M&A, DEBT & EQUITY CAPITAL MARKETS: 2015 UPDATE. March 11, 2015

Transcription

1 M&A, DEBT & EQUITY CAPITAL MARKETS: 2015 UPDATE March 11, 2015

2 M&A, Debt and Equity Capital Markets: 2015 Update Welcome Bob Rubino Executive Vice President Head of Corporate Finance & Capital Markets Today, our panel will discuss trends, insights and ideas we hope you can use to create value for your companies, focusing on M&A and the Capital Markets in We ll highlight a few topline findings of our annual middle market M&A Outlook research Why both the number and the focus of middle market firms in acquisition mode has grown substantially How seller motivations are shaping the market today What changing demographics of middle market owners means for the M&A landscape Our research also shows that smaller cap businesses are taking on an increasingly important role in M&A and affecting the balance of deal supply and demand. We ll also share our perspectives on the state of M&A, equity and debt capital markets, and implications for middle market corporate finance strategies in March 11,

3 M&A, Debt and Equity Capital Markets: 2015 Update Buyers have reached a tipping point The number of middle market firms currently involved in an acquisition or actively seeking opportunities is up particularly among larger firms. The right acquisition offers acceleration over today s slow, but steady, market growth. The number of buyers who have decided to put off acquisitions for at least a year has also increased. Formerly passive buyers have moved decisively to either postpone or pursue M&A. Source: Citizens Commercial Banking Middle Market M&A Outlook 2015 March 11,

4 M&A, Debt and Equity Capital Markets: 2015 Update Sellers are less engaged today but demographics forecast a change In contrast to buyers, sellers are less active in pursuing transactions; only 1 in 8 sellers are currently involved in or actively seeking opportunities today compared to more than 1 in 3 buyers now shifting the balance from a buyer s to a seller s market. However, the cresting wave of baby boomer retirement will dramatically increase the number of companies looking to sell over the next several years enabling buyers to become more selective, and requiring sellers to be thoughtful in packaging and planning to achieve the best valuations.. CURRENT SELLER ACTIVITY BOOMER IMPACT ON FUTURE SALES % 7% 6% 6% 9% 6% Be acquired by or merge with another firm My expected retirement timeframe has had a significant impact on the timing of the sale of my company (for Owners) 69% 24% 28% 21% Currently involved Actively seeking opportunities Passively receptive to opportunities The expected retirement timeframe(s) of my company s leader(s) has had a significant impact on the timing of the sale of the business (for Non-Owner Executives) 40% 62% 60% 64% Not likely to consider in the next 12 months I believe M&A activity in my industry will increase in 2015 as a result of a growing number of industry leaders nearing retirement 38% Source: Citizens Commercial Banking Middle Market M&A Outlook 2015 March 11,

5 M&A, Debt and Equity Capital Markets: 2015 Update Our Panel Jim Kuster Managing Director, Head of M&A, Corporate Finance Doug Cameron Managing Director, Head of Equity Capital Markets Ted Swimmer Executive Vice President, Head of Debt Capital Markets March 11,

6 The State of M&A in 2015 Jim Kuster Managing Director, Head of M&A, Corporate Finance Jim joined Citizens in August 2012 as the Managing Director of the M&A, Corporate Finance practice. Prior to Citizens, Jim was the Head of Corporate Finance Americas at RBS Securities Inc. for 8 years, advising primarily multinational clients of RBS on numerous successful cross-boarder transactions. Before joining RBS, Jim was a partner of Crest Advisors, LLC for 5 years where he worked with domestic middle market companies on mergers, acquisitions, divestitures and capital raises. He also served on the board of directors of several public and private companies as a result of Crest s investing activities. Before Crest, Jim spent 13 years at Chase Securities, Inc. where he was responsible for corporate finance and advisory transactions for many prominent companies in the Telecom, Media and Technology sectors. March 11,

7 The State of M&A, Debt & Equity Capital Markets in 2015 Macro Themes in M&A Economic On February 24 th, Federal Reserve Chairwoman, Janet Yellen, addressed the U.S. Senate not only highlighting significant and critical progress made in the U.S. economy but also commenting on underemployment, stagnant wage growth and low inflation expectations as critical issues Consumer spending has been lifted by the slight improvements in the labor market as well as by the increase in household purchasing power resulting from the sharp drop in oil prices Oil prices have declined by more than 50% driven by global supply growth coupled with moderating demand Sales of new and existing U.S. single family homes fell 0.2% and 4.9%, respectively in January but were offset by a 1.7% increase in pending home sales. Sales were likely held back by poor weather in the U.S. Northeast and shortage of supply Continued rising consumer confidence and declining unemployment could help return positive momentum in housing Fed policy and market communication is evolving under Janet Yellen, as she has reiterated that the central bank will be patient on raising interest rates Political After the 2014 mid-tem elections, the Republicans now control both the House and Senate, and with both parties focused on 2016, it is unlikely any major legislation will pass impacting economic or financial markets Financial Debt markets remain accommodative, with low rates persisting, but investors are becoming more selective on the edges Pressure on banks to reduce risk and improve capital positions is continuing to benefit non-bank lenders, and shift the landscape of capital markets Equity markets have continued to reach new highs and remain generally bullish and open to new issuance Factors Influencing M&A Activity Continued favorable credit markets are enabling ample leverage levels Historically low interest rates with a long, gradual upward movement projected A large number of private equity portfolio companies may seek liquidity given strong prevailing market conditions Healthy stock market performance - the S&P 500 is up nearly 16% since 1Q 2014 Many industries are facing stagnant revenue growth but strong earnings growth, highlighting that growth is being delivered through cost cutting and margin expansion rather than through top line expansion Shareholder Activism Driving Activity Shareholder activism continues to be a theme, increasingly occupying headlines in recent years and will continue to be a factor influencing M&A Constructivist investing is a recent theme adopted by activists as they focus more on stimulating growth opportunities for target companies, as was seen with the Bill Ackman-backed Valeant /Allergan proposed transaction Deal Activity U.S. M&A activity recorded its best performance in 5 years, there were 4,795 deals announced worth $1.4 trillion, a 22% increase in deal volume and a 57% increase in value 2014 witnessed 35 deals worth more than $10 billion Private equity exit values reached a five year high, as PE funds took full advantage of the U.S. M&A rebound in Investors sold 962 companies worth $261.8 billion, an increase of 31% in volume and 70% in value compared to 2013 March 11,

8 The State of M&A, Debt & Equity Capital Markets in 2015 Deal Statistics and Examples Middle Market M&A 1 $Volume (billions) Middle Market Sector Split Median Transaction Multiple $400 $350 $300 $250 $377 $255 $337 $337 $312 $291 $298 17% 12% 13% 7% 10% 21% 14.0x 12.0x 10.0x 8.0x 10.9x 9.8x 10.6x 10.2x 12.5x $200 $150 $100 $ % Business Services Energy & Minning Mining Real Estate 10% Consumer Financial Industrials TMT 6.0x 4.0x 2.0x Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Commentary Selected 2014 Notable Transactions Something has changed for buyers and sellers. The buyers are through their restructurings. They have done what they can on the cost side. Now they have lean, growing business operations, and they are ready to transform through acquisitions. The thing that has changed for sellers is that buyers are now willing to meet their price expectations and when you have enthusiastic buyers (even at high prices), you get willing sellers and a highly charged M&A Market. John Reiss, Global Head of M&A February 25, 2015 Sources: Dealogic, Thomson One, S&P Capital IQ, White & Case; 1. Deals valued at $50MM - $1BN January 2014: XPO Logistics acquisition of Pacer International ($336 million) May 2014: Genstar Capital s acquisition of Pretium Packaging ($500 million) June 2014: Endo International s acquisition of DAVA Pharmaceuticals ($600 million) June 2014: Bay Valley Foods acquisition of Flagstone Foods ($875 million) July 2014: E.W. Scripps acquisition of Journal Communications ($687 million) December 2014: Irving Place Capitals acquisition of American Apparel ($500 million) March 11,

9 Equity Capital Markets in 2015 Doug Cameron Managing Director, Head of Equity Capital Markets Oppenheimer & Co. Inc. In 2006, Doug joined Oppenheimer & Co. Inc. s (Oppenheimer) Equity Capital Markets as the Managing Director and Division Head, overseeing the underwriting of mid- and small-cap equity offerings, a wide range of capital-raising methods, and both after-market advisory and execution services. Prior to Oppenheimer, Doug was the Head of Equity Capital Markets at WR Hambrecht + Co. and executed 10 Open IPO transactions for companies including Morningstar and New River Pharmaceuticals. Before WR Hambrecht, Doug originated equity transactions in the communications, systems, semiconductor, and consumer space in the Equity Capital Markets group at JPMorgan. During his career, he has worked on over 100 lead-managed transactions that have raised in excess of $12B for clients across a broad spectrum of industries. March 11,

10 # of Transactions The State of M&A, Debt & Equity Capital Markets in 2015 Equity Market Headlines: Markets setting record highs The markets continue to move higher since the beginning of 2015 with the Dow Jones Industrial Average and the S&P 500 reaching record highs Oil prices have dropped greatly in the last few months Periodic market volatility as geopolitical issues arise Housing starts declined 2.0% in January after a 7.1% jump the month before Jobless claims fell a sizable 21K in the week of February 16th, moving from 304K to 283K The industrial sector turned modestly positive in January with industrial production rebounding 0.2% after a December decrease of 0.3% Q equity issuance on track with Q Monthly mutual fund flows have been net positive for 22 of the last 26 months (since January 2013) Converts IPOs Follow-Ons Jan-2012 Sep-2012 May-2013 Jan-2014 Sep-2014 Feb-2015 Source: Dealogic, February 2015 March 11,

11 # of Transactions $ Billions The State of M&A, Debt & Equity Capital Markets in 2015 Equity Market Overview Market Performance U.S. Equity Flows Nasdaq 4,956 S&P 500 2,110 DJIA 18,140 $50 $40 $30 $20 $10 20 of the past 24 months have seen net equity inflows 1 of the last 4 months experienced outflows 120 $0 100 ($10) ($20) 80 Jan-12 Jun-12 Nov-12 May-13 Oct-13 Mar-14 Sep-14 Feb-15 Markets break all-time highs in 2015 CBOE Volatility Index (VIX) ($30) Mar-2012 Oct-2012 May-2013 Dec-2013 Jul-2014 Feb-2015 Continued positive net mutual fund flows Equity and Equity-Linked Offerings Converts IPOs Follow-Ons 18 VIX Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Oct-14 Feb-15 Volatility in line with Jan-2012 Sep-2012 May-2013 Jan-2014 Sep-2014 Feb-2015 Capital markets activity expected to remain robust Source: FactSet, Dealogic and AMG Data as of 2/20/15 March 11,

12 The State of M&A, Debt & Equity Capital Markets in YTD Issuance Summary 2015 YTD IPOs (22 deals, $3.9BN) By $ Amount Raised Energy & Utility 28% Consumer 3% Finance 4% 22% Industrials 5% By # of Deals Consumer 5% Energy & Utility 4% Technology 9% Finance 9% 55% Real Estate 18% Real Estate 14% Technology 20% By $ Amount Raised Consumer 6% Finance 18% Energy & Utility 14% Telecom 1% 11% Industrials 7% Technology 39% Real Estate 4% 2014 IPOs (278 deals, $86.1BN) By # of Deals Consumer 11% Energy & Utility 10% Telecom 1% Industrials 4% Finance 12% Technology 18% Real Estate 3% Industrials 9% 36% Source: Dealogic as of 2/20/15 Deal values $20M, market caps $50M; Excludes Closed End Funds and SPACs March 11,

13 The State of M&A, Debt & Equity Capital Markets in YTD Issuance Summary By $ Amount Raised Consumer 19% Energy & Utility 18% By $ Amount Raised Consumer 16% Energy & Utility 15% Telecom 1% Finance 8% Technology 6% Finance 12% Technology 12% 2015 YTD Follow-ons (107 deals, $19.4BN) 28% 13% Industrials 2% Media 1% Real Estate 18% By # of Deals 2014 Follow-ons (622 deals, $137.1BN) Industrials 14% Media 1% Real Estate 16% By # of Deals Consumer 10% Technology 13% Real Estate 17% 23% Industrials 14% Source: Dealogic as of 2/20/15 Deal values $5M, Excludes Unit Transactions, Closed End Funds and SPACs March 11, Energy & Utility 11% Telecom 1% Technology 8% Real Estate 12% Media 1% Energy & Utility 9% Telecom 2% Consumer 8% Finance 12% Finance 3% Industrials 6% 50%

14 The State of Debt Capital Markets Ted Swimmer Executive Vice President, Head of Debt Capital Markets Ted has more than 20 years of broad financial services experience. He has been the head of the Capital Markets Group at Citizens Financial Group since 2010 and has since assumed responsibility for the Sponsor Finance Group. He joined Wachovia in 1998, after working in various positions at Chase Securities and its predecessor financial institutions. He holds an MBA in finance from Columbia University and a BA in economics and history from Lafayette College. From 2008 to 2010, Ted managed all of Wachovia Securities Leveraged Finance origination activities. From 2004 to 2008, he ran Loan Syndicate and Sale for Wachovia. Prior to that, Ted was a Managing Director originating leveraged loans and bonds. March 11,

15 The State of M&A, Debt & Equity Capital Markets Leverage Lending Environment Loan volumes are expected to slightly decrease in 2015 from the ~$529BN exhibited in 2014 due to the following factors: Regulatory Pressure Investor Technicals Limited Refinancings Potential Shift to Other Long Term Capital Pressure on arrangers continues from the Office of the Comptroller of the Currency (the OCC ) and Federal Reserve (the Fed ) who have implemented a low-tolerance policy for criticized underwritten transactions Strict repayment guidelines as a true point of emphasis from regulators Ability to repay (i) 50.0% of total debt or (ii) 100.0% of senior debt from cash flow within 7 years Some banks are now requiring that payback periods be run as if a given transaction occurred at its widest terms including the freeand-clear incremental facility, resulting in restrictions on Senior / Total Leverage multiples For most of 2014, retail investors experienced outflows that were mostly counterbalanced by new CLO formation. When retail outflows outpaced CLO formation, the market experienced meaningful disruption, adding volatility to trading levels and primary market clearing prices We expect volatility to again be driven by these technicals in The main catalyst for an improved environment would be near term rate increases which will improve retail fund flows as well as CLO formation These circumstances will stress the importance of choosing arrangers with strong sales & trading capabilities and deep investor relationships Loan volume growth in 2015 will be supported by event-driven financings given the loan maturity profile of the overall market as nearly 97.0% of loans outstanding today mature in 2017 or later At the end of 2014, the forward calendar stood at $33BN, of which $31.4BN was M&A-related, accounting for 95.0% of expected volume ($ s in Billions) $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 Minimal Near Term Loan Maturities $155 $228 $228 $98 $59 $1 $ Potential Increase in High Yield Executions: With arrangers facing a more restrictive regulatory environment thus potentially affecting issuers ability to refinance existing credit facilities, issuers may be best suited utilizing the high yield market. Historically low interest rates provide ability to lock in a regulatory favorable capital structure going forward The OCC and Fed have indicated to the market that simply lowering rates and / or extending maturities will not be considered, in and of themselves, credit-improving transactions Source: S&P LCD and Citizens Capital Markets As a result, issuers in 2015 can expect (i) intense competition among regulated arrangers for underwriting mandates, (ii) continued low-interest rate environment with increased market volatility, and (iii) increased scrutiny from arrangers driven by regulatory guidelines March 11,

16 The State of M&A, Debt & Equity Capital Markets Fourth Quarter 2014 Loan Market Trends and Impact on 2015 The loan markets slowed in Q and began to experience significant volatility, driven by adverse macroeconomic conditions and recent leverage loan investor trends Price of Crude Oil WTI Increase U.S. shale production coupled with substantially lower demand in Europe for oil has resulted in a surplus of oil driving down oil prices Prices have fallen substantially and are currently trading below $50 per barrel $100.0 $80.0 $60.0 $94.06 Crude Oil - WTI $40.0 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 $49.45 CLO Issuance and Net Retail Outflows Leveraged loan market returns slumped compared to other investable markets resulting in net retail outflows If 1Q 2015 is successful, many of the leading CLO fund managers are estimating a ~$ $85.0 million gross supply for 2015 resulting in a significant increase in pricing compared to the 1-year average and overall lower-than-anticipated leverage loan volumes $20.0 $10.0 $- $(10.0) ($ in billions) $2.9 $2.2 CLO Issuance Net Retail Outflows $8.9 $11.1 $12.3 $12.2 $13.8 $13.4 $11.3 $11.2 $11.3 $8.3 $7.7 $5.2 $5.0 $(1.3) $(1.3) $(2.6) $(2.2) $(4.0) $(1.2) $(2.1) $(0.4) $(5.6) $(5.9) $(6.2) Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Monthly New Issuance Yields Monthly Secondary Bid Levels 7.00% 6.00% 5.00% 6.20% 5.31% 4.90% % 4.04% % 2.00% Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 BB 2-year Average B 2-year Average BB/BB- B+/B Avg. Bid Price Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Given the uncertainty coming out of 2014, arrangers in 2015 are launching transactions at wider price levels and with more investor friendly terms while the market remained in a price discover phase during the first few weeks of the year Source: S&P LCD, ThomsonReuters LPC, and Citizens Capital Markets March 11,

17 Covenant-lite Volume ($ in billions) Covenant-lite Volume as a % of Total The State of M&A, Debt & Equity Capital Markets Current Loan Market Conditions Institutional Market Monthly New Institutional vs. Pro Rata Loan Issuance Volume Monthly Covenant-Lite Issuance Volume $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $- ($ in billions) $10 $41 $18 $47 $13 $43 $11 $27 $22 $15 $44 $43 $5 $7 $21 $42 $4 $12 $17 $18 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Institutional Pro Rata $7 $8 $16 $19 $2 $12 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 73% 76% 68% 68% 69% 67% 60% 60% 62% 61% 55% 48% 40% $32.0 $30.7 $27.5 $28.5 $26.3 $26.5 $15.9 $9.4 $12.4 $11.9 $9.4 $3.4 $3.3 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Covenant-lite % of Total 80% 70% 60% 50% 40% 30% 20% 10% 0% LBO and M&A activity has picked up significantly in the institutional market so far in 2015 Recap/Dividend 12% CY 2014 Institutional Issuance by Use of Proceeds Merger 9% Other 8% Corp. Purposes 2% Refinancing 27% Recap/Dividend 3% Merger 4% Refinancing 5% YTD 2015 Institutional Issuance by Use of Proceeds Corp. Purposes 2% Other 2% LBO 49% CY 2014 Issuance YTD 2015 Issuance % of % of Purpose Total Purpose Total Refinancing 26.6% LBO 49.6% Acquisition 22.3% Acquisition 35.1% LBO 20.3% Refinancing 4.8% Recap/Dividend 11.6% Merger 4.1% LBO 20% Acquisition 22% Acquisition 35% Merger 9.0% Recap/Dividend 2.7% Other 8.1% Corp. Purposes 2.0% Corp. Purposes 2.1% Other 1.8% Source: S&P Capital IQ LCD; Citizens Capital Markets March 11,

18 Pro Rata Volume ($ in Billions) Pro Rata % Share of Total Loan Issuance The State of M&A, Debt & Equity Capital Markets Current Loan Market Conditions Pro Rata Market Average Pro Rata Spreads by Rating Pro Rata Volume & Share of Total Issuance Pro Rata New Issue Volume by Purpose L+600 L+500 L+400 L+406 L+300 L+200 L+213 L+100 L+121 L+0 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 BBB 2-year Avg. BB 2-year Avg. B 2-year Avg. BBB/BBB- BB/BB- B+/B $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $ % $38 $75 $144 32% $170 38% 37% $151 $151 29% 25% 20% 36% $17 $ YTD YTD % 50% 40% 30% 20% 10% 0% $200.0 $180.0 $169.8 $160.0 $148.6 $141.2 $151.7 $150.7 $140.0 $120.0 $100.0 $80.0 $82.0 $74.9 $60.0 $37.0 $40.0 $17.7 $ Refinancing M&A (LBO + Acquisitions) Other Pro Rata Lender Participations Pro Rata Lenders with > 10 Deals New Issue Volume by Purpose 2015 YTD Over 400 lenders have participated in 5+ deals Acquisition 32.2% Recap/Dividend 18.4% Other 0.9% Deals 3 Deals 4 Deals 5 Deals 6 Deals 7 Deals 8 Deals 9 Deals 10 Deals Refinancing 38.6% LBO 9.6% Corp. Purposes 0.3% Source: S&P Capital IQ LCD; Citizens Capital Markets March 11,

19 The State of M&A, Debt & Equity Capital Markets Current High Yield / Fixed Income Market Conditions Corporate credit markets continue to improve driven by positive US economic data, solid 4Q 14 earnings and the rise in the price of oil HY Index Yield 10-Year Treasury 7.00% 6.75% 6.50% 6.25% 6.00% 6.67% 6.27% HY Cash Yield Ex-Energy 6.27% 5.86% 2.25% 2.00% 1.75% 1.95% 2.01% 5.75% 1/9/15 1/16/15 1/23/15 1/30/15 2/6/15 2/13/15 Source: RBS Securities, The Yield Book New Issuance Volumes ($ in billions) 1.50% 1/9/15 1/16/15 1/23/15 1/30/15 2/6/15 2/13/15 Source: Bloomberg Decreased Activity Among Energy Issuers in 2015 $10,000 $8,000 $6,000 $4,000 $2,000 $- $4,000 $3,000 $2,000 $1,000 $- $(1,000) $(2,000) 2015 YTD: $35.6BN in USD Proceeds 450 5,900 4,800 8,075 7,100 9,285 1/9/15 1/16/15 1/23/15 1/30/15 2/6/15 2/13/15 Source: AMG/Lipper Fund Flows ($ in millions) 2015 YTD: $8,087mm in Inflows (922) 880 (241) 2,765 2,670 2,935 1/9/15 1/16/15 1/23/15 1/30/15 2/6/15 2/13/15 Source: AMG/Lipper CY 2014 HY Issuance by Industry March 11, All Other 42% Computers & Electronics 5% Cable 6% Source: S&P Capital IQ LCD Oil & Gas 17% Telecom 6% Services & Leasing 15% 9% Recent volatility in oil prices has tapered activity in the high yield market among energy issuers All Other 39% Oil & Gas 7% YTD 2015 HY Issuance by Industry Retail 15% Cable 10% 9% Services & Leasing 9% Gaming & Hotel 11%

20 Questions? March 11,

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