Finding Opportunities in Restructuring in the Year Ahead

Transcription

1 Finding Opportunities in Restructuring in the Year Ahead Wednesday, April 28, 2010; 11:00 AM - 12:15 PM Moderator: Irwin Gold, Co-Chairman; Co-Head, Financial Restructuring Group, Houlihan Lokey Speakers: Christopher Jacobs, Senior Analyst, Western Asset Management Company Marc Rowan, Co-Founder and Senior Managing Director, Apollo Global Management LLC Alan Schwartz, Executive Chairman, Guggenheim; Chairman, Robin Hood Foundation Doug Teitelbaum, Managing Partner, Bay Harbour Management 1

2 Irwin Gold s slides 2

3 Credit bubble Unprecedented New Debt Issuance from 2003 through 2007 High Yield and Leveraged Loan New Issuances ($ in billions) $600 $511 $500 $449 US$ billions $400 $300 $200 $100 $291 $248 $158 $181 $152 $159 $149 $148 $148 $136 $106 $68 $75 $70 $53 $43 $ Q High Yield New Issue Volume Leveraged Loan New Issue Volume Sources: S&P LCD as of Q and JP Morgan North American High Yield Research Note: Data reflect domestic issues only 3

4 $200 $150 $100 $50 $0 Credit bubble (cont.) Substantial Deterioration in Credit Quality from 2003 through 2007 B+ Rated and Below New Issuances B+ Rated and Below New Issuances as a % of Rated ($ in billions) Leveraged Loan New Issuances $91.5 $86.3 $143.9 $124.8 $34.6 $15.2 $9.2 $10.4 $12.3 $5.1 Source: S&P LCD $ Q B+/B/B- Split B/CCC, CCC 40.0% 30.0% 20.0% 10.0% 8.2% 6.6% 7.5% 20.8% Source: S&P LCD Note: Data reflect domestic issues only 34.5% 29.3% 30.0% 23.3% 7.9% 6.7% 13.0% 0.0% Q

5 Credit bubble (cont.) ($ in billions) $120 $100 $80 $60 $40 $20 $0 12 Fewer Lender Protections Volume and Number of Covenant-Lite Loans ($ in billions) Q Volume Number of Deals Source: S&P Leveraged Lending Quarterly Review Q

6 Peak defaults in 2009 Expected Consequence of the End of the Easy Credit Environment Record Default The Levels amount of global defaults skyrocketed in 2009 to over $625 billion of defaulted debt (bonds and loans), representing the largest universe of defaulted debt in history 16% 14% 12% 10% 8% 6% 4% 2% Speculative-grade default rate reaches high of 10.6% in January 2002 and hits low of 0.87% in December of 2007 before rising to 3.5% in 2008 and peaking at 11.3% in November 2009, settling at 10.9% in December 2009 $700 $600 $500 $400 $300 $200 $100 0% $ Total Global Defaulted Debt Speculative-Grade Bond Default % Average Speculative Bond Default %, Sources: S&P Global Default Study, Moody s research, and Dow Jones Daily Bankruptcy Review 6

7 Recent ( ) distressed cycle dynamics Certain companies have incentive to act earlier to salvage value Weaker covenants provide less warning before distress Increased number of stakeholders creates more complex restructuring dynamic with new money playing a bigger role More low quality paper Massive increases in leverage loan issuances Complex and Opportunistic Distressed Environment Increased globalization by companies requires more crossborder coordination Increased leverage and less relative sponsor equity Recent Bankruptcy Code Amendments have reduced companies exclusive time and control of the process Dearth of external capital in the early stage of the cycle 7

8 Bankruptcy has become a more acceptable restructuring implementation alternative 8

9 Dramatically improved tone Improved Debt Prices Beginning in the Second Quarter of 2009 Average Secondary Spreads by Rating Average Secondary Prices by Rating 30.0% $ % $ % $ % $ % $40 5.0% $20 0.0% March 2002 March 2004 March 2006 March 2008 March 2010 $0 March 2002 March 2004 March 2006 March 2008 March 2010 BBB- Loans BB Loans B Loans BBB- BB Loans B Loans Source: S&P LCD Note: The current 3-month LIBOR is used to calculate the yield 9

10 Creating greater refinancing/restructuring options Capital Structure Alternatives for Overleveraged Companies Have Evolved as Credit Markets Have Thawed Beginning in the Second Quarter of 2009 The market has seen an increase in amend-and-extend and refinancing transactions, especially in high yield refinancing i of leveragedloans As market conditions have improved, companies have been less able and /or willing to opportunistically implement market-based, discounted exchange offers, which largely capitalized on creditors negative market perceptions and their desire to mitigate downside risk Recent Leveraged Loan and High Yield New Issue Volume ($ in billions) s $ in billions $80 $70 $60 $50 $40 $30 $20 $10 $ $47 $11 Q $55 $54 $34 Q $44 $18 Q $11 $3 Q $16 $16 $17 $13 Q Q Leveraged Loan High Yield 10 Source: S&P LCD through Q1 2010, reflects B+ and below and unrated issuances $47 Q $26 $51 Q $43 $70 Q1 2010

11 Looming debt maturities While current conditions have improved, there is less certainty around what the next few years will hold for distressed / restructuring markets However, with greater than $650 billion of domestic maturities in 2013 and 2014, many believe another restructuring wave is looming Commercial real estate problems could further complicate broader distressed/restructuring market dynamics as there are over $700 billion of commercial mortgage-backed securities outstanding and an additional $1.7 trillion of commercial mortgages and construction loans held by banking institutions Loan and HY Schedule of Maturities ($ in billions) $450 $382 $bln $400 $350 $300 $250 $200 $150 $100 $50 $0 $56 $123 Source: S&P; data as of January 1, Note: Revolving facilities are counted at committed amount $198 $

12 Summary of maturities Loan and HY Maturities by Industry Loan and HY Maturities by Rating Metals, mining, and steel Forest products and 2% building materials 3% Oil and gas 4% Transportation 4% Chemicals 5% Automotive 5% Capital goods 4% Retail and restaurants 6% Utility 7% Consumer products 7% H omebuilders, real estate, REITs 1% D NR C Aerospace and defense 8% CC 6% 1% 1% 1% Financial CCC- 14% 2% CCC 3% Media and entertainment 13% Telecommunications 9% High technology 8% Healthcare 8% CCC+ 5% B- 14% BBB 0% B 20% BBB- 1% BB+ 5% BB 8% BB- 11% B+ 15% Source: S&P Note: data as of January 1, 2010; revolving facilities are counted at committed amount Source: S&P LCD Note: data reflects issues rated BBB and lower listed on an index 12

13 Where do we go from here?... Defaults Expected to Decline in the Near-Term, Long-Term Forecast Unclear J.P. Morgan forecasts the leveraged loan and high yield default rates will fall to 4.0% and 2.0%, respectively, by the end of 2010 Altman projects a high yield default rate of 6.70% for 12 months ending December 31, 2010, noting the potential for additional economic stress in 2010 and / or 2011 Deals Less Leverage, More Equity Transactions being done are more conservatively structured, smaller, and reflect more expensive debt terms Leverage levels for LBOs have fallen to less than 4.5x total leverage with average senior leverage of approximately 3.0x, down from 6.0x and 5.0x, respectively, at their peak in 2007 LBO equity contributions reached a record high of 43% in 2008 However, inflows to loan funds have been growing steadily, which has created a strong demand for new debt, pushing down yields While current conditions have improved, are markets putting off the inevitable restructuring wave? 13

14 Marc Rowan s slides 14

15 What people were saying Hilton Buyout: Debt-heavy purchase Came in Waning Days of Deal Boom. Hotel- Market Slump Darkens the Outlook Wall Street Journal 11/5/08 First came Freescale's ugly private equity deal. Now the chipmaker has lost its CEO and its bearings Business Week 4/3/08 At Univision, High Leverage Creates Drama New York Times 8/20/08 Clear Channel Debt Sparks Investor Skepticism Wall Street Journal 2/11/09 Texas-Sized Losses: TXU Corp., the biggest leveraged buyout in history, is coming under increasing strain Wall Street Journal 3/4/09 Analysts: Harrah s plan might not stave off bankruptcy Las Vegas Sun 4/13/09 Intelsat: The Last of the LBO High Wire Acts Wall Street Journal 2/5/08 HCA is a distressed debtor Reuters 2/24/09 In the history of the latest private equity bubble, the $11.76 billion acquisition of SunGard Data Systems is the milestone New York Times 4/4/08 15

16 and with Good Reason Aggregated Maturities of Top 15 LBOS As of December 31, 2008 $ in billions $48 $63 $39 $35 $2 $2 $3 $8 $13 $ x 8.5x Weighted Averages of Top 15 LBOs (1) Loans 59.2% Bonds 36.6% Total Leverage Multiple (1) Weighted averages based on TEV of original LBO investment. Average Trading Levels * Top 15 LBOs of include: Alliance Boots, Clear Channel, Dollar General, First Data, Freescale, Harrah s, HCA, Hilton, Intelsat, Nielsen, Servicemaster, SunGard, TXU, Univision and US Foodservice 16

17 Equity was underwater Original Mark to Market LBO Date TEV Purchase Multiple Equity Debt Current Equity TXU 10/01/07 $ x $8.5 $35.0 n/a HCA 07/24/ x n/a Harrah s 01/25/ x n/a First Data 09/24/ x n/a Hilton 10/24/ x n/a Clear Channel 07/30/ x n/a Alliance Boots 06/27/ x n/a Freescale Semiconductor 12/04/ x n/a Intelsat 02/04/ x n/a Univision 03/29/ x n/a SunGard Data Systems 08/11/ x n/a Nielsen 03/08/ x n/a Dollar General 07/06/ x n/a US Foodservice 06/26/ x n/a Servicemaster 07/24/ x n/a $ x $68.9 $238.1? Average Equity % = 24.9% Average S&P Decline Since LBO Avg. Close* = -43.4% * Average LBO Close date is May 16, Average S&P decline is from May 16, 2007 through April 27, 2009, one year ago. 17

18 What a difference a year makes Recent re-financings for once-troubled buyouts Completed over $8.6 bn of re-financings across six transactions since December 2008 Retired remaining near-term maturities with $750 mm offering in April 2010 Refinanced approximately $4 billion of near-term maturity bank debt with secured notes in 2009 and 2010 YTD Extended maturities from 2013 to Completed amend-and-extend transaction in June 2009 Transaction pushed out $2.7 bn of bank debt maturities from 2014 to 2016 Issued $5.3 bn in high-yield notes in March and April 2010 Extended 2013 and 2014 maturities to 2018; partially paid down 2012 revolver Issued $2.5 bn in bonds in December 2009 to repay bank debt due August 2010 Deal pushed out 2014 and 2016 maturities to 2017 Reached deal to reduce debt by almost $4 bn in April 2010 Remaining maturities pushed out two years from 2013 to 2015 Issued $545 mm of notes due 2014 in June 2009 Proceeds used to fund a par tender offer for $500 mm of secured notes due 2011 Issued $500 mm of bonds due 2019 in December 2009 Proceeds used to repay $400 million of junior bonds due 2017 Issued $500 mm of new Senior Secured Notes due 2020 in January 2010 Proceeds used to repay near term maturities 18

19 Back in the black December 31, 2009 (Pro Forma for 1Q10 Activity where Available) $ in billions $0.0 $1.7 $1.3 $2.4 $1.4 $3.2 Maturities of Top 15 LBOS $6.7 $7.8 $14.6 $48.2 $63.6$62.6 $59.4 $39.3 $36.5$35.4 $20.0 $20.3 $13.1 $ x 8.5x Weighted Average of Top 15 LBOs (1) Loans 83.4% 59.2% Bonds 74.4% 36.6% Total Leverage Trading Levels as of December 31, 2009 as of December 31, 2008 (1) Weighted averages based on TEV of original LBO investment. * Top 15 LBOs of include: Alliance Boots, Clear Channel, Dollar General, First Data, Freescale, Harrah s, HCA, Hilton, IntelSat, Nielsen, Servicemaster, SunGard, TXU, Univision and US Foodservice 19

20 Some were not so lucky Selected recent distressed for control transactions Bankrupt Company Fulcrum Security Aleris (pending) Bank Debt Charter Communications Bonds Chemtura (pending) -- Chrysler Bank Debt CIT Bonds Cooper Standard (pending) Bonds Education Media Bank Debt General Growth Properties Equity General Motors Bonds Herbst Gaming Bank Debt Integra Telecom 2nd Lien Lear Corp. Bonds Lehman Brothers (pending) Bonds LyondellBasell Bank Debt Masonite Bank Debt Bankrupt Company Fulcrum Security Nortek Bonds Panavision 2nd Lien Panolam Bonds Riverdeep Bank Debt/2nd Lien SemGroup Bank Debt Six Flags Bonds Smurfit-Stone (pending) Bonds Spansion Bonds Stallion Offshore Bonds Station Casinos (pending) -- SuperMedia Bank Debt Technicolor (pending) Bonds Tribune Co. (pending) Bank Debt Visteon (pending) -- Washington Mutual (pending) Bonds 20

21 Key Opportunities Delayed Restructurings Real Estate Related Small/Mid Cap Restructurings Europe 21

22 Alan Schwartz s slide 22

23 CLO issuance, reinvestment period expiration, and maturity profile 30% 25% Orig Reinv End Maturity 20% 15% 10% 5% 0% Source: Citigroup 23