AVOCA CAPITAL LEVERAGED LOANS EUROPEAN LEVERAGED LOAN MARKET IMPACT OF THE CREDIT CRISIS OUTLOOK 1
AVOCA CAPITAL INTRODUCTION Avoca is a large and long established European leveraged loan manager Top 5 Market Position Avoca Capital is a top five European leveraged loan manager with 5.5 billion of assets under management Independent Avoca Capital is the largest totally independent partner owned leveraged loan manager in Europe. Large Team Avoca employs 35 people in offices in Dublin and London Track Record Currently manage 11 different funds plus separate managed accounts Consolidator in the market - 2 funds taken over Each of Avoca s nine funds have outperformed the benchmark index since inception High concentration, high conviction approach 2002 Year Founded 5.5bn Total AUM 35 Employees 150+ Institutional Investors 150 Loans in Portfolio 2
INVESTMENT PHILOSOPHY AND CREDIT PROCESS HEADING AVOCA CAPITAL LEVERAGED LOANS EUROPEAN LEVERAGED LOAN MARKET IMPACT OF THE CREDIT CRISIS OUTLOOK 3
LEVERAGED LOANS WHAT IS A LBO? As an example, a private equity firm purchases the following company and then sells it in 3 years: Valuation Time Period T T+3 EBITDA 10m 15m Valuation Multiple 10x 10x Price Purchase for 100m Sell for 150m Capital Structure 30m equity 80m equity Equity value uplift 70m debt 70m debt Debt returns fixed Equity earns 2.7x (IRR of c.40% over 3 years) Drivers 1. Public to private (e.g. Boots) 2. Disposal of Non-core assets by large corporates (e.g. Siemens Audiology) 3. Focus on efficiency / cost cutting (e.g. Debenhams) 4. Roll out / growth strategies (e.g. ISS / Halfords) 5. Break-up strategies 4
LEVERAGED LOANS WHAT IS A LEVERAGED LOAN? A leveraged loan typically exhibits the following characteristics: Above average risk Generally a loan to a geared borrower of sub investment grade quality (typically BB/B or lower at deal close) Typical LBO Capital Structure Spreads Tranching Returns Includes senior secured, second lien and/or mezzanine loans Floating rate margin over Euribor/Libor 40% equity 10% mezzanine debt E + 1,000 bps Terms Loan documentation typically includes financial covenants (leverage, cash cover, interest cover) and operational covenants (use of cash, disposal proceeds, etc) 50% senior debt E + 400 bps Security Senior debt has senior secured ranking over the assets of the company Purpose Over 90% of European Leveraged Loans used to finance private equity buyouts 5
LEVERAGED LOANS European leveraged loans today = superior downside protection + attractive pricing OVERVIEW OF THE LEVERAGED LOAN ASSET CLASS Leveraged Loans IG Bonds HY Bonds Private Equity Public Equity Security Information Potential for inefficient pricing High Liquidity Broad ownership spectrum Market Size (Europe only) 300 billion 2 trillion 400 billion 50 billion 7 trillion 6
LEVERAGED LOANS OVERVIEW OF THE LEVERAGED LOAN ASSET CLASS Leveraged Loans Investment Grade Bonds High Y ield Bonds Private Equity Public Equity Security First ranking security over First ranking security over Typically unsecured Last priority (but before Last priority to residual cash company assets, thus company assets, thus management) to residual cash flows from assets as well as any cons iderable downs ide considerable downside flows from assets as well as any debt interest not already protection protection debt interest not already distributed distributed Information Excellent information access, Reliant on public documents Reliant on public documents Excellent information access Reliant on public information as f ull due diligence on issuance, no access to private no access to private and depending on level of governed by the rules of the monthly management data information information shareholding day-to-day relevant market/exchange and management acces s control thereafter Ownership Now disproportionately Generally liquid market well Generally relatively liquid Specific issues with over Highly liquid institutional/retail owned by banking groups and covered by institutional and market well covered by commitments and relative fund market hedge f unds with capital retail funds institutional and retail funds over-allocation. Generally issues; illiquid market and institutionally held for the asymmetric information longer term. Generally illiquid (between those in the market and those not) Pricing Significant and endemic Credit discounts endemic; Credit discounts endemic; Significant liquidity and Valuation discounts depending liquidity and credit discounts selectively liquidity is an issue selectively liquidity is an issue valuation discounts depending on sector and stock specific throughout loan universe on manager/portfolio specific prospects prospects Market Size 300 billion 2 trillion 400 billion 50 billion 7 trillion (Europe only) 7
LEVERAGED LOANS MARKET PARTICIPANTS c. 200bn Banks Equity Current market c. 300bn c. 100bn CLOs Arranging Bank Debt Company Hedge Funds Risk Takers Underwriting Rationale for Participation: Arranging Banks: Underwrite finance in exchange for underwriting fee. Often do not retain exposure on the balance sheet Banks: Gain access to assets with yield in excess of their cost of funding CLOs: Package a portfolio of loans, tranche the risk and sell to investors Hedge Funds: Short term players - often via secondary market. 8
LEVERAGED LOANS WHAT IS A CLO? Portfolio of leveraged loans c.60 borrowers across c.25 sectors and c.10 countries Assets Leveraged Loans Liabilities Equity BB BBB A AA AAA rated debt Sold in capital markets Investors are banks, pension funds, insurance companies and asset managers Cost of debt tranche varies depending on rating Average spread: E+400bps Weighted average cost of debt: E+250bps 150bps arbitrage for equity investors leveraged at 10x (i.e. approximately 15% annual return) 9
INVESTMENT PHILOSOPHY AND CREDIT PROCESS HEADING AVOCA CAPITAL LEVERAGED LOANS EUROPEAN LEVERAGED LOAN MARKET IMPACT OF THE CREDIT CRISIS OUTLOOK 10
EUROPEAN LEVERAGED LOAN MARKET DEAL VOLUME Market Development and Growth Credit Crunch Current market outstandings c. 300bn in size with c.500 deals Average senior debt size of c. 500m 180 160 140 120 Introduction of Euro and first securitisation 32% CAGR 350 300 250 bn 100 80 200 150 No. of deals 60 40 100 20 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0 Deal Count Deal Volume Source: S&P LCD 11
EUROPEAN LEVERAGED LOAN MARKET SECTOR AND GEOGRAPHIC ISSUANCE Geographic Issuance Sector Issuance UK 24% Germany 19% France 16% Netherlands 11% USA 7% Spain 6% Sweden 5% Belgium 3% Other 9% Services & Leasing 13% Retail 8% Healthcare 8% Manufacturing 7% Chemicals 7% Printing & Publishing 6% TV 6% Building Materials 6% Other 38% Source: S&P LCD 12
EUROPEAN LEVERAGED LOAN MARKET LEVERAGE Market Development and Growth Credit Crunch Leverage levels peaked in 2007 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 First Lien/EBITDA Second Lien/EBITDA Other Debt/EBITDA Source: S&P LCD 13
EUROPEAN LEVERAGED LOAN MARKET IMPLICATIONS OF LEVERAGE Assuming 6x leverage, c.10% annual growth in earnings needed to repay debt from internally generated cashflow 900 800 700 10% CAGR 7.0x 6.0x 5.0x m 600 500 400 300 4.0x 3.0x 2.0x Debt/EBITDA 200 1.0x 100 0.0x 0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8-1.0x EBITDA Cash generation (post-interest cost) Net Leverage 14
INVESTMENT PHILOSOPHY AND CREDIT PROCESS HEADING AVOCA CAPITAL LEVERAGED LOANS EUROPEAN LEVERAGED LOAN MARKET IMPACT OF THE CREDIT CRISIS OUTLOOK 15
MARKET EVOLUTION MARKET EVOLUTION SINCE THE CREDIT CRUNCH Credit Crunch Market Recovery Bid-Price Evolution of European Leveraged Loan Index (ELLI ) 110 1 2 3 4 5 6 7 8 1. 2. 3. 4. 5. 100 90 80 70 60 50 May 07 May 2007 Stable market July 2007 Sub-prime crisis and securitisation market impact January 2008 Market value funds experience technical defaults April 2008 Rescue of Bear Stearns. Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 September 2008 Lehman Brothers declares bankruptcy Source: S&P LCD 6. 7. 8. Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 October 2008 Collapse of the Icelandic banks resulting in c. 15 billion of leveraged loans put up for sale May 2009 - Trough reached in Q1 2009. Performing loans led the price recovery in Q2 2009 Current Increasing prepayments in the leveraged loan market (due to IPOs and refinancings) and strong technical momentum has resulted in increasing secondary prices through Q1 2010 16
Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 MARKET EVOLUTION LIQUIDITY PREMIUM 35 30 25 20 15 10 5 0-5 17 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Credit Premium Liquidity Premium % May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08
1994 1997 2000 2003 2006 2009 MARKET EVOLUTION 18 16 14 12 10 8 6 4 2 0 SPECULATIVE GRADE DEFAULTS 18 1988 1991 1979 1982 1985 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1940 1943 % of issuers 1922 1925 1928 1931 1934 1937 Source: Moodys, Avoca estimates
INVESTMENT PHILOSOPHY AND CREDIT PROCESS HEADING AVOCA CAPITAL LEVERAGED LOANS EUROPEAN LEVERAGED LOAN MARKET IMPACT OF THE CREDIT CRISIS OUTLOOK 19
Q3 2009 Q4 2009 Q1 2010 OUTLOOK Slow return to normality Defaults to remain at elevated levels in 2010 with a next wave in Q2/ Q3 2010 Source: S&P LCD DEFAULTS DECREASING 60 50 40 30 20 10 0 20 Q2 2009 Q1 2009 Q4 2008 No. of defaults and restructurings Q1 2008 Q2 2008 Q3 2008
FUTURE TRENDS IMPROVING COMPANY PERFORMANCE Trend from Avoca portfolio of 105 companies across 28 different sectors and 12 different countries Key underperforming sectors are cyclicals: Building materials Automotive Chemicals & Plastics Rolling 3 month EBITDA versus PY 2% 0% (2%) (4%) (6%) (8%) (10%) (12%) Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Source: Avoca Deal Database 21
FUTURE TRENDS NEW ISSUE VERSUS SECONDARY SPREADS Secondary spreads tightening to match new issue spreads 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 New issue spreads Secondary spread yield Source: S&P LCD 22
OUTLOOK NEW ISSUANCE RE-STARTING 14 deals issued in Q1 2010 (c. 6.5bn) and issuance expected to increase Forecast issuance of 25-35bn for 2010 Global private equity firms have estimated cash of 350bn to be deployed bn 180 160 140 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (f) Leveraged Loan Issuance 10 year average issuance Source: S&P LCD, Avoca Estimate 23
OUTLOOK MORE CONSERVATIVE LEVERAGE 5.5x 5.0x 4.5x Senior debt/ebitda 4.0x 3.5x 3.0x 2.5x 2.0x 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (f) New issuance average senior leverage 10 yr average senior leverage Source: S&P LCD, Avoca Estimate 24
OUTLOOK DEBT AMORTISATION WALL Growth in LBO market in 2005-2007 resulted in large amortisation wall in 2014-2015 c. 150bn due to be refinanced between 2010 and 2014 % of ELLI Index 35% 30% 25% 20% 15% 10% 5% 0% 2010 2011 2012 2013 2014 2015 2016 2017 Source: S&P LCD 25
OUTLOOK VALUATION GAP Net debt/ebitda 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x Valauation gap 2009 2010 2011 2012 2013 2014 Net Leverage (forecast) FTSE 100 EV/EBITDA Source: Avoca estimates, Bloomberg 26
STRICTLY PRIVATE AND CONFIDENTIAL This presentation contains information which has been provided by a number of sources. While the information herein is believed to be reliable, no representation is made herein by AVOCA Capital Holdings ( Avoca ) as to the accuracy or completeness of such information. In addition, the results of certain financial models are contained herein. No representation or warranty is made by Avoca as to the reasonableness or completeness of such assumptions, estimates, projections, hypothetical performance analysis or as to any other financial information contained in such models. Actual results may vary, perhaps materially, from the results contained herein. Assumptions involve significant elements of subjective judgements and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Each recipient hereof is urged to make its own evaluation of such financial models (including the assumptions on which they are based). Avoca do not assume any responsibility for the accuracy or validity of such projections. Nothing contained herein shall constitute any representation or warranty as to future performance. This presentation is for informational purposes only and is being furnished on a confidential basis. This presentation is not an offer to sell or a solicitation of an offer to buy any security. The information contained herein is confidential and may not be reproduced in whole or in part. Information regarding the past performance of loans/portfolios/ funds set out herein are taken from publicly available sources, or from materials provided by Avoca, and are not independently verified.. Avoca makes no representation and have given you no advice concerning the appropriate regulatory treatment, accounting treatment, or possible tax consequences in connection with any investing in any proposed fund or managed account. Prior to entering into any proposed investment, you should determine, the economic risks and merits, as well as the legal, tax, and accounting characteristics and consequences, of the investment, and that you are able to assume these risks.
75 St. Stephens Green, Dublin 2, Ireland PHONE +353 1 475 7499 FAX +353 1 479 3129 www.avocacapital.ie Avoca Capital Holdings is regulated by the Irish Financial Regulator