SPP s Middle Market Leverage Cash Flow Market At A Glance

Transcription

1 Market Update January 2012 SPP s Middle Market Leverage Cash Flow Market At A Glance Deal Component January 12 December 11 January 11 CF Senior Debt (x EBITDA): <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x Total Debt Limit (x EBITDA): <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x <$10MM EBITDA x >$15MM EBITDA x >$25MM EBITDA x Senior CASH Flow Pricing: L (bank) L (non-bank) L (bank) L (non-bank) L (bank) L (non-bank) Second Lien Pricing (Avg): L+8%-, (with 1% floor) L+8%-, (with 1% floor) L+9%-11%, (with 1%-2% floor) Subordinated Debt Pricing: <$10MM EBITDA 15%-17% >$15MM EBITDA 13%-15% >$25MM EBITDA 12%-14% <$10MM EBITDA 15%-17% >$15MM EBITDA 13%-15% >$25MM EBITDA 12%-14% 14%-18% >$50MM EBITDA 13%-15% One Stop Pricing 8.5%-11.5% Fixed L+8-9% Floating (1% Floor) 8.5%-11.5% Fixed L+8-9% Floating (1% Floor) -13% (1%-1.5% Floor) Warrants Feature: Competitive pressure in market continues to mitigate need for warrants in favor of coupon only deals absent a compelling factor (i.e.-small size, large dividend recap, lack of sponsor, etc) Coupon only deals the norm except for very small issuers (<$7.5MM EBITDA) or in Dividend Recaps where 10 or more of initial investment is returned Requested, not Required Equity Appreciation Rights alternative where required LIBOR Floors: -1% for most Bank Only Club Deals; % Libor Floor for Syndicated or non-bank deals in most cases for most Bank Only Club Deals; Libor Floor for Syndicated or non-bank deals in most cases Libor floor Mezzanine Opt. Pre-Payment (first 3 years): 2nd Lien: 102,101 Par Sub: No-Call year one, 102, 101, par (SBIC 5,4,3,2,1) 2nd Lien: 102,101 Par Sub: No-Call year one, 102, 101, par (SBIC 5,4,3,2,1) 2nd Lien: 102,101 Par Sub: No-Call year one, 103, 102, par Minimum Equity Contribution: 25%-35% Recap Liquidity: Recap liquidity remains abundant for $15MM+ EBITDA credits with an equity sponsor; tightens dramatically in the absence of a sponsor, or sub $7.5MM credit. Scrutiny provided to duration of initial investment, size of dividend, and credit s performance in last downturn. Available for both small (<$10MM EBITDA) and larger issuers across the board, for both sponsored and non sponsored companies, and even for credits with a little hair. Pricing steeper for: transactions where total initial equity investment is returned to sponsor or where recap is less than a year since initial investment, or non-sponsored. Exceedingly Liquid -Preference for Sponsors, sensitivity to dividends in excess of initial investment, recent trends; -Generally less Leverage "Story" Receptivity: New Year, fresh allocations of capital and dearth of new deals makes Q1 most receptive to storied credits. Readily accessible but more likely to end up as a Q closing Readily Available Tone of Market Investors return to market with general optimism respecting macro-economic conditions and excess capacity coupled with limited deal flow. Great expectations for renewed M&A activity as sponsors look to exit assets frozen between 2008 and January generally a more merciful forum for challenged assets or storied paper unitl pipeline of new deals grows. Market generally bullish as Eurozone fears begin to ease on news of the Grand Plan for Greece. Underlying confidence in US economic growth fueling stronger liquidity for corporates large and small. Dearth of quality mezzanine issues driving intense competition for new assets. Lack of perceived deals in 144a secondary purchases bringing hedge funds back into the private market. Market characterized by excess liquidity and lack of new deals across all asset classes. New allocations combined with scant deal flow combining to create unprecedented leverage opportunities. Pricing remains consistent with Q levels. Mezzanine Investors: Participation across most sectors: Traditional LPs, SBICs, Non-Bank-Finance Company Alternative Asset Groups; Cross- Over Sponsor, Hedge Funds, CLOs; BDCs Participation across most sectors: Traditional LPs, SBICs, Non-Bank-Finance Company Alternative Asset Groups; Cross-Over Sponsor, Hedge Funds, CLOs; BDCs back in the market with and competitive again. Full Participation across all sectors: Traditional LPs, SBICs, Non-Bank- Finance Company Alternative Asset Groups; Cross-Over Sponsor, Hedge Funds, BDCs, CLOs

2 Will the Knicks win the championship this year? Say what, say what, anything can happen Will we find some peace of mind this year? Say what, say what, anything can happen You ready for the revolution this year? Say what, say what, anything can happen Anything Can Happen", Wyclef Jean Real GDP Growth Anything Can Happen On December 12 th, the Board of Governors of the Federal Reserve issued its final release of the Federal Open Market Committee ( FOMC ) for 2011, noting, in its own typically cryptic manner, that: Source: U.S. Bureau of Economic Analysis Seasonally Adjusted Unemployment Rate the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. In other words (in this case, my own), the US recovery is back on track; solid demonstrable growth in GDP has been established and, though unemployment is still at unacceptable levels, the labor markets continue to make progress. Threatening that growth is an increasingly unstable global economic crisis, most saliently exemplified in the Eurozone. Evidence of the resurgent US economy abounds as manufacturing, the engine driving this recovery (unlike past recoveries which have been in large part fueled by the housing sector), has returned to terra firma. The December Empire State Manufacturing Survey increased 8.9 points to 9.5, obviating fears that surfaced in Q that manufacturing was losing steam. The latest release of the Philadelphia Fed also confirmed that manufacturing has increased as well. CPI growth has appeared to have moderated as well, providing consumers with increased spending power to drive GDP growth. CPI growth swung from a -2% in 2009 to +4% in 2011, however it slowed to 3.4% in November and will likely dissipate to 3% this past December (swings in CPI are inversely correlated to GDP growth decelerating CPI corresponds to accelerating GDP). Retail sales in November rose.2%, not a particularly robust metric in itself, but it did represent the 6 th straight increase in consumer spending; in fact, retail spending in November was 6.7% higher than a year earlier. Most economists expect GDP growth in 2012 to be firmly in the 3% range, some outliers project as much as 5% GDP growth. Unemployment levels still dominate the headlines, but compared to a year ago, the labor markets are clearly strengthening. This time last year the ADP National Employment Report enthusiastically stated that Strength was also evident within all major industries and every size business tracked in the ADP Report. That was on the heels of a January 5 th, 2011 report showing that unemployment reduced from 9.8% to 9.4%. We start 2012 with unemployment at 8.; for the week ending December 10 th, unemployment claims fell to 366,000, the lowest level since May of Though clearly a stronger labor market, the sobering reality is that to reach pre-recession levels the US economy needs to add six million jobs lost during the downturn (plus another 4.6 million jobs to account for population growth). Consistent with the 3% GDP growth projection noted above, unemployment is expected to contract to approximately 8% in Tempering the enthusiasm generated by the recent performance of the US economy, is the continued threat that the economic crisis in Europe will contaminate US markets. France and Italy were declared to be in recession in December and German growth has been cut back to a mere 0.4%. On December 26 th, the number of jobless people in France hit a 12 year high. Source: BLS Source: BLS Source: CDX Indenx Nonfarm Payroll Employment North American High Yield Spreadhs

3 The continued austerity programs necessitated by the broken budgets in the Eurozone also pose the threat of increased layoffs and potential social unrest. In December, S&P placed the sovereign ratings of 15 Euro Area nations on negative watch. As the December 19 th ISI Weekly Economic Report summarized, The combination of an unfolding recession, significantly increased fiscal drag and significantly increased bank capital requirements is frightening. It is not only the Eurozone which poses a threat to US economic expansion, non-european global recessionary influences abound; industrial production in India is contracting, Brazil s real economic activity is lower and consumer confidence in China is at a record low. In a nutshell, the US economy is showing greater potential for growth than it has at any time since the recovery began, and even unemployment, though high, is on a proper trajectory for pre-recession levels. Unfortunately, negative global recessionary trends render our newfound economic footing somewhat precarious. Loan Availability Source: National Federation of Independent Business Net Loan Availability Percent The Private Capital Markets in 2012 Issuers looking to come to the private market in 2012 have the benefit of executing in one of the most liquid environments since the recession began. Throughout 2011, the private market remained competitive notwithstanding the significant volatility that impacted the syndicated bank and institutional loan, public high yield and 144A markets (i.e. - the traded markets ); whereas the European sovereign debt crisis literally shut down these markets sporadically, the private capital markets remained both liquid and competitive throughout In fact, there were only two investor constituencies that temporarily left the private market during the dislocation in the traded markets last year; public business development companies (whose own public share price volatility forced them to back off pricing new assets periodically) and hedge funds (who migrated over to the high yield secondary market when values in that forum plunged). As a practical matter, asset based senior lenders, one stops, and mezzanine lenders remained in an asset hungry underutilized mode throughout the last 12 months. The only sector of the private capital markets that remained seemingly inhospitable to many, besides the most stellar transactions, was the senior bank cash flow lending constituency. Pre-recession commercial bank enterprise lenders routinely executed transactions with senior debt leverage ratios ranging from 3x-4x LTM EBITDA; post recession, only the most pristine credits with EBITDA levels in excess of $25 million qualified for this low cost of commercial bank senior debt capital (L+3%-4.5%, no floor). Less stellar issuers have been either limited to significantly more conservative Sr Debt/EBITDA multiples (1.5x-2.5x), or relegated to the more expensive non-bank commercial lending constituencies (L+5%-, with a 1%-1.75% floor); and in the case of lower middle market issuers (sub- $10MM EBITDA), forced to the one-stop and uni-tranche community. Source: National Federation of Independent Business New-Issue Loan Value U.S. Bank Total Loans (Adjusted for FASB Accounting Change, 4 Week Average) Fortunately, even the senior bank lending community is gaining steam as we enter Over the last six months, loans have increased 5.7%. If, as anticipated, the market continues on its current trajectory respecting liquidity, there will likely be pressure on leverage multiples to increase. As leverage multiples expand, conventional wisdom (and history) suggest that valuation multiples are likely to follow suit. In short, increases in leverage capacity could significantly enhance M&A activity in Limited leverage capacity following the recession has continued to depress M&A activity; M&A volume in 2011 for the first three quarters was essentially flat with 2010 (according to Capital IQ, total M&A deal volume for Q1-Q was 6500 transactions vs for the period Q1-Q3 2010). If, as anticipated, leverage multiples expand over the course of the next 12 months, 2012 could well be a watershed year for M&A activity as equity sponsors increasingly seek to exit portfolio assets locked in place between 2008 and 2010.

4 Q Issuance: The first quarter tends to see relatively light issuance as issuers and investors step back from the typical December year end flurry of activity. The pressure to go to market in Q1 and get deals closed is less intense as putative issuers finalize year end reports and prepare offering memoranda in preparation for issuance. It is also a time when most lenders are starting the year with fresh portfolios and all but empty annual volume budgets. To those of us that make a living in the private capital markets, it is also the best time to tell a story as in storied credits deals that are challenged; where there is lender fatigue, covenant defaults, (even forbearance agreements), or storied and cyclical sectors (specialty retail, finance, oil and gas, etc) or unique use of proceeds i.e. dividend recaps. While year-end numbers are helpful, in most cases, they can be a condition precedent for a final closing but not for issuance. The simple truth of the matter is the lenders and investors have more time and capacity to dig into a difficult deal. That window tends to close around late February when the traditional deal flow starts in earnest. When volume picks up, the more challenging credit stories take a back seat; and with respect to dividend recaps, most (though not all) lenders will prefer to deploy capital into accretive uses of proceeds (i.e.-acquisitions) than non-accretive ones. These influences are seemingly only more pronounced in 2012 where heightened M&A activity is anticipated and the potential for adverse credit conditions could quickly arrive on US shores as a result of Eurozone dysfunction, global banking and credit deterioration or continued political instability during an election year. In short, if there is refinancing or recapitalization planned in 2012 it is hard to imagine a more compelling time to come to market than the first quarter. Middle Market Source Overview Leveraged Finance Volume Bank Debt and Bonds $1000B $750B $500B $250B $0B % 3 17% 43% Dec-09 15% 33% % 9% % 23% 21% Feb-10 Apr-10 3% 13% Flex Activity Lagging Twelve-Month Default Rate Pro Rata Institutional High-Yield 41% Jun-10 Aug-10 41% 49% 2 27% 25% 5% 11% 18% Oct-10 Flex Down 32% 4% 3% 3% Flex Up 33% 18% % 22% % 8% 4% 1/1-12/28/10 33% 1/1-12/28/11 24% 12% % 34% 3 3% Senior Asset Based Market: $70 B Amount to Default 12% Default Rate Q volume light as corresponding high yield deals were tabled;- Q volume anticipated to be light; Lenders comfortable with a modest (approx. 15%) airball for traditional asset based structures; Middle market pricing among the most competitive, and most active; Market remains competitive and characterized by increasing flexibility, including using fixed assets in borrowing base; Pricing L % for most clean deals (larger $150MM deals toward outer band) o L for more storied credits o Generally no Libor floors o Average spread fell to L+240bps in Q2 vs. L+270bps in Q1; Undrawn pricing ranging from bps inversely related to usage of facility; Four to five year maturities; Closing fees 25-50bps range; and Low utilization facilities out of favor. Senior Cash Flow Market: 2012 pricing levels expected to be competitive and consistent with Q o True Club deals remain most competitive senior capital available o Banks generally seeking funded assets $60 B $50 B $40 B $30 B $20 B $10 B $0 B Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Average Debt Multiples of Highly Levered Loans Dec-06 Dec-07 Dec-08 Dec-09 8% 4% 2% Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 10x 8x 6x x 2x 0x FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA

5 o Traditional use of proceeds preferred (i.e. non-recap) o Middle market pricing among the most competitive in the L % range o Libor floors absent for better club deals, % for challenged credits and larger syndicated facilities o Five year tenors most common o Accordion provisions limited to 4 of initial principal amount; Lower middle market issuers still faced with limited senior cash flow lenders o Lenders wary to go above 1.5x-2.0x LTM EBITDA for credits with less than $10 million in EBITDA o Less than $7.5 million EBITDA deals generally limited to one stop structures Looking for blended (combined senior and sub) pricing of 11%-13% o Recap liquidity still available for both sponsored and nonsponsored deals o Non-sponsored deals generally subject to higher pricing, stricter leverage requirements; Term facilities being priced at a 25-50bps premium to revolving credit facilities; Amortization structures: o Commercial banks Seven to 10 year straight line amortization with balloon in year five o Non-bank commercial lenders 1%-5% per annum with a 5 excess cash flow sweep; and Pricing grids: o Commercial bank lenders Pricing: L for leveraged middle market deals Higher quality, less leveraged deals as low as 2.5 Upfront fees: 0.375%-0.563% 25-50bps unused generally higher where there is larger unused proceeds Par call o Non-bank commercial lenders Pricing L for < 2.5x SD/EBITDA L for > 2.5x SD/EBITDA Fees: 0.75%-2.0: upfront, 75bps unused Non-call year one, 1% in year 2, par call in year 3. Mezzanine Market: Average Debt Levels of Middle-Market Loans 8x 6x x x 0x Average Debt Multiples of Middle-Market Loans New-Issue Middle Market Loan Volume Historical Cash Flow Senior Debt (x EBITDA) FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA 8x 6x x x 0x $50B $40B $30B $20B $10B $0B 6.00x 5.00x FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA Institutional /1-12/28/10 1/1-12/28/11 Pro Rata Mezz lenders report excess capacity, lack of deal flow, and intense competitive pressure ; Pricing schemes: o <$10MM EBITDA 15%-17% o >$15MM EBITDA 13%-15% o >$20MM EBITDA 12%-14%; Coupon Only for most subordinated debt deals o Warrants rarely required - limited to leveraged recaps where more than initial equity investment returned, lack of equity sponsor, smaller issuers, storied credits, or nosebleed leverage (in excess of 4.5x) o Investors asking for second lien positions (often silent ) o Leverage tolerances: <$10MM EBITDA 3.00x-4.00x <$15MM EBITDA 3.50x-4.75x >$25MM EBITDA 4.00x-5.00x 4.00x 3.00x 2.00x 1.00x 0.00x

6 Apr-09 Oct-09 Apr-10 Oct-10 Apr-09 Oct-09 Apr-10 Oct-10 Leveraged recaps or storied credits: 3.75x-4.25x; Maturities equal to the greater of five years or six months after maturity of the senior debt facility; Recap liquidity remains robust; Full participation by all investor constituencies o Traditional LP funds, credit opportunity funds, captive bank funds, hedge funds, commercial finance companies, BDCs, credit opportunity funds, and insurance companies creating pricing pressure o Regional bank mezz funds often provide below market pricing dynamics 13%-15% subordinated and L+-9% second lien pricing for less than $15 million EBITDA issuers, but will only lend where the bank provides the senior debt Transactions generally less than $15 million in aggregate principal amount; Co-invest equity strips readily available; Prepayment provisions highly negotiable, very investor specific; and Upfront fees average 1%-2%. Please feel free to call any of the professionals at SPP Capital to discuss a particular financing need, amendment or restructuring advisory, or just to get a little more color on the market; you don t need a deal ready to go to the market to call us. Our hope is that you use SPP as your go to resource for any information, analysis and review of potential transactions in concert with your internal evaluation process. 6.00x 5.00x 4.00x 3.00x 2.00x 1.00x 0.00x Historical Total Debt Limit (x EBITDA) 900 bps 800 bps 700 bps 600 bps 500 bps 400 bps 300 bps 200 bps 100 bps 0 bps Historical Senior Cash Flow Pricing (Bank) (Bank) (Bank) Stefan Shaffer Managing Partner (212) sshaffer@sppcapital.com Historical Senior Cash Flow Pricing (Non-Bank) 900 bps 800 bps 700 bps 600 bps 500 bps 400 bps 300 bps 200 bps 100 bps 0 bps (Non-bank) (Non-bank) DISCLAIMER: The "SPP Leveraged Cash Flow Market At-A-Glance" and supporting commentary is derived by the anecdotal experience of SPP Capital Partners, LLC, its specific transactions, discussion with issuers, lenders and investors consistent with its standard operating practices. Any empirical data specifically derived by third parties, or intellectual property or opinions of third parties are expressly attributed when utilized. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. All data, facts, tables or analyses provided by Governmental or other regulatory bodies are deemed to be in the public domain and not otherwise expressly attributed herein. SPP Capital Partners, LLC is a member of FINRA and SIPC. This information represents the opinion of SPP Capital and is not intended to be a forecast of future events, a guarantee of future results or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. 1 14% 12% 8% 4% 2% Historical Second Lien Pricing LIBOR Floor LIBOR Floor To unsubscribe to this , please click here. To request to be added to our distribution list, please click here

7 25% 15% 5% ADDITIONAL SUPPORTING DATA Historical Subordinated Debt Pricing Historical Minimum Equity Contribution