THOMSON REUTERS LPC’S FIFTH ANNUAL MIDDLE MARKET LOANS...

THOMSON REUTERS LPC’S FIFTH ANNUAL

MIDDLE MARKET LOANS CONFERENCE

REUTERS / Firstname Lastname REUTERS / Jean-Paul Pelissier

Ioana Barza

Director of Analysis

646-223-6822

[email protected]

REUTERS / Samrang Pring

Agenda

Global View

•Topline figures mask real new money declines

•How much M&A is financed in the loan market?

•How much M&A could we expect?

U.S. Leveraged Lending

•Riding the refi wave

•How do terms & conditions stack up?

•The usual suspects! Supply/demand dynamics

U.S. Middle Market Lending

•Record fundraising vs. low supply

•Will loan issuance get a revival this year?

•How are terms & conditions changing?

3

TR LPC's 5th Annual Middle Market Loans Conference April 27th, 2017

Global lending fell 12% in 1Q17 to $906B but was up 17% yoy

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0 1Q

03

3Q03

1Q0

4

3Q0

4

1Q0

5

3Q0

5

1Q0

6

3Q0

6

1Q0

7

3Q0

7

1Q0

8

3Q0

8

1Q0

9

3Q0

9

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Issu

an

ce ($

B.)

Global loan issuance

Americas EMEA APAC (ex. Japan)

Japan

4


At US$578B in 1Q17, global loan refinancings were flat vs. the prior quarter and up

58% yoy while new money, at $328B, was down 27% vs. 4Q16 and down 20% yoy

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

Global new money lending


Japan

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

Global loan refinancings


Japan

5


At $166B in 1Q17, global M&A-related lending was down 40% vs. 4Q16 and flat yoy

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

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

4Q

13

1Q14

2

Q14

3Q

14

4Q

14

1Q15

2

Q15

3Q

15

4Q

15

1Q16

2

Q16

3Q

16

4Q

16

1Q17

Issu

an

ce ($

B.)

Global M&A lending

Americas EMEA APAC (ex Japan)

Japan

“Valuations need to come down or sponsors need to develop greater confidence on prospects for growth. One of those things

has to happen to close the gap. I don’t think financial markets have held M&A back in any way. Markets have been as good

as they have ever been but valuations are high and optimism is low from the PE guys. They are running models based on

outlook and not getting to the right place to justify paying up,” said one arranger.

6


Global M&A deal activity fell 37% to $778B in 1Q17 vs. 4Q16 but was up 12% yoy

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1Q0

7

4Q

07

3Q0

8

2Q

09

1Q10

4Q

10

3Q11

2Q

12

1Q13

4Q

13

3Q14

2Q

15

1Q16

4Q

16

Va

lue

($B

.)

Global M&A by dollar value

Americas Europe Asia Pacific

Japan Africa/Mid. East

Slides 6-8: Figures track entire size of all M&A transactions (not financing portion).

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1Q0

7

4Q

07

3Q0

8

2Q

09

1Q10

4Q

10

3Q11

2Q

12

1Q13

4Q

13

3Q14

2Q

15

1Q16

4Q

16

Nu

mb

er

of

de

als

Global M&A by deal count

Americas Europe

Asia Pacific Japan

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0

20

40

60

80

100

120

140

160

1Q9

8

1Q9

9

1Q0

0

1Q0

1 1Q

02

1Q03

1Q

04

1Q

05

1Q0

6

1Q0

7 1Q

08

1Q

09

1Q

10

1Q11

1Q

12

1Q13

1Q

14

1Q15

1Q

16

1Q17

Nu

mb

er

of

de

als

(<

$50

0M

)

Nu

mb

er

of

de

als

Global M&A – deal counts by deal size

$500M-$1B $1B-$5B $5B-$10B $10B+ < $500M

7


YOY Comparison: the number of smaller M&A transactions is down globally

0.0

100.0

200.0

300.0

400.0

500.0

600.0

1Q9

8

1Q9

9

1Q0

0

1Q0

1 1Q

02

1Q03

1Q

04

1Q

05

1Q0

6

1Q0

7 1Q

08

1Q

09

1Q

10

1Q11

1Q

12

1Q13

1Q

14

1Q15

1Q

16

1Q17

Va

lue

($B

.)

Global M&A – deal values by deal size

$500M-$1B $1B-$5B $5B-$10B $10B+ < $500M

*Figures track entire size of all M&A transactions (not financing portion).

8


U.S. M&A deal making dropped by 60% to $272B in 1Q17 and down 5% yoy

0

100

200

300

400

500

600

700

1Q0

7

4Q

07

3Q0

8

2Q

09

1Q10

4Q

10

3Q11

2Q

12

1Q13

4Q

13

3Q14

2Q

15

1Q16

4Q

16

Va

lue

($B

.)

U.S. deal making activity by dollar value

*Figures track entire size of all M&A transactions (not financing portion).

“It’s funny, issuers are very optimistic from a

business standpoint, they feel good about the

administration being good for their business,

whether it’s manufacturing or regulation driven.

But they are also waiting for the other shoe to

drop with tax reform, interest deductibility of

debt, and repatriation.

It’s optimistic limbo which is a weird place.

The world feels good but no one knows what is

going to happen from a business standpoint,”

said one arranger.

9


U.S. M&A lending was down 49% in 1Q17 to $69B vs. 4Q16, down 32% yoy

“How can your board make a decision today on a transformative acquisition without knowing the consequences

with regard to tax reform?” asked one arranger.

0.0

25.0

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0

1Q9

6

3Q9

6

1Q9

7 3Q

97

1Q9

8

3Q9

8

1Q9

9

3Q9

9

1Q0

0

3Q0

0

1Q0

1 3Q

01

1Q02

3Q

02

1Q03

3Q

03

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

3Q11

1Q

12

3Q12

1Q

13

3Q13

1Q

14

3Q14

1Q

15

3Q15

1Q

16

3Q16

1Q

17

Issu

an

ce ($

B.)

U.S. M&A-related loan issuance

Non-Lev. Lev (excl. LBOs) LBOs

10


At US$535B in 1Q17, U.S. syndicated lending was up 50% yoy and down 8% vs.

4Q16; new money lending was down 38% vs. 4Q16 and down 22% yoy

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1Q0

0

1Q0

1

1Q02

1Q03

1Q0

4

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

U.S. loan issuance

I-Grade Leveraged Other

0.0

25.0

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0

250.0

275.0

1Q03

1Q0

4

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

U.S. new money lending

I-Grade Leveraged Other

LEVERAGED LENDING

The race for repricings


“The typical things that you want for the asset class are all there: low default rates, high historical

returns over the last 12-24 months and increasing interest rates. Those three things do not happen at

the same time that often and could mean a huge boom in issuance. But, the product is just not there,”

said one arranger.

12


Leveraged loan refinancings climbed to $261B, surpassing 2Q13’s $246B record

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1Q03

1Q0

4

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

Leveraged refinancings

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1Q03

1Q0

4

1Q0

5

1Q0

6

1Q0

7

1Q0

8

1Q0

9

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

an

ce ($

B.)

Leveraged new money

New Money-M&A

New Money-Other

“It seems there could be a lot more downside than upside on the M&A front if you look at the leveraged market,” said one

arranger. “New money deals mainly came from corporations selling divisions to sponsors. We are seeing pruning going on,

spinning off from larger entities but not transformative transactions.”

13


Institutional loan issuance jumped 55% in 1Q17 to $248B on the back of

refinancings; pro rata was down 15% in 1Q17 to $97B

0.0

50.0

100.0

150.0

200.0

250.0

300.0 1Q

02

3Q02

1Q03

3Q03

1Q0

4

3Q0

4

1Q0

5

3Q0

5

1Q0

6

3Q0

6

1Q0

7

3Q0

7

1Q0

8

3Q0

8

1Q0

9

3Q0

9

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Le

v. lo

an

issu

an

ce ($

B.)

Leveraged loan issuance: pro rata vs. institutional

Leveraged pro rata Leveraged institutional

14


Outlook: Leveraged pro rata loan issuance expected to be steady to up in 2017

0%

10%

20%

30%

40%

50%

60%

70%

80%

<$450 $500 $550 >$600

% o

f su

rve

y r

esp

on

de

nts

2017 Lev. pro rata issuance estimates ($B.)

Full year 2017 Lev. pro rata issuance estimates

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

1Q17

Issu

an

ce ($

B.)

Leveraged pro rata loan issuance

Refinancing New Money (M&A)

New Money (Other)

Leveraged pro rata ended 2016 at $461B and is expected to remain consistent or climb to the $500B range

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2002

20

03

200

4

200

5 20

06

20

07

200

8

200

9

2010

20

11

2012

20

13

2014

20

15

2016

1Q

17

2014

Fo

reca

st

2015

Fo

reca

st

2016

Fo

reca

st

2017

Fo

reca

st

Issu

an

ce ($

B.)

Institutional loan issuance: refinancings

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2002

20

03

200

4

200

5 20

06

200

7

200

8

200

9

2010

2011

20

12

2013

2014

2015

20

16

1Q17

2014

Fo

reca

st

2015

Fo

reca

st

2016

Fo

reca

st

2017

Fo

reca

st

Issu

an

ce ($

B.)

Institutional loan issuance: new money

15


Institutional refis reached $195B while new money was $54B in 1Q17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90% 4

-Jan

-12

4-M

ar-1

2

4-M

ay-1

2

4-J

ul-

12

4-S

ep-1

2

4-N

ov-

12

4-J

an-1

3

4-M

ar-1

3

4-M

ay-1

3

4-J

ul-

13

4-S

ep-1

3

4-N

ov-

13

4-J

an-1

4

4-M

ar-1

4

4-M

ay-1

4

4-J

ul-

14

4-S

ep-1

4

4-N

ov-

14

4-J

an-1

5

4-M

ar-1

5

4-M

ay-1

5

4-J

ul-

15

4-S

ep-1

5

4-N

ov-

15

4-J

an-1

6

4-M

ar-1

6

4-M

ay-1

6

4-J

ul-

16

4-S

ep-1

6

4-N

ov-

16

4-J

an-1

7

4-M

ar-1

7

Sh

are

of

loa

ns

bid

=>

100

Daily U.S. par-plus share of multi-quote institutional term loans

16


60% of all multi-quote term loans are bid at par or higher, down from a peak of 65%

TR LPC’s Leveraged Loan Monthly plus Special Reports on CLO Trading Activity and sector deep-dives,

provide both loan stats and trends on underlying CLO holdings across the U.S. and Europe

17


33% of U.S. CLOs see weighted average bids on underlying assets climb to 99 or

higher, down from 37%, as secondary rally slowed

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% A

pr-

14

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-14

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-15

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

% o

f CLO

s

Share of U.S. CLOs by weighted average bid on their assets

<97

97 to <98

98 to <99

>=99

LPC Collateral allows loan and CLO traders, to search all loan holdings of CLOs by manager, vehicle, or

across spread, industry, trade levels, and more

18


Meanwhile, leveraged loan spreads fell to lowest levels post-crisis

200.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0

600.0

1Q9

7 4

Q9

7 3Q

98

2

Q9

9

1Q0

0

4Q

00

3Q

01

2Q

02

1Q03

4

Q03

3Q

04

2

Q0

5 1Q

06

4

Q0

6

3Q0

7 1Q

-3Q

09

2

Q10

1Q

11

4Q

11

3Q12

2

Q13

1Q

14

4Q

14

3Q15

2

Q16

1Q

17

Avg

. fir

st li

en

sp

rea

d (b

ps)

Avg. first lien institutional loan spread (bps)

0

10

20

30

40

50

60

70

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

Nu

mb

er

of

inst

itu

tio

na

l fa

cili

tie

s

# of downward flexes

May ‘13

19


Primary yields dropped in 1Q17 on refi wave; ticking up now as deal mix changes

0%

2%

4%

6%

8%

10%

12%

1Q9

7 4

Q9

7 3Q

98

2

Q9

9

1Q0

0

4Q

00

3Q

01

2Q

02

1Q03

4

Q03

3Q

04

2

Q0

5 1Q

06

4

Q0

6

3Q0

7 1Q

-3Q

09

2

Q10

1Q

11

4Q

11

3Q12

2

Q13

1Q

14

4Q

14

3Q15

2

Q16

1Q

17

Yie

ld (3

-ye

ar

term

)

U.S. institutional primary yields

LIB/LIB floor LIB spread OID

3%

4%

5%

6%

7%

8%

Jan

-14

M

ar-1

4

May

-14

Ju

l-14

S

ep-1

4

No

v-14

Ja

n-1

5 M

ar-1

5 M

ay-1

5 Ju

l-15

S

ep-1

5 N

ov-

15

Jan

-16

M

ar-1

6

May

-16

Ju

l-16

S

ep-1

6

No

v-16

Ja

n-1

7 M

ar-1

7 Yie

ld (3

-ye

ar

term

)

B, BB yields: monthly

B BB

3%

4%

5%

6%

7%

8%

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Yie

ld (3

-ye

ar

term

)

B, BB yields: quarterly

B BB

20


Downward flex continues to dominate

-3%

-2%

-1%

0%

1%

2%

3%

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-15

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

Ave

rag

e f

lex

Nu

mb

er

of

fle

xe

s

Monthly institutional loan flex activity

# of flexes up/down Avg. yield adjustment up/down

21


TRLPC’s Flex Factor tracked issuer friendly conditions via price and structural

changes

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1Q15

2Q

15

3Q15

4Q

15

1Q16

2Q

16

3Q16

4Q

16

1Q17

2Q

17

Ave

rag

e f

lex

sco

re

Flex Factor

Investor friendly

Issuer friendly

TR LPC’s Flex Factor measures investor sentiment in the leveraged

loan market by assigning points to both price and structural flexes in

the primary market. The higher the flex score are on a deal, the

more price and structural changes were required to get that deal

done.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1Q0

5

2Q

06

2Q

07

4Q

09

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

4Q

15

4Q

16

% o

f vo

lum

e

Co

v-li

te v

olu

me

($

B.)

Cov-lite volume

Overall Cov-lite Vol.

% of Institutional Volume

% of Leveraged Volume

22


Half of new LBOs are levered 6 times or higher

Survey: The role of direct lending for larger borrowers will…

•Not change: growth will be focused on middle market issuers, said 27% of respondents

•Diminish: regulatory environment will ease under new administration, said 18% of respondents

•Grow: no one else can do tougher credits, said 55% of survey respondents

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

25%

30%

35%

40%

45%

50%

1H03

2H

04

3Q0

5

2Q

06

1Q0

7

4Q

07

1H10

1Q11

4Q

11

3Q12

2Q

13

1Q14

4Q

14

3Q15

2Q

16

1Q17

LB

O d

eb

t to

EB

ITD

A (

X:1

)

Eq

uit

y c

on

trib

uti

on

s (%

)

Equity contributions vs. leverage levels Equity Contribution Debt to EBITDA

0%

10%

20%

30%

40%

50%

60%

70%

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

1Q17

Sh

are

of

LB

O d

ea

ls

Share of all LBOs with total leverage >6x

Leverage > 6x Leverage > 7x

23


What fuels this, the usual (visible) suspects?

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0 Ja

n-1

2

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-15

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

$ B

ils.

Monthly CLO issuance vs. retail fund flows

CLO Issuance Loan fund flows

24


Demand remains strong: CLO issuance has climbed past $25B YTD and is expected

to be in the $60B-$70B range in 2017

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

Issu

an

ce ($

B.)

Annual CLO issuance

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$55-$60 $60-$65 $65-$70 >$70

% o

f su

rve

y r

esp

on

de

nts

2017 CLO issuance estimates ($B.)

Full year 2017 CLO issuance estimates

25


Responses are widely dispersed, expecting CLO issuance in the second quarter to

land between $12B and $20B

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan

-11

Sep

-11

May

-12

Jan

-13

Sep

-13

May

-14

Jan

-15

Sep

-15

May

-16

Jan

-17

Issu

an

ce ($

B.)

Monthly CLO issuance

0%

10%

20%

30%

40%

50%

60%

<$12 $12-$15 $15-$20 >$20

% o

f su

rve

y r

esp

on

de

nts

2Q17 CLO issuance estimates ($B.)

2Q17 CLO issuance estimates

0.0

5.0

10.0

15.0

20.0

25.0

Jan

-16

F

eb-1

6

Mar

-16

A

pr-

16

May

-16

Ju

n-1

6

Jul-

16

Au

g-1

6

Sep

-16

O

ct-1

6

No

v-16

D

ec-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

Issu

an

ce ($

B.)

CLO refis & resets

Resets

Refinancings

26


CLO assets under management are climbing steadily toward $450B

150

200

250

300

350

400

450

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

CLO

Ag

gre

ga

te P

rin

cip

al B

ala

nce

($B

.)

CLO assets under management climb past $445B

*Based on a sample of deals where discount margin available

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

190.0

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

AA

A D

isco

un

t M

arg

in*

bp

s

AAA spreads continue to tighten

27


Is it 2013 yet?

-2,500.0

-2,000.0

-1,500.0

-1,000.0

-500.0

0.0

500.0

1,000.0

1,500.0 Ja

n

Jan

Feb

Mar

Mar

Ap

r

May

May

Jun

Jul

Jul

Au

g

Sep

Sep

Oct

Oct

No

v

Dec

$ B

ils.

Weekly retail fund flows

2014 2015

-1,000.0

-500.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

Jan

Jan

Feb

Mar

Mar

Ap

r

May

May

Jun

Jul

Jul

Au

g

Sep

Sep

Oct

Oct

No

v

Dec

$ B

ils.

Weekly retail fund flows

2013 2016 2017

28


Loan fund assets under management approach $150B, inching toward

March 2014’s peak $174B

0

20

40

60

80

100

120

140

160

180

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

AU

M ($

B.)

Loan fund assets under management

29


Outlook: Lenders surveyed expect M&A will make up 38% of issuance; in 1Q17 M&A

made up 15% of issuance

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2013

A

ctu

al

2014

A

ctu

al

2015

A

ctu

al

2016

A

ctu

al

2017

A

ctu

al

2015

F

ore

cast

2016

F

ore

cast

2017

F

ore

cast

M&

A s

ha

re o

f is

sua

nce

M&A as % of leveraged loan issuance

0%

10%

20%

30%

40%

50%

60%

70%

Go down

Stay the

same

Go up M&A Mix Refis

% o

f su

rve

y r

esp

on

de

nts

Near term outlook

The institutional

calendar will…

What will be the

driver?

IT’S ALL ABOUT THE MIDDLE MARKET!

Has record fundraising set unmanageable expectations?


• TR LPC has combined its syndicated deals data with private deals to provide issuance, terms, and

conditions and credit metrics across the entire middle market for the first time

• BDC Collateral was created to provide transparency across BDC holdings

31


0% 10% 20% 30% 40% 50%

Public BDCs

Joint ventures

MM CLOs

Private BDCs

Private credit funds

Separately managed accounts

% of respondents

What fundraising strategy is most in vogue in the middle market right

now?

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2014 2015 2016* 2017E

MM

de

bt

fun

dra

isin

g (

$B

.)

Middle Market Direct Lending Capital Raised

Mezzanine

Total Debt Raise Estimate

2016 was a banner year for MM debt fundraising at $57.8B (w/mezz); $18B YTD

0% 25% 50% 75% 100%

Expecting fundraising to slow down meaningfully

Middle market is a hot spot; fundraising will

remain strong

Only well established players can raise money this year

% of respondents

What is your opinion on the fundraising environment for middle

market loans in 2017?

“Accelerated fundraising has resulted in a severe supply/demand imbalance,” said one arranger.

* Started tracking mezzanine in 2016

32


2016 MM CLO issuance of $8.4B was the highest level tracked post credit crisis;

$4.74B in MM CLOs have been issued so far this year

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

199

9

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

MM

CLO

Issu

an

ce ($

B.)

Middle market CLO issuance

0%

5%

10%

15%

20%

25%

30%

< $5.0B $5-6B $6-7B $7-8B $8-9B > $9B

% o

f re

spo

nd

en

ts

2017 Lender Survey: 2017 MM CLO issuance expectations

33


As an agent, which investors do you target?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

% o

f re

spo

nd

en

ts w

ho

sa

id y

es

to e

ach

ty

pe

Survey Date

Regulated Players

Asset-Based Lenders Regional Banks

Foreign Banks

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

% o

f re

spo

nd

en

ts w

ho

sa

id y

es

to e

ach

ty

pe

Survey Date

Non-regulated Players

BDCs CLOs

Specialty Finance Co's Hedge Funds

Other Investors

34


Only 25% of respondents said they met their 1Q17 lending goal

0%

10%

20%

30%

40%

50%

60%

70%

80%

Yes No

% o

f re

spo

nd

en

ts

Did you reach your 1Q17 lending goal?

Bank Non Bank

Those that fell below their goals attributed to:

– Lack of volume

– Terrible deal structures / terms

– Pricing too low

– Aggressive competition

– Could not compete on aggressive leverage levels

– Too many repricings

– Poor credit quality

– Corporates sat on sidelines

– Too many lenders with large hold size

– Banks were aggressive, which amped the competition

Those that met their goals attributed to:

– Strong origination efforts

– Early commitments

– Relationships

– Saw more dealflow

– Had a strong backlog from 4Q16

– Went up market

35


However, majority of respondents are confident they will meet their lending goals this

year in part due to more modest targets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

No Yes

% o

f re

spo

nd

en

ts

Will you meet your 2017 lending goal?

Banks Non-Banks

Why will you not meet your goal?

– Too much competition coupled with

• Capital from non-banks

• Large budgets

• Continued conservatism limits eligible deals

– Demand outpacing supply of deals

– Conservative credit culture

Why will you meet your goal?

– Markets should become a little more volatile which will help

direct lenders to step in

– Set more modest goals this year; the bar was lowered for

2017 given the significant runoff in 2016

– Have the ability to step into BSL deals

– Regulated banks are getting more looks at the smaller

sponsored deals as others move up market

– Have strong origination platform that is far-reaching

– Ability to source via sponsor relationships

36


How much more capital are you allocating to lend in the middle market?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90% (3

0%

)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

>30

%

% o

f re

spo

nd

en

ts

YOY Percentage change

Banks said…

2016 Survey

2017 Survey

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

(30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

>30

%

% o

f re

spo

nd

en

ts


Non-banks said…

2016 Survey

2017 Survey

37


Respondents are more bullish on a pick-up in deal flow this year

0%

10%

20%

30%

40%

50%

60%

70%

80%

(30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

>30

%

% o

f re

spo

nd

en

ts


Banks said…

2016 Survey 2017 Survey

0%

10%

20%

30%

40%

50%

60%

70%

(30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

>30

%

% o

f re

spo

nd

en

ts


Non-banks said…


38


Combined sponsored lending (syndicated + private execution) was up 16% in 2016

to $112B, while corporates were down 7% yoy

0.0

50.0

100.0

150.0

200.0

250.0

200

0

200

1

2002

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

1Q17

Issu

an

ce ($

B.)

Middle market lending activity

Non-sponsored Sponsored Private Sponsored

0%

10%

20%

30%

40%

50%

60%

70%

80%

(30

%)

(20

-30

%)

(10

-20

%)

(0-1

0%

)

0-1

0%

10-2

0%

20-3

0%

>30

%

% o

f re

spo

nd

en

ts


Will 2017 overall cash flow lending…

Banks Non-Banks

39


Sponsored M&A financings are expected to increase moderately this year for the

combined syndicated and private middle market

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

1Q03

2Q

04

3Q0

5

4Q

06

1Q0

8

2Q

09

3Q10

4Q

11

1Q13

2Q

14

3Q15

4Q

16

MM

M&

A V

olu

me

($B

.)

Sponsored M&A Issuance*

LBO Add-on acquisition

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Moderate decrease (0-15%)

Stay the same Moderate increase (+0-15%)

Significant increase (> +15%)

% o

f re

spo

nd

en

ts


Survey: Sponsored M&A financings in 2017 will…

Banks Non-Banks

* Loan volume includes both syndicated and private execution beg. in 1Q14

40


Outlook is mixed on whether non-sponsored M&A financings will see much growth in

2017

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1Q0

0

2Q

01

3Q02

4Q

03

1Q0

5

2Q

06

3Q0

7

4Q

08

1Q10

2Q

11

3Q12

4Q

13

1Q15

2Q

16

MM

Co

rpo

rate

M&

A V

olu

me

($B

.)

Non-Sponsored M&A Issuance

0%

10%

20%

30%

40%

50%

60%

70%

Moderate decrease (0-15%)

Stay the same Moderate increase (+0-15%)

Significant increase (> +15%)

% o

f re

spo

nd

en

ts


Survey: Non-Sponsored M&A financings will…

Banks Non-Banks

41


Pipelines are not stellar; M&A is not expected to make up a large share of volume

0%

10%

20%

30%

40%

50%

60%

0-25% 25-50% 50-75% 75%-100%

% o

f re

spo

nd

en

ts

M&A as % of volume

How much of 2Q17 volume will be M&A driven?

Banks

Non Banks

23%

57%

20%

How would you characterize your pipeline for 2Q17?

Very Strong Above average

Average Very light

42


Which sectors come out ahead given the new administration?

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Hea

lth

care

B

usi

nes

s S

ervi

ces

Tech

no

log

y S

ervi

ces

Man

ufa

ctu

rin

g

Ch

emic

als,

Pla

stic

s B

ever

age,

Fo

od

A

uto

mo

tive

W

ho

lesa

le

Oil

and

Gas

M

edia

R

etai

l & S

up

erm

kts

Fin

anci

al S

ervi

ces

Lei

sure

/En

tert

ain

. Te

leco

m

Uti

litie

s C

on

stru

ctio

n

Res

tau

ran

ts

Co

nsu

mer

Ser

vice

s A

ero

/Def

ense

Te

xtile

s an

d A

pp

arel

S

hip

pin

g

Pap

er &

Pac

kag

ing

D

istr

ibu

tors

Tr

ansp

ort

atio

n

Fo

rest

Pro

du

cts

Rea

l Est

ate

Fo

od

& B

ever

age

H

ote

l & G

amin

g

Ag

ricu

ltu

re

Min

ing

Lo

an

vo

lum

e ($

Bil

s.)

2016 volume (syndicated + private execution)

1Q16

2Q16

3Q16

4Q16

Loan volume includes first lien, 2nd lien, mezzanine and seller note volume

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Bu

sin

ess

Ser

vice

s

Tech

no

log

y

Wh

ole

sale

Hea

lth

care

Au

tom

oti

ve

Man

ufa

ctu

rin

g

Ser

vice

s

Tran

spo

rtat

ion

Ch

emic

als/

Pla

stic

s

Oil

and

Gas

Co

nst

ruct

ion

Med

ia

Bev

erag

e/Fo

od

Lei

sure

/En

tert

ain

.

Co

nsu

mer

Fin

anci

al S

vcs.

Uti

litie

s

Res

tau

ran

ts

Text

iles/

Ap

par

el

Sh

ipp

ing

Tele

com

Pap

er &

Pac

k.

Lo

an

vo

lum

e ($

Bil

s.)

1Q17 volume (syndicated + private execution)

43


How are you feeling about the economy?

0% 25% 50% 75% 100%

Caution: Seeing some cracks in issuer performance

Slow and steady growth will be sector specific

Expecting strong accelerated growth

% of respondents

Lender Survey: How are you feeling about the economy?

2Q17 Survey

1Q17 Survey

6%

43%

34%

17%

What has been Trump’s biggest effect on the loan market so far in 2017?

Restoring real growth in the economy

Increased optimism and confidence

Not much change, mostly just entertaining

His policies create uncertainty making investing more difficult

44


What is the biggest factor to winning a deal in today’s environment?

0% 20% 40% 60%

Most flexible on credit approval w/r/t sectors, issuer size,

financing/security type, etc.

Strongest origination platform

Offer the lowest pricing

Willing to stretch the most on documentation and leverage

levels

Hold level

% of respondents

Non-banks said…

0% 10% 20% 30%

Strongest origination platform

Most flexible on credit approval w/r/t sectors, issuer size,

financing/security type, etc.

Reputation / relationships

Willing to stretch the most on documentation and leverage

levels

Hold level

% of respondents

Banks said…

45


What is your maximum hold size for middle market deals?

0%

10%

20%

30%

40%

50%

60%

< $25 $25-$50 $50-$75 $75-$100 >$100

% o

f re

spo

nd

en

ts

Maximum hold size for a MM deal ($M)

Banks


0%

10%

20%

30%

40%

50%

60%

< $25 $25-$50 $50-$75 $75-$100 >$100

% o

f re

spo

nd

en

ts

Maximum hold size for a MM deal ($M)

Non-banks


46


Which structure will sponsors favor? First lien/Second lien is expected to gain favor given competitive landscape

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q13

2Q

13

1Q14

2Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

2Q

16

3Q16

4Q

16

1Q17

% o

f is

sua

nce

Data: Private/club lending by structure*

1st Lien/Mezz Stretch Sr. 1st/2nd Lien Unitranche

0%

10%

20%

30%

40%

50%

60%

1st/2nd Lien Stretch Sr. 1st Lien/Mezz Unitranche

% o

f re

spo

nd

en

ts

Survey: Which structure will sponsors favor?

2016 2017

*Loan volume includes first lien, 2nd lien, mezz and seller notes

47


Are yields commensurate with risk?

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15* 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

All

-in

-yie

ld (3

-ye

ar)

Quarterly middle market yields across the capital structure

MM Institutional TL Yield (rated) MM Private: Bank TL MM Private: Non-Bank Traditional TL* Unitranche MM Private: "High Octane" Senior** MM Second Lien Mezz (Cash) Mezz (Cash + PIK)

*Non-bank traditional TL is for “traditional” senior deals priced below 600bps, breakout/spread ceiling began in 2Q15

**High octane senior is non-bank term loans that are not unitranche but rather senior deals for tougher credits priced 600bps and up

48


Further structural deterioration is expected given ongoing supply/demand imbalance

0% 20% 40% 60% 80%

Remain the same

Structures and documentation will

deteriorate given supply demand

imbalance

Structures/docs will improve because

supply should pick up

% of respondents

What is your expectation for structures and quality of documentation in 2017?


3.0x

3.3x

3.5x

3.8x

4.0x

4.3x

4.5x

4.8x

5.0x

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

To

tal L

eve

rag

e

Avg. issuer D/EBITDA by arranger type

Regulated Lender

Non-regulated lender

49


Where are leverage levels heading in 2Q17?

0%

10%

20%

30%

40%

50%

60%

Leverage will rise

meaningfully

Leverage will rise only mildly

Remain the same

Leverage levels to tighten

% o

f re

spo

nd

en

ts

What is your expectation on issuer leverage levels in 2Q17?

4.0x

4.3x

4.5x

4.8x

5.0x

5.3x

5.5x

5.8x

6.0x

6.3x

6.5x

6.8x

7.0x

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

To

tal L

BO

de

bt

to E

BIT

DA

LBO leverage by market segment

Large Corp. Inst. MM Club MM

50


How are you expecting your portfolio to perform in 2017? What’s troubling you? • Almost 90% of respondents expect their portfolio health will be stable in 2017

• Biggest concerns for 2017 include: terms and conditions, excessive capital in the middle market and deal flow!

How are you expecting your overall portfolio to perform in 2017?

Sector specific: some weaken, some strengthen

Stable and steady growth

Strengthen, growth picks up

Weaken, growth is slowing

What are you most concerned about for 2017?

– Terms and conditions/loose structures

– Number of new participants/competition

– Too little deal flow/supply

– Leverage levels too high

– Excessive ill-experienced capital seeking yields

– Pricing going too low

– Too much leverage on cyclicals

– Rising rates and how it will impact borrowing costs

– Overall credit quality

– Recoveries could be abysmal in the next down cycle

– Potential new aggressiveness due to regulatory relief

– Uncertainty of Trump’s policies

– Retail inflows

– Very high public market valuations suppressing volume

51

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