Credit Markets Update March 31, 2018
Credit Markets Update as of March 31, 2018 We are pleased to provide this summary update of the U.S credit markets through the first calendar quarter ending March 31, 2018 to our clients and friends: The fundamental backdrop for the overall credit market remained volatile in the first quarter, as rising interest rates triggered pain for some fixed income investors. However, leveraged loan volume remained strong with terms continuing to favor issuers, countervailed by bonds weaker performance Newly issued leveraged loan volume showed a rise of 28.0% in the first quarter of 2018 over the last quarter, standing at $167 billion after three consecutive quarterly declines in 2017 New-issue covenant-lite loan volume decreased by 13.8% to $102 billion in the first quarter of 2018 from $119 billion in the corresponding quarter of previous year Non-investment grade B rated first lien pro rata and institutional syndicated leveraged loans remain attractive to investors with spread of L+346 and L+344, respectively, in the first quarter of 2018 Number of LBO transactions and volume rose by 10.3% and 7.0% from the first quarter of 2017 to reach 43 and $54 billion, respectively, in the first quarter of 2018. First quarter transactions and volume numbers are up 95.5% and 87.6%, respectively, over the last quarter Purchase price multiples for middle market LBOs increased to 10.5x in the first quarter of 2018 from 8.3x in the corresponding quarter of last year, indicating a sign of strong leveraged loan market Debt multiples of middle market and large corporate LBO loans stood at 5.4x and 5.9x, respectively, in the first quarter of 2018, almost flat at levels seen in full year 2017 Equity contribution to LBOs decreased to 39.2% of the purchase price in the first quarter of 2018 from 41.3% in 2017. However, the contribution when compared with the first quarter of 2017 is higher by 0.7% Second lien loan issuance volume stood at $6 billion in the first quarter, an increase of 61.8% over the last quarter, while a 14.3% dip from the corresponding quarter of 2017 High yield bond issuance volume decreased in the first quarter of 2018 to $64 billion from $82 billion and $68 billion in the corresponding quarter a year ago and the last quarter, respectively. Out of total volume in the first quarter, more than 15.4% was used to support M&A and LBO transactions High yield bond pricing increased to 6.6% in the first quarter of 2018 from 6.5% and 6.4% in the corresponding quarter a year ago and the last quarter, respectively Funds flows into leveraged loan funds increased to $36 billion in the first quarter of 2018 from $31 billion in the previous quarter CLO volume increased to $32 billion in the first quarter of 2018, up 84.6% from $17 billion in the corresponding quarter a year ago, and spreads tightened to L+104 Distress indicators eased during the quarter, with the dollar amount and number of facilities of all outstanding first lien loans trading in the secondary market at prices of L+1000 or greater falling to 2.3% and 2.9%, respectively Percentage of leveraged loans in default or in bankruptcy fell to 1.9% in the first quarter of 2018 from 2.1% in the corresponding quarter of last year, marking improvements in credit fundamentals 2
Leveraged Loans $700B $560B $420B $280B $140B New Issue Leveraged Loan Volume - Annual ($bn) $652 $607 $535 $528 $466 $478 $423 $377 $236 $210 $157 $167 $77 Pro Rata $220B $176B $132B $88B $44B 186 188 84 78 47 55 44 New Issue Leveraged Loan Volume - Quarterly ($bn) 66 72 54 43 27 11 16 16 18 141 120 53 62 115 88 137 126 189 164 127127 168 159 134 67 94 140 113 74 91 128 141 119 210 166145131 167 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 Pro Rata $400B $320B $240B $160B $80B New-Issue Cov-Lite Loans ($bn) 75.0% 79.0% $245 $57 $97 $98 $262 $237 $178 $375 $119 $102 $3 $3 $8 80.0% 60.0% 40.0% 20.0% 0.0% (20.0%) Volume Leveraged Loan Issuance by Purpose - Recap 9% LBO 14% Others 6% Refinancing 45% Percent of all loans Leveraged Loan Issuance by Purpose - LBO 17% Recap 7% Others 3% Refinancing 43% M&A M&A 26% 30% Total Volume: $210B Total Volume: $167B 3
Leveraged Loans (continued) L+450 New Issue First Lien Spreads BB/BB - Quarterly L+380 L+310 L+240 L+170 265 228 L+100 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 Pro Rata L+550 New Issue First Lien Spreads B+/B - Quarterly L+470 L+390 L+310 346 344 L+230 L+150 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 Pro Rata 4
Leveraged Loans Middle Market Leveraged Loan Volume- Annual ($bn) $35B $28B $29 $21B $14B $7B $8 $5 $11 $14 $10 $13 $15 $10 $9 $13 $3 $2 ProRata Leveraged Loan Volume- Quarterly ($bn) $15B $13 $12B $9B $6B $3B $8 $5 $3 $4 $5 $5 $5 $5 $4 $2 $1 $0 $1 $1 $1 $2 $2 $2 $3 $3 $2 $2 $3 $3 $3 $3 $4 $4 $4 $3 $4 $4 $3 $3 $3 $3 $2 $1 $2 $2 $3 $3 $2 $1 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 ProRata Recap/Dividend 16% Total New-Issue Volume by Purpose - Acquisition 9% Other 6% LBO 37% Recap/Dividend 13% Total New-Issue Volume by Purpose - Acquisition 3% Refinancing 22% LBO 62% Refinancing 32% Total Volume: $2.7B Total Volume: $2.4B Note: Middle market refers to companies with EBITDA of $50 million or less 5
LBO Summary $160B LBO Transaction Volume - Quarterly ($bn) 75 $128B 60 Volume ($bn) $96B $64B $50 $54 45 30 Number of Deals $32B 15 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 0 12.0x 9.6x 9.7x 9.1x 7.7x Average Purchase Price Multiple - All LBOs 10.3x 9.7x 10.0x 8.5x 8.8x 8.7x 8.8x 10.6x 9.7x 10.2x 7.2x 4.8x 2.4x 0.0x Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others Average Purchase Price Multiple Middle Market LBOs (1) 12.0x 9.6x 9.3x 8.3x 8.4x 8.2x 7.9x 8.8x 9.6x 10.7x 10.2x 11.6x 8.3x 10.5x 7.2x 6.6x 4.8x 2.4x 0.0x Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others (1) Middle market refers to companies with EBITDA of $50 million or less 6
LBO Summary (continued) Average Debt Multiples of Large Corporate LBO Loans (1) 6.5x 5.2x 3.9x 6.2x 4.9x 4.0x 4.7x 5.2x 5.3x 5.4x 5.8x 5.7x 5.5x 5.8x 5.7x 5.9x 2.6x 1.3x 0.0x FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA Average Debt Multiples of Middle-Market LBO Loans (2) 6.0x 4.8x 5.6x 4.5x 4.2x 4.3x 4.5x 4.8x 5.3x 5.4x 5.2x 5.5x 5.4x 3.6x 3.3x 2.4x 1.2x 0.0x FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA NA 50.0% 45.7% Equity Contribution - All LBOs 40.0% 38.9% 41.4% 38.0% 37.7% 35.6% 37.0% 40.5% 40.8% 41.3% 38.6% 39.2% 30.0% 30.9% 20.0% 10.0% 0.0% (1) Middle market refers to companies with EBITDA of $50 million or less. (2) Large corporate refers to companies with EBITDA of more than $50 million. 7
Second-Lien Loans Second-Lien Loan New-Issue Volume - Annual ($bn) $40B $32B $24B $16B $8B $37 $30 $29 $25 $18 $11 $10 $7 $3 $5 $2 $7 $6 $15B $12B $9B $6B $3B $11 $14 Second Lien Loan New-Issue Volume - Quarterly ($bn) $4 $4 $4 $2 $2 $3 $3 $1 $1 $1 $1 $0 $0$0 $0 $1 $1 $1 $1 $0 $0 $6 $5 $11 $6 $7 $13 $12 $8 $4 $3 $4 $3 $5 $2 $1 $1 $1 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 $7 $5 $10 $4 $6 200 160 120 80 40 178 Second-Lien Loans New-Issue Volume (Number of Deals) 19 11 31 46 89 152 198 85 62 131 35 44 L+1500 L+1200 L+900 L+600 L+300 Average New Issue Second-Lien Spreads 1,480 659 1,069 1,062 1,085 1,064 928 898 996 968 829 835 782 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 L+0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LIBOR Floor Upfront Fee Spread 8
High Yield Bonds $400B $320B $240B High Yield Bond Issuance Annual ($bn) $345 $322 $310 $287 $262 $218 $229 $276 $160B $144 $164 $80B $68 $82 $64 Secured Unsecured Subordinated High Yield Bond Issuance Quarterly ($bn) New issue High yield Bond yield to Maturity $110B 14.0% $88B 11.2% $66B $44B $64 8.4% 5.6% 6.6% $22B 2.8% Secured Unsecured Subordinated 0.0% High Yield Bond Issuance by Purpose 100% 80% 60% 13.2% 8.3% 5.2% 9.8% 29.2% 42.0% 75.5% 62.8% 16.5% 54.4% 10.5% 14.7% 15.5% 58.1% 50.3% 48.5% 10.6% 9.4% 8.9% 3.7% 4.9% 46.3% 63.7% 64.9% 70.0% 73.0% 40% 20% 0% 35.4% 3.3% 5.2% 3.8% 42.9% 5.5% 4.8% 7.1% 15.7% 16.2% 5.9% 12.5% 15.6% 22.3% 29.8% 5.8% 4.0% 2.8% 2.0% 15.3% 14.0% 16.3% 19.2% 13.4% 2.4% 13.4% 6.1% 4.4% 10.2% 6.8% 10.3% 14.1% 9.9% 9.9% 7.1% 5.9% 4.3% 6.7% Corp Purpose M&A/Acquisition M&A/LBO Refinancing Others 9
Dividend Recapitalization $70B $56B $49 Dividend or Stock Repurchase Loan Volume- Annual ($bn) $70 $56 $53 $50 $56 $42B $38 $36 $38 $28B $14B $20 $13 $3 $3 ProRata Dividend or Stock Repurchase Loan Volume- Quarterly ($bn) $30B $24B $18B $12B $6B $26 $21 $1 $1 $1 $2 $0 $0 $0 $0 $2 $1 $7 $5 $8 $19$17 $16 $2 $1 $16 $8 $18 $16 $16 $27 $14 $17 $18 $13 $11 $7 $4 $15 $13 $3 $0 $14 $13 $22 $20 $7 $15$14 $13 2Q'07 4Q'07 2Q'08 4Q'08 2Q'09 4Q'09 2Q'10 4Q'10 2Q'11 4Q'11 2Q'12 4Q'12 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 ProRata Middle-Market Dividend Related Volume- Quarterly ($bn) Middle-Market Dividend Related Volume- Annual ($bn) $2.0B $1.6B $3.5B $2.8B $3.2 $2.8 $2.5 $3.0 $1.2B $0.8B $0.4B $0.0B $0.5 $0.3 ProRata $0.0 $2.1B $1.4B $0.7B $0.0B $1.8 $1.5 $0.9 $0.8 $0.5 $0.4 $0.5 $0.3 $0.3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ProRata 10
Funds Flows $10B Flows into High Yield Bond Funds - Quarterly ($bn) $4B ($2B) ($8B) $3 $4 ($10) ($2) $9 ($5) ($9) ($2) $8 ($4) $6 $2 ($6) ($1) ($1) ($9) ($19) ($14B) ($20B) 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 $45B Flows into Leveraged Loan Funds - Quarterly ($bn) $32B $19B $6B ($7B) $9 $23 $38 ($5) $32 $31 $31 $29 ($4) ($12) ($2) ($17) $19 $20 ($7) ($13) $3 $18 $20 $8 ($8) ($1) $14 $26 $16 $17 $4 $35 $30 ($1) $36 ($5) $4 $32 ($20B) 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 CLO issuance Prime fund flows Annual CLO Volume ($bn) $125B $100B $124 $99 $118 250 200 $75B $83 $72 150 $50B $54 100 $25B $32 $12 $17 2011 2012 2013 2014 2015 2016 2017 Volume ($B) Count 50 0 11
Funds Flows (continued) 200 U.S. CLO Spreads 160 120 80 104 40 0 2Q'13 4Q'13 2Q'14 4Q'14 2Q'15 4Q'15 2Q'16 4Q'16 Libor + 2Q'17 4Q'17 Public BDCs - Price to Book Value Multiple - Quarterly 1.02x 0.82x 0.94x 0.92x 0.81x 0.82x 0.85x 0.88x 0.93x 1.00x 0.99x 0.95x 0.94x 0.89x 0.85x 0.61x 0.41x 0.20x 0.00x 2Q'15 4Q'15 2Q'16 4Q'16 2Q'17 4Q'17 12
Distress and Defaults 80.0% Percent of First-Lien Loans with Secondary Spreads of L+1000 or Higher By Amount Outstanding 64.0% 48.0% 32.0% 16.0% 2.3% 0.0% Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 80.0% Percent of First-Lien Loans with Secondary Spreads of L+1000 or Higher By Number of Facilities 64.0% 48.0% 32.0% 16.0% 2.9% 0.0% Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 13
Distress and Defaults (continued) Par Amount of Leveraged Loans in Payment Default or Bankruptcy ($bn) $60B $57 $48B $36B $24B $12B $31 $22 $25 $24 $18 $19 $12 $12 $14 $8 $10 $3 Percent of Outstanding Leveraged Loans in Default or Bankruptcy 12.0% 10.7% 9.6% 7.2% 4.8% 2.4% 0.0% 5.0% 3.7% 3.5% 2.3% 2.9% 2.2% 2.1% 1.9% 1.6% 1.2% 1.1% 0.6% Number of Issuers in Payment Default or Bankruptcy 80 74 64 48 44 32 29 16 10 13 9 12 9 13 14 12 15 16 0 14
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