DEBT CAPITAL MARKETS EXECUTIVE SUMMARY MIDDLE MARKET

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1 MARKET INSIGHTS 4Q 2017 DEBT CAPITAL MARKETS EXECUTIVE SUMMARY In the middle market, bank loan capital is available at attractive levels. For leveraged middle market companies, non-bank lenders are driving down borrowing costs as they quickly deploy excess funds. In the broadly syndicated leveraged loan market, investors are accepting spreads as low as L+200 and demanding fewer structural protections in an effort to invest new money. The high yield bond market is open to issuers, and spreads over treasuries sit at the lowest levels since. Investment grade lending increased on the back of higher M&A, and banks are still seeking to book funded loans to high-grade companies. Investors are oversubscribing investment grade bond transactions 3.1x year-to-date, and spreads over treasuries are the lowest dating back three years. MIDDLE MARKET We re seeing significant competition in the syndicated bank loan market. With a lack of new-issue volume, banks are competing to win deals, making it an attractive time for borrowers to raise bank capital. Further illustrating the point, seven out of every 10 bank respondents to a Thomson Reuters survey indicated missing their lending goals in 3Q While this is down from 95% missing in the prior quarter, it underscores the idea that banks have appetite to lend in the middle market but aren t able to find enough deals. TOTAL MIDDLE MARKET VOLUME % OF LENDERS THAT MET THEIR LENDING GOAL $ % $150 $50 % of Respondents 90% 80% 70% 60% 50% 40% 30% $ Refinancing New Money 1Q - 20% 10% 0% Bank Non Bank Sources: Thomson Reuters LPC, PNC Capital Markets LLC Debt Capital Markets 1

2 Debt Capital Markets 2 To win business, banks are doing any or all of the following: taking larger hold sizes, lowering their yield targets, loosening structure and leveraging strong relationships with private equity firms. Based on our conversations with investors, banks are also hard-pressed to end a client relationship unless there are unacceptably low returns or little opportunity for additional ancillary business. In the leveraged middle market segment, private debt funds are raising a staggering amount of capital. Direct lenders, those who originate deals directly and often support private equity backed deals, are raising the bulk of that capital. Investors are competing more fiercely to invest those new dollars, driving down spreads over LIBOR to the lowest level post-recession (439 bps). One effect of the competitive environment is that Debt / EBITDA levels are approaching 6x. In fact, Senior Debt / EBITDA is approximately equal to s total debt level. INSTITUTIONAL MIDDLE MARKET LEVERAGE LOANS RISING MIDDLE MARKET DIRECT LENDING CAPITAL RISING 6.00x $70 Debt to EBITDA 5.00x 4.00x 3.00x 2.00x 1.00x 0.00x Junior Debt to EBITDA 1st Lien Debt to EBITD A 1Q-3Q 2017 Middle Market Debt Fundraising $60 $50 $40 $30 $20 $10 $0 1Q-3Q 2017 Mezzanine Direct Lending Funds BDC Public Equity MM CLO ASSET-BASED LENDING In asset-based lending (ABL), we re seeing a continuing trend in structural flexibility. The market is issuer-friendly, and both sponsors and borrowers are finding creative ways to maximize borrowing base availability. For example, in syndicated ABL deals, we are frequently seeing the inclusion of First-In, Last-Out (FILO) tranches, which provide incremental liquidity at the cost of premium pricing over the traditional revolver. The FILO was most typically utilized in the retail industry, but has recently been accepted in the broader ABL market. New deal flow is limited, and as a result lead arrangers are utilizing their balance sheets to support clients with larger commitment levels. This creates club executions with small lender groups, meaning there s more ancillary business to spread across fewer lenders (who in turn must accept larger hold sizes). In addition, because the market is so competitive, large cap sponsor provisions (that are very borrower-friendly ) are trickling down to the middle market. In turn, lenders are relaxing their risk tolerance to compete. Sources: Thomson Reuters LPC, PNC Capital Markets LLC

3 Debt Capital Markets 3 $700 OVERALL LEVERAGED LOAN VOLUME Capital raising efforts continue to be robust by direct lenders, which creates the opportunity for these lenders to play a bigger role across unitranche, Term Loan B, second $600 lien and mezzanine tranches. While we expect to see $500 $400 $300 more ABL lenders partnering with direct lenders to provide one-stop shop financing solutions, we re also seeing lead arrangers/bookrunners pursue larger deals to help offset the direct lender origination model. LEVERAGED / HIGH YIELD Institutional Pro Rata INSTITUTIONAL NEW ISSUE AND REPRICING VOLUME $400 $350 $300 $250 $150 $50 2Q16 4Q16 New-Issue Repricing YTD will likely be a record volume year and an all-time high for the leveraged loan market. At more than $540 billion so far, and on the back of significant institutional refinance and re-pricing volume, pro rata and institutional leveraged loan volume looks like it will eclipse 2007 s $535 billion and s all-time high of $607 billion. Pricing is also coming in significantly. For pro rata, price tightening is less pronounced as the best mid to high BB names see pricing in the range of L+150. For Term Loan Bs, however, our analysis of tranches over million denominated in U.S. dollars finds that more than 50 borrowers either have spreads of L+200 or are in-market with price talk of L For reference, zero loans re-priced to L+200 in according to S&P Capital IQ data. One client, for example, is looking to reduce spread on a large Term Loan B from L+275 to L Price tightening is a trend we expect to continue throughout the fourth quarter. TIGHTER HY SPREADS ARE ATTRACTIVE FOR NEW ISSUERS MORE DEALS HAVE B+ OR WORSE RATING 950 bps 100% 850 bps 90% 750 bps 650 bps 550 bps 450 bps 350 bps 250 bps 150 bps Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 80% 70% 60% 50% 40% 30% 20% 10% 0% 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 4Q16 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Source: S&P Capital IQ LCD, PNC Capital Markets LLC, Bloomberg B+ or Worse BB- or Better

4 Debt Capital Markets 4 M&A UPTICK, REFINANCING SUSTAIN U.S. I-GRADE LOAN MARKET $300 We don t see demand for loans drying up anytime soon. Collateralized loan obligations, which purchase more than half of all institutional loans, raised $12.1 billion in an unusually busy August and another $8.9 billion in September, according to S&P Capital IQ data. Plus, the largest loan ETFs are still holding 5 10% of their assets in cash as they work to invest existing dollars from the massive investor inflows from earlier in the year. One trend we re watching in 4Q 2017 is the credit quality $0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 Refinancing 3Q14 1Q15 3Q15 M&A 1Q16 of new-issue deals. Issuers rated B+ or worse accounted for a staggering approximately 85% of TLB volume last quarter, up substantially from approximately 60% at the beginning of the year. I-GRADE DRAWN SPREADS In the high yield bond market, spreads over treasuries, as measured by the Option Adjusted Spread, are among 300 BBB their lowest levels post-recession. And volume is robust. 250 A bps Recession INVESTMENT GRADE H92 2Q95 2Q97 2Q99 2Q01 2Q03 2Q05 2Q07 2Q09 2Q11 2Q13 2Q15 Based on our conversations with borrowers, banks are looking to book funded assets. As such, lenders welcomed last quarter, which saw another meaningful step-up in M&A loan volume, bridge loans backing M&A and a meaningful quarter for refinancing volume. % of Respondents Reporting Net Tightening / Loosening BANKS LOOSEN STANDARDS FOR SECOND STRAIGHT QUARTER 20% 10% 0% -10% -20% After six periods of net tightening, banks appear to be loosening standards 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 4Q16 Sources: Thomson Reuters LPC, Federal Reserve, PNC Capital Markets LLC In fact, last quarter saw an 8% jump over the prior year period for a total of $168.5 billion, according to Thomson Reuters data. Also, the last two quarters both topped $60 billion in new-money issuance, which is new loan supply to the market. This hasn t happened since 2Q 3Q Loan pricing continues to stay relatively flat, with increasing regulatory costs making it difficult for banks to drastically reduce spreads as in past cycles. Banks are still looking to hit lending targets and are slightly loosening their lending standards to do so. The Federal Reserve s most recent Senior Loan Officer Opinion Survey echoes our own investor conversations, which show respondent banks on average loosening their lending standards.

5 Debt Capital Markets 5 Finally, in investment grade bonds, we re seeing a robust market where investors are piling in for new deals. Bond spreads over applicable treasury bonds are at significant period lows, and investors are oversubscribing deals a few times over. AVERAGE I-GRADE CORPORATE BOND SPREAD OVER TREASURY 175 bps 150 bps Data from PNC Capital Markets fixed-income syndicate desk show that on average investment grade bond deals are oversubscribed 3.1x year-to-date. In short, the market remains open and attractive for issuers to price new transactions. 125 bps 100 bps 75 bps Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 REAL ESTATE SYNDICATED REAL ESTATE VOLUME $ $93.8 $108.2 $109.2 $110.6 $91.5 $99.4 $80.0 $60.0 $40.0 $20.0 $47.5 $57.9 $21.1 $26.5 $20.2 $20.4 $19.0 $81.6 $62.3 $39.4 $31.9 $54.4 $58.2 $63.1 $74.6 $58.1 $ Volume YTD REIT Loan Volume Non-REIT Loan Volume 10 Year REIT Loan Volume Average 10 Year Non-REIT Loan Volume Average Participants in the real estate loan markets are having quite different experiences depending upon the segment of the market in which they lend. REIT markets have outperformed volume expectations year-to-date, while the market for construction loans continues to be shaped by regulatory and portfolio balance (real estate as a percentage of total loan portfolio) considerations. Term lending markets have been strengthened by great interest on the part of multiple market participants and a relative lack of product. Sources: Bloomberg, Thomson Reuters LPC, PNC Capital Markets LLC

6 Debt Capital Markets 6 The REIT markets are trending toward total volumes that would markedly exceed s record levels. These levels were unexpected based on a lack of any material movement in pricing or structure and many borrowers having refinanced. Year-to-date volumes totaled $99.4 billion as of September 30 versus $66.2 billion in. Meanwhile, pricing continues at virtually the same levels as in the past 18 months. REIT structural adjustments have been minimal, with most changes being to conform documents to existing market standards. The sole exception to this trend has been the re-examination of capitalization rates used for portfolio valuation, particularly in the case of retail-focused companies. Project-related markets continue to be a tale of haves and have nots as lenders employ heavy scrutiny of construction lending opportunities. Large, institutional borrowers with strong banking relationships and strong projects attract the most capital and the tightest pricing. Others find that attracting a bid can be more difficult, and, in some cases, pricing for these borrowers has increased to compensate for the lack of market liquidity. The property types attracting the most construction loan dollars continue to be multifamily and well-leased office. Retail, given the transformational and disruptive forces at work in the industry, has become much more difficult to finance. Finally, term lending saw the most aggressive lender behavior over the past quarter. Going against the trend, spreads actually have tightened for the best located, strongly leased, low leveraged deals. Life insurance companies have maintained strong appetite through the past quarter and, combined with CMBS and bank competition, helped drive demand for funded commitments. Into the fourth quarter, lenders will carefully watch developments in geopolitical relationships, regulatory and tax policy, interest rate movement and retail transformation as they refine their approach to lending in 2018 and through the late innings of an economic cycle. FOR MORE INFORMATION Visit pnc.com/dcm. Services such as public finance investment banking, securities underwriting, loan syndication, and securities sales and trading are provided by PNC Capital Markets LLC ( PNCCM ). PNCCM, member FINRA and SIPC, is a wholly-owned subsidiary of The PNC Financial Services Group, Inc. ( PNC ) and affiliate of PNC Bank, National Association ( PNC Bank ) The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF

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