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EY Private Placement Market Investor SurveyMarch 2016

Cont

ents

Foreword 1

2

4

6

9

Investment strategy

Credit quality

Deal structure

Outlook for 2016

1EY private placement market investor survey March 2016

L uke R eeve P art n e r E Y C ap i t al an d D e b t A d v i s o ry

Welcome to the second edition of the EY Private Placement Market Investor Survey. The EY Capital and Debt Advisory team once again surveyed a wide number of the most active investors in US, Sterling and Euro Private Placements to summarise their investment activity in 2015 and to gauge aspirations and views for 2016.

After a record setting year of issuance in the US Private Placement market in 2014, 2015 kicked off in a similar vein with the first half of the year seeing c. $27 billion equivalent of issuance, keeping the year slightly ahead of the $26 billion of supply in H1 2014. Issuance in H2 2015 remained robust, culminating in a new record being struck in 2015 for total issuance. Total supply rose by 3% to c. $61 billion vs. $59 billion in 2014. Reported volumes for the European Private Placement (‘EPP’) market was up 30% to €8.3 billion in 2015 from €6.4 billion in 2014.

Credit spreads were relatively tight throughout the beginning of 2015, however, amidst a backdrop of increasing concerns over the global economy, pricing began to noticeably widen in Q4 2015 — a trend that continued into the start of 2016. For example, the median 10 year credit spreads for NAIC-1 and NAIC-2 issuers since January last year widened by 55bps and 95bps, respectively year-on-year — following the trends seen in the public bond market. Nevertheless, as Government yields have also continued to fall and are close to record lows, all-in yields still remain attractive for (implied) investment grade borrowers.

Following the launch of the Loan Market Association (‘LMA’) template Private Placement documentation in January 2015, the Pan European Private Placement (‘PEPP’) market garnered much attention last year as a host of documentation templates for this market were made available to rival the better known Model Form Note Purchase Agreement from the American College of Investment Counsel (‘ACIC’) widely used for US Private Placements. Although take-up for these new documentation formats had been relatively slow by some market participants, an increasing number of issuers and investors are now considering the benefits of using these templates.

Looking ahead to 2016, a number of attendees at the 29th Annual Private Placement Industry Forum commented that although a steady volume of deals is expected this year, many believe investor demand will still exceed supply, particularly as bank market pricing has been very attractive as of late. Therefore, we expect to see investors continue to increase their bid sizes and tailor offers more in line with issuers’ funding requirements to secure better allocations. Further, as we see more UK/European investors enter the Private Placement market, we anticipate a greater level of non-USD (GBP/EUR) liquidity, adding to the growing US investor base that can offer direct currency via an internal swap (and for longer terms). Delay draw down profiles are also expected to be a key feature of the private market to provide greater flexibility for issuers.

In our opinion, although the Private Placement market will be challenged by a liquid and competitive bank market in 2016, the offer of longer tenors, diversification, and for some an existing supportive investor base, should still result in a robust year of supply to the market.

F orew ord

2 EY private placement market investor survey March 2016

I nvestment strateg y2 0 1 5 saw anoth er record - b reaking year w ith c. $ 6 1 b illion of issuance in th e U S P rivate P lacement market vs. $ 5 9 b illion in th e previous year

On average, the investors surveyed achieved 66% of their bid sizes vs. final allocations in 2015, an increase on the 52% average achieved in 2014. 50% of investors would liked to have invested more than the amount committed in 2015 and 45% of all investors surveyed have increased their investment targets for 2016. As expected, no investors surveyed seek to reduce their investment sizes in 2016.

P rivate P lacement activity per investor surveyed in 2 0 1 4 vs. 2 0 1 5

0 2 4 6 8

7.0

6.7

0.1

V olume invested ( $ b n)

Avg: 2.4

Avg: 3.0

0 20

41 100

1101 Avg: 59

Avg: 65

40 60 80 100 120

N umb er of d eals

0 20

71.2

76.0

40 60 80

10.5 Avg: 43.9

Avg: 36.015.9

A verag e d eal siz e ( $ m)

0% 20% 40% 60% 80% 100%

65%

100%

Average % bid vs. final allocation

0.7

25%

38%

Avg: 66%

Avg: 52%

2014 2015


L arg est ind ivid ual investment to a sing le issuer in 2 0 1 4 vs. 2 0 1 5

I nvestment siz es are increasing

74% of the investors surveyed had an individual commitment size on a transaction in 2015 of more than $50 million, down on the 92% in 2014. However, 61% invested more than $100 million, up on the 54% in 2015.

8%

20%

38%

Up to $50m $50m to $100m

2014 2015

Perc

enta

ge o

f inv

esto

rs

surv

eyed

L arg est ind ivid ual investment

$100m to 150m $150m to $200m More than $200m

13%

23%27%

23%27%

8% 7%


C red it q ualityC red it q uality continues to b e th e numb er one investment criterion in assessing any investment opportunity

93% of investors surveyed (86% in 2014) continue to believe that credit quality is the key driver in assessing investment opportunities.

H ow investors are prioritising investment d ecisions

1. Credit

2. Structure and covenants

3. Spread premium to publics

6. Portolio diversificaion

6. Relationship with borrower

5. Tenor

4. Coupon

A +


A verag e ( implied ) d esig nation split in 2 0 1 5 S ector view s

N A I C splitInvestors continued to search for yield in 2015, with some investors choosing to move further down the credit spectrum to obtain greater value as Government yields remained low. However, interestingly, the average NAIC split was less pronounced between NAIC-1 and NAIC-2 investments vs. our 2014 market survey data. On average for the investors surveyed, 51% of investments were for NAIC-1 credits and 48% were for NAIC-2, compared to 37% and 60% respectively in 2014.

S ectors on neg ative w atchIn 2015, the sectors that most survey participants invested in were Utilities (60% of investors surveyed) and Real Estate (33%).

The standout sectors that are on ‘negative watch’ for 2016, in the opinion of the investors surveyed, are Energy/Oil & Gas and Commodities/Metals & Mining.

NAIC-3 1%

NAIC-1 51%

NAIC-2 48%

U tilities

Energ y

C ommod ities

R eal Estate

O il & G as

M etals & M ining


D eal structureG reater d emand f or long er d ated maturities

To better match long term assets and liabilities, as well as pick up greater yield, investors had strong appetite for maturities over 10 years in 2015, with almost all investors surveyed having appetite for 10, 12 and/or 15 year notes. Longer dated maturities were even more popular in 2015 with 67% of investors surveyed offering beyond 20 years funding, an increase on the 54% in 2014.

M aturities investors h ad strong appetite f or in 2 0 1 4 vs. 2 0 1 5

C ontinuing appetite f or non- U S D d enominated transactionsDirect non-USD denominated transactions saw increased activity in 2015 compared to 2014, with the biggest increase being the rise in the number of investors transacting in GBP — from 36% of the investors surveyed in 2014 to 80% in 2015. Further, the rise in activity in the EPP market was beneficial for European issuers, with volumes rising by 30% from €6.4 billion in 2014 to €8.3 billion last year.

Nevertheless, it is worth noting that non-USD denominated funding from US investors do still typically come with limitations. For example, some investors have restrictions on obtaining internal swaps much beyond 20 years and often investors require swap breakage indemnification in the event of early repayment or default. Nevertheless, we have seen an increase in the number of investors that are able to extend non-USD funding beyond 20 years and/or have offered innovative structures to compensate for the absence of swap breakage language.

8% 7%

5 7 10 12 15 20+

31%

2014 2015

Perc

enta

ge o

f inv

esto

rs

surv

eyed

M aturity ( years)

20%

85% 80%

46%

73%

15%

87%

54%67%

NB: a number of investors highlighted multiple maturities that they had strong appetite for


N on- U S D d enominated market activity in 2 0 1 4 vs. 2 0 1 5

F loating rate investments in 2 0 1 4 vs. 2 0 1 5

Rise in floating rate capability47% of investors surveyed bought floating rate notes last year compared to 38% in 2014.

2014 2015

Perc

enta

ge o

f inv

esto

rs

surv

eyed

tran

sact

ing

36%

80%

36%

67%

36% 33%

18%27%

A O th ers ( * )$

(*) Other currencies include Dutch Krone, Danish Krone, Swiss Francs, Yen and Other European Currencies

2 0 1 4

Yes 38%

No 62%

2 0 1 5

Yes 47%

No 53%


2 0 1 4

2 0 1 5

> 12 months, 8%

> 12 months, 7%

Up to 3 months, 17%

Up to 6 months, 25%

Up to 3 months, 14%

up to 6 months, 36%

up to 9 months, 21%

up to 12 months, 21%

Up to 9 months, 33%

Up to 12 months, 17%

L ong est d elay of f ered in 2 0 1 4 vs. 2 0 1 5S elective M F L appetite

Inflation-linked Private Placements

Only 33% of investors surveyed bought a transaction in 2015 with no financial covenants and an Most Favoured Lender (‘MFL’) only clause compared to 62% in 2014.

Just 7% of investors bought inflation-linked Private Placements in 2015.

U se of P an European P rivate P lacement leg al d ocumentationDuring 2015, only 13% of investors surveyed bought transactions under LMA and/or ICMA Private Placement documentation.

D elayed d raw d ow ns continue to b e of f ered b y investors93% of investors surveyed had participated in a transaction with a delayed drawdown. Trends from 2014 continued into 2015, although a larger percentage of investors surveyed provided delayed funding beyond three months.

3 3 %

7 %

R ise in ‘ self - arrang ed ’ transactions73% of investors surveyed bought a transaction in 2015 that had no Agent or Broker involved (vs. 67% in 2014).


EY C apital and D eb t A d visory

L uke R eeve P art n e r Tel: + 44 20 7951 6548 Email: [email protected]

G iles B arling D i re ct o r Tel: + 44 20 7783 0862 Email: [email protected]

M ich ael M cC artney D i re ct o r Tel: + 44 20 7951 3263 Email: [email protected]

C aroline L y A s s i s t an t D i re ct o r Tel: + 44 20 7197 7301 Email: [email protected]

O utlook f or 2 0 1 6S imilar ch alleng es to th e P rivate P lacement market ex pected in 2 0 1 6 as 2 0 1 5

► All of the investors surveyed believe the biggest challenges to the Private Placement market in 2016 are cheap bank financing and/or limited supply vs. strong investor demand — the same concerns as 2015

► Interestingly, despite increased regulation, many investors saw this as a relatively benign factor for the private lending environment

B ig g est current ch alleng es to th e P rivate P lacement market in 2 0 1 6

O pportunity f or a g reater level of b espoke transactions ► As investors are eager to put large amounts of cash to work, we expect a greater number of institutions to entertain ‘non-standard’

structures to secure better allocations

► This view has been supported by the feedback received from the investors surveyed:

► 80% would be open to no financial covenants and MFL only transactions for select credits

► 73% would look at floating rate deals in 2016

► 47% of investors would be open to making use of LMA and/or ICMA documents

► 33% have suggested they may have appetite for inflation linked Private Placements

R eg ulation

P rivately placed b ond s and / or S ch uld sch ein

market

C h eap pub lic b ond d eb t

S low economic recovery

I nvestor d emand

ex ceed ing supply

C h eap b ank d eb t

1

2

3

4

5

6

B A N K

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