole Provider Sole Provider Sole Provider Sole Provider Sole Provider Sole Provider

Equipment Line of Credit Equipment Line of Credit Equipment Line of Credit Equipment Line of Credit Equipment Line of Credit

$16 million

Equipment Lease Equipment Term Loan

Lead Arranger &

Administrative Agent

$38.4 million $5 million $5 million $5 million $5 million $1.3 million

Sole Provider

Co-Documentation

Agent Lender

Sole Lead Arranger &


Joint Lead Arranger &




Syndication Agent

September 2016

June 2017

June 2016 June 2016

May 2017 January 2017

September 2016

$5 million

$130 million $60 million $250 million $1.3 billion

$90 Million $1.5 billion

Senior Credit Facility

Senior Credit Facility Senior Credit Facility Senior Credit Facilities

Senior Credit Facilities Senior Credit Facility



Sole Bank

$35 million


$300 million


Co-Syndication Agent

February 2017

$32.4 million

Senior Credit Facilities

Sole Bank

August 2016 January 2017

$250 million

February 2017

Joint Lead Arranger

$350 million


Joint Lead Arranger

April 2017

Senior Credit Facilities

Co-Agent

$2.99 billion

December 2016

$65 million



June 2017


http://www.turnerconstruction.com/



CIBC is a Toronto-based, global financial institution with a 150 year

history. CIBC acquired The PrivateBank in June 2017 to build its

U.S. Region, providing tailored commercial, wealth management,

personal, and small business financial solutions through 46 offices in

18 states, as well as cross-border banking services to clients with

North American operations.

CIBC Corporate Highlights:

• 11 million individual, small business, commercial, corporate and institutional clients

in Canada, the U.S. and around the world.

• Market capitalization of $36.9 billion (CM: TSX, NYSE) and Basel III Common

Equity Tier 1 capital ratio of 10.4% at 7/31/17.

• $440.5 billion in assets, 1,100 banking centers and offices on four continents...

Who We Are



U.S. Region Commercial Banking

Construction & Engineering

Specialty banking practice that caters to engineers, architects and contractors, including

general, prime and specialty, coast-to-coast.

Team of 10 professionals with collective industry experience of over 150 years.

Institutional knowledge and proven track record in supporting the industry.

80+ C&E credit clients with approximately $900mln in commitments.

Recent highlighted relationships:

Matt Gibbons Managing Director & Group Head

312 564-1233 | [email protected]



Agenda

Loan Market Update


Other Observations

BMO and CIBC



Leveraged loan activity remains extremely active, reaching record volumes in 1H’17

U.S. Loan Market

Source: Thomson Reuters / Loan

Pricing Corporation

SYNDICATED LOAN VOLUME BY RATING

SYNDICATED LOAN VOLUME

($ in billions)

($ in billions)

SYNDICATED LOAN VOLUME BY TRANSACTION TYPE

($ in billions)

Technology9%

Healthcare9%

Financial Services9%

Utilities8%

REITs5%

Manufacturing5%

Auto5%

Oil & Gas5%

Business Services5%

Retail5%

Other35%

SYNDICATED LOAN VOLUME BY INDUSTRY 1H2017

$275

$475 $343

$352

$255

$473

$335

$448

$466

$504

$0

$100

$200

$300

$400

$500

$600

$700

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Non-M&A M&A Non-Leveraged M&A Leveraged (excluding LBOs) LBOs

$0

$200

$400

$600

$800

$1,000

$1,200

2008 2009 2010 2011 2012 2013 2014 2015 2016 1H16 1H17

Leveraged Investment Grade Other

$0

$20

$40

$60

$80

$100

$120

$140

$160

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

AAA AA A BBB BB B



Investment Grade Loan Activity

INVESTMENT GRADE MATURITIES

($ in billions)

ALL-IN DRAWN BBB PRICING

$319

$230

$386

$845

$610

$749

$838$873 $861

$452

$372

2008 2009 2010 2011 2012 2013 2014 2015 2016 1H16 1H17

Refi M&A Other New Money

28.1%

5.6%

5.0%

56.4%

4.9%

0%

20%

40%

60%

80%

2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17

% o

f T

ota

l IG

Volu

me

364-Day 3-Year 4-Year 5-Year Other

163

188

203

50

100

150

200

250

300

350

2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17

LIB

OR

Spre

ad (

bps)

BBB+ BBB BBB-

63

94

118

0

50

100

150

200

250

300

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

LIB

OR

Sp

rea

d (

bp

s)

AA A BBB

INVESTMENT GRADE VOLUME ALL-IN DRAWN INVESTMENT GRADE PRICING (364-DAY TENOR)

Investment grade issuers moved forward cautiously, awaiting guidance on government policy changes

Source: Thomson Reuters / Loan Pricing

Corporation



Middle Market Conditions

Volume of middle market deals hit $9 billion in 2Q17, which was the highest level since 2Q15

$0

$50

$100

$150

$200

$250

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H16 1H17

Large MM Traditional MM

MIDDLE MARKET NON-SPONSORED LIBOR SPREADS (NON-M&A RELATED)

MIDDLE MARKET VOLUME BY SEGMENT MIDDLE MARKET ANNUAL VOLUME

MIDDLE MARKET VS LARGE CORPORATE TERM LOAN YIELDS

6.1%

5.1%

6.3%

4%

5%

6%

7%

8%

9%

10%

2Q12 2Q13 2Q14 2Q15 2Q16 2Q17

All-

in Y

ield

(3

-ye

ar)

MM B-rated Large Corp. B-rated MM NR

219

188

120

140

160

180

200

220

240

260

280

2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17

LIB

OR

Sp

rea

d (

bp

s)

Large MM Traditional MM

($ in billions) ($ in billions) (1) (1)

(1) (1)

$0

$50

$100

$150

$200

$250

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H16 1H17

Sponsor Non-Sponsor

Source: Thomson Reuters / Loan Pricing Corporation

1. Large Middle Market includes deals between

$100 million and $500 million, while Traditional

Middle Market includes deals less than $100

million.



Recent Engineering and Construction Loan Comparables

Many companies within the Engineering & Construction industry continue to take advantage of

current market conditions to increase facility sizes, reset maturities, and lower pricing



Source: Standard & Poor’s Leveraged Commentary and Data

By Deal Value

($ in billions)

Dividend Recapitalization Activity

Given current “red-hot” state of the leveraged loan

market, dividend recapitalization financings are

clearing at historically favorable terms

1H17 dividend recap volume was well above the value

generated during the 1H16 period, which only saw

$14MM due to weak market conditions

Average post-dividend recap leverage levels remain at

~5.4x, consistent with levels observed since the

beginning of 2014

DIVIDEND RECAPITALIZATION ACTIVITY BY RATING (2015-2017 YTD)

ANNUAL DIVIDEND RECAPITALIZATION LOAN VOLUME PRE- AND POST-DIVIDEND RECAPITALIZATION LEVERAGE LEVELS

Issuer-friendly conditions resulted in significant year-over-year increases in dividend recap activity

Single-B issuance continues

to represent the majority of

dividend recapitalization

issuance

BB10%

BB-16%

BB+7%

B36%

B-7%

B+17%

CCC+6%

CCC1%

Double-B: 33.0%

Single-B: 60.0%

CCC & NR: 7.0%

3.1x

2.4x2.7x

2.9x3.1x

3.4x 3.4x 3.6x

4.1x3.8x 4.0x

4.4x 4.3x4.7x

5.1x4.7x

5.1x 5.2x

2009 2010 2011 2012 2013 2014 2015 2016 1H 2017

Pre-Dividend Leverage Post-Dividend Leverage

$6 $5 $7 $4 $6 $6 $5 $3 $2

$29 $22

$43 $52 $44

$26

$43

$12

$25

$1

$35

$28

$50 $56 $50

$31

$48

$14

$27

1%

15% 7% 11% 9% 9% 7% 10% 7% 8%

2009 2010 2011 2012 2013 2014 2015 2016 1H 2016 1H 2017

Institutional Pro Rata Dividend Recap Volume (% of Total Loan Volume)



$5.3

$35.5

$51.9 $50.6

$81.7$85.3

$68.5

$80.3

$37.0

$58.9

2009 2010 2011 2012 2013 2014 2015 2016 1H16 1H17

Institutional Pro Rata

Leveraged Buy-Out Activity

Source: Mergerstat and Thomson Financial, Standard & Poor’s Leveraged Commentary and Data

LEVERAGED LOAN LBO VOLUME

LBO TOTAL DEBT MULTIPLE AND AVERAGE EQUITY CONTRIBUTION AVERAGE PRO RATA AND INSTITUTIONAL LBO SPREADS

($ in billions)

Private Equity firms are contributing ~41% of equity this year, marking the highest average equity check in any full year since 2009

3.8x

4.6x

4.9x 5.1x

5.3x

5.7x 5.6x

5.4x 5.8x

20%

30%

40%

50%

60%

70%

2.0x

3.0x

4.0x

5.0x

6.0x

2009 2010 2011 2012 2013 2014 2015 2016 1H17

Total Debt Multiple Equity Contribution

475

419

250

300

350

400

450

500

550

600

2008 2009 2010 2011 2012 2013 2014 2015 2016 1H 2017

LIB

OR

Sp

rea

d (

bp

s)

Pro Rata Institutional

NEW ISSUE LBO LOAN VOLUME BY INDUSTRY

Computers & Electronics, 28%

Services & Leasing, 20%

Healthcare, 7%Chemicals, 7%

Telecom, 6%

Manufacturing & Machinery, 5%

Home Furnishings, 4%

Entertainment & Leisure, 4%

Insurance, 4%

Oil & Gas, 3%

Other, 12%



Agenda

Loan Market Update


Other Observations

BMO and CIBC



U.S. Interest Rate Themes

Business & Consumer expectations remain elevated. Consumer and business sentiment have

risen sharply in the aftermath of last fall’s presidential election. Record confidence readings

translated into stronger spending by businesses and consumers during Q2.

Rates retrench. After surging to three year highs in early March, U.S. interest rates have declined

amid mixed economic data and growing skepticism about President Trump’s ability to push through

his ambitious fiscal agenda.

Flattening yield curve creates opportunities for borrowers. The narrowing of the gap

between the short-term and long-term rates has reduced the opportunity cost for borrowers to

switch from floating to fixed rate debt.

Fed sticks to the script. Fed officials have signaled that the recent patch of mixed economic data

won’t deter them from raising rates. The Fed’s median interest rate projections call for six 25bp rate

hikes through 2019, lifting the federal funds rate to 2.75% by 2019. Policymakers also expect to

begin shrinking the Fed’s record $4.5 trillion balance sheet beginning in October.



Consumer & Business Expectations are Running High

► Consumers and equity investors remain upbeat about the economy’s longer-

term prospects, buoyed by a strong stock market, increasing home prices and

renewed gains in income as employment continues to rise.

University of Michigan Consumer Sentiment Index S&P 500 Index

Source: Bloomberg



Bond Market Shows Signs of Skepticism (in the form of a flattening yield curve)

► While short-term rates have climbed in response to Fed rate hikes, longer-term rates

have declined over the past six months.

0.0

1.5

3.0

4.5

6.0

7.5

9.0

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Rate

(%

)

1-month LIBOR and 5 Year Swap Rate (last 20 years)

5 year swap rate

1m LIBOR

Source: Bloomberg



Volatility (Normalization) Shows Signs of Returning

► Historically, short-term index rates, such as LIBOR, change frequently. From 1991 to 2011, the

average change in 1-month LIBOR during a 3 year period was 365 bps.

0

100

200

300

400

500

600

7002

01

7

20

16

20

15

20

14

20

13

20

12

20

11

20

10

20

09

20

08

20

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

19

99

19

98

19

97

19

96

19

95

19

94

19

93

19

92

Average Change in 1-month LIBOR During 3 Year Period

3y Range of 1m LIBOR

Avg Range from 1990-2011

Source: Bloomberg



LIBOR Hits Highest Level Since 2008

► Money market rates have climbed to the highest level since the financial crisis

in response to recent rate hikes by the Federal Reserve.

1.23%

1.32%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2012 2013 2014 2015 2016

Ra

te (

%)

1-month & 3-month LIBOR

1-month LIBOR

3-month LIBOR

Source: Bloomberg



Fed has Nearly Achieved its Dual Mandate

► Eight years after emerging from the financial crisis, the Federal Reserve has

nearly achieved its dual mandate of full employment and stable inflation

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2012 2013 2014 2014 2015 2016 2016 2017

Un

em

plo

yme

nt

Ra

te

Ne

w J

obs A

dde

d

Labor Market Below “Full Employment” Inflation Near Target

Source: Bloomberg



FOMC Projections

► Federal Reserve forecasts continue to show a gradual pace of rate hikes.

Source: Economic Projections of Federal Reserve Board, Sep 20, 2017

3 year path to normal “normal” rates

around 3%



Market Now Supports an Additional Hike in 2017

► The futures market currently implies a 71.4% probability of a third rate hike this year.

Current Target Rate Probabilities (Dec 13 2017 Fed Meeting)

Source: CME Fed Watch



The Future of LIBOR

► Primary benchmark for short-term interest rates around the world -

tied to $350 trillion worth of financial derivative contracts, mortgages,

bonds and retail and commercial loans.

► Post financial crisis regulation has resulted in a lower volume of

transactions for banks to base LIBOR submissions.

► Expert judgement versus real transactions now make up a majority of

LIBOR submissions.

► Increased liability resulting from this approach has led the regulatory

agency that oversees LIBOR to recommended an expiration date for

LIBOR at the end of 2021.



The Future of LIBOR

► The Federal Reserve has assigned the Alternative Reference Rate

Committee (ARRC) to manage the transition from U.S. Dollar LIBOR

to a new benchmark rate.

► Leading replacement rate is an index called the Broad Treasury

Financing Rate (BTFR). The BTFR rate contains a broad set of U.S.

treasury market based financing transactions.

► BTFR index rates are expected to be published by The Fed starting in

2018.

► The new benchmark will gradually be transitioned into credit

documents. In the event LIBOR becomes unavailable prior to this

happening credit documents will generally default to the Prime rate.



Agenda

Loan Market Update


Other Observations

BMO and CIBC



Ideal Client

Character Market Position

Bonding

Quality of Cash Flow

Leverage / Capital Position

Reputation

Backlog / Margin

Liquidity

Revenue Diversity

Quality Mgmt

Team & Culture

Systems & Controls

Claims Mgmt

Return & Ancillary Business

Project Selection Criteria

What Does a Bank Look for in a Contractor?



Client Underwriting Keys

Area of Focus Credit Underwriting

• Ensuring that covenants are appropriate, and structures are

appropriately tight, to adequately monitor financial

performance, without hindering growth

• Detailed Review of surety agreements and terms

• Bonded work as a percentage of total revenue/backlog also

considered when evaluating risk and collateral

• Focus on bidding procedures to determine if appropriate

oversight is applied / proper approval systems are in place

• Analysis of historical and current work in progress reports to

asses profit fade and project execution risk

• Review of dependencies on major contracts/customers to

identify potential catalysts for financial performance

degradation without impacting potential areas of growth

• Monitor percentage of revenue associated with government

contracts, which are vulnerable to changes in policy and can

carry low margins

Capital Structure

Industry Outlook &

Customer Concentration

Bonded Work / Surety

Agreements

Bidding Procedures/Project

Execution



General Observations

Theme Drivers

• Significant capital on the sidelines

• Multiples seem reasonable when compared to other

industries

• Recent history of growth in revenue and earnings and

improved margin profile are intriguing

• “Visibility” and perception there is longer term demand

• Balance sheets continue to carry the burden of projects

substantially completed

• Multi-year resolution processes ahead

• Stress on capital and liquidity positions

• Balance sheets improved and businesses well positioned

• Aging ownership demographic

• Visibility in backlog

• Favorable financing conditions

• Beneficiary of improved market conditions

• Strategic advantages within given markets

• Less burdened by problematic multi-year contracts

Increased Sponsor Interest

Formidable Regional Contractor

Continued Exit Strategy Evaluation

Hangover Continues

Reliance on Unproven Subs

• Strong market has created opportunity, particularly amongst

the trade.

• Aggressive expansion and quickly going up market

• Adequacy of capital position, supervision, controls, systems



Scarcity in Skilled Labor Force

An increase in construction projects around the

world has increased demand for skilled

laborers since the 2008 recession

Companies that are unable to secure laborers

face significant opportunity costs and

decreased growth prospects

As labor becomes more scarce, filling positions

becomes more expensive

Contributing Factors Mitigants

► Growth in construction projects

► Decreased unemployment rate

► Aging workforce

► Hours of training required for new labor force members

► Immigration costs

► Investment in internal training and promotion programs, as well as local training programs

► Increases in pay and benefits to retain current laborers

► Use of technology to replace positions

► Recruiting efforts outside of immediate construction area

Source: Navigant “Skilled-Labor Shortage: Myth or Reality?” 2017

Source: Bureau of Labor Statistics - Job openings - Workforce Statistics for NAICS: 236,237,238

The risk and expense associated with labor shortages can be mitigated through effective planning and

investment in both internal and external labor development



Interest Rate Increases Rate Risk Management – Best Practices Within the context of a broader risk management policy, managing interest rate risk usually involves the examination of

three key areas:

What is the ‘optimal’ mix of fixed and floating rate debt for our company?

Every company faces a unique mix of internal and external factors that influence the decision on ‘optimal’ debt

capital structure

Key quantitative objectives: lowest average cost of debt, lowest volatility of funding, and duration matching

– For intermediate tenors, a roughly balanced liability profile is the mathematically optimal blend

Any framework developed to analyze a company’s debt capital structure must consider historical data as well as

forward looking factors and their inter-relationships

Our observations indicate that most N. American corporations maintain fixed rate debt between 50% and 75% of

total debt

What are the potential risks/rewards of various hedging strategies?

Understand the quantum of risk and how a properly structured hedging program will perform under a variety of future

scenarios

Many companies will ladder the maturities of hedges and/or stagger the execution in order to reduce near-term and

longer-term pricing (repricing) risk

How do current market conditions help or hinder our objectives?

Current term rates remain near historical lows, favoring an increase in fixed rate liabilities (either via swapped bank

debt or bond issuance)

The yield curve is historically flat, reducing the cost to extend duration as well as the cost to hedge on a forward

basis

Interest rate risk management is a dynamic process that incorporates market conditions,

company specific factors and hedge performance as drivers of the decision



Interest Rate Increases (Cont.) Hedging Product Overview Interest rate derivatives are widely used by many different types of institutions as a part of regular prudent risk

management programs

Corporate entities use interest rate derivatives to manage fixed / float mix, hedge anticipated debt issuance and / or manage the currency mismatches between revenue streams and debt service

Other entities (e.g. hedge funds, pension funds, asset managers) use OTC derivatives both to hedge risk and / or take a position on the market

Although both exchange traded and OTC derivatives can be used for the same purposes, OTC derivatives provide a higher degree of customization, allowing for protection more closely tailored to a hedger’s specific risk profile

These are common contract features that can be customized:

Tenor The time between the start date and the maturity date of the instrument

Notional size /

amortization The amount of notional outstanding can remain flat, amortize or accrete

Forward start A contract entered into today that has an effective date that is weeks, months or years in the future

Floating rate index Specify both the index type (e.g. LIBOR, SIFMA , Prime) and the tenor (e.g. 1-month, 3-month, 6-month)

Payment frequency The frequency of settlements under the contract (e.g. monthly, quarterly). Can be the same or different for

fixed and floating legs

Swaps are flexible instruments that can be tailored to your specific situation



Interest Rate Hedging Strategies

Strategy Description Upfront Fee

Protects Against

Rising Rates

Benefits from

Falling Rates

Potential Early

Termination Values

Rate

Compared

to Swap

Plain

Vanilla

Swap

Fixed rate No Yes No Positive, flat or

negative N/A

Forward

Starting

Swap

Floating rate

initially, followed

by fixed rate

No Yes – after initial

floating period

Yes – during

initial floating

period

Positive, flat or

negative Higher

Cancellable

Swap

Fixed rate with

option to cancel

trade before

maturity

No Yes Yes – after call

period

Before call period:

Positive, flat or

negative

After call period:

Positive or flat

Higher

Swaption

Option to enter

into a swap

agreement at

future date

Yes Yes Yes

Before call period:

Positive or flat

After call period:

Positive or flat

Higher



Ownership/Liquidity Transition

Status

Quo

Debt

Recapitalization

Minority

Recapitalization ESOP

Majority

Recapitalization

Strategic

Sale

Liquidity

Ownership

Be

ne

fits

C

on

sid

era

tio

ns

• Grow revenue and

earnings in an effort to

increase future

valuation

• Maintain control and

maximize upside

• Provides rapid access

to capital and

opportunity for

Shareholder liquidity

• Enables Shareholders

to maintain economic

control

• Establishes lending

relationship that

Shareholders can

utilize for additional

capital requirements in

near-term

• Provides rapid access

to capital and

opportunity for

Shareholder liquidity

• Enables Shareholders

to maintain economic

control

• Establishes lending

relationship that

Shareholders can

utilize for additional

capital requirements in

near-term

• Creates liquidity and asset

diversification

• Competitive valuation to

majority recap

• Shareholders determine

process and criteria

• Ownership incentives for

employees

• Limited organizational

change – stocks stay in

friendly hands

• Lower valuation typical

• Creates liquidity and

source of future

growth capital

• Opportunity to benefit

from prevailing

industry trends

• Minimizes future

business risk

• Can be pursued in

conjunction with

acquisition growth

strategy

• Maximizes current

payout

• Eliminates business

risk

• Capitalizes on

potential synergies

and product

expansion

opportunities

• Valuation not solely a

result of capital

markets environment

• Risk associated with

execution of growth

strategy

• No near-term liquidity

or capital for growth

• Tighter leverage

standards and overall

lending criteria

• Liquidity will be limited

in an “un-sponsored”

transaction

• Debt service

requirements

• May reduce

Shareholders’

potential to realize

upside

• Expectation that

senior management

remains with the

Company

• Potential valuation

discount for

investment

• Tighter leverage standards

and overall lending criteria

• ESOP administration costs

• Potentially greater risk for

employee retirement funds

• Corporate obligation to

repurchase shares

• May reduce Shareholders’

upside

• Tighter leverage

standards and overall

lending criteria

• Optimal timing

• May reduce

Shareholders’ potential

to realize upside

• Ability to facilitate due

diligence

• Expectation that senior

management remains

with the Company

• Industry performance

and timing

• Company positioning

• Uncertainty of

Shareholders’ and

management’s future

roles

• Integration and

cultural issues

A desired balance of liquidity and ownership can be reached through a number of different actions



Increased Project Size and Complexity

• Large projects likely to be more capital intensive

• Multi-year construction timeline increases likelihood of unexpected events occurring

• Cost overruns and change orders are amplified by the scale of a given project

• New building designs call for a wider array of building techniques and building materials

• Industry importance of safety vs. customer request for rapid completion

Size Complexity

Ch

all

en

ge

s

So

luti

on

s

• Capital risk can be mitigated by entering into joint ventures or private-public partnerships

• Modern machines can speed up project completion by accelerating data collection and analysis

• Investment in project modeling and bidding software can help reduce errors and improve cost estimates

• Availability of high-grade materials (ex: glass/concrete-based products), and Building Information Modeling (“BIM”) software allows for more complex structure construction

• Use of prefabricated structures or modular building materials can shorten project completion time without increasing risk of injury

Source: IBISWorld Industry Report – Commercial Building Construction in the U.S. (December 2016)

Project size and complexity can be managed through a combination of proper structure,

and adoption of modern technology/building techniques



Q&A

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