Semi-Annual Credit Markets Update: Credit Markets

Transcription

1 Semi-Annual Credit Markets Update: Navigating the Current Credit Markets May 2013

2 Important notice This presentation is confidential and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by KPMG Corporate Finance LLC. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of KPMG Corporate Finance LLC. The information in this presentation is based upon publicly available information and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change, and such changes may be material. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. While the information presented and views expressed in this presentation and the oral briefing have been prepared in good faith, KPMG Corporate Finance LLC accepts no responsibility or liability to any party in connection with such information or views. 1

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4 Contents General overview of current credit markets Technicals are a key driver of current demand Lenders are maintaining a degree of credit discipline Creative financing sources are providing new alternatives to the middle market Key items to consider when approaching the current credit markets Issues facing the credit markets as we approach the mid-way point of

5 Credit Markets Summary The leveraged loan market feels almost like early-2007 as the aggressive tone advances into mid-may, with longer maturities (out to eight years), multiple flexes, re-pricings and historically tight spreads Single-B leveraged loans have an average new-issue yield-to-maturity of roughly 4.99%, down from 6.48% this time last year Average spreads of high-yield flow names are just above 500 bps over LIBOR, having declined well over 200 bps from May 2012 Much of the aggressive behavior is a function of such low-yielding alternatives for those with capital to invest For high-grades, the yield-to-maturity averages 2.6% Corporate issuers are also eager to take advantage of this demand, evidenced by Apple s record setting $17 billion six-part financing in late April Despite the Dow s march to a a new all-time high above the 15,000 level, inflows into CLOs and other credit vehicles remain strong The only weak news to report in the credit markets is that much of the issuance activity is not M&A and LBO-related as corporates and private equity funds still seem cautious and unsure about the health of the U.S. and global economy Re-Financings Account for 71% of Total Value New-Issue M&A Loan Volume Lags 2007 by 52% Other 2% Corp Purpose 1% Recap/Dividend 5% Recap/General Recap 5% LBO 7% $120B $100B $80B $60B $40B Acquisition 9% $20B $0B Refinancing 71% Institutional Pro Rata Source: S&P Capital IQ LCD 4

6 Credit Markets Summary (Continued) In the first quarter, new-issue loan volume broke through to a post-credit crunch high of $185 billion 64 broadly-syndicated CLOs priced through April 30 th, making activity the strongest since 2007 Bond funds have become active buyers of leverage loans with bond funds averaging 8.5% of their portfolio in loans High-yield bond issuance through April 30 th was $114.2 billion, and though slowing into April and May, first-half volume may place its six-month issuance level in the top four or five periods on record The low yields available in the high-grade and large-corporate non-investment grade market has created significant opportunities for smaller middle market issuers as well Access to the public equity markets remains strong as issuance volume continues to grow to potential record setting levels in 2013 after 2012 s approximately $1.3 billion which was up over 300% from the prior year. The average stock price increase across all 28 publicly-traded BDCs was almost 5% for the quarter alone, and the top 10 stocks averaged over 9% gains Total New Issue Loan Volume (in $billions) Change in outstanding loans and inflows $600 $500 $400 $300 $200 $100 $0 Institutional Source: S&P Capital IQ LCD & Fitch Ratings Agency Pro Rata 5

7 Technicals are Everything Massive injections of liquidity from CLO issuance and mutual-fund inflows were the primary drivers moving pricing ever tighter Q CLO issuance reached $26.3 billion, exceeding Q s previous post-credit crunch high of $23.2 billion CLO s took 60.4% of the primary market during the first quarter of the 2013, a six-year high, from 55.2% in 2012 Three principal trends support the CLO resurgence: Liability cost have decreased over the last 12 months as part of the risk-on trade across the capital markets. As a result, the weighted-average liability spread tightened to L+168 from L+212 the first nine months of last year Lower liability spreads are enhancing prospective returns, keeping CLO equity investors in the game Increasing depth of managers able to tap the market. The ranks of managers able to ink a deal over the past 12 months have reached 79, the largest since 2007, up from 67 in 2012 and 26 in 2011 Source: S&P Capital IQ LCD 6

8 Key Loan Pricing and Terms - 12 Month Comparison & New Issue Details Average New Issue Pricing B+/B Sept-12 Dec-12 Mar-13 ME 5/2/13 Straight Spread L L L L Up-front Fee (over 3 years) Libor Floor Benefit Total spread Total Debt / EBITDA 3.9x 4.8x 4.5x 4.8x Interest Coverage Ratio 3.3x 3.1x 3.4x 2.9x Date Issuer Industry Sponsor Recently Launched Transactions Apr-13 Summit Business Media Media and Information / Publishing EOS Partners Senior / Total Leverage and Equity Cap Apr-13 Sprint Industrial Holdings Rental Provider of Liquid Storage Solutions First Atlantic Capital 3.9x / 5.7x Apr-13 Orchard Brands Clothing Retailer Oerberus, American Capital 3.5x / 4.5x Apr-13 MCCI Group Medical Management Services Humana 3.8x Issue Proceeds (US$mm) 5 yr RC 5 yr TL $10.0 $ yr RC $ yr TL $ L TL $ yr ABL RC $ yr TLB $ yr 2LTL $50.00 RC 5 yr TL $150.0 $225.0 LIBOR +/- Coupon L L L L OID L L L+250 Apr-13 Learning Care Group (US) No. 2 Recently Priced Deals May-13 Neenah Foundry Cast Iron Supplier For-Profit Child Care and Early Education Services Provider MS Capital Partners May-13 Fairway Group Supermarkets NasdaqGS: FWN Apr-13 Ability Network Healthcare Technology Bain Capital, Lemhi Ventures 3.9x / 5.4x Apr-13 Erickson Air-Crane Aerospace and Defense NasdaqGS: EAC Apr-13 New Wave Communications Communications & Media GTCR 4.5x / 6.3x Source: S&P Capital IQ LCD & CIT Group 5 yr RC 6 yr TL $40.0 $220.0 ABL RC $ yr TLA $ yr RC 5.25 yr TLB 5 yr RC 6 yr TL Mezz ABL RC 7yr2LNotes RC 7 yr TL 8 yr 2L TL $40.0 $274.3 $15.0 $115.0 $43.0 $100.0 $400 0 $15.0 $148.5 $ yr 2L Notes $400.0 L L L L+400 L+400 L+475 L % L+400 L

9 High-Yield Activity has Really Taken off Over the Past 10 Days Issuance over the past 45 days has been choppy as yields have dropped to such low levels While active in loans, some fund managers are protecting themselves against a rise in rates The rise in U.S. equities has impacted demand as those with liquidity sought higher potential alpha from the equity market than what is realistically left in high-yield bonds Lower-rated credits are making up a larger percentage of issuance volume in that search for more yield In July 2012, BB notes represented 25.7% of the total, 27.0% in December and a mere 26.0% in through April 2013 In turn, B-rated notes, which made up just 25.2% 2% of issuance volume in May 2012, increased to 35.0% through April 2013 The U.S. high-yield default rate remains below average at 1.6% and is expected to stay low New-Issue Bond Vol Sponsored vs. Nonsponsored $ $ $ $ $ $150.0 $ $50.0 Source: S&P Capital IQ LCD $ YTD - 4/25/12 Sponsored Non-Sponsored YTD - 4/25/13 8

10 Despite Low Yields, Credit Discipline has Prevailed to a Large Degree Credit fundamentals Average Debt Multiples Current leverage levels are within historical norms Interest coverage is modestly improving Use of proceeds The majority of both bond and loan issuance has gone toward refinancing, pushing out maturities and lowering coupons 7.0x 60x 6.0x 5.0x 4.0x 3.0x 20x 2.0x 4.7x 4.9x 4.3x 4.6x 4.8x 4.6x 5.2x 5.7x 4.6x 4.6x 5.0x 4.8x Over the past 15 months, the absolute dollar amount of loan proceeds dedicated toward LBOs was 59.8% lower than in x 0.0x Transactions FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA Management teams and sponsors clearly are expressing caution regarding M&A and this is playing out with fewer deals of virtually all sizes The volume, size and leverage of LBOs are collectively lower or smaller than in 2007 Covenant lite and PIK issuance Only approximately 5% of issuance currently has a PIK-pay feature and there are virtually no large- cap, highly-leveraged transactions like Cengage or Univision in 2006 and 2007 While there has been an increase in covenant-lite loan issuance, Fitch Ratings has published data suggesting that covenants do not necessarily stop value erosion and do not necessarily lead to higherh recoveries Source: Fitch Ratings & S&P Capital IQ LCD 9

11 Will the Rise in Public Equities Help or Hurt the Credit Markets? As the DJIA crests 15,000, will capital migrate to equities as long-term gains and higher relative returns in public stocks trump the desire for current yield? Has most of the juice been removed from the current yield asset classes? Given previous observations about the slow down in the supply of capital into high-yield bond funds, this theory certainly could be playing itself out High-yield bonds and equities tend to be highly correlated The rise in equities could also help the credit markets since higher valuations may encourage public and private companies to raise equity to further bolster balance sheet strength or engage in more M&A activity That said, the IPO market has been weak at best so far this year Structured equity products are increasingly gaining traction amongst lower middle market issuers as liquidity available to fund these structures has expanded significantly Redeemable PIK, preferred stock with penny warrants targeting g an IRR 10

12 For Lower Middle Market Issuers, the Big Boy Terms Filter Down New players and non-banks are not as cheap as commercial banks but typically can be more nimble and more flexible with debt structures often with little or no syndication risk Convergence of markets More institutional investors coming down into the traditional middle market ($20 to $40 million of EBITDA) and lower end of the large middle market Less price volatility More stable terms Lower leverage In some cases, more robust covenant packages but some covenant-lite has crept in Terms and security structures previously only available to larger middle issuers (or even large cap issuers) are increasingly showing up in lower middle market deals Hold-Co PIK notes The traveling capital structure Springing covenants Distributions based on pro forma covenant compliance Impact of the SBIC and BDC on this aggressive tone SBIC leverage advantages Public market frothiness for BDC issuers Could lead to some level of volatility similar to that created by the CLO market 11

13 Creative Structures are Providing Issuers with the Ability to Customize Their Capital Stack As the stress at the height of the financial crisis eases with the passage of time and with a more stable economy, the U.S. financing markets continue to develop creative structures to provide numerous additional alternatives to raise capital than pre-lehman Evolving covenant-lite and ABL structures Covenant-lite deals with looser covenants Generally seem to be performing well Not all covenant-lite deals are the same, e.g., replicating bond covenants to create an incurrence-based covenant package, synthetic covenant-lite Often paired with a working capital facility Working capital or ABL facilities paired with a covenant-lite deal ABL facilities with a springing fixed charge coverage ratio when certain availability thresholds are crossed Springing revolvers tested only quarterly and on each draw down date Tends to provide better pricing flexibility Generally not considered as true ABLs by most lenders Certainty of funds issue The uni-tranche has become more acceptable across the markets Combination of senior and junior credit risk (or first lien/second lien) into a single security Collateral splits Flexible or no amortization More flexible financial covenants Less risky for the issuer because the arranger often commits to the entire facility 12

14 Key Items to Consider when Approaching the Current Credit Markets Capital available up and down the capital structure With M&A activity not keeping pace, more capital is chasing opportunistic deals (refinancings, dividends, de ds, amend-and-extends, a d eteds,etc) etc.) Alternative sources of capital are becoming much more prevalent in the middle market Tighter spreads More aggressive structures (covenant-lite) Private equity groups are enjoying more leverage when financing LBOs Flexibility around inter-creditor issues (focus on bankruptcy rights) With multiple types of capital available, companies need to understand what their real financing needs are to support long-term business plans, not just short-term term needs, and what the right sources of capital are to achieve those goals Take advantage of a heated market and run a competitive process More favorable pricing and terms Covenant-lite deals prevalent in today s market More and more companies are refinancing debt that matures as far out as 2015 Despite heated demand for deals, lenders are being more diligent in the underwriting process, and even before issuing term sheet Typical timeline: 3 4 months (some BDC s are quicker) 13

15 Issues Currently Facing the Credit Markets Will the overheated credit and equity markets create a bubble-like environment that shakes confidence if an exogenous event were to affect the macro environment Uncertainty ty about the U.S. budget deficit and the inability of the U.S. government e to arrive at a bi- partisan solution Impact of weaker Euro Zone economic health and lack of political will to improve overall GDP performance Competing agendas both within certain countries and also across ones as well Potential geopolitical instability Iran Israel / Syria The Korean Peninsula 14

16 Contact information Presenter Ray Kane Managing Director Co-Head U.S. Capital Advisory Ed Albert Managing Director Panelists Cassandra Mott Partner KPMG Corporate Finance LLC 345 Park Avenue Fortress Investment Group LLC 1345 Avenues of the Americas 40 th Floor 44 th Floor New York, NY New York, NY Jones Day 717 Texas Suite 3300 Houston, TX

17 Q&A

18 Thank you

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