SPP s Middle Market Leverage Cash Flow Market At A Glance

Transcription

1 Check out SPP online: Market Update August 214 SPP s Middle Market Leverage Cash Flow Market At A Glance Deal Component August 14 July 14 August 13 Cash Flow Senior Debt (x EBITDA) Total Debt Limit (x EBITDA) Senior Cash Flow Pricing Second Lien Pricing (Avg) <$7.5MM EBITDA 1.5x2.5x >$1.MM EBITDA 2.x3.5x >$25.MM EBITDA 3.4.5x <$7.5MM EBITDA 3.x4.25x >$1.MM EBITDA 3.75x5.x >$25.MM EBITDA 4.x5.75x L+3.%4.5% (bank) L+4.5%6.% (nonbank) <$7.5MM EBITDA L+8.%11.% floating >$1.MM EBITDA L+6.%9.% floating Subordinated Debt Pricing <$7.5MM EBITDA 12.%14.% >$1.MM EBITDA 11.%13.% >$25.MM EBITDA 11.%12.% Warrants limited to special situations; Second lien may buy down rate to ~9.%. Unitranche Pricing Libor Floors Mezzanine Opt. Prepayment Minimum Equity Contribution Recap Liquidity Story Receptivity Tone of the Market *Changes from last month in red <$7.5MM EBITDA L+8.%11.% >$1.MM EBITDA L+6.%8.% >$25. MM EBITDA L+5.5%6.5% (1.% floor) Potential for fixed rate with BDC or mezz lender. No Libor floor for most bank deals; 1.% for nonbank deals, second lien, and floating rate unitranche. Though it varies with the lender, there are increasingly no noncall periods with a market norm of 3.% in year one, 2.% in year two, 1.% in year three, and par thereafter (SBICS at 15 in Year 1 and then decline); for second lien unitranche, there are more aggressive prepayment schedules (2, 1, par). 2.%3.% total equity (including rollover); minimum 1.% new cash combined with rollover or seller notes. Focus continues to be more on aggregate credit metrics (Total Debt/EBITDA, etc.) than on the level of equity contribution. Recap liquidity is abundant, but is the best (pricing and terms) associated with a combination recap and accretive event (acquisition, expansion, etc). Commercial Banks are likely to be less aggressive across the board than their nonbank competitors on most recaps. Q4 has never been friendly to challenging credits. From Labor Day until yearend, the private capital markets will become increasingly difficult to access for storied paper, outofmarket metrics, and aggressively structured deals. The OCCinduced bank pullback has been constant for a quarter, and banks continue to take a progressively conservative stance. We are now seeing increasing reticence on nonbank and onestop lenders (to a lesser extent). This month s market theme is entitled Best Shot for a reason; after eight gangbuster months, the private market will become increasingly selective as we get into Q4. Historically, Q4 is for documenting and closing deals, not presenting challenging credits or aggressively priced/structured new deals to institutional investors. While there is still abundant liquidity in general, banks will continue to take a conservative posture and levered funds may become more expensive as their own cost (or expectation thereof) of capital begins to rise. <$7.5MM EBITDA 1.5x2.5x >$1.MM EBITDA 2.x3.5x >$25.MM EBITDA 3.4.5x <$7.5MM EBITDA 3.x4.25x >$1.MM EBITDA 3.75x5.x >$25.MM EBITDA 4.x5.75x L+3.%4.5% (bank) L+4.5%6.% (nonbank) <$7.5MM EBITDA L+8.%11.% floating >$1.MM EBITDA L+6.%9.% floating <$7.5MM EBITDA 12.%14.% >$1.MM EBITDA 11.%13.% >$25.MM EBITDA 11.%12.% Warrants limited to special situations; Second lien may buy down rate to ~9.%. <$7.5MM EBITDA L+8.%11.% floating >$1.MM EBITDA L+6.%8.% floating Definite signs of rate compression evident. Potential for fixed rate with BDC or mezz lender. No Libor floor for most bank deals; 1.% for nonbank deals, second lien, and floating rate onestops. Though it varies with the lender, there are increasingly no noncall periods with a market norm of 3.% in year one, 2.% in year two, 1.% in year three, and par thereafter (SBICS at 15 in Year 1 and then decline); for second lien unitranche, there are more aggressive prepayment schedules (2, 1, par). 25.%35.% total equity (including rollover); minimum 1.% new cash combined with rollover or seller notes. Greater focus recently on general deal metrics than on level of new equity going in. Recap liquidity is abundant, but is the best (pricing and terms) associated with a combination recap and accretive event (acquisition, expansion, etc). Commercial Banks are likely to be less aggressive across the board than their nonbank competitors on most recaps. Though the excess liquidity conditions that have characterized the market throughout the first half continue, increased deal flow and summer schedules have conspired to make the market a little more challenging for storied issuers. The bad news is that it will only get worse before it gets better. Issuers with a challenging credit profile will find even less opportunities in the banking market. This will make commercial finance companies, BDCs (more unitranche oriented) a better venue for issuance. Still, a very liquid mezzanine market is openly receptive to storied paper, especially among the SBICs. The pace of deal flow continues to gain momentum through June. Implementation of the Commercial Bank capital adequacy guidelines have made it tougher for leveraged issuers (and storied paper) to attract low cost capital, and made banks less competitive for transactions across the board. The big winners are nonbank commercial lenders and unitranche providers that can stomach higher leverage metrics and lighter amortization structures. <$8MM EBITDA 1.5x2.5x >$1MM EBITDA 2.25x3.25x >$25MM EBITDA 2.5x4.x <$8MM EBITDA 3.x4.25x >$1MM EBITDA 3.75x4.75x >$25MM EBITDA 4.x5.5x L+3.5%4.5% (bank) L+4.5%6.5% (nonbank) <$1.MM EBITDA L+9.%12.% floating >$15.MM EBITDA L+7.5%9.% floating <$7.5MM EBITDA 14.%17.% >$1MM EBITDA 13.%15.% >$25MM EBITDA 11.%14.% Warrants not required except in rare cases of excessively leveraged or challenged credits. <$8.MM EBITDA 1.%15.% >$1.MM EBITDA L+7.5%9.% No Libor floor for most bank deals; 1.% for nonbank deals. Highly negotiated; coupononly deals (no warrants) seeking nocall 12 years, with declining prepayment penalties (3, 2, 1, par). Significantly more latitude in warrant deals (SBIC maximum limited to 5, 4, 3, 2, 1). As coupononly deals dominate, prepayment premiums are scrutinized. 25.%35.% total equity (including rollover); minimum 15.% new cash in. Recap liquidity continues to be as abundant as any other type of liquidity and, most recently, is typified by leverage metrics not seen since the boom prerecession days. Recent deal reports include a recap of 4.x/5.x senior/sub for a $17.MM LTM EBITDA issuer. Lack of traditional deal flow has kept the market in a highly receptive mode with respect to storied paper. Investors are eager to consider refinancing for troubled credits (even those in forbearance agreements), highly cyclical businesses, etc. The highly anticipated deluge of new deal flow has failed to materialize and, accordingly, investors are eager to deploy capital. Smaller issuers (sub $5.MM EBITDA) are still getting a great deal of interest. There is evidence of slightly reduced bank participation across the board and especially for senior cash flow transactions for issuers sub$1. million EBITDA. However, the normal lull in new deal flow for January issuers should compensate for any reduced commercial bank lender participation. Mezzanine liquidity conditions remain as robust as ever and competition for new deals should result in competitive pricing and terms.

2 Thousands of Employees Billions of Dollars Millions of Dollars When your sky is dark and the earth is shaking your bed your hope is at its end you just need one friend I'll be here, giving it my best shot baby your love's got all that I need Here, crying from the rooftops nothing can stop us if we believe 19, 185, 18, 175, 17, 165, 16, 155, 15, 145, Retail Sales 185,67 Here, giving it my best shot baby I find that we can be free when you're here, here with me Best Shot Best Shot, Birdy Note: This August edition of the Market Update will be much briefer and more summary than normal; it reflects the fact that many of you are already on a beach, boat or ranch, or have plans to be there shortly. With summer flying by and an early Labor Day ahead (9/1), it can safely be said that current conditions in the private capital markets are about as liquid as they will be for the remainder of 214. Come October, conditions will likely become increasingly less hospitable until yearend. The next four to six weeks will, however, still provide a window of opportunity for potential issuers to secure highly competitive terms and for the more challenged issuers to get in front of a forgiving and receptive audience. These favorable market conditions come at a time when there is an increasing chorus for higher interest rates. Recent positive macroeconomic releases (to wit, Q2 GDP at 4%, six consecutive nonfarm payroll gains in excess of 2,, 2% inflation), in combination with Fed policymakers prepping the capital markets for inevitable increases in underlying interest rates to come in 215, suggest that it s a pretty safe bet that the remainder of 214 provides potential issuers their Best Shot for assessing capital for some time to come. 1,2 1, U.S. Business Loans (Seasonally Adjusted) 1,8 1,6 1,78. 1,4 Nonfarm Payroll Employment (Seasonally Adjusted) 14, 139,4 138, 136, 134, 132, 13, 128, 126, 124, Historically, Q4 is the most active quarter in the private market. Part of that action can be attributed to an increasing number of issuers (the Q4 stampede or deluge ) looking to have major financial and strategic capital exercises completed by yearend. This reliable and predictable Q4 pickup of new issue transactions exacerbates the already high volume of deals that came to market earlier in the year that remain in documentation (or in deal purgatory ), where closings are delayed and remain dependent upon appraisals, qualityofearning reviews, legal opinions, intercreditor negotiations, or other legal or documentation related issues. As we enter Q4, lenders and investors will have a greater selection of new transactions available and be under increased pressure to complete their deals by yearend. Who are the winners and losers in the Q4 214 closing derby? The winners tend to be those with reasonably structured deals; if an issuer is seeking a deal with a commercial bank, debt limits are generally no more than 3.x senior debt/ltm EBITDA and 4.x total debt/ltm EBITDA. For nonbank deals, another turn of leverage beyond that is required. Overly aggressive pricing and/or structured deals tend to stall, and that tendency will aggravate in a year like 214 because deal flow levels far exceed averages from prior years. The big losers in an overheated Q4 market will be the challenged and storied credits, which will require increased diligence considerations and time commitments as time becomes a progressively Source: USA Today GDP Growth by Quarter

3 12Month Percent Change cherished resource. Consumer Confidence Index If timing is critical, a transaction can be expedited by engaging wellregarded (nationally known) advisors to initiate qualityofearnings reviews, appraisals, etc. prior to entering the market. Clearly, the utilization of an equally wellregarded intermediary, recognized by the private institutional investor base and specialists in capital formation, is critical in Q4. Macroeconomic Conditions At its last FOMC meeting on July 3 th, the Fed reiterated its commitment to monetary stimulus; there will be no imminent rate increases or changes to the timing of potential rate increases in the future. Predictably, Fed Chair Yellen continued the current pace of the taper (now down to $25 billion and on schedule to be done by October) and indicated that, as a result of the continued slack in the labor market, interest rates would remain low for a considerable time following the end of the taper. The Fed s action (or rather, omission to act) is rooted in what Yellen refers to as the significant underutilization of labor resources. Still, it is not lost on anyone that the unemployment level has dropped from 7.6% to 6.2% over the last year. Below is a quick summation of the major releases for the month: Consumer Confidence/Retail Sales: The most recent Conference Board's Consumer Confidence Index remains a bright spot in the most recent releases. The index pushed to new recovery highs last month (85.2 in June vs. a revised 82.2 in May). In fact, June was the fourth straight month that the index was in excess of 8.. June's gain was centered in the present situation component, which is at a recoverybest 85.1, a 4.8 point gain from May. Source: Conference Board 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% CPI and Core CPI CPI Core CPI ISM Manufacturing and NonManufacturing Indices Inflation: The Consumer Price Index (CPI), as reported in July (for June) suggested that inflationary pressures remained steady, rising.3%, and actually moderating with respect to the Core CPI (excluding food and energy) which only increased.1% (May s core reading was +.3%). GDP: The headline release for the month was Q2 GDP, which came in at a very robust 4.% annual rate, dramatically increased from an upwardly revised Q1 GDP of 2.1%. Consensus expectation for Q2 GDP was close to 3.%. The growth was driven by increased consumer spending and a nice upward swing in business inventories. Though, the jump was also positively impacted by business investment, government spending, and investment in home building Manufacturing NonManufacturing Manufacturing: The Institute for Supply Management s Manufacturing Index was stronger than expected at 57.1 in July, a nice bump above June s 55.3 and the best report since June of 211 (and again, ahead of the consensus expectation of 56.). The new orders component was of particular significance, as it came in at a startlingly 63.4 (a 4.5 point increase). Employment: U.S. employers added 29, more jobs in July. It was a sharp decline from last month s upwardly revised 298, added jobs, yet it was still another +2, month (the sixth straight month of >2,). The Unemployment Rate kicked up from 6.1% to 6.2% for a very good reason, 329, more people joined the workforce (and accordingly, were counted in the Unemployment Rate) and inched the Participation Rate up to 62.9%. 12.% 1.% 8.% 6.% 4.% 2.%.% Unemployment Rate 6.2% Housing: The housing market was the only substantial negative in an otherwise positive series of economic indices. Home price appreciation accelerated faster than actual sales. As a result, the

4 Thousands of Units Index (Jan. 2 = 1) CaseShiller s 2City Index reversed in May by a seasonallyadjusted.3% change (the first negative reading since January 212). Lawrence Yun, the Chief Economist at the National Association of Realtors, recently reflected on the housing economy, Activity is notably higher than earlier this year as prices have moderated and inventory levels have improved. However, supply shortages still exist in parts of the country, wages are flat, and tight credit conditions are deterring a higher number of potential buyers from fully taking advantage of lower interest rates. Housing prices cannot sustainably and quickly appreciate when existing home sales are falling. Rising interest rates will further reduce demand because the cost of carrying a purchased home increases exponentially CaseShiller 2City Home Price Index 171. SPP Tracked Market Activity New One Family Homes Sold July is historically the hottest month of the year. Despite the lack of recordsetting temperatures here in New York, the July 214 total deal count followed seasonal tradition with a scalding 232 deals, the most in three and a half years by a considerable margin. July 214 exits totaled 97, which is comparable with the 214 average exits per month thus far (94), but still substantially more than the average exits in the last three years (68). 214 yeartodate totals are currently 655 exits (a 65% increase from July 213 yeartodate total exits) and 1,438 deals (a 53% increase from July 213 yeartodate total deals). Standard and Poor s lists a decline in the average middle market leverage tolerances for companies with under $5 million EBITDA. The average July 214 total debt multiple is now at 4.93x EBITDA, a.5x decrease from the June 214 total debt multiple. Furthermore, the middle market loan volume has declined slightly from $1.9 billion in June 214 to $97 million in July. This July is comparable with the average 214 loan volume per month (1.7 billion) and brings the yeartodate loan volume total to $7.45 billion (approximately $.75 billion less than the 213 yeartodate loan volume through July). Please feel free to call any of the professionals at SPP Capital to discuss a particular financing need, amendment or restructuring situation, or just to get a little more color on the market. You don t need an imminent or marketready deal to call us. Our hope is that you use SPP as your goto resource for any information, analysis, and review of potential transactions Middle Market Annual Loan Volume 46 Stefan Shaffer Managing Partner (212) Source: Standard and Poor s Average Debt Multiples of Middle Market Loans 7.x 6.x 5.x 4.x 3.x 2.x 1.x.x FLD/EBITDA SLD/EBITDA Sub Debt/EBITDA DISCLAIMER: The "SPP Leveraged Cash Flow Market AtAGlance" 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. Source: Standard & Poor s To unsubscribe to this , please click here. To request to be added to our distribution list, please click here

5 Thousands of Units July Deal Count SUPPORTING DATA July Exit Activity Total Deals <5M <25M Total Exits <5M <25M 5 2 July 212 July 213 July 214 July 212 July 213 July 214 YTD Deal Count YTD Exit Activity 1,6 7 1,4 6 1,2 1, Total Deals <5M <25M Total Exits <5M <25M YTD 212 YTD 213 YTD 214 YTD 212 YTD 213 YTD 214 Labor Force Participation Rate Average Hourly Earnings 65.5% $25. $ % $ % $ % $ % $ % $22.5 $ % 62.9% $ % $ % Existing Home Sales Middle Market Monthly Loan Volume 6, 5, 5,4 4, 3, 2, 1, Source: Standard and Poor s

6 Historical Cash Flow Senior Debt (x EBITDA) Historical Total Debt Limit (x EBITDA) 7.x 7.x 6.x 6.x 5.x 5.x 4.x 4.x 3.x 2.x 1.x.x 3.x 2.x 1.x.x < $7.5MM EBITDA > $1MM EBITDA > $25MM EBITDA < $7.5MM EBITDA > $1MM EBITDA > $25MM EBITDA Historical Senior Cash Flow Pricing (Bank) 7 bps 6 bps 5 bps 4 bps 3 bps 2 bps 1 bps bps Historical Senior Cash Flow Pricing (NonBank) 7 bps 6 bps 5 bps 4 bps 3 bps 2 bps 1 bps bps Bank Lower Bound Bank Upper Bound NonBank Lower Bound NonBank Upper Bound Historical Second Lien Pricing 18% 15% 12% 9% 6% 3% % Historical Subordinated Debt Pricing 18% 15% 12% 9% 6% 3% % Lower Bound LIBOR Floor Lower Bound Upper Bound LIBOR Floor Upper Bound <$7.5MM EBITDA >1MM EBITDA > $25MM EBITDA Historical Minimum Equity Contribution 6% 5% 4% 3% 2% 1% % Secondary High Yield Pricing 85. Lower Bound Upper Bound Secondary High Yield Pricing SPP Value Inflection Point Source: Piper Jaffray Debt Capital Markets Update