quarterly capital market presentation 1q 2016 · pdf filesource: s&pcapitaliq, dealogic,...

State of the Capital Markets:

Presentation to:

Fourth Quarter 2015 Review and First Quarter 2016 Outlook

The Premier Middle Market Newsletter©

Fed move in December largely discounted; public markets remain impacted by China and commodities worries

Challenged by outflows from HY funds last year ($8B in December alone), bond volume softened to $261.7B, from $310.5B in 2014

US leveraged loan issuance of $420.7B was 20% off 2014’s total of $528.1B – worst performance since 2011

Retail loan funds suffered net outflows of $16.5B for 2015; first week of January marked 24th consecutive week of outflows

2015’s new CLO formation of $97.3B came up 22% short of the previous year record of $124.1B amid risk retention headwinds

2

Tale of two trends continues: volatility vs. constructive credit

Capital Markets Review – Fourth Quarter 2015

Source: S&P Capital IQ, Dealogic, PitchBook, UBS, Barclays

GPs still deploying capital; add-‐‑ons easier than LBOs in this environment

Middle market sponsor leveraged loan volume for 2015 was $50.3B, off27% from last year’s $69.5B level – lowest level of activity since 2009

Private credit funds continue to invest opportunistically as regulatedbanks retreat fromhighly leveraged transactions

Chase for yield now balanced with flight-‐‑to-‐‑safety impetus; institutionalinvestors weighed more to cash, less large cap credit

Junior capital (second lien and mezzanine) tougher to source with BDCscash-‐‑constrained; unitranchemore attractive risk/rewarddynamic

What’s the setting for debt and equity INVESTORS?

3


Source: PitchBook, S&P Capital IQ, Thomson Reuters LPC

Large cap issuers struggle with story deals, as broadly syndicatedmarkets stick to better known plain-‐‑vanilla credits

Big banks wary of underwriting given uncertain buyer appetite; largermiddle market arrangers filling the void

Regulatory pressures continue to curb overall bank appetite; non-‐‑banksproviding one-‐‑stop shop solutions

Private credit arrangers employ “cargo pants” strategy to increase holdlevels; unitranche financings provide certaintyof execution

Borrowers and sponsors seeking flexibility at a price

How about debt and equity ISSUERS?


4

Institutional investor market share Source: S&P LCD, Capital IQ

Nothing new about regulatory pressures favoring shadow banks

5

Capital Markets – Behind the Scenes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Institutional investors and finance companies

Banks & securities firms

Primary market for highly leveraged loans (banks vs. non-banks)

North American PE fundraising ended the year on an upswing…


6

Source: PitchBook

$35

$34

$25

$20

$35

$36

$26

$36

$37

$81

$35

$81

$47

$60

$40

$65

$45

$38

$43

$54

6152

45

7467

63

51

63 63

87

76

88

10092

73 74 72 74 76

62

0

20

40

60

80

100

120

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2011 2012 2013 2014 2015

Capital Raised ($B) # of Funds Closed

…while North American deal flow tapered off at year end


7

Source: PitchBook

$110

$114

$96

$123

$96

$106

$107

$200

$109

$117

$133

$188

$165

$165

$178

$184

$153

$156

$203

$118

813761

695

799878

823

789

1,149

849

792

9671,024

1,100987

1,100 1,085 1,023 1,0411,034

753

0

200

400

600

800

1,000

1,200

1,400

$0

$50

$100

$150

$200

$250

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2011 2012 2013 2014 2015

Capital Invested ($B) # of Deals

Source: S&P/LCD

Despite prospect of higher rates, loan fund outflows were $16 billion


8

-$5B

-$4B

-$3B

-$2B

-$1B

$0B

$1B

$2B

Jan 2015

Feb 2015

Mar 2015

Apr 2015

May 2015

Jun 2015

Jul 2015 Aug 2015

Sep 2015

Oct 2015

Nov 2015

Dec 2015

Prime-fund flows (weekly reports only)

CLO formation slows as managers wrestle with risk retention


Source: S&P/LCD

9

$0B

$2B

$4B

$6B

$8B

$10B

$12B

$14B

$16B

$18B

Feb 2014

Apr 2014

Jun 2014

Aug 2014

Oct 2014

Dec 2014

Feb 2015

Apr 2015

Jun 2015

Aug 2015

Oct 2015

Dec 2015

Monthly CLO volume

Source: Thomson Reuters LPC

Leveraged Lending Guidance impacting leverage levels

Capital Markets Metrics – Leverage

10

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

LBO Deb

t to EB

ITDA (x

)

Institutional MM Large Corp.

20%

25%

30%

35%

40%

45%

50%

55%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Equity Con

tribut

ions

Institutional MM Large Corp.

Source: Thomson Reuters LPC

Sentiment shifts in 4Q15 away from the issuer

Capital Markets Metrics – Pricing

11

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-‐10.0

-‐8.0

-‐6.0

-‐4.0

-‐2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan-‐11

Mar-‐11

May

-‐11

Jul-‐1

1Se

p-‐11

Nov

-‐11

Jan-‐12

Mar-‐12

May

-‐12

Jul-‐1

2Se

p-‐12

Nov

-‐12

Jan-‐13

Mar-‐13

May

-‐13

Jul-‐1

3Se

p-‐13

Nov

-‐13

Jan-‐14

Mar-‐14

May

-‐14

Jul-‐1

4Se

p-‐14

Nov

-‐14

Jan-‐15

Mar-‐15

May

-‐15

Jul-‐1

5Se

p-‐15

Nov

-‐15

Sing

le B-‐yields (3 yea

rs)

Loan

fund

flow

s ($B

)

Loan fund flows Single-‐ B loan yields


Source: S&P LCD

Both “good” and “better” credits remain range-‐‑bound

12

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

BB B

New-issue yield to maturity for leveraged loans

Middle market institutional yields (3 year) Source: Thomson Reuters LPC

Yields on leveraged middle market loans tick up in 4Q15


13

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1Q10

May

-‐10

Jul-‐1

0Se

p-‐10

Nov

-‐10

Jan-‐11

Mar-‐11

May

-‐11

Jul-‐1

1Se

p-‐11

Nov

-‐11

Jan-‐12

Mar-‐12

May

-‐12

Jul-‐1

2Se

p-‐12

Nov

-‐12

Jan-‐13

Mar-‐13

May

-‐13

Jul-‐1

3Se

p-‐13

Nov

-‐13

Jan-‐14

Mar-‐14

May

-‐14

Jul-‐1

4Se

p-‐14

Nov

-‐14

Jan-‐15

Mar-‐15

May

-‐15

Jul-‐1

5Se

p-‐15

Nov

-‐15

All-‐

in-‐yield (3

-‐yea

r)

LIB/LIB Floor LIB Spread Spread due to OID

Covenant-‐‑lite issuance cools in 4Q15 in the face of volatility

Capital Markets Metrics – Covenants

14Source: S&P LCD & Thomson Reuters LPC

US Covenant-‐‑Lite Loans US Covenant-‐‑Lite Loans (by purpose)

$0B

$25B

$50B

$75B

$100B

$125B

$150B

$175B

$200B

$225B

$250B

$275B

$300B

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Volume

Percent

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15

Cov-lite volume ($Bils.)

M&A/LBO

Div. Recap.

Refi & All Other

Source: S&P LCD

Capital Markets Review – Credit Quality

While energy sector is focus of concern, overall defaults remain low

15

0

10

20

30

40

50

60

70

Dec 2002

Dec 2003

Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Lagging 12-month default number of issuers

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec 2002

Dec 2003

Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Lagging 12-month leveraged loan default rate by number

Non-‐‑bank direct lenders stepping into void left by skittish public markets and regulated lenders under leveraged lending constraints

Continued retail loan outflows and modest CLO formation will temper new deal issuance in broadly syndicated market

Middle market origination will be driven by one-‐‑stop credit solution providers partnering with key sponsor lender relationships

Additional direct lending capacity coming from new firms and smaller managers merging or bulking up with JV’s and partnerships

All-‐‑in first-‐‑lien loan yields widen to 6% for BSL’s; mid caps to 7% ; unitranche still in 7-‐‑9% all-‐‑in range

Expect leverage of 3.5x senior/4.5x total for traditional middle market; 4.0x senior/5.5x total for larger mid caps; 4.5-‐‑5.0x senior/6.0x total for BSL

Capital Markets – First Quarter 2016 Outlook

Advantage swings to the buy-‐‑side as volatility widen spreads

16

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quarterly capital market presentation 1q 2016 · pdf filesource: s&p*capital*iq, dealogic,...

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quarterly capital market presentation 1q 2016 · pdf filesource: s&pcapitaliq, dealogic,...