MIDDLE MARKET PANEL DISCUSSION LSTA S 18 TH ANNUAL CONFERENCE Ioana Barza Director of Analytics ioana.barza@thomsonreuters.com
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Issuance ($Bils.) Issuance ($Bils.) 2013 GLOBAL M&A LOAN ISSUANCE REACHES $370B; U.S. M&A LENDING REACHES $250B 1,600.0 1,400.0 1,200.0 GLOBAL M&A LENDING PICKS UP Americas EMEA Asia-Pacific (excl. Japan) Japan (beg. '06) U.S. M&A LENDING: GAINING TRACTION 500.0 450.0 400.0 350.0 Non-Lev. Lev. LBOs BIG PICTURE 1,000.0 800.0 600.0 400.0 200.0 0.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2
M&A OUTLOOK TR LPC SURVEY When might M&A lending reach 2007 levels? 10% of respondents said 2014 20% said 2015 17% said 2016 31% said >2016 22% said never When will M&A gain traction? 1% said 4Q13 8% said 1H14 19% said 2H14 72% said after 2H14 TR LPC SURVEY Global M&A was: 2011 - $450 billion 2012 - $450 billion 1-3Q13 - $370 billion This year, global M&A lending will reach 17% of respondents said $350-$400 billion 34% said $400-$450 billion 35% said $450 - $500 billion 14% said > $500 billion BIG PICTURE 3
WHAT WAS THE BIGGEST CHANGE IN 3Q13? Lack of supply Limited new money dealflow Too much refi activity A modest pick up in M&A Commercial bank regulation Leverage lending guidance More competition Aggressive terms and conditions Aggressive leverage multiples Prevalence of structures going covenant lite Loose terms on large cap deals trickling down market Arranger fees going down Large institutional investors searching down market for deals Pricing continues lower Not enough non-sponsored opportunities Increasing hold levels New money / M&A volume Will structure and price continue to erode due to demand/supply imbalance Credit standards Leverage lending guidance Deteriorating documentation Lack of risk assessment due to folks chasing yield Aggressiveness of institutions that need to meet budgets Lack of quality dealflow Waiting for new LBOs as opposed to sponsor-tosponsor deals Maintaining structures Price compression Need higher quality deals Fiscal policy / QE issue Budget debate TR LPC QUARTERLY MIDDLE MARKET BANK & INVESTOR SURVEY RESULTS/4Q13 OUTLOOK MOST IMPORTANT ISSUE IN 4Q13? Meeting return hurdles Getting deals to close as scheduled 4Q13 MIDDLE MARKET SURVEY 4
% of respondents VAST MAJORITY OF RESPONDENTS WERE UNABLE TO LEND AS MUCH AS THEY DESIRED IN 3Q13 DID YOU REACH YOUR 3Q13 LENDING GOAL? Bank respondents 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes Non-bank respondents No WHAT FACTORS CONTRIBUTED TO THIS? Those who fell below goals attributed to: Not enough M&A Slow issuance Too much competition Strategics took away M&A Sponsors lost deals on price Buyer / seller mismatch Aggressive market Some capex projects put on hold Repayments Lack of quality dealflow Banks underpriced non-bank lenders Loose structures / weak covenants Low allocations / shrinking bank groups More amendments rather than new lending Those who met goals attributed to: Strong pipeline Strong relationships with sponsors Flexible capital on structure and yield (one-stop shop) Sector focused healthcare, energy Lucky that our sponsors won their deals Focused on smaller EBITDA companies 4Q13 MARKET SURVEY 5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Issuance ($Bils.) Issuance ($Bils.) MIDDLE MARKET LENDING DRIVEN BY REFINANCINGS QUARTERLY MIDDLE MARKET ISSUANCE 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Non-sponsored Sponsored ANNUAL MIDDLE MARKET ISSUANCE 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Refinancing New money (beg. 1Q03) Middle Market definition: 1) Borrower sales size $500 million or less & deal size $500 million or less 2) See additional exclusionary criteria on LoanConnector.com 6MIDDLE MARKET STATS
% of respondents RESPONDENTS PREDICT SPONSORED VOLUME WILL RISE MODESTLY IN 4Q13; NON-SPONSORED LIKELY FLAT 60% 50% 40% 30% 20% Non-Sponsored Sponsored 4Q13 ISSUANCE EXPECTATIONS 4Q13 MARKET SURVEY 10% 0% Significant decrease (more than 15%) Moderate decrease (between 5-15%) Remain flat Moderate increase (between 5-15%) Significant increase (more than 15%) Sponsored: Over half of respondents believe we will see a moderate pick up (5-15%) in 4Q13 Non-sponsored: Half of respondents believe volume will remain unchanged in 4Q13 7
MAJORITY EXPECTS THAT LOAN SUPPLY WILL NOT MEET LOAN DEMAND IN 4Q13 No, loan demand will outstrip loan supply Loan supply and loan demand will be balanced SPONSORED No, loan demand will outstrip loan supply Loan supply and loan demand will be balanced NON-SPONSORED 4Q13 MARKET SURVEY Yes, lenders will be able to pick and choose Yes, lenders will be able to pick and choose 0% 20% 40% 60% 80% 100% % of respondents 0% 20% 40% 60% 80% % of respondents Respondents feel that neither sponsored nor non-sponsored volume will be sufficient to meet lenders demand in 4Q13 How will the ongoing imbalance impact structures? 8
1Q06 3Q06 1Q07 3Q07 3Q08 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 Issuance ($Bils.) Issuance ($Bils.) MIDDLE MARKET COV-LITE VOLUME THE FUTURE IS HERE? 80.0 70.0 60.0 50.0 40.0 COV-LITE VOLUME: MM VS. LC Large Corp. Middle Market 5.5 5.0 4.5 4.0 3.5 3.0 2.5 MIDDLE MARKET COV-LITE VOLUME MIDDLE MARKET STATS 30.0 20.0 10.0 0.0 2.0 1.5 1.0 0.5 0.0 9
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 LBO Debt to EBITDA (x) Equity contributions EQUITY CONTRIBUTIONS DROP MORE STEEPLY FOR LARGE DEALS, LEVERAGE CREEPS UP FOR MM LBOS 7.5x 7.0x 6.5x 6.0x 5.5x DEBT TO EBITDA: MM VS. BSL LBOs MM BSL EQUITY CONTRIBUTIONS: MM VS. BSL LBOs 55% 50% 45% 40% MM BSL MIDDLE MARKET STATS 5.0x 4.5x 4.0x 3.5x 3.0x 35% 30% 25% 20% 10
% of respondents TR LPC SURVEY: SPONSORS PICK FROM WIDER ARRAY OF FINANCING OPTIONS AND FUNDING SOURCES 4Q13 OUTLOOK: WHAT STRUCTURE WILL SPONSORS FAVOR? 1st / 2nd lien Unitranche 4Q13 OUTLOOK: WILL THE UNITRANCHE GAIN MARKET SHARE? 70% 60% 50% 40% 4Q13 MARKET SURVEY 30% 1st Lien / mezz 20% 10% Stretch senior 0% 10% 20% 30% 40% 50% 60% % of LPC survey respondents 0% Increase as more lenders offer the unitranche Remain unchanged Decrease - the unitranche is losing favor 11
1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 2008 2Q10 2Q11 2Q12 2Q13 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1H08 3Q09 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Yield (3-year term to repayment) All-in-yield (3-year) STRONG DEMAND ALSO DRIVES YIELDS LOWER BUT, YIELD PREMIUM VS. BSL STAYS STEADY 12% 10% 8% 6% 4% U.S. QUARTERLY TERM LOAN YIELDS LIB/LIB floor LIB spread OID MIDDLE MARKET VERSUS LARGE CORPORATE 13% 12% 11% 10% 9% 8% 7% 6% Large Corp. Middle Market LPC MIDDLE MARKET PANEL 2% 0% 5% 4% 3% 12
% of respondents % of respondents IN A HYPER-COMPETITIVE ENVIRONMENT, LENDERS MINIMUM YIELD REQUIREMENTS ARE COMING DOWN SPON. MINIMUM YIELD REQUIREMENT IN 4Q13 BSL INVESTORS APPETITE FOR MM IN 4Q13? 50% 40% 30% 20% 10% 0% Banks Non-banks < 4% 4-5% 5-6% 6-7% 7-8% 8-9% Very strong - lack of BSL dealflow forcing investors down market Somewhat strong - showing interest if yield is enticing 4Q13 MARKET SURVEY 60% 50% 40% 30% 20% 10% 0% MIN. SPREAD REQUIREMENT IN 4Q13 Banks non-spon. Non-banks spon. < 100 100-200 200-300 300-400 Banks - spon. 400-500 500-600 > 600 Moderate - investors buying smaller deals occassionally Weak - investors are not showing interest 4Q13 4Q12 0% 10% 20% 30% 40% 50% % of respondents 13
HOW HAS BANKS BEHAVIOR CHANGED FOLLOWING FINALIZED LEVERAGED LENDING GUIDANCE? BANK VERSUS NON-BANK PERSPECTIVE No change in banks behaviour is expected Banks will still participate but will have to limit the amount of leveraged deals they buy Banks will be shut out of the leveraged market Non Banks Banks 0% 20% 40% 60% 80% 100% % of survey respondents LEVERAGED LENDING GUIDANCE SUMMARY Final guidance issued in March 2013 by the OCC and FDIC Deals treated as leveraged include: Proceeds used for buyouts, dividends, etc. Senior debt/ebitda > 3x Total debt/ebitda > 4x Loans to vehicles that engage in leveraged finance (CLOs, BDCs, etc.) Fallen angels* ABL* Deals treated as criticized include: If a company cannot show the ability to amortize 100% of its senior debt or 50% of its total debt within 5 to 7 years, it would be treated as criticized Issuers with leverage in excess of 6x debt/ebitda after asset sales 4Q13 MARKET SURVEY Based on a survey conducted by Thomson Reuters LPC in 4Q13, the majority of respondents believe banks will still participate in leveraged lending but will have to limit the amount of deals they buy 14
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 ($Bils.) ($Bils.) BDCS PUT $21B TO WORK IN SR. LOANS, MEZZ IN LAST TWELVE MONTHS $30BILLION IN BDC EQUITY CAPITAL ISSUED SINCE INCEPTION 6.0 5.0 4.0 3.0 2.0 25.0 20.0 15.0 10.0 TRAILING TWELVE MONTH GROSS ORIGINATIONS MIDDLE MARKET STATS 1.0 0.0 5.0 0.0 15
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