U.S. THOMSON REUTERS LPC FEBRUARY 2016 Colm (C.J.) Doherty Director of Analysis colm.doherty@thomsonreuters.com 646-223-6821
U.S. Key Points Slides 3-4 Oil & Gas Institutional Loan Defaults Slide 5 Oil & Gas Leveraged Loan Issuance Slides 6-13 Oil & Gas High Yield Bond Issuance Slides 14-16 Oil & Gas Secondary Market Review Slides 17-21 Oil & Gas CLO Market Analysis Slides 22-25 2
KEY POINTS In the last year (through February 23), nearly $5 billion of energy institutional loans have defaulted. The latest was Paragon Offshore, with $641.9 million of institutional loan debt. Leveraged loan issuance in the oil & gas sector is not surprisingly off to a slow start, with volume at $1.9 billion year to date. In the same period, there has been no high yield bond issuance in the oil & gas sector. In full year 2015, leveraged loan issuance in the oil & gas space amounted to $49 billion compared to $25 billion in the high yield bond market. Volume in both markets represented a roughly 50% decline compared to a year earlier. In 2015, the vast majority of leveraged loan issuance in the oil & gas sector was pro rata debt. Institutional volume was down over 60% to $6.3 billion, compared to a drop of 47% in the pro rata market to $42.8 billion. The oil and gas share of institutional loan outstandings is now roughly 3.4%. Oil & gas loan bids have tumbled to the 54 area on a straight average basis. When weighted by loan size, the average bid is in the 52 area. Over 60% of oil & gas loans are now bid below 70, while only 7% are priced in the 95-plus area. Cont d on next slide 3
KEY POINTS Cont d from prior slide Oil & gas loan bids vary widely by subsector. Loan bids are lowest for issuers in the upstream subsector followed by the services subsector. Loan prices are highest in the downstream sector. Energy credits in the high yield bond secondary market have fallen to the 55 context and the OAS has jumped to over 1800 bps. High yield bond in the energy sector lost 24% in 2015 and are down another 14% so far in 2016. Oil & gas is a small share of overall U.S. CLO loan holdings, accounting for roughly 3.2% of assets. Oil & gas is a much smaller share of European CLO loan holdings, representing 0.4% of assets. Across CLOs there is wide variation in oil & gas exposure. Roughly one-third of CLOs have oil & gas exposure of less than 2% of their portfolio, while 21% of deals have exposure exceeding 5% of their assets. The most widely held oil & gas names in U.S. CLOs are Energy Transfer Equity LP, Seadrill Ltd., Ocean Rig, MEG Energy Corp., and Citgo. 4
ENERGY SECTOR: INSTITUTIONAL LEVERAGED LOAN DEFAULTS IN PAST YEAR Month Issuer Par Value ($ Mil.) Default Date Default Source Industry March 2015 Cal Dive International Inc. 80.0 03/03/15 Chapter 11 Filing Energy Quicksilver Resources Inc. 625.0 03/17/15 Chapter 11 Filing Energy May 2015 Sabine Oil and Gas Corp. 700.0 05/21/15 Missed Payment Energy September 2015 Samson Resources Co. 1,000.0 09/16/15 Chapter 11 Filing Energy October 2015 Miller Energy Resources Inc. 175.0 10/01/15 Chapter 11 Filing Energy December 2015 Vantage Drilling Co. 664.8 12/03/15 Chapter 11 Filing Energy Energy & Exploration Partners Inc. 765.3 12/07/15 Chapter 11 Filing Energy Magnum Hunter Resources Corp. 336.6 12/15/15 Chapter 11 Filing Energy February 2016 Paragon Offshore 641.9 02/14/16 Chapter 11 Filing Energy Source: Fitch U.S. Leveraged Loan Default Index. In the last year (through February 23), nearly $5 billion of energy institutional loans have defaulted. The latest was Paragon Offshore, with $641.9 million of institutional loan debt. 5
OIL & GAS LEVERAGED LOAN AND HY BOND ISSUANCE: MONTHLY issuance ($ Bils.) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 U.S. OIL & GAS LEVERAGED LOAN & HY BOND ISSUANCE: MONTHLY HY Bonds Leveraged Loans 2.0 0.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb TD Leveraged loan issuance in the oil & gas sector is not surprisingly off to a slow start, with volume at $1.9 billion year to date (through February 23). There has been no high yield bond issuance in the oil & gas sector. 6
OIL & GAS LEVERAGED LOAN AND HY BOND ISSUANCE: ANNUAL issuance ($ Bils.) 120.0 100.0 80.0 60.0 40.0 U.S. OIL & GAS LEVERAGED LOAN & HY BOND ISSUANCE HY Bonds Leveraged Loans 20.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 In full year 2015, leveraged loan issuance in the oil & gas space amounted to $49 billion compared to $25 billion in the high yield bond market. Volume in both markets represented a roughly 50% decline compared to a year earlier. 7
OIL & GAS LEVERAGED LOAN ISSUANCE: BY SUBSECTOR Leveraged Loan Issuance ($ Bils.) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Oil & Gas Upstream Oil & Gas Midstream Oil & Gas Downstream Oil & Gas Services U.S. OIL & GAS LEVERAGED LOAN ISSUANCE 0.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 8
OIL & GAS LEVERAGED LOAN ISSUANCE - PRO RATA VS. INSTITUTIONAL: ANNUAL Leveraged Loan Issuance ($ Bils.) 120.0 100.0 80.0 60.0 40.0 20.0 U.S. OIL & GAS LEVERAGED LOAN ISSUANCE Pro rata Institutional 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 In 2015, the vast majority of leveraged loan issuance in the oil & gas sector was pro rata debt. Institutional volume was down over 60% in 2015 to $6.3 billion, compared to a drop of 47% in the pro rata market to $42.8 billion. 9
2015 LEVERAGED LOAN ISSUANCE BY INDUSTRY - Industry Lev. Vol. ($Bils.) % of Lev. Vol. Healthcare 78.26 10.0% Technology 76.68 9.8% Retail & Supermarkets 70.72 9.0% General Manufacturing 64.83 8.3% Media 60.54 7.7% Financial Services 55.52 7.1% Oil and Gas 49.10 6.3% Chemicals, Plastics & Rubber 37.85 4.8% Wholesale 33.97 4.3% n/a 25.82 3.3% Services 24.07 3.1% Business Services 21.03 2.7% Beverage, Food, and Tobacco Processing 19.85 2.5% Telecommunications 18.79 2.4% Transportation 18.34 2.3% Leisure and Entertainment 17.23 2.2% REITS 14.61 1.9% Shipping 14.25 1.8% Utilities 13.34 1.7% Automotive 12.64 1.6% Restaurants 12.10 1.5% Paper & Packaging 9.47 1.2% Construction 9.47 1.2% Mining 8.70 1.1% Aerospace and Defense 6.68 0.9% Textiles and Apparel 5.51 0.7% Hotel & Gaming 2.32 0.3% Agriculture 1.57 0.2% Government 0.08 0.0% 10
OIL & GAS INSTITUTIONAL LOAN AND HY BOND ISSUANCE: MONTHLY issuance ($ Bils.) 14.0 12.0 10.0 8.0 6.0 4.0 U.S. OIL & GAS INSTITUTIONAL LOAN AND HY BOND ISSUANCE: MONTHLY HY Bonds Institutional Loans 2.0 0.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb TD Just as in the high yield bond market, there has been no oil & gas issuance so far this year in the institutional loan market. 11
2015 INSTITUTIONAL LOAN ISSUANCE BY INDUSTRY - Industry Inst. Vol. ($Bils.) % of Inst. Vol. Healthcare 40.11 13.6% Technology 36.67 12.5% Retail & Supermarkets 30.71 10.4% Chemicals, Plastics & Rubber 21.39 7.3% Financial Services 16.85 5.7% Media 16.61 5.6% General Manufacturing 15.33 5.2% n/a 13.82 4.7% Services 12.69 4.3% Telecommunications 12.33 4.2% Leisure and Entertainment 10.82 3.7% Business Services 8.66 2.9% Transportation 7.83 2.7% Wholesale 7.62 2.6% Oil and Gas 6.68 2.3% Shipping 5.85 2.0% Automotive 4.19 1.4% Beverage, Food, and Tobacco Processing 3.88 1.3% Construction 3.66 1.2% REITS 3.32 1.1% Mining 3.26 1.1% Paper & Packaging 3.25 1.1% Utilities 3.16 1.1% Textiles and Apparel 2.39 0.8% Aerospace and Defense 2.05 0.7% Hotel & Gaming 0.67 0.2% Restaurants 0.46 0.2% Agriculture 0.16 0.1% Government 0.07 0.0% 12
INDUSTRY BREAKDOWN OF INSTITUTIONAL LOAN OUTSTANDINGS Share of Institutional Loan Market 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Technology Healthcare Retail & Supermarkets Broadcasting General Manufacturing Chemicals, Plastics & Utilities Financial Services Business Services Telecommunications INDUSTRY BREAKDOWN Services n/a Oil and Gas Hotel & Gaming Leisure and Wholesale Media Automotive Mining Aerospace and Defense Transportation Restaurants Beverage, Food, and Paper & Packaging Construction Shipping REITS Textiles and Apparel Real Estate Agriculture Government The oil and gas share of institutional loan outstandings is roughly 3.4%. 13
HIGH YIELD BONDS ISSUED IN 2015, BY INDUSTRY Proceeds (US$ Bils.) 60 50 40 30 20 10 U.S. HIGH YIELD BONDS Proceeds (US$ Bils.) # of Issues 80 70 60 50 40 30 20 10 # of Issues 0 0 Financials Energy and Power Healthcare Industrials Media and Entertainment Materials Telecom High Technology Retail Consumer Products Consumer Staples Real Estate On the high-yield bond side, energy & power at $40 billion was the second biggest sector in terms of issuance in 2015. 14
HIGH YIELD BONDS BREAKOUT OF ENERGY & POWER SECTOR Proceeds (US$ Bils.) 35 30 25 20 15 10 U.S. HIGH YIELD CORPORATE BONDS Alternative Energy Sources Oil & Gas Other Energy & Power Petrochemicals Pipelines Power Water and Waste Management 5 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Issuance in the energy and power sector fell in 2015, driven largely by a drop in oil and gas volume. Oil & gas activity fell particularly sharply in the second half of the year as oil prices continued to fall and market volatility picked up. 15
HIGH YIELD BONDS BREAKOUT OF OIL & GAS SECTOR Proceeds (US$ Bils.) 25 20 15 10 5 U.S. HIGH YIELD CORPORATE BONDS Wholesale Transportation Retail Other Finance Pipeline Natural Resources Manufacturing 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Gas Distribution Construction 16
OIL & GAS LOAN BID LEVELS Avg. Bid (% of par) 100.0 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 U.S. multi-quote Inst. TLs Oil & Gas loans WTI Crude Oil (US$) U.S. OIL & GAS BID LEVELS 100 90 80 70 60 50 40 30 20 WTI Crude Oil (US$) Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 *Historical oil & gas bids were restated due to availability of new information Oil & gas loan bids have tumbled to the 54 area on a straight average basis. Excluding second-liens, the average bid is roughly at 57. When weighted by loan size, the average bid is in the 52 area. 17
DISTRIBUTION OF OIL & GAS SECONDARY MARKET LOAN BIDS Share of loans 70% 60% 50% 40% 30% 20% DISTRIBUTION OF OIL & GAS INSTITUTIONAL TERM LOAN BIDS 10% 0% <70 70 to <80 80 to <85 85 to <90 90 to <95 95 to <98 98 to <99 99 to <100 >=100 Avg. bid (% of par) Over 60% of oil & gas loans are now bid below 70, while only 7% are priced in the 95-plus area. 18
OIL & GAS SECONDARY MARKET LOAN BIDS BY SUBSECTOR Bid (% of par) 100 90 80 70 60 50 40 OIL & GAS LOAN BIDS BY SUBSECTOR Avg. Bid Median Bid 30 20 Oil & Gas Upstream Oil & Gas Midstream Oil & Gas Downstream Oil & Gas Services Oil & gas loan bids vary widely by subsector. Loan bids are lowest for issuers in the upstream subsector followed by the services subsector. Loan prices are highest in the downstream sector. 19
ENERGY HIGH YIELD BOND PRICE LEVELS ENERGY HIGH YIELD BOND PRICE LEVELS Energy credits in the high yield bond secondary market have fallen to the 55 context and the OAS has jumped to over 1800 bps. 20
ENERGY HIGH YIELD BOND RETURNS ENERGY HIGH YIELD BOND RETURNS High yield bond in the energy sector lost 24% in 2015 and are down another 14% so far in 2016. 21
TOP INDUSTRIES U.S. CLOS Share of U.S. CLO loan assets 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% TOP INDUSTRIES U.S. CLOS Technology Healthcare Retail & Supermarkets Gen. Manufacturing Business Services Chem & Plastics Financial Services Broadcasting Services Telecommunications Leisure & Entertain Utilities Automotive Oil and Gas Media Wholesale Transportation Aerospace & Defense Bev, Food & Tobacco Hotel & Gaming Mining Construction Shipping Paper & Packaging Restaurants REITS Textiles and Apparel Agriculture Real Estate Government Oil & gas is a small share of overall U.S. CLO loan holdings, accounting for roughly 3.2% of assets. 22
TOP INDUSTRIES EUROPEAN CLOS Share of European CLO loan assets 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% TOP INDUSTRIES EUROPEAN CLOS Gen. Manufacturing Healthcare Technology Chem & Plastics Telecom Broadcasting Leisure & Entertainment Services Retail & Supermarkets Wholesale Media Business Services Bev, Food & Tobacco Financial Services Paper & Packaging Transportation Automotive Utilities Real Estate Construction Textiles & Apparel Shipping Mining Restaurants Agriculture Government Oil and Gas Hotel & Gaming REITS Aerospace & Defense Oil & gas is a much smaller share of European CLO loan holdings, representing 0.4% of assets. 23
SHARE OF OIL & GAS ASSETS IN U.S. CLOS* Share of CLOs 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 0 >0 to <1 1 to <2 2 to <3 3 to <4 4 to <5 5 to <6 6 to <7 7 to <10 >=10 *Excludes CLOs less than $50 million in size. SHARE OF OIL & GAS ASSETS IN U.S. CLOS Oil & Gas share of CLO assets (%) Across CLOs there is wide variation in oil & gas exposure. Roughly one-third of CLOs have oil & gas exposure of less than 2% of their portfolio. 21% of CLOs have oil & gas exposure greater than 5% of their assets. 24
LARGEST OIL & GAS HOLDINGS IN U.S. CLO PORTFOLIOS Rank Issuer Amount ($Mils.) 1 Energy Transfer Equity LP 1,009 2 Seadrill Ltd 888 3 Ocean Rig 788 4 MEG Energy Corp 634 5 Citgo 449 6 Fieldwood Energy 437 7 Sheridan Production Partners 406 8 Expro International Group PLC 376 9 PACIFIC DRILLING SA 370 10 Philadelphia Energy Solutions Refining & Marketing 330 11 HGIM Corporation 320 12 Western Refining 320 13 EP Energy 296 14 Penn Product Terminals LLC 295 15 Houston Fuel Oil Terminal 269 16 Southcross Energy 268 17 American Energy - Marcellus LLC 267 18 Templar Energy LLC 251 19 Paragon Offshore 245 20 Petroleum Geo-Services ASA 235 21 Frac Tech Services Ltd 225 22 Southcross 220 23 Seventy Seven Energy Inc 217 24 Chelsea Petroleum Products 201 25 C&J Energy Services Inc 186-25