RECAPPING RECORD-BREAKING ACTIVITY IN THE...

RECAPPING RECORD-BREAKING ACTIVITY IN THE GLOBAL LOAN MARKET Ioana Barza

Director of Analytics

[email protected]

OVERVIEW

Global

– New money stalls amid record-breaking volumes

– Will global M&A gain traction in 4Q13?

U.S. Investment Grade

– Can you hear me now? Life after Verizon…

– Regulatory pressures: Is the relationship model changing?

– Will IG term loans make a comeback?

U.S. Leveraged Finance

– The big bang: Unprecedented demand outpaces supply, creating new norms

– Wipeout! Surfing 2013’s repricing waves

– Seeking substance: Longing for M&A’s big comeback

September 19, 2013 Thomson Reuters LPC’s 19th Annual Loan & CLO Conference

2

RECAPPING RECORD-BREAKING ACTIVITY IN THE GLOBAL LOAN MARKET

OV

ER

VIE

W

2013 GLOBAL LOAN ISSUANCE REACHES $2.5T

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

199

7

199

8

199

9

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

Issu

an

ce ($

Bil

s.)

Americas EMEA Asia-Pacific (ex. Japan) Japan


3

GLOBAL LENDING

GLO

BA

L

REFINANCINGS DOMINATE LENDING ACROSS AMERICAS & EMEA

20%

30%

40%

50%

60%

70%

80%

90%

1Q0

5 2

Q0

5 3Q

05

4Q

05

1Q0

6

2Q

06

3Q

06

4

Q0

6

1Q0

7 2

Q0

7 3Q

07

4Q

07

1Q0

8

2Q

08

3Q

08

4

Q0

8

1Q0

9

2Q

09

3Q

09

4

Q0

9

1Q10

2

Q10

3Q

10

4Q

10

1Q11

2

Q11

3Q

11

4Q

11

1Q12

2

Q12

3Q

12

4Q

12

1Q13

2

Q13

3Q

13

Re

fi m

ark

et

sha

re

EMEA Asia-PAcific (excl. Japan) Americas


4

REFINANCINGS’ SHARE OF REGIONAL LENDING

GLO

BA

L

2013 REFINANCINGS REACH $1.6T, SURPASSING 1-3Q12 BY 20%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

1Q0

5 2

Q0

5 3Q

05

4Q

05

1Q0

6

2Q

06

3Q

06

4

Q0

6

1Q0

7 2

Q0

7 3Q

07

4Q

07

1Q0

8

2Q

08

3Q

08

4

Q0

8

1Q0

9

2Q

09

3Q

09

4

Q0

9

1Q10

2

Q10

3Q

10

4Q

10

1Q11

2

Q11

3Q

11

4Q

11

1Q12

2

Q12

3Q

12

4Q

12

1Q13

2

Q13

3Q

13 T

D

Issu

an

ce ($

Bil

s.)

New Money Refinancings


5

GLOBAL LOAN ISSUANCE BREAKOUT

GLO

BA

L

2013 GLOBAL M&A LOAN ISSUANCE REACHES $310B

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

199

9

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

Issu

an

ce ($

Bil

s.)

Americas EMEA Asia-Pacific (excl. Japan) Japan (beg. '06)


6

GLOBAL M&A LENDING

GLO

BA

L

INVESTMENT GRADE: WAITING IS THE HARDEST PART


7

CAN YOU HEAR ME NOW? VERIZON’S FINANCING BRINGS $63B TO M&A FINANCINGS PIPELINE


8

U.S. IG BIGGEST BONDS U.S. IG BIGGEST BRIDGE LOANS

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Ver

izo

n C

om

mu

nic

atio

ns

(Sep

t '1

3)

Pfi

zer

Inc

(Mar

'09

)

AT

&T

Inc

(Mar

'11)

Sch

erin

g-P

lou

gh

(Oct

'07)

Tran

soce

an In

c (S

ept

'07)

Un

ited

Tec

hn

olo

gie

s C

orp

(No

v '1

1)

Ver

izo

n W

irel

ess

(Dec

'08

)

Exp

ress

Scr

ipts

Inc

(Au

g '1

1)

Do

w C

hem

ical

Co

(Mar

'09

)

SB

C C

om

mu

nic

atio

ns

(Oct

'04

)

($

Bil

s.)

INV

ES

TM

EN

T G

RA

DE

0.0

10.0

20.0

30.0

40.0

50.0

Ver

izo

n C

om

mu

nic

atio

ns

(Sep

'13)

Ap

ple

(Ap

r '1

3)

Ro

che

Ho

ldin

gs

(Feb

'09

)

Deu

tsch

e Te

leko

m In

tl (J

un

'00

)

Pfi

zer

(Mar

'09

)

Wo

rld

Co

m (M

ay '0

1)

GE

CC

(Mar

'02

)

Pet

rob

ras

Glo

bal

Fin

ance

(May

'13)

Bri

tish

Tel

eco

m (D

ec '0

0)

Un

ited

Tec

hn

olo

gie

s (M

ay '1

2)

Kra

ft F

oo

ds

(Feb

'10

)

($

Bil

s.)

2013 U.S. IG VOLUME REACHES $384B, LARGELY DRIVEN BY REFINANCINGS


9

U.S. IG LOAN ISSUANCE U.S. IG M&A LOAN ISSUANCE

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

199

0

199

1 19

92

19

93

199

4

199

5 19

96

19

97

199

8

199

9

200

0

200

1 20

02

2003

20

04

20

05

200

6

200

7 20

08

20

09

20

10

2011

20

12

2013

U.S

. IG

issu

an

ce ($

Bil

s.)

AAA AA A BBB Verizon Pipeline

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

1Q0

8

2Q

08

3Q

08

4

Q0

8

1Q0

9

2Q

09

3Q

09

4

Q0

9

1Q10

2

Q10

3Q

10

4Q

10

1Q11

2

Q11

3Q

11

4Q

11

1Q12

2

Q12

3Q

12

4Q

12

4Q

12

1Q13

2

Q13

3Q

13

U.S

. IG

M&

A is

sua

nce

($

Bil

s.)

Issuance Pipeline

INV

ES

TM

EN

T G

RA

DE

IS THE VERIZON FINANCING A SIGN OF THINGS TO COME?


10

2H13 IG LOAN ORIGINATION: EXPECTED TO BE FLAT IF M&A DOESN’T PICK UP

QTRLY SURVEY: WHAT KIND OF PICK –UP DO BANKS EXPECT FOR M&A FINANCINGS?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

(> 3

0%

)

(20

-30

%)

(10

- 20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

> 3

0%

% o

f re

spo

nd

en

ts

% change in lending

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3Q11

4Q

11

1Q12

2Q

12

3Q12

4Q

12

1Q13

2Q

13

3Q13

% o

f re

spo

nd

en

ts

LPC survey date

Gradual pick-up Major pick-up No pick-up

INV

ES

TM

EN

T G

RA

DE

Down Up

WITH LIMITED IG DEAL FLOW, BANKS’ PORTFOLIOS ARE SHRINKING


11

EXPECTED ANNUAL PERCENTAGE CHANGE IN BANKS’ IG LOAN PORTFOLIOS

0%

10%

20%

30%

40%

50%

60%

(<20%) (10-20%) (0-10%) 0-10% 10-20% >20%

% o

f re

spo

nd

en

ts

% change in size of banks’ IG loan portfolios

2012 Survey

2013 Survey

Smaller Bigger

INV

ES

TM

EN

T G

RA

DE

• 2008 – IGR portfolios were shrinking as

banks struggled with capital constraints,

managed out of unprofitable

relationships, let deals drop off if they

didn't have a meaningful role

• 2009 – 50% expected IGR portfolios to

grow as banks expanded market share

and yields were attractive

• 2010 – 70% say IGR portfolios will grow

from low baseline

• 2011 – Majority of banks hope to grow

portfolios despite lower yields

• 2012 – Portfolios flat to down

• 2013 – Portfolios flat to up on M&A hopes

MEANWHILE, LONGER TENORS EXPECTED TO CONTINUE TO DOMINATE IG MARKET

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

200

8

200

9

2010

2011

2012

2013

200

8

200

9

2010

2011

2012

2013

2010

2011

2012

2013

200

8

200

9

2010

2011

2012

2013

IG r

evo

lve

r is

sua

nce

($B

ils.

) AAA AA A BBB


12

REVOLVER VOLUME BY TENOR AND RATING

INV

ES

TM

EN

T G

RA

DE

364 day

3 year

4 year

5 year

IG PRICING HAS STABILIZED OVER THE PAST YEAR


13

QUARTERLY BBB DRAWN SPREADS QUARTERLY BBB UNDRAWN SPREADS

0

10

20

30

40

50

60

70

1H9

1

1Q9

4

3Q9

5

1Q9

7

3Q9

8

1Q0

0

3Q0

1

1Q03

3Q0

4

1Q0

6

3Q0

7

1Q0

9

3Q10

1Q12

3Q13

bp

s

INV

ES

TM

EN

T G

RA

DE

0

50

100

150

200

250

300

350

1H9

1

1Q9

4

3Q9

5

1Q9

7

3Q9

8

1Q0

0

3Q0

1

1Q03

3Q0

4

1Q0

6

3Q0

7

1Q0

9

3Q10

1Q12

3Q13

bp

s

SURVEY: MAJORITY OF RESPONDENTS BELIEVE SPREADS WILL BE FLAT IN 2H13


14

CHANGE IN SPREADS FOR HIGHER-RATED ISSUERS

CHANGE IN SPREADS FOR BBB-RATED ISSUERS

0%

10%

20%

30%

40%

50%

60%

70%

(<30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20

-30

%

+>

30%

% o

f re

spo

nd

en

ts

% change in pricing

2H11 Survey 2H13 Survey

Down Up

INV

ES

TM

EN

T G

RA

DE

0%

10%

20%

30%

40%

50%

60%

70%

80%

(<30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20

-30

%

+>

30%

% o

f re

spo

nd

en

ts

% change in pricing

2H11 Survey 2H13 Survey

Down Up

IS THE RELATIONSHIP LENDING MODEL CHANGING?


15

FOR A CLIENT WITH A STRONG RELATIONSHIP FOR A CLIENT WITH A WEAKER RELATIONSHIP

INV

ES

TM

EN

T G

RA

DE

0%

10%

20%

30%

40%

50%

60%

a TL (funded) an RC (unfunded)

Neither

% o

f re

spo

nd

en

ts

In LPC’s Quarterly Survey, banks were asked: What is your lending preference based on the strength of your relationship with an issuer?

Regardless of relationship, banks are evenly split on funding preferences: an unfunded revolver or funded term loan

For a client with a weak relationship – 20% of banks would not lend at all

0%

10%

20%

30%

40%

50%

a TL (funded) an RC (unfunded)

Neither %

of

resp

on

de

nts

AND, WILL TERM LOAN ISSUANCE PICK UP?

0

10

20

30

40

50

60

70

1H0

8

2H

08

1H0

9

2H

09

1H10

2H

10

1H11

2H

11

1H12

2H

12

1H13

2H

13

Issu

an

ce ($

Bil

s.)

Term Loans Bridge Loans


16

U.S. IG BRIDGE LOAN & TERM LOAN ISSUANCE (INCL. IN MARKET)

INV

ES

TM

EN

T G

RA

DE

WHERE DOES DEAL FLOW COME FROM? BULK OF U.S. IG LOANS WILL MATURE IN 2016-17


17

VOLUME OF U.S. IG LOANS COMING DUE

The majority of lenders surveyed by Thomson Reuters LPC report that the challenge…or…opportunity of building an M&A financing pipeline is the biggest issue facing the IG market in 2H13

INV

ES

TM

EN

T G

RA

DE

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1Q13

2Q

13

3Q13

4Q

13

1Q14

2Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

2Q

16

3Q16

4Q

16

1Q17

2Q

17

3Q17

4Q

17

1Q18

2Q

18

$ B

ils.

As of 3/31/13 As of 6/30/13 As of 12/31/12

IS THE WAIT OVER?

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1987

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

YT

D

Issu

an

ce ($

Bil

s.)

Non-Lev. Lev. LBOs Verizon Pipeline


18

U.S. M&A LOAN ISSUANCE

U.S

. M&

A

LEVERAGED FINANCE: RIDING THE REPRICING WAVES!

2013 LEVERAGED FINANCE NEARS 2012’S FY $991B RECORD, BUT…

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

Issu

an

ce ($

Bil

s.)

HY Bonds Leveraged loans Lev. Loans Refi Lev. Loans New Money


20

LEVERAGED LOAN AND HIGH YIELD BOND ISSUANCE

LEV

ER

AG

ED

…WHAT IS REALLY GOING ON?

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sh

are

of

leve

rag

ed

loa

n is

sua

nce

Refinancings New Money


21

LEVERAGED LOAN ISSUANCE

LEV

ER

AG

ED

IN OTHER WORDS…

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Issu

an

ce ($

Bil

s.)

Refinancings M&A


22

LEVERAGED LOAN ISSUANCE

LEV

ER

AG

ED

SURGING LOAN DEMAND COUPLED WITH A LACK OF NEW ISSUE PAVED THE WAY FOR…


23

MONTHLY LOAN ISSUANCE

LEV

ER

AG

ED

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jan

'10

M

ar '1

0

May

'10

Ju

l '10

S

ep '1

0

No

v '1

0

Jan

'11

Mar

'11

May

'11

Jul '

11

Sep

'11

No

v '1

1 Ja

n '1

2

Mar

'12

M

ay '1

2

Jul '

12

Sep

'12

N

ov

'12

Ja

n '1

3 M

ar '1

3 M

ay '1

3 Ju

l '13

S

ept

'13

($

Bil

s.)

Dividend Recap

M&A

New money (other)

Refinancings

CUMULATIVE CLO & LOAN FUND FLOWS (BEG. JAN 2011 )

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Jan

'11

Mar

'11

May

'11

Jul '

11

Sep

'11

No

v '1

1 Ja

n '1

2

Mar

'12

M

ay '1

2

Jul '

12

Sep

'12

N

ov

'12

Ja

n '1

3 M

ar '1

3 M

ay '1

3 Ju

l '13

S

ept

'13

($

Bil

s.)

CLO issuance

Loan fund flows

… A REFI/REPRICINGS WAVE!


24

CUMULATIVE LOAN ISSUANCE BEG. 2011

LEV

ER

AG

ED

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

Jan

'11

Mar

'11

May

'11

Jul '

11

Sep

'11

No

v '1

1 Ja

n '1

2

Mar

'12

M

ay '1

2

Jul '

12

Sep

'12

N

ov

'12

Ja

n '1

3 M

ar '1

3 M

ay '1

3 Ju

l '13

S

ept

'13

Issu

an

ce ($

Bil

s.)

Dividend Recap

M&A

New money (other)

Refinancings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Jan Feb Mar Apr May Jun Jul Aug Sep

Re

pri

cin

gs

($B

ils.

)

2007 2013

REPRICINGS ONLY (CUM. BEG. JAN. 2010)

DISSECTING DEMAND: RETAIL FUNDS


25

CUMULATIVE SINCE JAN. 2006 CUMULATIVE SINCE JAN. 2011

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Cu

mu

lati

ve f

low

s ($

Bil

s.)

Cumulative HY Bonds

Cumulative Loans

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Ja

n-1

2

Mar

-12

M

ay-1

2

Jul-

12

Sep

-12

N

ov-

12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

Cu

mu

lati

ve f

low

s ($

Bil

s.)

Cumulative HY Bonds

Cumulative Loans

LEV

ER

AG

ED

65 WEEKS OF POSITIVE FLOWS INTO LOAN RETAIL FUNDS


26

SINCE 2005 2011/12/13 COMPARISON

-2,500.0

-2,000.0

-1,500.0

-1,000.0

-500.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

We

ek

ly f

low

s ($

Mil

s.)

2011 2012 2013

-2,500.0

-2,000.0

-1,500.0

-1,000.0

-500.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

1/5/

200

5

1/5/

200

6

1/5/

200

7

1/5/

200

8

1/5/

200

9

1/5/

2010

1/5/

2011

1/5/

2012

1/5/

2013

We

ek

ly f

low

s ($

Mil

s.)

LEV

ER

AG

ED

LOAN AND HIGH YIELD BOND FUND FLOWS DIVERGE

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

11/2

5/20

08

1/

25/2

00

9

3/25

/20

09

5/

25/2

00

9

7/25

/20

09

9

/25/

200

9

11/2

5/20

09

1/

25/2

010

3/

25/2

010

5/

25/2

010

7/

25/2

010

9

/25/

2010

11

/25/

2010

1/

25/2

011

3/

25/2

011

5/

25/2

011

7/

25/2

011

9

/25/

2011

11

/25/

2011

1/

25/2

012

3/

25/2

012

5/

25/2

012

7/

25/2

012

9

/25/

2012

11

/25/

2012

1/

25/2

013

3/

25/2

013

5/

25/2

013

7/

25/2

013

Lo

an

fu

nd

flo

ws

($M

ils.

)

HY

bo

nd

fu

nd

flo

ws

($M

ils.

)

HY Fund Flows Loan Fund Flows


27

WEEKLY HIGH YIELD BOND & LOAN FUND FLOWS

LEV

ER

AG

ED

NOT SURPRISING, LOAN FUNDS AUM REACH RECORD

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Jan

20

07

Ap

r 20

07

Jul 2

00

7

Oct

20

07

Jan

20

08

Ap

r 20

08

Jul 2

00

8

Oct

20

08

Jan

20

09

Ap

r 20

09

Jul 2

00

9

Oct

20

09

Jan

20

10

Ap

r 20

10

Jul 2

010

Oct

20

10

Jan

20

11

Ap

r 20

11

Jul 2

011

Oct

20

11

Jan

20

12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Lo

an

mu

tua

l fu

nd

& E

TF

AU

M

($B

ils.

)


28

U.S. LOAN MUTUAL FUND & ETF ASSETS UNDER MANAGEMENT*

Thanks to continued inflows, loan mutual funds & ETFs had roughly $136 billion in net assets at the end of August, and when taking into account the leverage employed by closed-end funds, total assets are estimated to be approximately $143 billion.

LEV

ER

AG

ED

*Based on the most recent data available

LOAN FUNDS DON’T DOMINATE DEMAND BUT THEY DO DOMINATE SENTIMENT


29

SHARE OF INDEX OUTSTANDINGS*

LEV

ER

AG

ED

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Ja

n-1

2

Mar

-12

M

ay-1

2

Jul-

12

Sep

-12

N

ov-

12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

Sin

gle

-B y

ield

s to

3 y

ea

rs

Mo

nth

ly lo

an

fu

nd

flo

ws

($

Bil

s.)

Loan fund flows Single- B loan yield

SINGLE-B PRIMARY LOAN YIELDS VS. LOAN FUND FLOWS

36% Other

21% Loan

Funds

43% CLOs*

*Based on: - a universe of 734 U.S. CLOs - S&P/LSTA Leveraged Loan Index outstandings - the most recent data available

2013’S $56B IN CLO ISSUANCE IS ON PAR WITH FY’12 BUT HAS SLOWED DOWN IN 2H13


30

MONTHLY CLO ISSUANCE ANNUAL CLO ISSUANCE

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Sep

Oct

No

v

Dec

Issu

an

ce ($

Bil

s.)

2011 2012 2013

LEV

ER

AG

ED

0.0

20.0

40.0

60.0

80.0

100.0

120.0

199

6

199

7 19

98

19

99

20

00

20

01

2002

20

03

200

4

200

5 20

06

20

07

200

8

200

9

2010

20

11

2012

20

13

Issu

an

ce ($

Bil

s.)

U.S. CLO OUTSTANDINGS ARE FLAT DESPITE RISE IN CLO ISSUANCE


31

CLO OUTSTANDINGS ARE $285 BILLION CUM. CLOS REACHING END OF REINV.

150.0

170.0

190.0

210.0

230.0

250.0

270.0

290.0

310.0

Jul-

12

Au

g-1

2

Sep

-12

O

ct-1

2

No

v-12

D

ec-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

M

ay-1

3 Ju

n-1

3 Ju

l-13

A

ug

-13

CLO

Ag

gre

ga

te P

rin

cip

al B

ala

nce

($B

ils.

) LE

VE

RA

GE

D

Based on a universe of 734 U.S. CLOs

0.0

50.0

100.0

150.0

200.0

250.0

300.0

<=

2011

2012

2013

2014

2015

2016

2017

Cu

mu

lati

ve C

LOs

EO

R (

$B

ils.

)

EOR

AAA SPREADS FOLLOW WIDENING LOAN SPREADS


32

AAA SPREADS VS. SINGLE B LOAN YIELDS CLO ISSUANCE VS. LOAN YIELDS

4%

5%

6%

7%

8%

9%

100

110

120

130

140

150

160

Jan

-12

F

eb-1

2

Mar

-12

A

pr-

12

May

-12

Ju

n-1

2

Jul-

12

Au

g-1

2

Sep

-12

O

ct-1

2

No

v-12

D

ec-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

M

ay-1

3 Ju

n-1

3 Ju

l-13

A

ug

-13

Sep

-13

Sin

gle

-B lo

an

yie

ld t

o 3

yrs

.

AA

A S

pre

ad

(bp

s)

Avg. AAA CLO Spreads (excl. MM)

Single-B loan yields

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Ja

n-1

2

Mar

-12

M

ay-1

2

Jul-

12

Sep

-12

N

ov-

12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

Sin

gle

-B y

ield

s to

3 y

ea

rs

Mo

nth

ly C

LO is

sua

nce

($B

ils.

)

CLO issuance

Single- B loan yields

LEV

ER

AG

ED

POST-CRISIS FIRST: SPREADS DROP BELOW 400BPS; TIGHTENING REFLECTED IN CLOS’ LOAN HOLDINGS


33

U.S. INSTITUTIONAL TERM LOAN SPREADS CLO HOLDINGS: CONTRACTUAL LOAN SPREADS

0

100

200

300

400

500

600

700

1Q9

7 1Q

98

1Q

99

1Q

00

1Q

01

1Q02

1Q

03

1Q0

4

1Q0

5 1Q

06

1Q

07

200

8

2Q

10

2Q

11

2Q

12

2Q

13

Co

ntr

act

ua

l sp

rea

d (b

ps)

LE

VE

RA

GE

D

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

<20

0

200

to

<25

0

250

to

<30

0

300

to

<35

0

350

to

<4

00

40

0 t

o <

450

450

to

<50

0

500

to

<55

0

550

to

<6

00

60

0 t

o <

650

650

to

<70

0

>=

700

Sh

are

of

loa

ns

he

ld b

y U

.S. C

LOs

Spread (bps)

Dec-12

Aug-13

LIBOR FLOORS PREVAIL BUT SIT BELOW 1%


34

CLO HOLDINGS: % OF LOANS WITH LIBOR FLOORS MARKET: % OF LOANS WITH LIBOR FLOORS

0%

10%

20%

30%

40%

50%

60%

70%

80%

<=

200

4

200

5

200

6

200

7

200

8

200

9/1

0

2011

2012

2013

Sh

are

of

loa

ns

wit

h L

ibo

r fl

oo

rs

CLO vintage

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

Sh

are

of

loa

ns

wit

h L

ibo

r fl

oo

rs

No floor 0.75% & 1% 1.25% 1.50% 1.75% >= 2%

LEV

ER

AG

ED

0.75% floor

1.25% floor

1.75% floor

1.5% floor

TABLES TURNED IN MAY/JUNE – YIELDS BACKED UP WHILE UPWARD FLEX DOMINATED


35

INST. TLS SINGLE-B LOAN YIELDS FLEX ACTIVITY

LEV

ER

AG

ED

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-60

-40

-20

0

20

40

60

Jan

-12

F

eb-1

2

Mar

-12

A

pr-

12

May

-12

Ju

n-1

2

Jul-

12

Au

g-1

2

Sep

-12

O

ct-1

2

No

v-12

D

ec-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

M

ay-1

3 Ju

n-1

3 Ju

l-13

A

ug

-13

Sep

-13

Avg

. yie

ld a

dju

stm

en

t

# o

f fl

ex

es

# of flexes up/down

Avg. yield adjustment up/down

3%

4%

5%

6%

7%

8%

9%

10%

Jan

-10

M

ar-1

0

May

-10

Ju

l-10

S

ep-1

0

No

v-10

Ja

n-1

1 M

ar-1

1 M

ay-1

1 Ju

l-11

S

ep-1

1 N

ov-

11

Jan

-12

M

ar-1

2

May

-12

Ju

l-12

S

ep-1

2

No

v-12

Ja

n-1

3 M

ar-1

3 M

ay-1

3 Ju

l-13

S

ep-1

3

Yie

ld (3

-ye

ar

term

)

MARKET-WIDE: PAR-PLUS SHARE DROPPED IN MAY/JUNE, CREATING BUYING OPPORTUNITIES

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Jan

-10

F

eb-1

0

Mar

-10

A

pr-

10

May

-10

Ju

n-1

0

Jul-

10

Au

g-1

0

Sep

-10

O

ct-1

0

Oct

-10

N

ov-

10

Dec

-10

Ja

n-1

1 F

eb-1

1 M

ar-1

1 A

pr-

11

May

-11

Jun

-11

Jul-

11

Au

g-1

1 S

ep-1

1 O

ct-1

1 N

ov-

11

Dec

-11

Jan

-12

F

eb-1

2

Mar

-12

A

pr-

12

May

-12

Ju

n-1

2

Jul-

12

Au

g-1

2

Sep

-12

O

ct-1

2

No

v-12

D

ec-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

M

ay-1

3 Ju

n-1

3 Ju

l-13

A

ug

-13

Sh

are

of

loa

n b

ids

=>

pa

r

SMi 100 Multi-quote TLs 101+

2010 2011 2012 2013


36

DAILY PAR-PLUS SHARE IN U.S. SECONDARY MARKET

LEV

ER

AG

ED

CLO HOLDINGS: PAR-PLUS SHARE STAYS BELOW 10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

<9

0

90

to

<9

1

91

to <

92

92

to

<9

3

93

to <

94

94

to

<9

5

95

to <

96

96

to

<9

7

97

to <

98

98

to

<9

9

99

to

<10

0

>=

100

Sh

are

of C

LOs

Weighted avg. bid

Dec. 2012

End of May Peak

End of Aug.

Late May

Year-end

Aug. 30th


37

U.S. CLO WEIGHTED AVERAGE BID DISTRIBUTION

LEV

ER

AG

ED

SECONDARY PRICE VOLATILITY SPIKES, YTD LOAN RETURNS OUTPACE HY, IG BONDS


38

DAILY PRICE VOLATILITY 2013 YTD RETURNS

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1/2

/20

13

2/2

/20

13

3/2

/20

13

4/2

/20

13

5/2

/20

13

6/2

/20

13

7/2

/20

13

8/2

/20

13

9/2

/20

13

We

ek

ly r

etu

rns

(%)

S&P/LSTA Index ML HY Master II Index ML Corp. Master

LEV

ER

AG

ED

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

12-A

pr-

07

10-A

ug

-07

8-D

ec-0

7 6

-Ap

r-0

8

4-A

ug

-08

2

-Dec

-08

1-

Ap

r-0

9

30-J

ul-

09

27

-No

v-0

9

27-M

ar-1

0

25-J

ul-

10

22-N

ov-

10

22-M

ar-1

1 20

-Ju

l-11

17

-No

v-11

16

-Mar

-12

14

-Ju

l-12

11

-No

v-12

11

-Mar

-13

9-J

ul-

13

Sta

nd

ard

de

via

tio

n o

f d

ail

y c

ha

ng

e in

pri

ce

(ba

sed

on

20

da

y m

ovi

ng

avg

.)

Leveraged Loans

HY Bonds

IS THE WAIT OVER? M&A DEALS MAKE UP 65% OF THE PIPELINE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3/22

/20

12

4/2

2/2

012

5/22

/20

12

6/2

2/2

012

7/22

/20

12

8/2

2/2

012

9/2

2/2

012

10/2

2/2

012

11/2

2/2

012

12/2

2/2

012

1/22

/20

13

2/2

2/2

013

3/22

/20

13

4/2

2/2

013

5/22

/20

13

6/2

2/2

013

7/22

/20

13

8/2

2/2

013

Sh

are

of

we

ek

ly p

ipe

lin

e

RFI Repricings M&A


39

INSTITUTIONAL LOAN PIPELINE BY PURPOSE

LEV

ER

AG

ED

DIVIDEND RECAPS REACH $21B RECORD IN 2Q13


40

DIVIDEND RECAP VOLUME – 2Q13 RECORD SECOND LIEN VOLUME – 2Q13 RECORD

0.0

5.0

10.0

15.0

20.0

25.0

1Q0

4

3Q0

4

1Q0

5 3Q

05

1Q0

6

3Q0

6

1Q0

7 3Q

07

1Q0

8

3Q0

8

1Q0

9

3Q0

9

1Q10

3Q

10

1Q11

3Q

11

1Q12

3Q

12

1Q13

3Q

13

Vo

lum

e ($

Bil

s.)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2Q

02

4Q

02

2Q

03

4Q

03

2Q

04

4

Q0

4

2Q

05

4Q

05

2Q

06

4

Q0

6

2Q

07

4Q

07

2Q

08

4

Q0

8

2Q

09

4

Q0

9

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

Vo

lum

e ($

Bil

s.)

LEV

ER

AG

ED

NEWER VINTAGE CLO HOLDINGS: 40% OF LOANS HELD ARE COV-LITE


41

CUM. COV-LITE VOLUME 2007 VS. 2013 CLO HOLDINGS: COV-LITE LOANS’ SHARE

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Sep

t

Vo

lum

e ($

Bil

s.)

2007 2013

LEV

ER

AG

ED

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

<=

200

4

200

5

200

6

200

7

200

8

200

9/1

0

2011

2012

2013

Sh

are

of

cov-

lite

loa

ns

CLO Vintage

LARGE CORP. LBOS SEE LOWER EQUITY CONTRIBUTIONS, HIGHER LEVERAGE LEVELS


42

2013 LBO PURCHASE PRICE MULTIPLES LBO LEVERAGE LEVELS CLIMB (EXCL. MM)

25%

30%

35%

40%

45%

50%

55%

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

Eq

uit

y C

on

trib

uti

on

LB

O D

eb

t to

EB

ITD

A (

x:1

)

Debt to EBITDA

Equity Contribution

LEV

ER

AG

ED

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

Private MM 1H13 Institutional MM YTD

Large Corp. YTD

Tra

nsa

ctio

n M

ult

iple

1st lien Debt/EBITDA Total Debt/EBITDA Equity Check

NOT LIKE ’07


43

WEEKLY INSTITUTIONAL PIPELINE ANNUAL ISSUANCE COMPARISON TO 2007 PEAK

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Jan

-07

No

v-0

7

Sep

-08

Jul-

09

May

-10

Mar

-11

Jan

-12

No

v-12

Sep

-13

Inst

itu

tio

na

l pip

eli

ne

($

Bil

s.)

LE

VE

RA

GE

D

-150%

-100%

-50%

0%

50%

100%

150%

2008 2009 2010 2011 2012 2013

% c

ha

ng

e v

s.20

07

pe

ak

Refinancings

New Money

Copyright © 2013 by Thomson Reuters LPC. Any reproduction or retransmission of this report - via fax, photocopy or electronically - is a violation of Federal and International Copyright Laws. Contact Thomson Reuters LPC at (1) 646-223-6890 (Americas) or (44) 207-542-8405 (EMEA) or (852) 2294-8853 (Asia-Pacific) or (81) 120-161-916 (Japanese language support) for information on additional LoanConnector tokens.

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