KPMG CORPORATE FINANCE Credit Markets Update 4 th Quarter 2012 CAPITAL ADVISORY
Credit Markets Summary Leveraged loan activity flourished in the fourth quarter amid a largely stable macro environment and demand-rich technical conditions despite ongoing concerns around Eurozone financial stability and worries about the U.S. fiscal cliff in the aftermath of the U.S. Presidential election. o New issue loan volume reached $136.0 billion during the fourth quarter, more than double the $61.8 billion recorded in Q4 2011 and exceeded the $126.0 billion booked during the third quarter. Total 2012 volume ended up being the third-biggest year in terms of primary production, behind only 2006 and 2007 with $465.2 billion surpassing 2011 s volume of $375.1 billion by 24%. o The S&P/LSTA Leveraged Loan Index has returned 9.66%, compared to just a 1.52% gain during 2011. Opportunistic business boomed in 2012, making it a banner year for recaps as potential changes in dividend tax rates put such financings in focus. o Issuers closed $15.6 billion of dividend-related loans in the fourth quarter, bringing volume for the full year to a record $56.4 billion. Collateralized Loan Obligations ( CLO ) continued to drive demand with $22.8 billion of new vehicles printed, the most since the second quarter of 2007 and up from $12.8 billion in the third quarter. o There were a total of 116 CLO vehicles established during the year totaling $53.5 billion, which is a five-year high and more than four times 2011 s tally of $12.3 billion. Issuers took advantage of the strong liquidity and supply/demand imbalance to push for more generous structures, terms, and reduced pricing. Perhaps not coincidently, there has been an eroding of new-issue quality with B+/B1 volume representing 63.9% of new-issue volume during the second half of 2012 up from 56.5% in the first half of the year. o Despite the issuer friendly environment, the default rate ended the year at just 1.27% with 2013 projected to range approximately 1.5% to 2.0%, both well below the historical average of 3.3%. One factor driving the optimism is the 2013 debt maturity wall has all but collapsed: the amount of S&P/LSTA Index loans due in 2013 stood at just $4.7 billion, down from $29 billion at year-end 2011. Early expectations for 2013 remain positive driven by projected moderate LBO activity, continued recap activity (albeit at a much slower pace than during 2012) and expected favorable technical conditions aided by the eleventh-hour deal in Washington which provided certainty around tax rates and averted the fiscal cliff at least for now. Standards & Poor Leveraged Commentary & Data 1
Leveraged Loan Market Overview With U.S. monetary policy signaling that interest rates would remain at current historical lows investors went in search of yield during the quarter and throughout 2012. For many, this heralded a return to the leveraged loan asset class as well as renewed focus on high yield bond debt. o Total leveraged loan volume increased 7.9% to $136.0 billion during Q4 2012 from $126.0 billion during the third quarter. o Q4 2012 new issue middle market loan volume hit a record high during the quarter of $30.9 billion. o Q4 2012 high yield volume reached $96.4 billion, bringing 2012 issuance to a record level of $347.0 billion surpassing 2010 s prior mark of $287.0 billion. The average yield has decreased from December 2011 to December 2012 for the following types of loans: o BB/BB- loans (currently at 4.0% from 4.48%) and B+/B loans (currently at 6.0% from 7.01%). $160 Total Leveraged Loan Volume by Quarter ($ in billions) 9.00% New Issue First-Lien Yield to Maturity $140 8.00% $120 $100 $80 7.00% 6.00% $60 5.00% $40 $20 $0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 4.00% 3.00% Institutional Pro Rata All Loans All-BB All-B Standards & Poor Leveraged Commentary & Data 2
Leveraged Loan Market Current Trends Dividend recaps continued its rapid pace in Q4 2012 driven by the proposed changes in dividend tax rates. Total volume reached $15.6 billion for the quarter versus $16.4 billion in Q3 2012 and $56.4 billion for the year versus $36.4 billion in 2011. o Private equity firms accounted for 86.5%, or $48.8 billion of dividend-related transactions versus 69.7%, or $25.5 billion, in 2011 with an historical average of 61.1%. Covenant-lite facilities became more prominent in deal structures, representing a record 39.4% of overall issuance in the fourth quarter from 31.2% in Q3 2012. Leverage multiples are beginning to gradually increase, reaching 5.5x for new large LBOs (greater than $50 million of EBITDA) from 4.5x during Q1 2012. Acquisition-related loans dipped to $38.2 billion during Q4 2012 from $45.9 billion during the third quarter despite a pickup in LBO volume from $13.5 billion to $17.5 billion. Full year M&A loan volume reached a five-year high of $143 billion. With issuers focused on dividends and more impactful business, repricings suffered. Issuers shaved spreads on $15 billion of loans during the final three months of 2012, versus $21.7 billion during the prior period. Spread-cutting activity also fell for the full year down to $51.2 billion versus $69.9 billion in 2011. Second-lien activity jumped to a post-credit crisis high of $6.4 billion in the fourth quarter, from $3.9 billion in Q3. For the year as a whole, second-lien volume more than doubled to $17.1 billion from $7.0 billion in 2011. Another growth area in 2012 was Yankee loans from European-based issuers looking to take advantage of the more fertile U.S. market to finance, or refinance loans. o Such activity climbed to a record $28.4 billion during the year versus $8.8 billion during 2011. o Refinancings accounted for 65% of such activity. Additionally, the institutional investor base for loans expanded during 2012 as hedge funds and other relative-value players entered, or reentered, the market in search of elusive wide-margin investment opportunities in today s low-yield landscape. Standards & Poor Leveraged Commentary & Data 3
Middle Market Lending Conditions Middle market loan volume hit a record high during the quarter of $62.1 billion (including new money and refinancings), with full year volume reaching $180.3 billion which was in line with 2011 s volume of $182.2 billion. The middle market ended the final quarter of the year with dividend deals and new incremental add-on facilities for acquisitions leading the way. Middle market investors expedited deals in the wake of tax law changes and the looming fiscal cliff, pushing what would have been Q1 2013 deals into the final quarter of 2012. Overall investor appetite has remained strong, with selectivity becoming increasingly more prevalent in the market as lenders have become more concerned of leverage levels. o Yields dropped slightly at the beginning of the quarter to the 6.5% - 6.7% range, then crept back up in December to the 7.6% level as selectivity in the market increased supply. o Investor selectivity is reflected in the flex metrics with upward flexes outnumbering reverse flexes by 3.5:1 the last two months of the year, where the opposite was true in October with downward price flexes exceeded upward flexes 1.4:1. L+650 Middle Market Loan Average Pricing $70 Total Middle Market Leveraged Loan Volume ($ in billions) L+600 $60 L+550 L+500 $50 $40 $30 L+450 $20 L+400 L+350 $10 $0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Refinancing New Money Pro Rata Institutional Standards & Poor Leveraged Commentary & Data and Thomson Reuters LPC 4
High-Yield Bond Market Update A combination of fiscal cliff fears, tax law changes and expectations for a more challenging 2013 had issuers rushing into the high yield market. Q4 2012 high yield volume reached $96.4 billion, bringing 2012 issuance to a record level of $347.0 billion surpassing 2010 s prior mark of $287.0 billion. o High yield bond issuers have been taking advantage of the recent friendly issuance environment. October saw $37.7 billion priced, making it the third busiest month on record. o Investor demand has been driven by the continued low interest rate environment and the expectation that quantitative easing of the federal reserve will continue in 2013. High-Yield Loan Volume by Quarter ($ in billions) High-Yield Bond Volume by Purpose $120 $100 $80 $60 $40 $20 $0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 100% 80% 60% 40% 20% 0% 24% 7% 35% 32% 5% 11% 11% 14% 13% 10% 12% 5% 4% 50% 7% 17% 55% 8% 13% 11% 9% 47% 3% 29% 13% 4% 6% 11% 8% 6% 11% 45% 18% 10% 32% 24% 22% 12% 16% 19% 19% 20% 22% 23% 23% Sr. Secured Sr. Unsecured Subordinated 2005 2006 2007 2008 2009 2010 2011 YTD 12/20/12 Refinancing / Bonds Refinancing / Bank Debt Refinancing / General M&A Recap Other Standards & Poor Leveraged Commentary & Data 5
Asset Based Lending Update Asset based lenders found themselves less busy during the fourth quarter than they would have hoped largely a reflection of slimmer deal pickings during the quarter, and throughout the year, in general. o ABL lending in Q4 2012 recorded a decline versus Q3 2012 with $2.4 billion booked during the quarter, which was 64% lower than the $6.8 billion closed in Q3 2012, and 19% lower than the $2.9 billion of Q4 2011 volume. Full year activity reached $19.4 billion versus $24.5 billion in 2011, but well exceeding the $12.6 billion closed during 2010. o ABL occasionally found itself competing with the bull market cash flow structures and a shift to covenant-lite revolvers. The automotive industry represented 17.5% of all asset based facilities during Q4 2012. Asset-Based Volume by Industry Volume of Asset Based Deals ($ in billions) Automotive Forest Product 14.4% 17.5% $12 Food & Beverage 12.8% $10 Services & Leasing 12.3% $8 Printing & Publishing 12.3% $6 Manufacturing & Machinery 8.2% Retail 6.6% Retail Food & Drug 6.2% Metals & Mining 6.2% Healthcare 3.5% 0% 5% 10% 15% 20% $4 $2 $0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Institutional Pro Rata Standards & Poor Leveraged Commentary & Data 6
Collateralized Loan Obligation Vehicle Update 2012 saw managers create 116 vehicles totaling $53.5 billion, which is another five-year high and more than four times 2011 s total of $12.3 billion. o CLO s took 63.7% of the primary market during the final quarter of the year, when issuance reached $22.8 billion, or a $91.2 billion annualized rate. o In all, 69 managers closed new vehicles, up from 28 in 2011. The large jump is due to increased demand for CLO equity, which opened the door for new deals funded by distributed equity. o Structured-finance vehicles accounted for 68.9% of new-issue allocations in loans rated B/B2 or better, versus 49% in 2011. o For lower-rated paper, including second-lien loans, the CLO share grew as well to 32.5% in 2012 from 23.5% in 2011. $25B Leveraged Loan CLO Activity 80.0% CLO share of primary institutional market for highly leveraged loans 70.0% $20B 60.0% 50.0% $15B 40.0% $10B 30.0% 20.0% $5B 10.0% 0.0% $0B 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Loans rated B/B2 or higher Loans rated B-/B3 or lower Standards & Poor Leveraged Commentary & Data 7
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10-Jan 10-Mar 10-May 10-Jul 10-Sep 10-Nov 11-Jan 11-Mar 11-May 11-Jul 11-Sep 11-Nov 12-Jan 12-Mar 12-May 12-Jul 12-Sep 12-Nov Covenant-Lite Update Issuers took advantage of strong loan demand in the fourth quarter and pushed for generous terms and structures. Covenant-lite is quickly turning from a perk for favored issuers to a standard product feature. o Total covenant-lite volume in 2012 came in at over $71 billion, a 35% increase over the prior year s total. In October alone, over $22 billion covenant-lite transactions came to market. o Covenant-lite facilities reached a record 39.4% of overall issuance in the fourth quarter, including December s record 51.5% from 31.2% in the third quarter. o 29.5% of S&P/LSTA Index loans outstanding were covenant-lite as of the end of December, up from 24% as year end December 2011. $25B $20B $15B $10B $5B $0B New-Issue First-Lien Covenant-Lite Loan Volume 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% $100 $80 $60 $40 $20 New-Issue Loan Volume by Year ($ in billions) $0 Volume Percent Volume Standards & Poor Leveraged Commentary & Data 8
Dividend Recap Update Dividend recaps exploded in 2012, and Q4 2012 in particular, with private equity-backed issuers tapping the market ahead of the anticipated 2013 dividend tax rate increase. o 2012 experienced dividend recap volume at $56.4 billion, a historical high, with Q4 2012 volume at $15.6 billion, one of the largest volume dividend recap on record. o Sponsored entities comprised 86.5% of dividend-related finance, versus 69.7% in 2011 and a historical average of 61.1%. o Based on the data, $33.7 billion of the $56.4 billion recap loan refinancing has been used to pay dividends. Add to that $20.8 billion of HY bonds, and the dividend total grows to $54.5 billion. Dividend Related Loan Volume Sponsored Dividend Related Loan Volume $20B $18B $16B $14B $12B $10B $8B $6B $4B $2B $0B 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 $18B $16B $14B $12B $10B $8B $6B $4B $2B $0B 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Institutional ProRata Institutional ProRata Standards & Poor Leveraged Commentary & Data 9
KPMG Corporate Finance: Capital Advisory KPMG s Capital Advisory professionals are leaders in raising debt and equity capital and, in this capacity, we closely monitor capital market activities involving both public and private transactions large and small and maintain current knowledge of debt refinancing activity, private and public equity investments, and M&A transactions. Primary Service Offerings o Capital raises Lead private placement processes for refinancings, growth capital, acquisition financing, and dividend recapitalization o Debt restructuring Provide assistance to companies that are currently in default and may need help negotiating a resolution with the existing lender(s), raising junior capital, or refinancing existing debt o General capital advisory Helping companies assess their capital structures and provide insight on available options in the capital markets How we might assist o Execute private placement process in arranging new capital (across all tranches) o Strategic advice in relation to identification and evaluation of financing options, structures, and appropriate debt/equity mix o Strategic financing advice on the methods, tactics, and timetable for dealing with lenders/financial stakeholders in order to enable a renegotiation/restructuring of debt facilities o Provide market data on current lending environment o Advice on appropriate funding strategy for remaining and divested businesses and average stand-alone capital package o Help reset or renegotiate costs o Provide an optimal capital structure review in order to suggest appropriate capital solutions o Support in negotiations with lenders/investors of terms through to close 10
KPMG Corporate Finance: Capital Advisory PHILIP ISOM Head of U.S. Corporate Finance Tel 312-665-1911 Fax 312-873-3834 pisom@kpmg.com Select Recently Closed Engagements JOE RODGERS Managing Director Tel 404-222-3278 Fax 404-759-2294 jrodgers@kpmg.com RAYMOND KANE Managing Director Tel 212-954-2226 Fax 212-842-5153 rkane@kpmg.com Corporate Finance Acted as financial advisor to Logisticap Partners and privately placed a senior secured credit facility in connections with the acquisition of MyUS.com Corporate Finance Acted as financial advisor to the Company to assess the viability of a Bond Repurchase program Corporate Finance Acted as financial advisor to the Company and Private Equity Sponsor, and privately placed an Asset Based Revolving Credit Facility in connection with a refinancing and to provide liquidity for capital expenditures and working capital requirements MIKE RUDOLPH Director Tel 312-665-1442 Fax 312-602-3890 msrudolph@kpmg.com Corporate Finance Advised CACI International, Inc. on its capital structure and proposals from financing sources Corporate Finance Acted as financial advisor to the Company and privately placed an Asset Based Revolving Credit Facility in connection with the refinancing of its existing debt facility and to provide liquidity for working capital requirements 11
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