Debt Market Snapshot January 22, 2013

Transcription

1 Peter Kline, Managing Director Richard Jones, Managing Director Michael Mahoney, Managing Director Daniel Chapman, Managing Director Jeffrey Duncan, Managing Director Kavian Boots, Managing Director Investment Grade Loan Market Market Commentary: Coming on the heels of a blockbuster year in the investment grade loan market in 2011, few market participants expected loan volume in 2012 to even come close to that of the previous year. In fact, investment grade loan volume declined 28% to $610 billion. Yet despite the anticipated decline, the fourth quarter witnessed a flurry of activity with $175 billion in issuance as some corporates rushed to finance dividends and stock buybacks in anticipation of higher tax rates, while others executed simple amends and extends to add one more year onto the tenor of their existing facilities. This activity was driven in large part by the concern that new provisions proposed by the Basel Committee and expected to be implemented by national bank regulators would increase pricing since the provisions will make it more expensive for banks to commit capital. Lenders (and borrowers) breathed a collective sigh of relief in early January when the Basel Committee announced a phasing in of the Liquidity Coverage Ratio and an expansion of assets counted as buffer, which was to be fully implemented in 2015 but now will phase in over Additionally, in November 2012 the Fed, FDIC, and OCC postponed Basel III implementation in the U.S. until an unspecified date. These developments bode well for a continued stable pricing environment. Indicative Corporate Investment Grade Pricing Grid Undrawn Cost (bps) Drawn Cost (bps) Traditional Grid CDS-Based Grid Rating 364-day Multi-year Drawn* Floor* Cap* AA A A A- N/A N/A N/A BBB+ N/A N/A N/A BBB N/A N/A N/A BBB- N/A N/A N/A BB+ N/A N/A N/A Source: U.S. Bank National Association * Spread to LIBOR This grid is subject to change and is indicative in nature only. Freeport-McMoRan Copper & Gold BBB/Baa3 Freeport-McMoRan Copper & Gold (FCX) is a leading international mining company. It recently announced plans to acquire Plains Exploration & Production Company (PXP) and McMoRan Exploration Company (MMR), both of which are engaged in the upstream oil and gas business. The company has obtained an underwritten commitment of $9.5 billion in credit facilities to finance the acquisitions including a $4 billion term loan A and a $5.5 billion bridge loan to be taken out with bonds. Additionally, the company expects to upsize its existing $1.5 billion revolver to $3 billion. Opening pricing is LIBOR Mid-Corporate Loan Market Market Commentary: Despite periodic market rumblings due to the U.S. fiscal cliff and continued weak economic conditions, the Mid-Corporate loan market ended 2012 with a positive tone. While a Basel III regulatory overhang is beginning to affect the large corporate segment, the effect is much less pronounced for the clubbier Mid-Corporate segment, where Basel is still more of a talked-about rather than a structure-around type of issue. Mid-Corporate pricing was flat through most of 2012 and certainly lower than for deals that were closed prior to the first half of 2011, so a number of midcorporates came to market in late 2012 and already in January 2013 to re-price existing deals. In addition to the Noteworthy Deal highlighted below, several other companies have recently refinanced 5-year revolvers that were put in place only 18 to 24 months ago. In these deals, spreads were sliced by 37.5 to even 62.5 bps, unused fees were trimmed by 5 to 15 bps, and upfront fees were much lower than those offered with the original deal, with old money/ new money upfront fee models being used sometimes for deals as old as 2 years. Market acceptance for these deals is not indiscriminate, as most of these companies don t have significant non-credit fees to offer, and arrangers have sometimes pushed pricing to the edge of acceptability, prompting some banks to drop if the deal fails to meet minimum return hurdles. Indicative Mid-Corporate Grade Pricing Grid Leverage Unused Fee (bps) All-In Drawn (bps) > < < < < Source: U.S. Bank Nat ional Association. Note: Pricing grid considers indicat ive pricing for t raditional commercial and corporat e borrowers (i.e., non-sponsored and non-leveraged) with EBITDA in excess of $50mm. Consumer Services Company Sales approx. $1.5 billion TD/EBITDA approx. 1.0x The Company has historically operated with low cash flow leverage, and usage under its revolving credit is primarily for letters of credit. The Company is in the process of refinancing its existing $350 million revolving credit for a new 5-year term. The prior 5- year facility was established in 1Q11 and has drawn pricing of 175 bps at the > 1.0x but < 1.5x tier. Pricing on the new facility is proposed at a drawn spread of 125 bps for that same tier of the pricing grid, and the unused fee is dropping to 20 bps from 30 bps. The drawn spreads at almost all of the other tiers are also being cut by 50 bps. Financial covenants are remaining essentially unchanged, with a maximum Total Debt to EBITDA of 3.5x and a minimum Fixed Charge Coverage ratio of 1.5x. Upfront fees are 10 bps for recommitments of old money and tiered upfronts (17.5 to 25 bps) for new money, as compared to fees that ranged from 30 to 50 bps two years ago. The new facility is being syndicated with a subset of the existing bank group, as several existing lenders are not re-committing to the new facility. The aggressive reduction in pricing here as well as the use of a less-expensive old money/new money model for upfront fees are noteworthy given the low level of usage. Market commentary is provided by U.S. Bank 1

2 Peter Kline, Managing Director Richard Jones, Managing Director Michael Mahoney, Managing Director Daniel Chapman, Managing Director Jeffrey Duncan, Managing Director Kavian Boots, Managing Director Leveraged Loan Market Market Commentary: Without an extensive calendar of new loans on the horizon, investors are committing large dollar amounts to transactions in Indicative Leveraged Pricing the market. Strong demand is ranging from traditional loan investors to Average New-Issue Pricing (YTM) high-yield, where managers have similarly not seen a large inflow of deals. LCD s forward pipeline shows a modest $28.2 billion of deals either in-ornear syndication, causing the yield to maturity on new B+/B institutional loans to fall to 5.79% from 5.93% the prior week amid pent-up investor demand. Beyond a handful of deals already in process, including Carlyle Ratings BB/BB- B+/B Jun % 7.59% Sep % 5.79% Oct % 5.67% Jan % 5.79% Source: Standard & Poor's LCD Group s $4.9 billion LBO of DuPont Performance Coatings and Apollo s As of January 17, 2013 $2.5 billion LBO of McGraw-Hill Education, the LBO pipeline appears to be less than robust. Dividend recaps are likely to slow from the rapid pace of the fourth quarter simply because so many issuers already came to market before potential changes in the tax law took effect. Bankers are expecting volumes may decline in the first quarter from a year ago. On the investor side of the equation, capital inflows are expected to continue from CLO s, mutual funds and institutional allocations. The CLO pipeline is strong as managers tap into demand, with CLO issuance in early 2013 expected to continue at the $7-8 billion per month rate seen in the fourth quarter. Add to that a potential $2-4 billion per month of retail and institutional allocations and net new capacity per month could be in the $9-12 billion range, assuming no macro surprises. For the time being it appears that strong loan demand has increased deal capacity to levels not seen since Middle-market loans yielded record premiums, averaging 98 bps, over large-cap credits in the fourth quarter. As premiums climbed to record levels, leverage increased, with average middle-market total leverage of 4.5x up from 4.3x in the third quarter. On a senior basis, leverage averaged 4.4x in the fourth quarter compared to 3.7x in the third quarter. If the broader market remains quiet, middle-market pricing may decline this quarter as investors search for paper. The S&P / LSTA Leveraged Loan Index returned 0.3% for the week ended 1/16, bringing YTD loan returns to 0.71%, down from 1.07% during the same period in The BB/BB and B+/B indices returned 0.57% and 0.91% YTD, respectively, down from 0.91% and 1.35%, respectively through YTD Packaging Film Manufacturer U.S. Bank was Lead-Left Arranger and Joint Bookrunner on a $160 million senior secured set of facilities for a leading producer of polyethylene films for packaging applications. The $25 million revolver, $120 million term loan and $15 million delayed-draw term loan, all four-year facilities, partially supported the acquisition of a rival firm resulting in senior leverage of 3.3x and total leverage of 4.5x. Pricing on the deal, which closed in December, was L+5.00% with a LIBOR Floor of 1.00%. Asset Based Finance Market Market Commentary: Activity in the asset-based financing market rebounded at the tail end of 2012, but FY 2012 volume of $80.7 billion was still down 25.3% on a year-to-year basis from a record 2011, according to Thomson Reuters/LPC. Opportunistic dividend recaps highlighted much of the year-end uptick, while refinancings slowed. The trend toward more new-money and event-driven financings is expected to continue into Drawn pricing remained relatively steady at attractive rates for issuers throughout 2012, with a modest increase for more storied credits and larger transactions. The covenant-lite institutional term loan remains a very popular product with ABL issuers, as companies such as Northern Tool & Equipment and Wesco Distribution closed term loans alongside new ABL revolvers in December. Earlier this month, SUPERVALU Inc. announced a refinance, in conjunction with a spin-off of some of its banner stores, that includes a $1.5 billion covenant-lite term loan B with a new $900 million ABL revolver. U.S. Bank will act as Joint Lead Arranger and Co-Underwriter on the ABL revolver. Indicative Asset Based Pricing Grid LIBOR Spreads Deal Size Credit Fundamentals <$125mm > $125mm Strong/Stable Story Credits Undrawn pricing typically ranges from 25.0 to 37.5 bps, with a grid that is inversely related to usage of the facility. Leslie s Poolmart, Inc. Swimming pool and pool supply retailer Phoenix, AZ B/B3 Corporate Rating U.S. Bank served as Joint Lead Arranger, Joint Bookrunner and Syndication Agent on a new $125 million, 5-year ABL revolving credit facility for Leslie s Poolmart, Inc. The new ABL facility, along with a new $575 million covenant-lite institutional TLB and $50 million delayed-draw TLB, supports a one-time distribution to shareholders and refinances existing debt. Market commentary is provided by U.S. Bank 2

3 Terry Martin, Managing Director Violet Grecu, Vice President David Wood, Managing Director Michael Dullaghan, Managing Director Amanda Lamberti, Vice President Private Placements Market Market Commentary: Private Placement Market activity got off to a strong start in the new year. Approximately 13 new issues representing over $1.6 billion of volume launched to market ahead of the annual Private Placement Industry Conference this week. This solid activity is on the heels of record-setting issuance in Full year 2012 saw around $60 billion in total volume, representing over 250 transactions. WiththemodestriseinU.S.TreasuryyieldsinJanuary,wehaveseenapick-upin client inquiry, as clients consider locking in coupons that remain near historical lows. To take advantage of these favorable coupons, many issuers have recently issued private placements with delayed funding options to lock-in today s attractive rates. Some investors are pushing tenor to capture higher coupons, although strong appetite remains at the shorter end of the curve. NAIC Rating 5-Year (bps) 7-Year (bps) 10-Year (bps) Private Placement Spreads to U.S. Treasury (if available) (if available) (if available) Source: Private Placement M onitor (as of December 2012) Please note that actual pricing will be sector and issuer specific. Given this and the market s volatility; drastic spread changes could occur at anytime. Please contact Terry M artin at (646) to review and discuss potential individual basis. Utilities U.S. Bancorp Investments, Inc. served as Joint Lead Placement Agent on the $200 million private placement offering for a utility. The offering included the following tranches: (i) $125 million of 10-year bullet Senior Notes priced at T+125 bps or a 3.09% coupon; (ii) $75 million of 30-year bullet Senior Notes priced at T+145 bps or a 4.48% coupon. The transaction was welloversubscribed with over $600 million in investor bids, and upsized from an original $150 million launch amount. In total 14 investors participated in the offering. U.S. Bancorp successfully raised 75% of the bids and brought in 9 of the investors. Public Debt Market High Grade Market Commentary (for the week ended January 18) A return to tradition has kept high grade markets active in the early goings of Last week s record shattering $41.60 billion in supply, led by the customary January Yankee funders, was followed up by a massive $ billion week driven by domestic bank supply post-earnings. Goldman Sachs (A3/A-) and JP Morgan (A2/A) both brought $6 billion offerings to market this week, capitalizing on the market s appetite for high beta credits in one instance, and from a JPM trade that was anchored by a $1 billion reverse that allowed them to price their offering virtually on top of secondary paper in the second. The long awaited ConAgra (Baa2/BBB-) acquisition financing of Ralcorp came to market, pricing $3.975 billion between 3s-5s-10s-30s, paying only a slight concession, and attracting over $20 billion in orders. Leverage will jump to an estimated 4.0x in theprocess,thoughcaghasstatedthatdebtreductionwillbeakeyfocusoverthenextcoupleofyears.anheuser-buschinbev(a3/a)brought$4billionof 3s-5s-10s-30, priced with an 11 bps concession, while attracting $7.50 billion in total orders. In contrast, their last deal in July (the acquisition financing of Grupo Modelo), generated $28 billion in orders and highlights that while low beta names have no trouble bringing deals, investors have shown some price sensitivity in their transactions, and the negative concessions possible last summer/fall have been tougher to come by for such credits. Zoetis (Baa2/BBB-), the animal health business of Pfizer, came with its debut debt offering of $3.65 billion of 3s-5s-10s-30s. With no outstanding issues to use as comps, investors looked to names like Celgene, Mylan, and Watson Pharmaceuticals to determine relative value. January is already approaching $89 billion in supply, surpassing consensus estimates of an $85 billion figure for the month. The week was characterized by jumbo trades, as only 18 issuers brought the $35 billion, and 6 issuers alone accounted for $26 billion (NAB,ABIBB,CAG,PFE,GS,JPM). We continue to see high beta and BBB credits outperform their higher rated/low beta counterparts in new issue, as investors search for yield with aggregate corporate spreads near multi-year lows. Estimates for the week of January 22 are for the frantic pace of January to moderate, with an estimated $20 billion calendar on tap. If the reported debt ceiling compromise that helped boost markets solidified in the holiday shortened week, we could see some upside to next week s estimates. High Yield Market Commentary (for the week ended January 18) There was a steady flow of new issues in the high yield market as twenty issuers priced deals for just under $8 billion in volume. That brings us to about $15.5 billion on the month, with two weeks left to go. Seven of the deals which priced last week, priced with sub-5% yields. This includes Brocade Communications which priced with a 4.625% yield, the lowest yield on a 3-B rated (B1/BB+) issue, beating out previous record holder AMC, which priced a deal in December that yielded 4.75%. Performance of new issues was good for the most part this week. While most were up a point and some as many as four points, there were a handful that were flat to up only marginally. Secondary spreads continue to tighten and we continue to hit new lows for the average yield to maturity. After hitting a fifty-two week high last week, we saw the HY CDX index close out Thursday at $102.49, only slightly down from that high. We saw the second week in a row of inflows into high yield funds. For the week ended January 18 th, $571.5 million flowed into high yield funds, down from $1.1 billion the prior week. There are currently only two deals in the pipeline and flow is expected to be much lighter. Market commentary is provided by U.S. Bancorp Investments, Inc. 3

4 Terry Martin, Managing Director Violet Grecu, Vice President David Wood, Managing Director Michael Dullaghan, Managing Director Amanda Lamberti, Vice President Public Debt Market Recent High Grade New Issues Date Issuer Industry YKE / DMS Amount Securities Maturity Coupon Price Yield Spread Mdy S&P 1/17/2013 ABN Amro Bank NV Bank Yankee $1,000.0 Senior Notes 1/22/ % % 100 A2 A 1/17/2013 Canadian Imperial Bank of Commerce Bank Yankee $750.0 Senior Notes 1/23/ % % 78 Aa2 A+ 1/17/2013 Thai Oil Energy Yankee $500.0 Senior Notes 1/23/ % % 185 Baa1 BBB 1/17/2013 Thai Oil Energy Yankee $500.0 Senior Notes 1/23/ % % 200 Baa1 BBB 1/17/2013 JPMorgan Chase & Co. Bank Domestic $2,400.0 Senior Notes 1/25/2018 3mL mL A2 A 1/17/2013 JPMorgan Chase & Co. Bank Domestic $1,250.0 Senior Notes 1/25/ % % 103 A2 A 1/17/2013 JPMorgan Chase & Co. Bank Domestic $2,750.0 Senior Notes 1/25/ % % 133 A2 A 1/17/2013 John Deere Capital Corp. Finance Domestic $500.0 Senior Notes 1/22/ % % 40 A2 A 1/17/2013 Toyota Motor Credit Corp. Finance Domestic $300.0 Senior Notes 1/23/2015 3mL mL Aa3 AA- 1/17/2013 National Rural Utilities Cooperative Finance Corporation Utility Domestic $350.0 Senior Notes 2/18/2014 3mL mL+8 8 A2 A 1/16/2013 Pacific Lifecorp Insurance Domestic $500.0 Senior Notes 1/30/ % % 220 Baa1 BBB+ 1/16/2013 Zoetis, Inc. Medical Domestic $400.0 Senior Notes 2/1/ % % 80 Baa2 BBB- 1/16/2013 Zoetis, Inc. Medical Domestic $750.0 Senior Notes 2/1/ % % 115 Baa2 BBB- 1/16/2013 Zoetis, Inc. Medical Domestic $1,350.0 Senior Notes 2/1/ % % 145 Baa2 BBB- 1/16/2013 Zoetis, Inc. Medical Domestic $1,150.0 Senior Notes 2/1/ % % 175 Baa2 BBB- 1/16/2013 The Goldman Sachs Group, Inc. (Re-Open) Bank Domestic $1,000.0 Senior Notes 11/23/ % % 115 A3 A- 1/16/2013 The Goldman Sachs Group, Inc. Bank Domestic $2,750.0 Senior Notes 1/22/ % % 165 A3 A- 1/16/2013 The Goldman Sachs Group, Inc. Bank Domestic $2,250.0 Senior Notes 1/22/ % % 185 A3 A- 1/15/2013 Korea Developmenet Bank Bank Yankee $500.0 Senior Notes 1/22/ % % 80 Aa3 A 1/15/2013 Korea Developmenet Bank Bank Yankee $500.0 Senior Notes 1/22/ % % 97.5 Aa3 A 1/15/2013 Inter-American Developmet Bank Sovereign Yankee $2,000.0 Senior Notes 3/15/ % % Aaa AAA 1/15/2013 Carlyle Holdings Finance, LLC Finance Domestic $500.0 Senior Notes 2/1/ % % 205 NR A- 1/15/2013 ConAgra Foods, Inc. Food & Beverage Domestic $750.0 Senior Notes 1/15/ % % 95 Baa2 BBB- 1/15/2013 ConAgra Foods, Inc. Food & Beverage Domestic $1,000.0 Senior Notes 1/25/ % % 115 Baa2 BBB- 1/15/2013 ConAgra Foods, Inc. Food & Beverage Domestic $1,225.0 Senior Notes 1/25/ % % 140 Baa2 BBB- 1/15/2013 ConAgra Foods, Inc. Food & Beverage Domestic $1,000.0 Senior Notes 1/25/ % % 165 Baa2 BBB- 1/15/2013 NextEra Capital Holdings, Inc. Utility Domestic $425.0 Jr. Sub Notes 1/15/ % % Baa2 BBB 1/15/2013 Jefferies Group, Inc. Broker Dealer Domestic $600.0 Senior Notes 1/15/ % % Baa3 BBB 1/15/2013 Jefferies Group, Inc. Broker Dealer Domestic $400.0 Senior Notes 1/15/ % % Baa3 BBB 1/14/2013 Penske Truck Leasing Co LP / PTL Finance Corp Transporation Domestic $500.0 Senior Notes 7/17/ % % 215 Baa3 BBB- 1/14/2013 Penske Truck Leasing Co LP / PTL Finance Corp Transporation Domestic $500.0 Senior Notes 1/17/ % % 250 Baa3 BBB- 1/14/2013 Energy Transfer Partners Energy Domestic $800.0 Senior Notes 2/1/ % % 175 Baa3 BBB- 1/14/2013 Energy Transfer Partners Energy Domestic $450.0 Senior Notes 2/1/ % % 215 Baa3 BBB- 1/14/2013 Yapi ve Kredi Bankasi A.S. Bank Yankee $500.0 Senior Notes 1/22/ % % 281 Baa2 BBB 1/14/2013 National Australia Bank Ltd (acting through NYC Branch) Bank Yankee $750.0 Senior Notes 1/20/ % % 60 Aa2 AA- 1/14/2013 National Australia Bank Ltd (acting through NYC Branch) Bank Yankee $750.0 Senior Notes 1/20/ % % 117 Aa2 AA- 1/14/2013 National Australia Bank Ltd Bank Yankee $1,000.0 Senior Notes 1/22/2015 3mL mL Aa2 AA- 1/14/2013 Anheuser-Busch InBev Finance Inc. Food & Beverage Yankee $1,000.0 Senior Notes 1/15/ % % 42 A3 A 1/14/2013 Anheuser-Busch InBev Finance Inc. Food & Beverage Yankee $1,000.0 Senior Notes 1/17/ % % 60 A3 A 1/14/2013 Anheuser-Busch InBev Finance Inc. Food & Beverage Yankee $1,250.0 Senior Notes 1/17/ % % 85 A3 A 1/14/2013 Anheuser-Busch InBev Finance Inc. Food & Beverage Yankee $750.0 Senior Notes 1/17/ % % 100 A3 A Shaded transactions represent those in which U.S. Bancorp Investments, Inc. played a role Source: Bloomberg Market commentary is provided by U.S. Bancorp Investments, Inc. 4

5 Investment products and services are: NOT A DEPOSIT NOT FDIC INSURED NOT GUARANTEED BY THE BANK NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY MAY LOSE VALUE This report is intended for institutional investors only. This material is based on data obtained from sources we consider to be reliable. It is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. Before investing, carefully consider the investment objectives, risks, charges and expenses. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this publication may not be eligible for solicitation in the states in which the client resides. Past performance is no guarantee of future results. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations,liquidity,prepayments,earlyredemption,corporateevents,taxramifications,andotherfactors.investmentindebtsecuritiestypically decrease in value when interest rates rise. The risk is usually greater for longer term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher rated securities. Investments in high-yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer s ability to make principal and interest payments. U.S. Bancorp Investments, Inc. and U.S. Bank are not affiliated with the entities named above. For U.S. Bank: U.S. Bank is not responsible for and does not guarantee the products, services, or performance of affiliates or third parties. For U.S. Bancorp Investments, Inc.: Investment products and services are available through U.S. Bancorp Investments, Inc., member FINRA and SIPC, an investment adviser and a brokerage subsidiary of U.S. Bancorp and affiliate of U.S. Bank. This material contains the current opinions of the author but not necessarily those of U.S. Bancorp Investments and such opinions are subject to change without notice. 5