Current State of the Leveraged Loan Market

Transcription

1 Current State of the Leveraged Loan Market Ted Basta, LSTA William Lemberg, Alcentra Michael Schechter, CITI Gil Tollinchi, Crescent Capital Brian Yorke, Halcyon May 3, 2016

2 Presentation Overview 1. Macro Factors Affecting Today s Markets 2. State of the Primary Loan Market 3. Loan Returns & The Secondary Market 4. Trade & Settlement Liquidity Final Thoughts and Audience Q & A 2

3 Macro Factors Affecting Today s Markets 3

4 The Markets & Their New Risk/Return Paradigm (Through M/E March) 14% 12% 5 year Annualized Return 3 year Annualized 1 year Annualized 10% 8% Total Return 6% 4% 2% 0% -2% -1.3% 1.0% 1.8% 3.1% -4% -4.0% -6% Source: S&P Capital IQ HY Bond S&P/LSTA Lev Loan Index HG Bond S & P YR Treas 4

5 Volatility Levels Spiked Across Asset Classes as The Price of Oil Plummeted CBOE Volatility Index (VIX) Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 WTI Crude Oil $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $- Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Yahoo Finance 5

6 Weaker Global Economies, in Particular China, Have Negatively Affected U.S. Markets 5,500 Shanghai Composite Index 2,200 S&P 500 Index 5,000 4,500 2,000 4,000 1,800 3,500 3,000 1,600 2,500 1,400 2,000 1,500 1,200 1,000 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 1,000 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Yahoo Finance 6

7 2016 US Economic Growth Forecasted in a Range From 1.6% to 2.4% 3.0% GDP Annual Growth Rate 7% GDP Quarterly Growth Rate 2.5% 6% 2.0% 5% 4% 1.5% 3% 1.0% 2% 0.5% 1% 0.0% High Est Low Est. 0% -1% -2% 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Est. 1Q16 Source: Federal Reserve 7

8 Markets Are Not Pricing in Substantial Future Rate Hikes Historical Rates (%) Implied Forward Rates (%) 5 10YR Treas 3-MO LIBOR 5 10YR Treas 3-MO LIBOR 4 QE1 Begins 4 3 QE2 Begins QE3 Begins QE3 Ends 1 Fed Raises Rates 1 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 0 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Source: Federal Reserve 8

9 State of the Primary Loan Market 9

10 As Secondary Prices Fell Through Late-February 2016, New Issue Yields Increased to Multi-Year Highs Avg. Bid Level in The Secondary Market 8% Avg. New-issue Yield in The Primary Market 7% 6% 5% 4% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: Thomson Reuters LPC 10

11 While Pro-Rata Lending Volume Has Remained Mostly Constant, Institutional Lending Has Fallen Sharply $700 $600 Institutional $625 Pro rata S&P/LSTA Leveraged Loan Index (LLI) Par Amount Outstanding $900 Lending Volume ($Billions) $500 $400 $300 $200 $451 $289 $800 $700 $600 Billions $100 $ $44 1Q15 $39 1Q16 $500 Jan-13 Jan-14 Jan-15 Jan-16 Source: Thomson Reuters LPC & S&P Capital IQ 11

12 Leveraged Lending Activity Has Favored Higher Rated and Pro-Rata Heavy Deals Share of Total New Issue Volume Pro rata TLA% of term loans 70% 60% 50% 40% 30% 20% 10% BB- Rated Share of New Issue Volume Total Institutional 70% 60% 50% 40% 30% 20% 10% 0% Q16 0% Q16 Source: S&P Capital IQ LCD 12

13 Net Demand From CLOs & Loan Mutual Funds Has Tapered Off Considerably, But Did Improve in March Share of Non-Bank Institutional Lending 70% Q16 60% 50% 40% 30% CLO Issuance $150 $125 $100 Billions $75 $50 Loan Fund Flows 20% $25 10% 0% Hedge, Fin. & Dist. & Insur. Cos HY Funds Retail Loan Funds CLOs $- $(25) _ 2Q15 3Q15 4Q15 $8.2 $(5.9) 1Q16 Source: S&P Capital IQ LCD & Thomson Reuters LPC 13

14 Loan Returns & The Secondary Market 14

15 As Markets Became More Volatile & Correlated in 2015, Loan Returns Ran Negative For Only The Second Time in 20 Years 6% Cross-Asset Returns Q16 5.0% 12-Mo. Lagging Return Volatility Mar-15 Mar-16 4% 4.0% 2% 0% -2% 1.55% -0.69% SD of Return 3.0% 2.0% -4% 1.0% -6% 10YR Treas HG Bonds HY Bond Lev. Loans S&P % Lev. Loans HG Bond HY Bond 10YR Treas S&P 500 Source: S&P/LSTA Leveraged Loan Index & S&P Capital IQ 15

16 Pre-March 2016, The Secondary Loan Market Was Marked by Red-Ink For a Record 9 Consecutive Months 100% Decliners Advancers 3.5% S&P/LSTA Lev. Loan Index Return LLI 100 Return 3.0% Secondary Market Price Movement 75% 50% 25% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 0% Jan-15 Mar-15 May-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Mar % Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: LSTA/TRLPC MTM Pricing & S&P/LSTA LLI 16

17 Changes in Supply & Demand Levels Can Create Technical Dislocations in The Secondary Market Change in Existing Supply (LLI Outstandings) New Visable Demand (CLO + Fund Flows) $20 $15 $20 $15 $10 Visable Demand Less Net New Supply $ Billions $10 $5 $ Billions $5 $- $(5) $- $(5) Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 $(10) $(15) $(20) Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: Thomson Reuters LPC & S&P/LSTA LLI 17

18 Today s Secondary Trading Market Looks Quite Different From One Year Ago Mean Trade Price (% of Par) Median Trade Price (% of Par) <90 90 to <98 98 to 100 > % 11% % of Trade Volumes 75% 50% 43% % % 14% 21% Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Source: LSTA Trade Data Study 18

19 The Broader Energy/Commodity Sectors Comprise Just 12% of Par Index Outstanding (6% at MV) 100 All Loans Oil & Gas Loans WTI Crude Oil 10% 2015 Return 1Q16 Return % Par Outstanding % 0% -5% 2% 4% 6% 50-10% 40-15% 30-20% 20 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16-25% -30% Source: Thomson Reuters & S&P /LSTA Leveraged Loan Index 19

20 Despite Downgrades in The Energy/Commodity Sectors, Broader Credit Trends Should Remain Mostly Benign 12% LTM $Defaults Historical Avg. LTM # of Defaults Historical Avg. 100 Upgrades Downgrades Delta 10% % 25 6% 0 4% % -75 0% -100 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Source: S&P Capital IQ LCD 20

21 Year-Over-Year EBITDA (ex Energy) Was Up 9.2% in 4Q15 While Cash-Flow Coverage Remained Strong 16% EBITDA Growth EBITDA Growth (ex Energy) 4 Average C/F Coverage Weighted average 14% 12% 3 10% 8% 6% 4% 2% 9% 7% 2 1 0% 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: S&P Capital IQ/LCD 21

22 Trade & Settlement Liquidity 22

23 Annual U.S. Secondary Trading Volumes Totaled $591 Billion in 2015 (6% Lower Than Last Year s Record Level) $700 Annual Trade Volume $1,000 Trade Volume Avg. Size of the S&P/LSTA LLI Loan Turnover Ratio (%) 100% $600 $500 $750 75% Billions $400 $300 Billions $500 50% $200 $100 $250 25% $ Q16 ANN $ Q16 ANN 0% Source: The LSTA Trade Data Study 23

24 1Q16 Secondary Trading Volumes Totaled $146.5B (+3%) ~March Volumes Totaled a 13-Month High $55.8B (+24%) Billions Quarterly Trade Volume PAR DIS $200 $175 $150 $125 $100 $75 $50 $25 Billions $70 $60 $50 $40 $30 $20 $10 Monthly Trade Volume $- $0 1Q14 3Q14 1Q15 3Q15 1Q16 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: The LSTA Trade Data Study 24

25 Par Settlement Times Have Been Trending Lower in Advance of The New Delayed Comp. Rules 20 Median Time to Settle 25 Median (Sell-side Purchases) Median (Sell-side Sales) T+ Business Days T+ Business Days Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 5 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: LSTA Settlement Data Study 25

26 Final Panel Thoughts & Audience Q&A 26

27 Despite The March Rally, The Secondary Market is Still Trading Around Its Four-Year Low Mean Trade Price (% of Par) Mean Bid-Ask Spread (Basis Points) 101 Median Trade Price (% of Par) 125 Median Bid-Ask Spread (Basis Points) Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: The LSTA Trade Data Study 27