The bank perspective: lending in a hyper competitive environment SPONSORED BY UNION BANK Stephen Flynn Moderator Senior Vice President, Syndications & Placements UNION BANK Jeffrey Doherty Managing Director PNC Capital Markets Mike Mahoney Managing Director / Team Leader, Loan Syndications U.S. BANCORP Robert F. Marcus Senior Managing Director, Group Head Capital Strategies Group FIFTH THIRD SECURITIES
1Q13 SPONSORED AND NON SPONSORED ISSUANCE DROPS SPONSORED VS. NON SPONSORED MM VOLUME Issuan nce ($B.) COMMENTARY 40.00 Non sponsored Sponsored 1Q13 Sponsored loan volume $14.1 billion 35.0 Down 47% from 4Q12 Up 25% from 1Q13 30.0 4Q12 Non Sponsored loan volume $22.5 billion 25.0 Down 37% from 4Q12 Even with 1Q12 20.0 15.0 ANNUAL SPON. VS. NON SPON. LOAN VOLUME 200.0 Non sponsored Sponsored MIDD LE MA RKET STATS 10.0 ($B.) 150.0 5.0 0.0 1Q00 0 2Q01 3Q02 4Q03 1Q05 2Q06 3Q07 4Q08 1Q10 2Q11 1 3Q12 Issuance ( 100.0 50.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q13 2
04/03/13 Register for TRLPC's Middle Market Conference: www.loanpricing.com/mmconference VAST MAJORITY OF RESPONDENTS WERE UNABLE TO LEND AS MUCH AS THEY DESIRED % of respon ndents DID YOU REACH YOUR 1Q13 LENDING GOAL? WHAT FACTORS CONTRIBUTED TO THIS? Bank Non Bank Those who fell below goals attributed to: Anemic dealflow 90% Lack of M&A 80% Banks still not lending Aggressive competition 70% Repricings blah! Lack of quality opportunities 60% Over par price asking 50% More players in middle market Too much leverage on credits 40% Those who met goals attributed to: Several large deals pushed from 4Q12 30% into 1Q13 20% Did a lot of refinancings/repricings i i i Buying in the secondary market 10% Did deals we did not love fingers 0% crossed! Yes No Did deals priced below our yield target 2Q13 MARKE ET SURV VEY 3
HOW ARE LOANS THAT FIT INTO THAT CRITERIA BEING APPROACHED TODAY?? HAVE DECISIONS BEEN AFFECTED? HOW ARE LOANS THAT WOULD FIT INTO THE NEW CRITERIA BEING APPROACHED TODAY? Maximizing use of bucket with focus on maximizing yield of overall portfolio Maximizing use of bucket within specific credit quality and industry sector parameters HOW HAS THE NEW GUIDANCE AFFECTED YOUR DAY TO DAY DECISION MAKING? HLT deals are considered, depends on sponsor relationship HLT deals are discouraged but nothing official 1Q13 MARKET SURV VEY Utilizing basket but very selective 25% Avoiding deals that would get lumped into this bucket 75% 0% 10% 20% 30% 40% 50% % of bank respondents 4
WHAT WILL BE THE MOST IMPORTANT ISSUE IN THE MIDDLE MARKET IN IN 2Q13? WHAT WILL BE THE MOST IMPORTANT ISSUE IN THE MIDDLE MARKET IN 2Q13? Dealflow Does something turn on the M&A switch? Need to replace loan run off Need new money dealflow Will large corporate dealflow pick up and curb investors appetite for smaller deals Competition Oversupply of bank capital Large investors are crowding out traditional middle market players How will leveraged lending guidance change dynamics Pressure on pricing Will banks continue to lower pricing to win deals? Pressure on structures Weak underwriting Credit outlook Lenders cannot continue to ignore credit because of lack of dealflow How much higher can leverage levels go? Need to keep covenants reasonable Optimism Need a sustained favorable economic outlook to boost new money issuance 2Q13 MARKE ET SURV VEY 5
WHAT STRATEGIES ARE YOU IMPLEMENTING TO PUT MONEY TO WORK IN THE CURRENT SLOW MARKET? % of resp pondents 80% 70% 60% 50% 40% 30% 20% 10% 0% Increasing hold levels Expanding geograhic footprint BANKS VERSUS NON BANKS Banks Moving down market to companies with smaller EBITDAs Buying broadly syndicated deals Non Banks Buying loans in the secondary market Adding more products Reducing minimum return hurdles deals market hurdles 2Q13 MARKE ET SURV VEY Increasing hold levels and reducing minimum return hurdles are the most popular responses for both banks and non banks Bank respondents also said they are expanding their geographical footprint while non banks are more apt to add more products. 6
LEVERAGE TOLERANCE FOR NON SPONSORED DEALS % of respondent ts NON SPONSORED: SENIOR DEBT TO EBITDA NON SPONSORED: TOTAL DEBT TO EBITDA < 2x 2x 25x 2.5x 25x 2.5x 3x > 3x < 3x 3x 35x 3.5x 35x 3.5x 4x > 4x 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 % of respondent ts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 2Q13 MARKE ET SURV VEY After pulling back on leverage tolerance heading into 2013, lenders have loosened their tolerance heading into 2Q13 2.5x 3x senior by 3.5 4x total is the most common response but more lenders are willing to go above 3x by 4x heading into 2Q13 compared to heading into 1Q13 7
MAJORITY FEEL THAT REFINANCINGS WILL CONTINUE TO DOMINATE ACTIVITY, FOLLOWED BY SOME WHAT WILL DRIVE THE BULK OF LOAN ACTIVITY IN 2Q13? Other Refis / Amends and extends M&A/LBO SOME M&A/LBO 2Q13 MARKET SURV VEY Dividend/ recapitalization Capex / working capital Amendments 0% 10% 20% 30% 40% 50% 60% % of respondents 8
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