Current State of the Leveraged Loan Market Ted Basta, LSTA William Lemberg, Alcentra Michael Schechter, CITI Gil Tollinchi, Crescent Capital Brian Yorke, Halcyon May 3, 2016
Presentation Overview 1. Macro Factors Affecting Today s Markets 2. State of the Primary Loan Market 3. Loan Returns & The Secondary Market 4. Trade & Settlement Liquidity Final Thoughts and Audience Q & A 2
Macro Factors Affecting Today s Markets 3
The Markets & Their New Risk/Return Paradigm (Through M/E March) 14% 12% 5 year Annualized Return 3 year Annualized 1 year Annualized 10% 8% Total Return 6% 4% 2% 0% -2% -1.3% 1.0% 1.8% 3.1% -4% -4.0% -6% Source: S&P Capital IQ HY Bond S&P/LSTA Lev Loan Index HG Bond S & P 500 10YR Treas 4
Volatility Levels Spiked Across Asset Classes as The Price of Oil Plummeted CBOE Volatility Index (VIX) 45 40 35 30 25 20 15 10 5 0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 WTI Crude Oil $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $- Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Yahoo Finance 5
Weaker Global Economies, in Particular China, Have Negatively Affected U.S. Markets 5,500 Shanghai Composite Index 2,200 S&P 500 Index 5,000 4,500 2,000 4,000 1,800 3,500 3,000 1,600 2,500 1,400 2,000 1,500 1,200 1,000 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 1,000 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Yahoo Finance 6
2016 US Economic Growth Forecasted in a Range From 1.6% to 2.4% 3.0% GDP Annual Growth Rate 7% GDP Quarterly Growth Rate 2.5% 6% 2.0% 5% 4% 1.5% 3% 1.0% 2% 0.5% 1% 0.0% 2012 2013 2014 2015 2016 High Est. 2016 Low Est. 0% -1% -2% 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Est. 1Q16 Source: Federal Reserve 7
Markets Are Not Pricing in Substantial Future Rate Hikes Historical Rates (%) Implied Forward Rates (%) 5 10YR Treas 3-MO LIBOR 5 10YR Treas 3-MO LIBOR 4 QE1 Begins 4 3 QE2 Begins QE3 Begins 3 2 2 QE3 Ends 1 Fed Raises Rates 1 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 0 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Source: Federal Reserve 8
State of the Primary Loan Market 9
As Secondary Prices Fell Through Late-February 2016, New Issue Yields Increased to Multi-Year Highs 100 98 96 94 92 90 88 Avg. Bid Level in The Secondary Market 8% Avg. New-issue Yield in The Primary Market 7% 6% 5% 4% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: Thomson Reuters LPC 10
While Pro-Rata Lending Volume Has Remained Mostly Constant, Institutional Lending Has Fallen Sharply $700 $600 Institutional $625 Pro rata S&P/LSTA Leveraged Loan Index (LLI) Par Amount Outstanding $900 Lending Volume ($Billions) $500 $400 $300 $200 $451 $289 $800 $700 $600 Billions $100 $- 2013 2014 2015 $44 1Q15 $39 1Q16 $500 Jan-13 Jan-14 Jan-15 Jan-16 Source: Thomson Reuters LPC & S&P Capital IQ 11
Leveraged Lending Activity Has Favored Higher Rated and Pro-Rata Heavy Deals Share of Total New Issue Volume Pro rata TLA% of term loans 70% 60% 50% 40% 30% 20% 10% BB- Rated Share of New Issue Volume Total Institutional 70% 60% 50% 40% 30% 20% 10% 0% 2013 2014 2015 1Q16 0% 2013 2014 2015 1Q16 Source: S&P Capital IQ LCD 12
Net Demand From CLOs & Loan Mutual Funds Has Tapered Off Considerably, But Did Improve in March Share of Non-Bank Institutional Lending 70% 2015 1Q16 60% 50% 40% 30% CLO Issuance $150 $125 $100 Billions $75 $50 Loan Fund Flows 20% $25 10% 0% Hedge, Fin. & Dist. & Insur. Cos HY Funds Retail Loan Funds CLOs $- $(25) 2013 2014 2015 _ 2Q15 3Q15 4Q15 $8.2 $(5.9) 1Q16 Source: S&P Capital IQ LCD & Thomson Reuters LPC 13
Loan Returns & The Secondary Market 14
As Markets Became More Volatile & Correlated in 2015, Loan Returns Ran Negative For Only The Second Time in 20 Years 6% Cross-Asset Returns 2015 1Q16 5.0% 12-Mo. Lagging Return Volatility Mar-15 Mar-16 4% 4.0% 2% 0% -2% 1.55% -0.69% SD of Return 3.0% 2.0% -4% 1.0% -6% 10YR Treas HG Bonds HY Bond Lev. Loans S&P500 0.0% Lev. Loans HG Bond HY Bond 10YR Treas S&P 500 Source: S&P/LSTA Leveraged Loan Index & S&P Capital IQ 15
Pre-March 2016, The Secondary Loan Market Was Marked by Red-Ink For a Record 9 Consecutive Months 100% Decliners Advancers 3.5% S&P/LSTA Lev. Loan Index Return LLI 100 Return 3.0% Secondary Market Price Movement 75% 50% 25% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 0% Jan-15 Mar-15 May-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Mar-16-1.5% Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: LSTA/TRLPC MTM Pricing & S&P/LSTA LLI 16
Changes in Supply & Demand Levels Can Create Technical Dislocations in The Secondary Market Change in Existing Supply (LLI Outstandings) New Visable Demand (CLO + Fund Flows) $20 $15 $20 $15 $10 Visable Demand Less Net New Supply $ Billions $10 $5 $ Billions $5 $- $(5) $- $(5) Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 $(10) $(15) $(20) Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: Thomson Reuters LPC & S&P/LSTA LLI 17
Today s Secondary Trading Market Looks Quite Different From One Year Ago 101 100 Mean Trade Price (% of Par) Median Trade Price (% of Par) <90 90 to <98 98 to 100 >100 100% 11% 99 98 97 96 95 94 % of Trade Volumes 75% 50% 43% 93 92 25% 91 90 0% 14% 21% Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Source: LSTA Trade Data Study 18
The Broader Energy/Commodity Sectors Comprise Just 12% of Par Index Outstanding (6% at MV) 100 All Loans Oil & Gas Loans WTI Crude Oil 10% 2015 Return 1Q16 Return % Par Outstanding 90 80 70 60 5% 0% -5% 2% 4% 6% 50-10% 40-15% 30-20% 20 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16-25% -30% Source: Thomson Reuters & S&P /LSTA Leveraged Loan Index 19
Despite Downgrades in The Energy/Commodity Sectors, Broader Credit Trends Should Remain Mostly Benign 12% LTM $Defaults Historical Avg. LTM # of Defaults Historical Avg. 100 Upgrades Downgrades Delta 10% 75 50 8% 25 6% 0 4% -25-50 2% -75 0% -100 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Source: S&P Capital IQ LCD 20
Year-Over-Year EBITDA (ex Energy) Was Up 9.2% in 4Q15 While Cash-Flow Coverage Remained Strong 16% EBITDA Growth EBITDA Growth (ex Energy) 4 Average C/F Coverage Weighted average 14% 12% 3 10% 8% 6% 4% 2% 9% 7% 2 1 0% 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: S&P Capital IQ/LCD 21
Trade & Settlement Liquidity 22
Annual U.S. Secondary Trading Volumes Totaled $591 Billion in 2015 (6% Lower Than Last Year s Record Level) $700 Annual Trade Volume $1,000 Trade Volume Avg. Size of the S&P/LSTA LLI Loan Turnover Ratio (%) 100% $600 $500 $750 75% Billions $400 $300 Billions $500 50% $200 $100 $250 25% $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 ANN $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 ANN 0% Source: The LSTA Trade Data Study 23
1Q16 Secondary Trading Volumes Totaled $146.5B (+3%) ~March Volumes Totaled a 13-Month High $55.8B (+24%) Billions Quarterly Trade Volume PAR DIS $200 $175 $150 $125 $100 $75 $50 $25 Billions $70 $60 $50 $40 $30 $20 $10 Monthly Trade Volume $- $0 1Q14 3Q14 1Q15 3Q15 1Q16 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: The LSTA Trade Data Study 24
Par Settlement Times Have Been Trending Lower in Advance of The New Delayed Comp. Rules 20 Median Time to Settle 25 Median (Sell-side Purchases) Median (Sell-side Sales) T+ Business Days 15 10 T+ Business Days 20 15 10 5 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 5 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: LSTA Settlement Data Study 25
Final Panel Thoughts & Audience Q&A 26
Despite The March Rally, The Secondary Market is Still Trading Around Its Four-Year Low Mean Trade Price (% of Par) Mean Bid-Ask Spread (Basis Points) 101 Median Trade Price (% of Par) 125 Median Bid-Ask Spread (Basis Points) 100 99 98 100 97 96 75 95 94 50 93 92 25 91 90 0 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Source: The LSTA Trade Data Study 27