2q09 review and 3q09 preview: better times ahead?

8/14/2019 2Q09 Review and 3Q09 Preview: Better Times Ahead?

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2Q09 Review and 3Q09 Preview:Better times ahead?

Diana Diquez, Sr. Market AnalystThomson Reuters LPC

July 16, 2009


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Register for our 15th Annual Loan Conference on Sept. 17th! http://www.loanpricing.com/conference.html

Webinar overview -2Q09 review & 3Q09 preview: Better times ahead?

2Q09 sees some stability

What were the biggest changes?

Secondary market rallies; middle market stabilizes Issuance recovers from 1Q levels

Non-sponsored lending up

Non-sponsored issuance is up

Banks lend selectively look for high quality deals

Ancillary business remains very important

Spreads are up but some deals get done at aggressive levels

Sponsored issuance shows slight signs of life

A few deals get done volume slightly up

Many obstacles remain

Balancing act between banks and reduced investor base

Amendments take center stage

51% amendments rule

Issuers see spread increases in return for more flexibility

Are better times ahead?


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Traditional middle market bids currently in 77-78context

Traditional MM & SMi100 bids

Price(%ofpar)

Source: LSTA/LPC Mark-to-Market Pricing

60

65

70

75

80

85

90

95

100

7/2/2007

7/27/2007

8/21/2007

9/15/2007

10/10/2007

11/4/2007

11/29/2007

12/24/2007

1/18/2008

2/12/2008

3/8/2008

4/2/2008

4/27/2008

5/22/2008

6/16/2008

7/11/2008

8/5/2008

8/30/2008

9/24/2008

10/19/2008

11/13/2008

12/8/2008

1/2/2009

1/27/2009

2/21/2009

3/18/2009

4/12/2009

5/7/2009

6/1/2009

6/26/2009

Traditional MM

SMi100

Traditional MM Deal size


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5


Market Survey -

How much time did you spend analyzing opportunities inthe secondary market in 2Q09?

12%

35% 35%

18%

0%

10%

20%

30%

40%

50%

60%

Majority of time as

primary issuance

has been quiet

Modest amount of

time as select

opportunities

arise

Very little time as

more focused on

amendments,

restructurings and

new deals

No time as our

strategy is to buy

and hold to

maturity

Source: Thomson Reuters LPC Quarterly MM Survey

%of

respondents


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6


2Q09 Middle market issuance up relative to 1Q

Middle Market Loan Issuance

Source: Thomson Reuters LPC

0

10

20

30

40

50

60

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

New Money

(beg. 2Q03)

Issuance

($Bils.)

2Q09 loan issuance

$17.6 billion

Up 74% from 1Q09

Down 40% from 2Q08

New money

$6.32 billion

Up 67% from 1Q09

Down 67% from 2Q08

Middle Market definition:1) Borrower sales size $500 million or less;2) Deal Size $500 million or less3) See additional exclusionary criteria in Guidelines

on LoanConnector


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Comparison to the overall market

Year-over-year

Middle market drops 40%

Overall market drops 37%

OverallSyn.Loa

nIssuance

($Bils.)

MiddleMarketIssuance

($Bils.)

Quarter-over-quarter

Middle market up 74%

Overall market up 37%

0

100

200

300

400

500

600

700

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

0

10

20

30

40

50

60

70

Overall U.S.

Middle Market



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Middle market issuance breakout

Traditional MM Deal size $100 Mil. to $500 Mil.

For all: Borrower sales


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Somewhat

below goals

33%

Met goals

39%

Below goals by

>15%

28%

Market Survey-Were you able to lend as much as you wanted to in 2Q09?


61% of lenders fell below

goals 39% met goals


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Market Survey -

What were the biggest obstacles to getting middle marketdeals done in 2Q09?


Ancillary business requirementsRelatively limited deal flow; lack of quality

opportunities

Lack of M&A activity

High costs prevented issuers from coming to market

Limited liquidity


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Market Survey -Lending capacity in the middle market

Unchanged

48%

Increased

[< 10%]

26%

Increased

[10-25%]

26%


[more than

75%]

27% [less than 25%]

33%

[25 - 50%]

27%

[50 - 75%]

13%

How much did lending capacity shrinkin 1Q09?

What happened to lending capacity in2Q09, relative to 1Q09?


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Bookrunner volume at very low levels; ranks shift


- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Bank of America ML

PNC (incl. National city)

Wells (incl. Wachovia)

JPM (incl. Bear Stearns)

U.S. Bancorp

GECC

Mitsubishi UFJ

KeyBank

BMO

BNP

SunTrust

Golub Capital

CIT Group

Bookrunner vol ($Bils)

1H09 1H07 (pre-mergers)


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Secondary market rallies; middle market stabilizes Issuance recovers from 1Q levels




Ancillary business remains very important Spreads are up but some deals get done at aggressive levels






51% amendments rule




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Non-sponsored lending gets selective

0

5

10

15

20

25

30

35

40

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

x`

Issuance

($B

ils.)

Percentage change in issuance y-o-y

Year-over-year

change(%)

-60%

-40%

-20%

0%

20%

40%

60%

80%

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

Non-sponsored Issuance



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Market Survey

In 2009, are you allocating more or less capital formiddle market loans than in 2008?

0%

10%

20%30%

40%

50%

60%

70%

(30%

%o

fre

spondents

2009 Capital allocation change relative to previous year

Source: Thomson Reuters LPC Annual MM Survey

Percentage change


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Market Survey

Rank in order of importance the following factors youconsider when committing to a new deal


18%

9%

18%

9%

46%

-

%

Ranked#5

27%

-

37%

18%

9%

9%

%

Ranked#3

55%

-

27%

9%

9%

-

%

Ranked#4

-

-

9%

-

18%

73%

%

Ranked#1

-

-

9%

64%

9%

18%

%

Ranked#2

-

91%

-

-

9%

-

%

Ranked#6

Size ofcompany

Yield

Ancillarybusiness

Structure

Industry

Creditquality

Factor

Non-Sponsored Respondents

Credit quality, structure and ancillary business are the top three factors for non-sponsored lenders


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Market Survey Lenders reduced tolerance for leverage revealed

0%

10%

20%

30%

40%

50%

60%

70%

80%

Perc

entofRespondents

3x

2007 2008 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Perc

entofRespondents

2.5x - 3x 3x - 4x > 4x

2007 2008 2009

Total Debt to EBITDASenior Debt to EBITDA

Non-sponsored leverage tolerance levels continue to decline

Majority of lenders focused on non-sponsored want senior leverage under2.5x and total leverage under 4x


Min. acceptable sr. debt to EBITDAMin. acceptable total debt to EBITDA


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Non-sponsored market: spreads high in 2009

100

150

200

250

300

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

LargeTraditional

Non-Sponsored non-M&A Revolvers

LIB+(bps)



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Market Survey -

Do you think that 2H09 pricing will increase ordecrease relative to 1H09 pricing?

0%

10%

20%

30%40%

50%

60%

70%

(30%

%o

frespondents

Percentage change


Majority expect spreads to increase


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Middle market sees shorter maturities

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

1H

09

Large MMTrad MM

Avg. Maturity Multi-Year Revolvers

Avg.Maturity-

numberofmonths

Trad. MM tenor dispersion: multi-year RCs

0%

10%

20%

30%

40%

50%

60%

70%

1 to


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Secondary market rallies; middle market stabilizes

Issuance recovers from 1Q levels




Ancillary business remains very important Spreads are up but some deals get done at aggressive levels






51% amendments rule




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Sponsored issuance up from 1Q levels

0

5

10

15

20

25

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

Other

LBO

Issuance

($Bils.)



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Market Survey

Rank in order of importance the following factors youconsider when committing to a new deal


-

71%

-

-

29%

-

%Ranked

#5

71%

-

-

29%

-

-

%Ranked

#3

-

29%

-

-

71%

-

%Ranked

#4

-

-

-

13%

-

87%

%Ranked

#1

29%

-

-

57%

-

14%

%Ranked

#2

-

-

100%

-

-

-

%Ranked

#6

Size ofcompany

Yield

Ancillarybusiness

Structure

Industry

Creditquality

Factor

Sponsored Respondents

Credit quality, structure and yield are the top three factors for sponsored lenders


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Although improved from last quarter, institutionalissuance is still well below historical levels

0

2

4

6

8

10

12

14

16

18

20

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

MMI

nstitution

alIssuance($Bi

ls.)

0%

10%

20%

30%

40%

50%

60%

70%

80%Institutional Volume % of Total Sponsored Volume



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What is your minimum yield requirement?

Assumptions: OID of 97, 4 years to maturity, Libor floor included, otherwise 3-month Libor of .65%

%o

frespondents


0%

10%

20%

30%

40%

50%

60%

< 7.5% 7.5 - 8.5% 8.5 - 9.5% 9.5 - 10.5% > 10.5%

Banks

Non-Banks

Total yield


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Term loan spreads and yields

250

350

450

550

650

750

850

950

1050

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

*

2Q08

*

3Q08

*

4Q08

*

1Q09

*

2Q09

*

Traditional MM

Large MM

*Discounted spread on loans (assuming a 4-year term to repayment)including OID

Avg.TL

BSpread(bps)

0%

2%

4%

6%

8%

10%

12%

14%

RepconStrickland

LocalInsight

Ventu

re

Transp

ort

AnchorGla

ss

T

NS

Pharma

net

Travelp

ort

Church'sChicken

Spread due to OID

Contractual spreadLIB Floor

Yiel

d(%)

Term loan spreadsTerm loan yields (4-year-term to repayment)

2Q08 2Q09Traditional MM Deal size $100M to $500MFor all: Borrower sales


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M&A issuance almost non-existent

0

2

4

6

8

10

12

14

16

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

0

1

2

3

4

5

6

7

8

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

3Q07

2Q08

1Q09

Sponsored M&A Issuance Non-Sponsored M&A Issuance

M&Aissuance

($Bils.)

M&Aissuance

($Bils.)



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Amendments take center stage in 1H09


Amends &

Extends

1% 100% vote

amendments

23%

51% vote

amendments

48%

Loan

Issuance

(excluding

Amendments)

28%


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Market Survey

Spread increase due to financial covenantamendment


0%5%

10%15%20%25%30%35%40%45%50%

%o

fRes

pondents

0 - 100 100 - 200 200 - 300

Spread (bps)

Non Sponsored Sponsored


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Amendment spread increases: Sponsored vs. Non-sponsored


0%5%

10%15%20%25%30%35%40%

45%

%o

fRevolvers

0 - 100 100 -200

200 -300

> 300

Spread Increase bucket (bps)

Sponsored

Non Sponsored


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Listener survey question(Live Poll)

What will drive issuance in 3Q?

M&A/LBO

Capex spending/Corporate purposes

DIPs

Amendments

Refis/Repricings

Exit financings


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Upcoming middle market loan maturities

0

5

10

15

20

25

30

35

40

45

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

SponsoredNon Spons

x`

0

2

4

6

8

10

12

14

16

18

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

Maturingvolume($Bils.)

Maturing

volume($Bils.)

Sponsored and non-sponsored Institutional

$127 billion in institutionaltranches is coming due in next 3years

74% of upcoming maturitiesare non-sponsored




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Market Survey What will happen with all the MM maturitiesapproaching in the next 3 to 4 years?

0%

10%

20%

30%

40%

50%

60%

Majority

refinanced at

higher spreads

Amends and

extends will

become

popular

Solution hard

to find, defaults

HY Issuance

will reach MM

names

Strategic

buyers will

acquire

%o

frespo

ndents




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Market Survey -

What are your expectations for issuance in 3Q09?


Moderate

Increase (5 to

15%)68%

Moderate

decrease ( 5

to 15%)

5%

Remain flat

16%

Significant

increase

(>15%)

11%



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g p p p g

Market Survey -What will be the most important issue in middle marketlending in 3Q09?

Economic outlook

Increasing default rates

Liquidity is still constrained

Lack of new deal flow beginning of the summer doldrums

Existing portfolio performance

Do buyer and seller expectations meet? What happens to purchase price

multiples?

Sustainability of high-yield rally

Uncertain outcomes for M&A processes




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g p p p g

Thank you for participating in todays webinar:

U.S. MIDDLE MARK ET:

2Q09 Review and 3Q09 Preview:Better times ahead?

Presenter: Diana Diquez, Senior Market AnalystDate: Thursday, July 16, 2009

Time: 11 AM Eastern Standard TimeDuration: 1 hr [includes Q&A session]

If you have any follow-up questions please e-mail us at [email protected] with MiddleMarket in the subject line

Register for our 15th Annual Loan Conference on Sept. 17th!http://www.loanpricing.com/conference.html

For a replay of the large corporate or middle market webinars please register athttp://www.loanpricing.com/LPC_webinars.html

2q09 review and 3q09 preview: better times ahead?

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