KeyBanc Capital Markets Debt Capital Markets

Transcription

1 KeyBanc Capital Markets Debt Capital Markets The KeyBanc Capital Markets Debt Capital Markets team represents one of the strongest full-service debt-side investment banking, sales, trading and distribution platforms in the nation. We use a blend of real world perspectives, backed by robust capabilities and relationships, to help our clients use leverage to grow, make acquisitions, and enhance operations. For additional information regarding this newsletter, please contact the individuals listed below: Andrew Frawley afrawley@key.com Steve Rasoletti stephen.rasoletti@key.com Disclosure: KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association ( KeyBank N.A. ), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. This report was not issued by our research department. The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete, and it should not be relied upon as such. This report does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity.

2 Executive Summary KeyBanc Capital Markets (KBCM) conducts a quarterly survey of mezzanine and junior debt participants to measure market conditions and transaction terms The junior debt capital markets (including mezzanine, subordinated, second lien structures, etc.) are not as well documented or organized as the senior debt markets or the equity or venture capital markets This challenge is even more pronounced in the lower end of the middle market (typically companies <$50 million of EBITDA) Our survey and resulting newsletter is an attempt to address the lack of market information noted above We have been conducting our survey since 2011 and have aggregated the data for review and analysis I. Executive Summary Unless otherwise stated, statistics found in this analysis reflect the average of answers provided since inception of survey Junior Debt Market Analysis 2

3 Executive Summary (cont d) In a typical quarter since Q2 2011, junior capital providers who respond to our survey: I. Executive Summary Fund Overview Transaction Flow / Closed Transactions Transaction Structure Terms and Conditions Invest across a wide range of industries Have $220.3 million available to invest A typical investment size of $18.1 million per transaction May or may not need to begin fundraising in the next twelve months, but expect that process to take 10.9 months Generally speaking, funds are getting larger and capital providers are looking to put larger amounts of capital in each transaction See opportunities from a range of sources, with 61. involving a sponsor On a quarterly basis: Review 44.8 opportunities Submit 7.5 LOIs Close 3.7 transactions In 4Q16: Reviewed 41.7 opportunities Submitted 4.5 LOIs Closed 2.4 transactions Of note, on average, ~23% of funds do not close any transactions during a given quarter For completed transactions Senior debt to EBITDA multiple is 3.3x Total debt to EBITDA multiple is 3.7x The typical capital structure includes 48. of senior debt 16.9% of junior debt 34.5% of equity On a quarterly basis: Cash pay rate is 12. Average PIK rate is 2. Total expected IRR is 14.1% 59. of transactions have warrants equal to 4.9% of the fully-diluted equity In 4Q16: Cash pay rate is 11.3% PIK rate is 2. Total expected IRR is 13.9% Junior Debt Market Analysis 3

4 Debt providers continue to consider a broad range of industries and many continue to be industry generalists Approximately 4- of our respondents do not have any industry focus There is general consistency over the last four quarters II. Fund Profiles Industries of Interest Industrial Manufacturing Business Services Health Care Consumer Information Services Transportation and Logistics Professional, Scientific, and Technical Services Basic Materials Technology Education Finance and Insurance Construction, Engineering and Infrastructure Services Energy and Utilities Hospitality Real Estate Do not have any industry specialization Other Q Q Q Q % 41% % % Junior Debt Market Analysis 4

5 II. Fund Profiles Capital for Deployment Significant capital remains available as debt providers flush with cash continue to seek investment opportunities 6 of funds reported $100 million or more of capital available In the most recent quarter, ~3 of respondents reported >$500 million of capital available % % 31% 5% 3 21% % % 3 23% 41% % 1 29% 39% % 5% 1 Q2 14 Typical Investment Size Debt providers seeking to place more than $25 million per investment had increased steadily to 57. leading into 2015, but dropped off to leading into 2016, and eventually in 2Q16, but have recently bounced back to 2 In our experience (and supported by this data), there are essentially two primary junior debt markets One for companies with >$10 million of EBITDA One for companies with <$10 million of EBITDA For transactions >$50M, this is developing into another definable and distinct market segment <$50M $50M - $99M $100M - $250M $251M - $500M >$500M Other 10 5% 32% 21% 22% 2 23% 1 1 9% 1 32% 32% 3 39% 4 41% 3 39% % 33% 5% <$5M $5M - $10M $11M - $25M $26M - $50M >$50M Please note: KBCM bifurcated the typical investment size question to measure maximum and minimum investments which may impact survey results Junior Debt Market Analysis 5

6 II. Fund Profiles Commentary New Fund Raises in the Next Twelve Months Fundraising sentiment remains positive ~4 of respondents do not anticipate fundraising in the next 12 months, with the remainder anticipating fundraising more than 12 months out or undecided The majority of respondents believe it would take less than 12 months to raise a new fund Only 1 believe fundraising would take more than a year 10 5% % 52% 6 63% % 4 39% 39% 4 Yes No Undecided Time Needed to Raise a New Fund % 33% % % 1 <6 months 6-12 months months >18 months Junior Debt Market Analysis 6

7 III. Transaction Flow Commentary Portfolio Investment Sources Sponsors continue to be an important source of opportunities They typically represent 4 to of leads, but recently declined as investment banks become more prominent Sponsor groups represent ~ of closed transaction volume % 2 2 9% % 4 41% 5 21% 1 1 9% 3 23% % Investment Banks PE Sponsor Groups Other Mezzanine Funds Other Sponsored vs. Non-Sponsored Sources % 55% 49% % 6 53% 6 55% 45% 51% Sponsored Non-Sponsored Junior Debt Market Analysis 7

8 III. Transaction Flow Commentary Transactions Reviewed Transaction volume in the market is healthy 52% of respondents reviewed more than 50 transactions in the prior quarter 1 of respondents submitted 10 or more LOIs 8 of market participants closed at least one transaction in Q % % 52% 73% % 21% 5% 5% 5% Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q transactions 1-5 transactions 6-10 transactions transactions transactions >50 transactions LOIs Submitted Transactions Closed % % % 31% 2 65% % 62% 43% 4 3 5% 5% 10 5% 5% % 1 22% 23% 2 33% 5% 5% 1 32% % 4 21% 21% % 21% % 0 LOIs 1-5 LOIs 6-10 LOIs >10 LOIs Junior Debt Market Analysis 8

9 Senior Debt The majority of transactions are being completed at 2.6x 4.0x senior leverage Total Debt Total Debt/ EBITDA Ratios Total Debt/ EBITDA Ratios <1.5x 1.5x 1.9x 2.0x 2.5x 2.6x 3.0x 3.1x 3.5x 3.6x 4.0x 4.1x 4.5x 4.6x 5.0x >5.0x Q4 14-3% 39% - - Q % 33% - - Q % 22% Q % 3 3 3% - Q % 22% Q % Q % 51% Q % - - Q4 16 5% The majority of transactions are being completed at 3.6x 5.0x total leverage III. Transaction Flow <1.5x 1.5x 1.9x 2.0x 2.5x 2.6x 3.0x 3.1x 3.5x 3.6x 4.0x 4.1x 4.5x 4.6x 5.0x >5.0x Q Q Q % 21% 3 Q % Q % 22% 22% 22% - Q Q Q Q % 2 Junior Debt Market Analysis 9

10 Commentary There has been some compression in the cash pay amount (typically the largest single component of IRR) In Q2 2011, ~8 of transactions had a cash pay of In Q4 2016, ~ of respondents had a cash pay of Historically, the combination of cash pay plus PIK plus other elements of return was remarkably consistent from quarter-toquarter and year-to-year Currently, 69% PIK rates are 2% In the current quarter, the majority of respondents aim for a base-case total IRR requirement of ~14.5% The average expected IRR over the past 21 quarters has been 15. Cash Payment Requirement PIK Rate Requirement IV. Transaction Specifics % 32% 33% % 41% % 2 33% 3 23% 29% 2 1 9% 5% <1 1 1 > 10 5% 1 1 9% 4 65% 72% 69% 73% 69% % 5 31% % 5% 5% 9% 3% Average IRR Expectation % 16.5% Q4 11 Q % 15.1% Q4 12 Q2 13 Q % Q % Q % Q % Q Q % Q4 16 Rarely or Never Have PIK Rate 1% 2% 3% 5% >5% Total IRR Requirement 10 9% 5% 9% 9% 1 9% 1 9% % % 2 22% 22% 9% 32% % 1 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q >2 Junior Debt Market Analysis 10

11 IV. Transaction Specifics Percentage of Transactions with Warrants / Equity Upside Since survey inception, nearly all respondents indicated that their transactions have either warrants or purchased equity upside Has remained fairly consistent across the past 21 quarters The amount of warrants / purchased equity upside as noted in survey responses is substantially higher than we have seen (anecdotally) in the market 10 9% % % 6 21% Never % - 99% 10 Warrant Positions as Percentage of Fully-Diluted Equity 33% of the respondents reported warrant positions that represented 5% or more of fully-diluted equity Average of 4.9% of fully-diluted equity Not only is the incidence of equity upside more commonly noted in our survey results (as discussed above), the amount of the position as a percent of fully-diluted equity as reported is much higher than we typically see in the limited instances we observe it in the market % 4 5 9% % 2 29% % % 1% 2% 3% 5% >5% Junior Debt Market Analysis 11

12 IV. Transaction Specifics Percentage of Transactions with No-Call Periods 52% of respondents reported having some form of call protection On average, 4 of respondents indicated that they have no call protection in place (across past thirteen quarters), while 41% indicated they have it in all cases Clearly a highly negotiated point that differs from transaction to transaction 10 9% 23% 22% 2 22% 2 1 9% 9% 9% % % - 99% 10 Percentage of Transactions with Prepayment Penalties The vast majority of transactions have some form of prepayment penalty 10 65% 73% 61% 62% 8 61% 7 82% 3 43% 6 23% 33% 2 2 1% % - 99% 10 Junior Debt Market Analysis 12

13 Commentary The majority of respondents are willing to consider a second lien structure Of note, we see junior capital providers consistently ask for a second lien (even if a company has a limited asset base, etc.) We believe this is a logical request for capital providers to pursue, and typically not a logical request for the issuer to grant Approximately 6 of respondents would consider a unitranche structure in a transaction We have seen a willingness to do a unitranche structure as a competitive differentiator among capital providers 61% in our most recent quarter Willingness to Complete a Second Lien Deal V. Second Lien 10 23% % 23% 21% % % 79% 7 81% 79% 72% 63% 6 Yes No Second Lien Providers are Active Market Participants Willingness to Provide a Unitranche Structure % 61% % 5 61% 5 39% % % 3 39% 33% 39% % 73% 72% 59% 63% 61% 6 61% Yes No Yes No Junior Debt Market Analysis 13

14 VI. Conclusion Biggest Challenge Facing Junior Debt Providers Respondents have remained consistently and evenly split regarding market challenges facing the junior debt market over the past several quarters Given the current interest rate environment, increased competition from other debt providers is a major challenge, which may persist as more market participants try to put capital to work in the short-term 10 5% 5% 5% 5% % 29% % 23% 22% % % 22% 23% 23% 1 Debt Market Unitranche Structure Capital Provider Competition Company Uncertainty Economy Other Junior Debt Market Analysis 14