Junior Debt Market Analysis

Transcription

1 Junior Debt Market Analysis Q Q KeyBanc Capital Market s Private Capital Group The Private Capital Group at KeyBanc Capital Markets ( KBCM ) is a dedicated private capital effort responsible for the private placement of debt and equity securities with substantial expertise across industries and investment stages. Primarily, we place minority equity investments and junior / subordinated debt for middle market companies with institutional investors. Through extensive transaction experience, deep expertise in focused KBCM verticals and industry established relationships with institutional and private investors, the Private Capital Group helps clients raise capital for growth, liquidity events, ownership transitions, recapitalizations and acquisitions. For additional information regarding KBCM's Private Capital Group or this newsletter, please contact the individuals listed below: Andrew Frawley afrawley@key.com Ante N. Turcinov aturcinov@key.com

2 Disclosure KeyBanc Capital Markets ( KeyBanc or KBCM ) 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 by its licensed securities representatives. Banking products and services are offered by KeyBank N.A. A number of our corporate and institutional team members are employed by both KeyBanc Capital Markets Inc. and KeyBank N.A. These dual employees are licensed securities representatives of KeyBanc Capital Markets Inc., and they are there to better serve your needs, by making available both securities and banking products and services. Further, in connection with our effort to deliver a comprehensive array of banking and securities products and services to you in a seamless manner, from time to time KeyBank N.A. and KeyBanc Capital Markets Inc. will share with each other certain non-public information that you provide to us. Of course, as always, this information will not be shared or otherwise disclosed outside of the KeyCorp organization without your express permission. Please also be assured that, as with other banks and broker-dealers, KeyBank N.A. and KeyBanc Capital Markets Inc. adhere to established internal procedures to safeguard your corporate information from areas within our organization that trade in or advise clients with respect to the purchase and sale of securities. KEYBANC CAPITAL MARKETS INC. IS NOT A BANK OR TRUST COMPANY AND IT DOES NOT ACCEPT DEPOSITS. THE OBLIGATIONS OF KEYBANC CAPITAL MARKETS INC. ARE NOT OBLIGATIONS OF KEYBANK N.A. OR ANY OF ITS AFFILIATE BANKS, AND NONE OF KEYCORP S BANKS ARE RESPONSIBLE FOR, OR GUARANTEE, THE SECURITIES OR SECURITIES-RELATED PRODUCTS OR SERVICES SOLD, OFFERED OR RECOMMENDED BY KEYBANC CAPITAL MARKETS INC. OR ITS EMPLOYEES. SECURITIES AND OTHER INVESTMENT PRODUCTS SOLD, OFFERED OR RECOMMENDED BY KEYBANC CAPITAL MARKETS INC., IF ANY, ARE NOT BANK DEPOSITS OR OBLIGATIONS AND ARE NOT INSURED BY THE FDIC. This information is provided in confidentiality and is not to be shared by the principals with third parties. Junior Debt Market Analysis 2

3 KeyBanc Capital Markets and Private Capital Group Overview KeyBanc Capital Markets and Private Capital Group Corporate and Investment bank focused on the middle market Capital Markets Products and Services: Mergers & Acquisitions Debt and Equity Capital Markets Debt Capital Markets Private Capital Over 550 bankers in 10 offices: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Houston, New York, San Francisco and Seattle Over 60 senior and associate equity research analysts, tracking more than 500 companies across four major industry sectors The Private Capital Group ( PCG ) is a dedicated private capital effort responsible for the private placement of debt and equity securities Substantial expertise across industries and investment stages Place minority equity investments and junior / junior / subordinated debt for middle market companies with institutional investors Select Transactions June 2013 $237,000,000 Senior Secured Credit Facilities Joint Lead Arranger, Joint Bookrunner & Administrative Agent December 2012 $16,000,000 Private Placement Exclusive Financial Advisor April 2013 $180,000,000 Senior Secured Credit Facility Joint Lead Arranger, Joint Bookrunner & Administrative Agent January 2012 has received a minority investment from Exclusive Financial Advisor and Sole Placement Agent March 2013 $25,000,000 Private Placement Sole Placement Agent November 2011 has received funding from $75,000,000 Private Placement Exclusive Financial Advisor and Sole Placement Agent I. Executive Summary March 2013 has acquired the Supply Chain Operation of $110,000,000 Senior Secured Credit Facilities Sole Lead Arranger, Sole Bookrunner & Administrative Agent October 2011 a portfolio company of has been acquired by Co Sell-Side Advisor September 2010 September 2010 September 2010 August 2009 a portfolio company of a portfolio company of has received funding in the form of $6,000,000 Series A Convertible Preferred Stock from $65,000,000 Senior Secured Credit Facility $15,000,000 Private Placement Mezzanine Debt Senior Secured Credit Facilities Common Stock Offering Headquarters: Cleveland, OH Sole Corporate Banking Offices (14 States) Co Sell-Side Advisor Exclusive Financial Advisor Exclusive Financial Advisor and Sole Placement Agent Financial Advisor Sole Community Banking Offices (11 States) Combined Corporate and Community Banking Offices (3 States) Junior Debt Market Analysis 3

4 Executive Summary Since Q2 of 2011, KeyBanc Capital Markets has conducted 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 less than $50 million of EBITDA Our survey and resulting newsletter is an attempt to address the lack of market information noted above I. Executive Summary We have been conducting our survey for the last eight quarters and have aggregated the data for review and analysis In this study, we share with you the results of our survey from the past two years and provide other anecdotal observations to bring you our state-of-the-market perspective Junior Debt Market Analysis 4

5 Executive Summary (cont d) In a typical quarter, junior capital providers who respond to our survey: I. Executive Summary Fund Overview Transaction Flow / Closed Transactions Transaction Structure Terms and Conditions Have $210.3 million available to invest A typical investment size of $16.7 million per transaction May or may not need to begin fundraising in the next twelve months, but expect that process to take 11.3 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 63. involving a sponsor Look at 36.6 opportunities across a broad range of industries Submit 4.8 LOIs Close 1.8 transactions Of note, on average, ~3 of funds do not close any transactions during a given quarter For completed transactions Senior debt to EBITDA multiple is 3.1x Total debt to EBITDA multiple is 4.1x The typical capital structure includes 16. of junior debt 34. of equity The average Cash pay rate is 12. Average PIK rate is 3.1% Total expected IRR is % of transactions have warrants equal to 4. of the fully-diluted equity The average no call period (or lack thereof) is highly negotiated on a transactionto-transaction basis The average prepayment penalty is 3. (in the first year) Junior Debt Market Analysis 5

6 Debt providers continue to consider a broad range of industries and many continue to be industry generalists Almost half of our respondents do not have any industry focus There is general consistency over the last four quarters II. Fund Profiles Industries of Interest Business Services Industrial Manufacturing Transportation & Logistics Healthcare Technology Information Services Professional, Scientific, and Technical Services Education Consumer Finance & Insurance Energy and Utilities Construction, Eng. and Infrastructure Services Basic Materials Hospitality Real Estate Media & Telecom Other Do not have any industry specialization Q % % 3 12% 12% 12% 2% - - 4% 3 Q % 16% 34% % 21% 2% - 2% 41% Q % 3 41% 2 46% 1 22% 1 2% 2% 4% 4 Q % Junior Debt Market Analysis 6

7 II. Fund Profiles Capital for Deployment Significant capital remains available as debt providers flush with cash continue to seek investment opportunities 59.3% of funds reported having more than $100 million of capital available Funds with more than $100 million to invest have become a larger part of the overall market Increased competition for opportunities / lack of companies seeking capital may be driving increased levels of capital available 10 12% 12% 12% 16% % 26% 22% % 46% 3 43% 32% % % 21% 23% 16% 21% 22% 1 Typical Investment Size 72. of respondents indicated having a typical investment size of $5 - $25 million Debt providers seeking to place at least $25 million per investment have almost tripled since Q Larger funds seeking to deploy capital efficiently, i.e. in larger amounts 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 Investments of <$5 million have decreased significantly over the past eight quarters <$50M $50M - $99M $100M - $250M $251M - $500M >$500M % 16% 1 23% 2 31% 23% 31% 34% % 43% 36% 46% 3 42% 3 23% 1 4% <$5M $5M - $10M $11M - $25M $26M - $50M >$50M Junior Debt Market Analysis 7

8 II. Fund Profiles Commentary New Fund Raises in the Next Twelve Months Given current capital availability and competition among providers, anticipated fundraising activity remains modest As expected, ~ 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 substantially longer than 6 months to raise a new fund believe fundraising would take more than a year 10 11% % 44% % 4 36% % 41% 41% 46% 46% 2 Yes No Undecided Time Needed to Raise a New Fund % % 4% 23% % 3 43% Q Q Q Q Q Q Q Q <6 months 6-12 months months >18 months Junior Debt Market Analysis 8

9 III. Transaction Flow Commentary Portfolio Investment Sources Sponsors continue to be an important avenue for opportunities They typically represent 4 to of leads They represent ~6 of closed transactions 10 26% 23% 26% 21% 1 12% 4 43% % % 21% 26% 21% % 26% Q Q Q Q Q Q Q Q Investment Banks PE Sponsor Groups Other Mezzanine Funds Other Sponsored vs. Non-Sponsored Sources % % 3 34% 3 64% 5 62% 63% 64% 62% 66% 61% 72% Sponsored Non-Sponsored Junior Debt Market Analysis 9

10 III. Transaction Flow Commentary Transactions Reviewed The number of participants closing at least one transaction increased from in Q to 81% in Q Significantly more respondents executed at least one transaction in 2011 vs. 2012, a result of current market conditions which include: Substantial capital (both senior and junior) chasing too few opportunities More aggressive transaction structures Seasonality Although we have a limited sample set, there seems to be an indications that Q1is a slow quarter for closed transactions In both Q and 2013, or more of respondents did not close a transaction % % 3 34% 23% 26% 3 43% 1 22% 31% Q Q Q Q Q Q Q transactions 1-5 transactions 6-10 transactions transactions transactions >50 transactions LOIs Submitted Transactions Closed 10 4% 4% 1 23% % 26% % 6 71% % 3 11% 10 6% 1 12% 6% 26% 16% 11% 12% % % % 3 21% 31% 23% 21% 4% 0 LOIs 1-5 LOIs 6-10 LOIs >10 LOIs Junior Debt Market Analysis 10

11 Senior Debt The majority of transactions are being completed at 2.0x 3.5x senior leverage III. Transaction Flow Senior 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 Q % % Q Q Q % % 4.1% 2. - Q % 7.4% % Q % 17.4% % 15.2% 2.2% - - Q % 28.6% 33.3% Total Debt Over the past several quarters, most completed transactions had 3.1x 5.0x total leverage 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 Q % % 13.3% % Q % Q % Q % 18.4% % Q % - 7.4% % 29.6% Q % 2.2% 4.3% % 26.1% 10. Q % Junior Debt Market Analysis 11

12 Commentary Cash pay has remained consistent in the 11% - range, with 12% remaining (by far) the most common coupon In our experience, the combination of cash pay plus PIK plus other elements of return is remarkably consistent from quarterto-quarter and year-to-year The majority of respondents aim for a base-case total IRR requirement of 1-1 with a smaller percentage targeting total returns greater than The consistency in absolute return expectation is surprising, i.e., why does it not contract in strong credit markets and expand in weak credit markets? I have heard the joke that mezz has been 12 plus 2 since the Kennedy administration (referring to 12% cash pay and 2% PIK) Junior lenders prefer to differentiate themselves on other transaction terms, i.e. prepayment penalties, no call periods, etc. The average expected IRR over the past eight quarters has been 16. Currently, most PIK rates are 2% Average PIK rate over the past eight quarters has been 3. Increasing occurrence of no PIK rate over the past five quarters There appears to be some (limited) elasticity in pricing as it relates to PIK rates IV. Transaction Specifics Cash Payment Requirement 10 6% 1 11% 16% 1 6% % 64% 5 63% 62% 5 43% 64% % 1 16% 2 6% 6% <1 1 11% 12% 1 >1 PIK Rate Requirement % 1 26% 16% 31% % 5 66% 5 41% % 1 Rarely or Never Have PIK Rate 1% 2% 3% 4% > Total IRR Requirement % 6% 6% % 2 6% 1 11% % 34% % 6% Q Q Q Q Q Q Q % 1 16% 1 2 >2 Junior Debt Market Analysis 12

13 IV. Transaction Specifics Percentage of Transactions with Warrants / Equity Upside Over the past eight quarters, approximately 8 of respondents indicated that their transactions have either warrants or equity upside Has remained fairly consistent across the past eight quarters The amount of warrants / equity upside as noted in survey responses is substantially higher than we have seen (anecdotally) in the market We have recently begun to distinguish purchased equity versus not purchased equity in our survey to help us refine our analysis going forward 10 26% 2 36% 31% 2 22% 41% % % 12% 6% 16% 1 11% 2 6% 12% 16% 12% 12% 1 16% Never 1 11% - 26% - 51% Warrant Positions as Percentage of Fully-Diluted Equity Approximately 5 of the respondents reported warrant positions that represented or more of fully diluted equity Average of 4. of fully-diluted equity Not only is the incidence of equity upside more commonly noted in our survey results (as noted 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 10 34% 34% 3 32% 4 43% 1 23% % 2 11% 11% 1 6% 23% % % 1 6% 11% 1 1% 2% 3% 4% > Junior Debt Market Analysis 13

14 IV. Transaction Specifics Percentage of Transactions with No-Call Periods Most respondents reported having some form of call protection over the past eight quarters On average, 34.6% of respondents indicated that they have no call protection in place (across past eight quarters), while 23.1% indicated they have it in all cases 2 11% Clearly a highly negotiated point that differs from transaction to transaction 42% % % 23% 2 21% 2 6% 2 32% 2 16% 11% 3 36% Q Q Q Q Q Q Q Q % % - 26% - 51% Percentage of Transactions with Prepayment Penalties The vast majority of transactions (>9) have some form of prepayment penalty Interestingly, a small but consistent percentage of respondents ( - ) report having no prepayment penalty in place for transactions that occurred over the past eight quarters 10 66% % 62% 2 12% 11% 1 16% 2 22% 2 6% 6% 6% 6% 6% Q Q Q Q Q Q Q Q % % - 26% - 51% Junior Debt Market Analysis 14

15 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 More respondents (~6) 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 V. Second Lien Willingness to Complete a Second Lien Deal 10 22% 32% 31% 26% % 81% 74% 73% Q Q Q Q Q Q Q Q Yes No Second Lien Providers are Active Market Participants 10 Willingness to Provide a Unitranche Structure % 61% % 5 61% 63% % 4 53% 51% 44% 3 62% 62% 3 43% % 56% 6 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Yes No Yes No Junior Debt Market Analysis 15

16 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 five 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 36% 44% 31% 26% 6% 6% 6% % 12% 16% 1 16% 1 21% 21% 21% 21% 22% 23% 22% 21% 22% 23% 21% 23% 2 21% 22% 22% Q Q Q Q Q Q Q Q Debt Market Unitranche Structure Capital Provider Competition Company Uncertainty Economy Other Junior Debt Market Analysis 16