New Issue Market Deelopments Jarrod Kaplan Director High Yield Capital Markets Credit Agricole CIB
Key Topics / Trends Lower high yield new issue olume Continued strength of leeraged loan market Return of olatility Some inestor friendly dynamics at play Energy sector returns to capital markets en masse Healthy M&A / LBO enironment but fewer mega-deals Impact of tax reform Slide 2
HY Issuance Volume Down Significantly in 2018 Yearly U.S. High Yield New Issue Volume $350B $300B $294.1 $327.8 $327.1 $312.7 $281.0 $250B $252.2 $260.2 $235.4 $200B $180.7 $150B $100B $100.6 $50B $52.9 $0B 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 US olume currently down ~23% Y-o-Y Month of May was slowest since 2010 Consensus for 2018 total issuance is being reised towards ~$250bn s $270bn-$300bn+ by some dealer strategists Source: Credit Agricole CIB as of 6/5/18 Slide 3
Return of Volatility Challenges Deal Enironment Monthly U.S. High Yield New Issue Volume $50B $45B 2016 Total: $235B 2017 Total: $281B 2018 YTD Total: $101B 50 45 $40B 40 $35B 35 $30B 30 $25B 25 $20B 20 $15B 15 $10B 10 $5B 5 $0B Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 No-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 SPX Volatility Index (right axis) Aug-17 Sep-17 Oct-17 No-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 0 Source: Credit Agricole CIB as of 6/5/18, Bloomberg Slide 4
2018 New Issue Market Temperature Monthly U.S. High Yield New Issue Pricing s Talk (% of deals) 100% 90% 80% 70% 60% 50% 11% 11% 59% 12% 13% 32% 2% 10% 20% 4% 26% 50% 6% 35% 18% Outside Wide-end Middle 40% 30% 36% Tight-end Inside 20% 42% 27% 40% 10% 0% 20% 16% 9% Jan '18 Feb '18 Mar '18 Apr '18 May '18 Priced Transactions Volume ($B) $24.5 $12.8 $26.7 $17.4 $15.8 Deals (#) 31 21 43 30 32 Pulled Transactions Volume ($B) $0 $0 $1.4 $0 $0.4 Deals (#) 0 0 3 0 1 Source: Credit Agricole CIB as of 6/5/18 Slide 5
Lowest May New Issue Volume Since 2010 Historical Month of May U.S. High Yield Volume s Index Yield $50B 14.7% 15.00% $45B $42.9 U.S HY Volume Ag. Yield (US HY Index) 13.50% $40B $35B 10.0% $39.4 $37.0 $35.2 12.00% 10.50% $30B $25B $20B $25.2 8.8% 6.7% 7.3% $19.7 5.2% 5.2% 6.0% $28.7 7.7% $24.0 5.6% 6.3% 9.00% 7.50% 6.00% $15B $13.1 $15.3 4.50% $10B $9.5 3.00% $5B 1.50% $0B 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.00% May is historically one of the more actie months for issuance but olumes hae declined six consecutie years Fewer opportunities for issuers to attractiely refinance intage 13-15 callable paper HY index aeraged 6.3% in May 2018, significantly inside of May 2016 when deal olume was nearly double with aerage index yield of 7.7% Howeer May 2016 median yield at issue was 5.7% s 6.7% on deals pricing in May 2018 Source: Credit Agricole CIB, Aerage monthly YTW % of ICE BofAML High Yield Master II Index Slide 6
Leeraged Loan Market Continues to Take Bigger Piece of the Pie Leeraged loans saw record issuance in 2017 and the momentum has carried into 2018 Total share of leeraged issuance has grown from 50% in 2015 to 70% 2018 YTD Total amount of leeraged loans outstanding has eclipsed $1.0 trillion, nearly doubling since 2010 Yearly U.S. Leeraged Finance Volume $900B $800B $700B $600B $500B $400B $300B $200B $100B $0B $139 49% Institutional Loans $203 81% 51% 19% Bonds $445 $450 65% 35% 49% 51% $640 54% 46% $778 41% 59% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 U.S. Institutional Loan Outstandings $687 45% 55% $519 50% 50% $565 40% 60% $779 35% 65% $325 30% 70% $1200B $1000B Amount Outstanding $800B $600B $400B $200B $0B 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Credit Agricole CIB, LCD, Thomson Reuters Slide 7
Leeraged Loan Market Proides Increasing Borrower Flexibility Boosted by a surge of opportunistic deals and a spate of LBO credits, institutional new money issuance in the U.S. leeraged loan market jumped to $66 billion in May, the most since the record $78 billion in January 2017 Refinancing actiity remains the main drier of leeraged loan actiity, with a 71% share of issuance so far into the second quarter, in line with 2017 Howeer, strong PE deal flow (add-on M&A / new LBO) is adding to oerall market growth Best in class corporate borrowers currently clearing at L + 175 (~4.7% swap adjusted) s L + 200-225 in 2017 Approximately 80% of Term Loan B olume YTD is co-lite, a record high Recent deals from Iron Mountain, Vistra Energy and Telenet highlights the increase in leeraged loans with maturities of greater than 7-years (at least 7 deals already this year) Banks increasingly proiding flexible / friendly all senior backstops in lieu of high yield bridges Source: Credit Agricole CIB, LCD Slide 8
Robust M&A Enironment but Primarily for Large Cap Multinationals Yearly Announced & Completed US M&A Deal Volume ($Tn / # of Deals) $2.0T $1.6 $1.8 $1.7 14,082 13,940 14,517 YTD growth in new M&A financing Strong deal flow among large cap multinationals boosted by tax reform Most deals structured to presere IG credit ratings $1.5T 12,878 $1.0T 9,206 $0.8 10,522 $1.0 10,965 $0.9 10,813 $1.0 $1.3 $0.9 5,960 6,213 Lower olume from leeraged deals Fewer non-ig corporates willing to bet big at current aluations Sponsors preferring smaller LBOs or add-on deals to capture alue, primarily funded in loan market $0.5T $0.5 Change-of-control portability increasingly keeping bonds in place e.g. Sprint / T-Mobile $0.0T 2010 2011 2012 2013 2014 2015 2016 2017 YTD May '17 YTD May '18 Source: Credit Agricole CIB, Bloomberg Slide 9
Priate Equity Financing Trends 7x+ is the new 6x+ EBITDA add-backs galore TLB market is preferred funding source to maximize financing needs for nearly all transactions Depth of second lien loan market is increasing with large bond size placements readily achieable Aerage deal size approaching $250MM with increasing number of $400MM+ deals outstanding 2L preferred by many sponsors to capture prepayability despite higher financing costs Sources of Funding: U.S. Sponsored Borrowers U.S. Second Lien Loan Issuance 100% $40B $35B 35.97 75% $30B $25B 29.26 25.16 50% $20B 17.76 25% $15B $10B $5B 4.83 6.83 10.78 10.08 6.10 0% 2010 2011 2012 2013 2014 2015 2016 2017 YTD May 1L Loan only 1L/2L Loan 1L Loan+Bond '18 $0B 2010 2011 2012 2013 2014 2015 2016 2017 2018 Bond only Other Source: Credit Agricole CIB, LCD Slide 10
Corporate Issuance Themes U.S. High Yield Issuance by Sector 2016 2017 2018 TMT 26.5% 13.8% 15.2% Basic Materials 9.4% 18.3% 16.0% Consumer, Cyclical 9.8% 10.2% 9.3% Consumer, Non-Cyclical 14.6% 18.9% 13.9% Energy 15.2% 17.1% 23.7% Financial 2.3% 1.3% 3.8% Healthcare 4.9% 7.0% 6.6% Industrial 8.6% 4.7% 5.1% Gaming/REIT/Lodging 8.7% 8.7% 6.5% U.S. High Yield Issuance by Ratings Category 2016 2017 2018 CCC 5.0% 10.0% 7.6% Split B / CCC 7.3% 7.5% 8.4% Single-B 30.3% 28.1% 36.0% Split BB / B 18.1% 22.0% 16.2% Double-B 32.3% 29.5% 30.3% Split BBB / BB 6.4% 2.5% 1.5% U.S. High Yield Issuance by Use of Proceeds 2016 2017 2018 LBO 6.3% 4.3% 3.8% Acquisition 14.4% 15.3% 13.0% GCP 11.8% 9.3% 11.1% Spin-off 4.8% 0.4% 1.3% Refinance 62.5% 68.5% 67.8% Diidend 0.2% 2.2% 2.5% Energy issuance driing olume in 2018 41 Oil & Gas and Energy-related issuers raising $23.3B in HY financing YTD Decrease in refinancing olume from frequent, well known market darling issuers NIC s gapped wider in February to 30 62.5 bps, een for on the run names Less frequent / first time issuers on the rise; debut issuers represent c. 17% of YTD olume, s c. 14% in 2017 Less duration is more defensible in uncertain pricing enironment Only 18 deals (c. 13%) with maturity of 10+ years in 2018, s 36 deals (c. 18%) this time last year Source: Credit Agricole CIB Slide 11
Rise of 'Reerse Yankee' Euro Issuance European High Yield Reerse Yankee Volume 100B 90B 80B 70B 60B 50B 40B 30B 20B 10B 0B EU Issuers U.S. Issuers 66.7 54.5 43.0 24.5 10.9 8.9 19.7 6.1 2015 2016 2017 2018 U.S. issuers with EUR funding needs hae recently been attracted to the European market in 2017 due to the cost saings aailable Differential between the EUR tranches of cross-border transactions and the USD tranches has widened to 200+ bps in some cases US borrowers hae also been drawn to Europe to expand their inestor base, as well as to capitalize on relatiely more stable demand U.S. market is more susceptible to fund inflows and outflows affecting week-on-week demand Oerall 2017 was a record year for Reerse Yankee issuances in both the HY bond and Loan markets 36 HY bond deals hae priced in 2017, s 20 for 2016 Notable decrease thus far in 2018 gien the bouts of olatility witnessed in the European markets throughout the course of the year but more deal flow is expected Source: Credit Agricole CIB Slide 12
Tug of War on Coenants Modest improement in oerall coenant scores but numbers don t necessarily tell the whole story HY-lite indentures represented 35% of total issuance in 2017 s less and 15% in 2011 Traditional HY indentures proiding significant flexibility for secured debt capacity and restricted payments through multiple grower baskets, unlimited leerage-based goernors and numerous loopholes Seeral recent deals hae seen successful buyside pushback on key coenants including attempts at CoC portability, though this has suried on others Moody s HY Coenant Quality Index (2011 Present) Weaker Stronger 4.6 3.20 4.4 3.40 4.2 3.60 3.80 4 3.8 4.00 3.6 4.20 3.4 4.40 3.2 4.60 CQI Weakest-Leel Protection Threshold 2011 2012 2013 2014 2015 2016 2017 2018 2018 Source: Credit Agricole CIB, Moody's High-Yield Coenant Database Slide 13
Select Recent Transactions of Note April 24, 2018 $702MM 7.875% Sr Notes due 2025 (Caa1 / B+) Community Adjusted EBITDA May 18, 2018 $1.0BN 7.750% Sr Secured Notes due 2026 (B1 / B) 1.125 lien May 2, 2018 $500MM 6.875% Sr Notes due 2026 (B3 / B-) Tax reform March 28, 2018 $550MM 6.500% Sr Notes due 2026 (B2 / BB) 550MM 4.000% Sr Notes due 2023 250MM 4.750% Sr Notes due 2026 Cross border, HY-lite May 24, 2018 $300MM 8.75%/9.5% Sr PIK Toggle Notes due 2023 (Caa1 / CCC+) PIK toggle diidend recap Slide 14