State of the U.S. Loan Market 3Q17

Transcription

1 October 17, Xtract Research 1

2 Methodology: The data reflected in this report were drawn from New York-governed credit agreements of dollardenominated first-lien (and split collateral) Term B loans that were originated during the LTM period from 4Q16 through 3Q17, either in draft or, to the extent available, final form. We have segmented the data into three groups: (1) sponsor deals with a TLB facility balance of at least $350mm, (2) non-sponsor deals with a TLB facility balance of at least $350mm, and (3) sponsor deals with a TLB facility balance of less than $350mm. In the report we label these segments as Sponsor, Non-Sponsor, and Middle Market, respectively. The number of agreements included in each segment were as follows: The significant findings were as follows. 4Q16 1Q17 2Q17 3Q17 LTM Sponsors ($350mm+) Non-Sponsors ($350mm+) Middle Market (< $350mm) The headline for the second quarter of 2017 was that sponsors had increasingly incorporated the permissive terms of large leveraged loans into their middle market loans, and investors in the middle market space apparently didn t like what they were reading. The third quarter witnessed a rollback of some of the aggressive provisions that sponsors had injected into the smaller balance loans. These include: the sharp rise in the incidence of maintenance financial covenants; the reduction in the percentage of loans which do not cap add-backs to EBITDA for cost savings; for those loans which did provide for a cap, a tightening of that cap and a reduction in the time horizon related to those cost savings; and a less dramatic, but still significant, drop in the number of loans which permit a Restricted Payment when a leverage ratio is met Xtract Research 2

3 In the larger loan market, sponsors continued to consolidate the gains they had made in the second quarter (after an aberrant adverse first quarter) and achieved these notable incursions into investor protection: the percentage of loans with uncapped EBITDA addbacks jumped over ten percentage points; the number of loans which measured incremental loan capacity by reference to EBITDA mushroomed by over twenty percentage points; the percentage of loans which contained grower baskets tied to EBITDA (rather than assets) spiked by ten percentage points; the composition of the builder basket saw a dramatic shift from retained ECF to of CNI, most likely attributable to the importing into credit agreements of the covenant packages of high-yield bonds, whose builder baskets are traditionally CNI-based; the number of loans which had an EBITDA-based starter amount in its builder basket grew significantly; and the number of loans which permitted a Restricted Payment to be made if a leverage ratio was met grew by ten percentage points Xtract Research 3

4 The larger non-sponsored loan market was the odd man out, as it continued to exhibit the most investorfriendly terms. However, even in these loans, cracks appeared in some of the protections, perhaps as a result of the widespread and public dissemination of new covenant technology. These loans still lag their sponsored brethren in permissiveness but have adopted the following bad habits, all of them continuing an upward trend first detected last quarter: the inclusion of primary purpose language now weakens the call protection in over 6 of loans; the number of loans whose freebie incremental loan basket was calculated by reference to EBITDA (rather than a fixed dollar amount) almost tripled; and more than 8 in 10 loans now permit a Restricted Payment to be made if a leverage ratio is met. NOTE: We have obtained the information provided in this report from our Deal Data platform and will update it on a quarterly basis. If you are interested in Deal Data, please contact us at sales@xtractresearch.com Xtract Research 4

5 Table of Contents Call.. 6 Call Periods Primary Purpose Requirements.. 11 EBITDA Add-Backs Cash Netting Freebie Amounts Evergreen Freebies (Debt Reclassification).. 35 Type of Covenant.. 40 Grower Baskets Ratio Debt Builder Baskets Leverage-Based RP Carveouts 2017 Xtract Research 5

6 2017 Xtract Research 6

7 Call Periods 10 % of Agreements with 6-Months versus 12-Months Call, LTM* % 76% 6 64% 4 21% Sponsors Non-Sponsors Middle Market 6 Months 12 Months * Agreements with a call period greater than 12 months are included in the data set but not pictured above Xtract Research 7

8 Call Periods % of Agreements with 6-Months Call % 89% 79% 71% 71% 83% 83% 83% 75% 6 63% 64% 4 42% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 8

9 Primary Purpose Requirements % of Agreements that Contain the 'Primary Purpose' Requirement, LTM* 6 69% 56% 4 4 Sponsors Non-Sponsors Middle Market 2017 Xtract Research 9

10 Primary Purpose Requirements 10 9 % of Agreements that Contain the 'Primary Purpose' Requirement* 8 73% 81% % 6 65% 61% 61% 48% 48% 42% 21% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 10

11 2017 Xtract Research 11

12 EBITDA Add-Backs % of Agreements with Uncapped Add-Backs for Cost Savings & Synergies, LTM 4 22% 27% Sponsors Non-Sponsors Middle Market 2017 Xtract Research 12

13 EBITDA Add-Backs 10 % of Agreements with Uncapped Add-Backs for Cost Savings & Synergies % 4 48% 44% 47% 19% 26% 13% 26% 27% 14% 39% 29% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 13

14 EBITDA Add-Backs 10 % EBITDA Cap on Add-Backs for Cost Savings & Synergies, LTM % 36% 42% 24% 26% 3% 14% 14% 6% Sponsors Non-Sponsors Middle Market 12% 15% 25% 2017 Xtract Research 14

15 EBITDA Add-Backs % EBITDA Cap on Add-Backs for Cost Savings & Synergies 10 Sponsors % 52% 54% 53% 4 25% 38% 41% 4% 17% 9% 9% 6% 15% 25% 4Q16 1Q17 2Q17 3Q Xtract Research 15

16 EBITDA Add-Backs % EBITDA Cap on Add-Backs for Cost Savings & Synergies 10 Non-Sponsors % 4 45% 4 42% 24% 25% 18% 17% 18% 18% 12% 12% 15% 25% 17% 4Q16 1Q17 2Q17 3Q Xtract Research 16

17 EBITDA Add-Backs % EBITDA Cap on Add-Backs for Cost Savings & Synergies 10 Middle Market % 4 32% 42% 44% 36% 44% 5% 25% 21% 19% 13% 6% 15% 25% 4Q16 1Q17 2Q17 3Q Xtract Research 17

18 EBITDA Add-Backs 10 % of Add-Back Provisions that Have a Time Limit on Realization of Cost Savings, LTM % 4 Sponsors Non-Sponsors Middle Market 2017 Xtract Research 18

19 EBITDA Add-Backs 10 % of Add-Back Provisions that Have a Time Limit on Realization of Cost Savings % 89% 91% 92% 67% 59% 79% 94% 77% 87% 96% 4 Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 19

20 EBITDA Add-Backs 10 Months within which Realization must Occur or be Expected to Occur, LTM % 47% 33% 24% 32% 23% 39% 28% 16% 11% Sponsors Non-Sponsors Middle Market No Limit 2017 Xtract Research 20

21 EBITDA Add-Backs Months within which Realization must Occur or be Expected to Occur Sponsors 34% 33% 32% 29% 26% 28% 28% 26% 27% 24% 25% 23% 19% 19% 11% 12 Months 18 Months 24 Months No Limit 4Q16 1Q17 2Q17 3Q17 18% 2017 Xtract Research 21

22 EBITDA Add-Backs Months within which Realization must Occur or be Expected to Occur 10 Non-Sponsors % 42% 38% 38% 26% 27% 25% 21% 21% 21% 15% 17% 15% 9% 9% 12 Months 18 Months 24 Months No Limit 4Q16 1Q17 2Q17 3Q17 21% 2017 Xtract Research 22

23 EBITDA Add-Backs Months within which Realization must Occur or be Expected to Occur Middle Market 54% 4 45% 34% 32% 27% 28% 27% 24% 21% 21% 22% 18% 14% 4% 12 Months 18 Months 24 Months No Limit 4Q16 1Q17 2Q17 3Q17 9% 2017 Xtract Research 23

24 Cash Netting 10 % of Agreements with Uncapped Cash Netting, LTM % 6 66% 4 Sponsors Non-Sponsors Middle Market 2017 Xtract Research 24

25 Cash Netting 10 % of Agreements with Uncapped Cash Netting 9 91% 92% 8 83% 75% 78% 71% % 58% 61% 64% 38% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 25

26 2017 Xtract Research 26

27 Freebie Amounts % of 'Freebies' with a Fixed Dollar Cap vs. a Greater of $Amount and % of EBITDA 'Grower' Formulation, LTM % 4 51% 49% 39% Sponsors Non-Sponsors Middle Market Fixed $Amount Grower 2017 Xtract Research 27

28 Freebie Amounts 10 % of 'Freebies' with a 'Grower' Formulation % 65% 4 48% 44% 48% 23% 25% 13% 6% 8% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 28

29 Freebie Amounts 10 % EBITDA Cap on 'Grower' Prong of 'Freebie' Amount, LTM % 86% 72% % 14% 14% Sponsors Non-Sponsors Middle Market <10 EBITDA = 10 EBITDA 2017 Xtract Research 29

30 Freebie Amounts % EBITDA Cap on 'Grower' Prong of 'Freebie' Amount 10 Sponsors % 79% 71% 4 31% 21% 29% <10 EBITDA =10 EBITDA 4Q16 1Q17 2Q17 3Q Xtract Research 30

31 Freebie Amounts % EBITDA Cap on 'Grower' Prong of 'Freebie' Amount Non-Sponsors % 4 33% <10 EBITDA =10 EBITDA 1Q17 2Q17 3Q Xtract Research 31

32 Freebie Amounts % EBITDA Cap on 'Grower' Prong of 'Freebie' Amount Middle Market % 88% 75% % 18% 12% <10 EBITDA =10 EBITDA 4Q16 1Q17 2Q17 3Q Xtract Research 32

33 Evergreen Freebies 10 % of Provisions that Permit 'Freebie' Usage to be Reclassified to Ratio Prong, LTM % 6% Sponsors Non-Sponsors Middle Market 2017 Xtract Research 33

34 Evergreen Freebies 10 % of Provisions that Permit 'Freebie' Usage to be Reclassified to Ratio Prong % 32% 29% 28% 22% 18% 16% 5% 4% Sponsors Non-Sponsors Middle Market 23% 4Q16 1Q17 2Q17 3Q Xtract Research 34

35 2017 Xtract Research 35

36 Type of Covenant 10 LTM Period % 6 69% 58% 4 42% 31% 14% Sponsors Non-Sponsors Middle Market Maintenance Cov-Lite 2017 Xtract Research 36

37 Type of Covenant 10 Sponsors % 81% 84% 88% 6 4 7% 19% 16% Maintenance 12% Cov-Lite 4Q16 1Q17 2Q17 3Q Xtract Research 37

38 Type of Covenant 10 Non-Sponsors % 74% 67% 4 38% 26% 33% Maintenance Cov-Lite 4Q16 1Q17 2Q17 3Q Xtract Research 38

39 Type of Covenant 10 Middle Market % 57% 4 43% 32% Maintenance Cov-Lite 4Q16 1Q17 2Q17 3Q Xtract Research 39

40 2017 Xtract Research 40

41 Grower Baskets 10 % of Covenant Packages that contain Baskets with a %Assets or %EBITDA 'Grower" Formulation, LTM % 64% 4 42% 31% 22% 23% 24% 13% 12% 4% Sponsors Non-Sponsors Middle Market %Assets %EBITDA Both No Grower 2017 Xtract Research 41

42 Grower Baskets % of Covenant Packages that contain Baskets with a %Assets or %EBITDA 'Grower' Formulation 10 Sponsors % 69% 79% 4 48% 37% 23% 15% 15% 16% 13% 14% %Assets %EBITDA No Grower 4Q16 1Q17 2Q17 3Q17 8% 2017 Xtract Research 42

43 Grower Baskets % of Covenant Packages that contain Baskets with a %Assets or %EBITDA 'Grower' Formulation 10 Non-Sponsors % 47% 48% 43% 29% 33% 35% 35% 33% 14% 12% 6% 4% 13% 4% %Assets %EBITDA Both No Grower 4Q16 1Q17 2Q17 3Q Xtract Research 43

44 Grower Baskets % of Covenant Packages that contain Baskets with a %Assets or %EBITDA 'Grower' Formulation 10 Middle Market % 75% 12% 32% 27% 18% 17% 13% 7% %Assets %EBITDA No Grower 18% 4Q16 1Q17 2Q17 3Q Xtract Research 44

45 Ratio Debt 10 % of Agreements that Permit Ratio Debt, LTM % 82% 6 69% 4 Sponsors Non-Sponsors Middle Market 2017 Xtract Research 45

46 Ratio Debt 10 % of Agreements that Permit Ratio Debt 9 91% 91% 94% 8 82% 81% 82% 83% 83% 6 73% 64% 68% 4 Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 46

47 Builder Basket Basis 10 Basis on which Builder Basket (Available/Cumulative Amount) Builds, LTM % 6 56% 4 38% 43% 43% 25% 14% 5% 3% Sponsors Non-Sponsors Middle Market Retained ECF CNI Other 2017 Xtract Research 47

48 Builder Basket Basis Basis on which Builder Basket (Available/Cumulative Amount) Builds 10 Sponsors % 62% 4 51% 43% 44% 36% 31% 2% 6% 7% Retained ECF CNI Other 4Q16 1Q17 2Q17 3Q17 6% 2017 Xtract Research 48

49 Builder Basket Basis Basis on which Builder Basket (Available/Cumulative Amount) Builds 10 Non-Sponsors % 45% 45% 33% 38% 29% 17% 17% 14% Retained ECF CNI Other 5% 4Q16 1Q17 2Q17 3Q Xtract Research 49

50 Builder Basket Basis Basis on which Builder Basket (Available/Cumulative Amount) Builds 10 Middle Market % 54% 61% 54% 4 31% 38% 41% 5% 8% 9% Retained ECF CNI Other 4Q16 1Q17 2Q17 3Q17 5% 2017 Xtract Research 50

51 Builder Basket Starter Amount 10 % of Builder Baskets that contain a Seeded/Starter Amount with a 'Grower' Formulation instead of a Fixed Dollar Amount, LTM % 25% 6% Sponsors Non-Sponsors Middle Market 2017 Xtract Research 51

52 Builder Basket Starter Amount 10 % of Builder Baskets that contain a Seeded/Starter Amount with a 'Grower' Formulation instead of a Fixed Dollar Amount % 4 37% 38% 39% 39% 28% 23% 13% 9% 6% Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 52

53 Leverage-Based RP Carveouts 10 9 % of RP that Contain the Basket, LTM 8 83% 6 68% 4 Sponsors Non-Sponsors Middle Market 2017 Xtract Research 53

54 Leverage-Based RP Carveouts % of RP Carveouts that Contain the Basket % 8 76% 81% 84% 71% 83% 87% 75% 6 62% 57% 58% 64% 4 Sponsors Non-Sponsors Middle Market 4Q16 1Q17 2Q17 3Q Xtract Research 54

55 Conditions of Use and Legal Disclaimer This report is a product of Xtract Research. All information contained herein is protected by copyright law and may not be copied, reproduced, transferred, distributed, published, or resold in any manner or by any means whatsoever without express written consent from Xtract Research. This report is not intended and should not be construed as legal advice. Xtract Research does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice. The information contained in this report is for informational purposes only. All information is sourced from either the public domain or our subscribers, and Xtract Research cannot and does not verify or guarantee the adequacy, accuracy, or completeness of any source document. No representation is made that the information contained herein is current, complete, or accurate. The information contained herein is not intended to be relied on or used as a basis for investment decisions and does not constitute an offer to buy or sell any securities or a recommendation to pursue any particular investment strategy. Xtract Research does not provide investment advice and accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein Xtract Research 55