1Q17 REVIEW/2Q17 PREVIEW & SURVEY RESULTSshare.thomsonreuters.com/...trlpc_large...preview.pdf · 3 1Q17 Review/2Q17 Preview April 5th, 2017 At $166B in 1Q17, global M&A-related lending

1Q17 REVIEW/2Q17 PREVIEW & SURVEY RESULTS

REUTERS / Firstname Lastname REUTERS / Jean-Paul Pelissier

Ioana Barza Director of Analysis 646-223-6822 [email protected]

2

1Q17 Review/2Q17 Preview April 5th, 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

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3Q13

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1Q15

3Q15

1Q16

3Q16

1Q17

Issu

ance

($B

.)

Global loan issuance Americas EMEA APAC

(ex. Japan) Japan

3


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

0.0

50.0

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450.0 1Q

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17

Issu

ance

($B

.)

Global M&A lending

Americas EMEA APAC (ex Japan)

Japan

4


At US$535B in 1Q17, U.S. syndicated lending was up 50% yoy and down 8% vs. 4Q16 while refinancing activity was up 7% to US$409B

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1Q00

1Q

01

1Q02

1Q

03

1Q04

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1Q

11

1Q12

1Q

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1Q14

1Q

15

1Q16

1Q

17

Issu

ance

($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

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

ance

($B

.)

U.S. new money lending

I-Grade Leveraged Other

5


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

0.0

25.0

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0

1Q96

3Q

96

1Q97

3Q

97

1Q98

3Q

98

1Q99

3Q

99

1Q00

3Q

00

1Q01

3Q

01

1Q02

3Q

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1Q03

3Q

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3Q

14

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3Q

15

1Q16

3Q

16

1Q17

Issu

ance

($B

.)

U.S. M&A-related loan issuance

Non-Lev. Lev (excl. LBOs) LBOs

“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.”

U.S. investment grade lending was down 15% yoy to $140B in 1Q17


“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.

7


Investment grade refinancing activity was US$117bn in 1Q17, roughly in line with prior first quarters

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300.0

350.0 1Q

03

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16

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17

U.S

. IG

issu

ance

($B

.)

U.S. investment grade loan issuance

Refinancing New Money (M&A)

New Money (Other)

8


1Q17 M&A financings fell to $11B, a low not seen since 4Q12

0.0

10.0

20.0

30.0

40.0

50.0

60.0

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80.0

90.0

1Q08

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2Q14

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1Q15

2Q15

3Q15

4Q15

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2Q16

3Q16

4Q16

1Q17

IG lo

an is

suan

ce ($

B.)

U.S. investment grade M&A issuance by loan type

Revolver Term Loan Bridge Loan Other

“Debt is still affordable, companies have access, and are performing generally well,” another lender said. “At some point they have to pull the trigger but in the meantime it is impossible to know how long they will wait. As long as they see that there is at least discussion going on and it is leaning in the right direction, they will remain optimistic.”

9


Bridge loan issuance was negligible in 1Q17

0

2

4

6

8

10

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14

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70.0 1Q

06

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1Q

17

No.

of d

eals

U.S

. IG

bri

dge

loan

issu

ance

($B

.)

U.S. investment grade bridge loan issuance

Volume ($B.) No. of Deals

“How can your board make a decision today on a transformative acquisition without knowing the consequences with regard to tax reform?” asked one arranger. .

10


U.S. IG term loan issuance registered $25B in 1Q17

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07

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3Q

14

1Q15

3Q

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1Q16

3Q

16

1Q17

Issu

ance

($B

.)

U.S. IG term loan issuance - quarterly “If you’re a big pharma or tech company with billions of dollars overseas, you don’t know if or when you will have access to it,” said one lender. “Is it next year, is it 2019? How does that impact your financing plans now? If you will get the money back, do you really want to issue 10-year or 20-year bonds? And if you might lose net interest deductibility, are existing obligations going to be grandfathered, in which case maybe you issue 30-year bonds?” “Overnight or as long as possible: when those are your two options it is really hard to plan,” said the lender.

11


How much was used for M&A?

0.0

5.0

10.0

15.0

20.0

25.0 1Q

08

3Q08

1Q

09

3Q09

1Q

10

3Q10

1Q

11

3Q11

1Q

12

3Q12

1Q

13

3Q13

1Q

14

3Q14

1Q

15

3Q15

1Q

16

3Q16

1Q

17

IG M

&A

-rel

ated

term

loan

issu

ance

($B

.)

IG term loan issuance slated for M&A

0% 20% 40% 60% 80%

100%

1Q08

3Q

08

1Q09

3Q

09

1Q10

3Q

10

1Q11

3Q

11

1Q12

3Q

12

1Q13

3Q

13

1Q14

3Q

14

1Q15

3Q

15

1Q16

3Q

16

1Q17

Share of IG term loans used for M&A

0% 10% 20% 30% 40% 50% 60%

1Q08

3Q

08

1Q09

3Q

09

1Q10

3Q

10

1Q11

3Q

11

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3Q

14

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3Q

15

1Q16

3Q

16

1Q17

Share of M&A financings funded by term loans

“It’s what we live for, the M&A. While doing a revolver keeps you busy, we live for the M&A,” said one lender.

12


Lending preferences update: half of lenders surveyed prefer to lend a funded term loan where there is a strong relationship

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dec

. 201

3

Mar

. 201

4

Jun.

201

4

Sept

. 201

4

Dec

. 201

4

Mar

. 201

5

Jun.

201

5

Sept

. 201

5

Dec

. 201

5

Mar

. 201

6

Jun.

201

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Sept

. 201

6

Dec

. 201

6

Mar

. 201

7

% o

f res

pond

ents

For a client with a strong relationship

a TL (funded) an RC (unfunded)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dec

. 201

3

Mar

. 201

4

Jun.

201

4

Sept

. 201

4

Dec

. 201

4

Mar

. 201

5

Jun.

201

5

Sept

. 201

5

Dec

. 201

5

Mar

. 201

6

Jun.

201

6

Sept

. 201

6

Dec

. 201

6

Mar

. 201

7

% o

f res

pond

ents

For a client with a weaker relationship

a TL (funded) an RC (unfunded) Neither

For a client with a weak relationship – the share of banks opting not to lend at all was 67%

13


Revolvers’ share of all IG issuance: 5-year RCs continue to dominate; lenders do not expect this to change anytime soon

0%

10%

20%

30%

40%

50%

60%

70%

80%

1990

1992

1994

1996

1998

2000

2002

2004

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Shar

e of

all

U.S

. IG

loa

n is

suan

ce

Revolver tenor breakout – as a percent of all IG lending

364-DAY THREE-YEAR FIVE-YEAR FOUR-YEAR

Annual Quarterly

14


For revolvers, the 5-year trend is consistent across rating categories

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0 1Q

16

2Q16

3Q16

4Q16

1Q17

1Q16

2Q16

3Q16

4Q16

1Q17

1Q16

2Q16

3Q16

4Q16

1Q17

1Q16

2Q16

3Q16

4Q16

1Q17

IG re

volv

er is

suan

ce ($

B.)

Revolver volume by rating & tenor

AAA AA A BBB

364 day

3 year

4 year

5 year

15


2Q17 Outlook? Majority of lenders expect pricing flat in the near term

0

50

100

150

200

250

300

350

1H91

1H

93

3Q94

3Q

95

3Q96

3Q

97

3Q98

3Q

99

3Q00

3Q

01

3Q02

3Q

03

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3Q

05

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3Q

07

3Q08

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09

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11

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13

3Q14

3Q

15

3Q16

bps

Quarterly drawn spreads

BBB

A

0

10

20

30

40

50

60

70

1H91

1H

93

3Q94

3Q

95

3Q96

3Q

97

3Q98

3Q

99

3Q00

3Q

01

3Q02

3Q

03

3Q04

3Q

05

3Q06

3Q

07

3Q08

3Q

09

3Q10

3Q

11

3Q12

3Q

13

3Q14

3Q

15

3Q16

bps

Quarterly undrawn spreads

BBB A

“It feels like banks are getting more aggressive; nothing materially changed, it is a glacial shift, a slow slide on the margin as covenants are getting more aggressive and pricing may become more aggressive,” said one lender.

Majority of lenders surveyed expect a moderate increase of up to 10% in issuance in 2Q17 and hope for a gradual increase in M&A but with little conviction.

16


More lenders said impact of Basel reforms has worked through the system until the next iteration

0%

25%

50%

75%

100%

Little impact Capital requirements LCR Leverage Ratio

% o

f res

pond

ents

Which of the following reforms are having the greatest impact on IG lending today?

Summer 2014 Survey YE 2014 Summer 2015 Fall 2015 YE 2015 Spring 2016 Summer 2016 Fall 2016 YE 2016 Spring 2017

0%

25%

50%

75%

100%


% o

f res

pond

ents

Which of the following reforms do you expect will have the greatest impact in the next 2-3 years?

Summer 2014 Survey YE 2014 Summer 2015 Fall 2015 YE 2015 Spring 2016 Summer 2016 Fall 2016 YE 2016 Spring 2017

17


Capital requirements are taking a toll on IG lending

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


% o

f res

pond

ents

Which of the following Basel III related reforms are having the greatest impact on the IG lending landscape?

Near-term Next 2-3 years

When asked about the long term effect, 79% said capital requirements will continue to have a big impact on lending decisions. But for now, the lack of supply remained the biggest concern heading into the second quarter.

Leveraged lending was swept up again by refi wave in 1Q17


“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,” said one arranger. “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.”

19


Leveraged refinancings soared to new heights in 1Q17

0.0

20.0

40.0

60.0

80.0

100.0

120.0 Ja

n-10

M

ar-1

0 M

ay-1

0 Ju

l-10

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1 Se

p-11

N

ov-1

1 Ja

n-12

M

ar-1

2 M

ay-1

2 Ju

l-12

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3 Se

p-13

N

ov-1

3 Ja

n-14

M

ar-1

4 M

ay-1

4 Ju

l-14

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5 Se

p-15

N

ov-1

5 Ja

n-16

M

ar-1

6 M

ay-1

6 Ju

l-16

Sep-

16

Nov

-16

Jan-

17

Mar

-17

Issu

ance

($B

.)

Leveraged refinancings

20


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

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

ance

($B

.)

Leveraged refinancings

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

Issu

ance

($B

.)

Leveraged new money

New Money-M&A

New Money-Other

21


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

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Lev

. loa

n is

suan

ce ($

B.)

Leveraged loan issuance: pro rata vs. institutional

Leveraged pro rata Leveraged institutional

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

1Q

17

2014

For

ecas

t 20

15 F

orec

ast

2016

For

ecas

t 20

17 F

orec

ast

Issu

ance

($B

.)

Institutional loan issuance: refinancings

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

1Q

17

2014

For

ecas

t 20

15 F

orec

ast

2016

For

ecas

t 20

17 F

orec

ast

Issu

ance

($B

.)

Institutional loan issuance: new money

22


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

23


Demand remained strong: CLO issuance has climbed past $17B YTD and is expected to be in the $55B-$65B range in 2017 Note: see LPC’s Leveraged Loan Monthly for in-depth CLO, Retail Funds, and CLO underlying collateral trends

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

20

17

Issu

ance

($B

.)

Annual CLO issuance

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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

% o

f sur

vey

resp

onde

nts

2017 CLO issuance estimates ($B.)

Full year 2017 CLO issuance estimates

24


Responses are widely dispersed, expecting CLO issuance in the second quarter to land between $12-$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

ance

($B

.)

Monthly CLO issuance

0%

10%

20%

30%

40%

50%

60%

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

% o

f sur

vey

resp

onde

nts

2Q17 CLO issuance estimates ($B.)

2Q17 CLO issuance estimates

0.0

5.0

10.0

15.0

20.0

25.0

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6 A

ug-1

6 Se

p-16

O

ct-1

6 N

ov-1

6 D

ec-1

6 Ja

n-17

Fe

b-17

M

ar-1

7 A

pr-1

7

Issu

ance

($B

.)

CLO refis & resets

Resets

Refinancings

25


Fund inflows maintained momentum while 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

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Ave

rage

flex

sco

re

Flex Factor

Investor friendly

Issuer friendly

LPC 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.

-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

M

ar

Apr

M

ay

May

Ju

n Ju

l Ju

l A

ug

Sep

Sep

Oct

O

ct

Nov

D

ec

$ B

ils.

Weekly retail fund flows

2013 2016 2017

26


Although structural loosening continued, equity contributions for large corporate LBOs increased to 40% on average

0%

10%

20%

30%

40%

50%

60%

70%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1Q17

Shar

e of

LB

O d

eals

Share of all LBOs with total leverage >6x

Leverage > 6x Leverage > 7x

20%

25%

30%

35%

40%

45%

50%

55%

1H04

1Q

05

3Q05

1Q

06

3Q06

1Q

07

3Q07

20

08

1H10

4Q

10

2Q11

4Q

11

2Q12

4Q

12

2Q13

4Q

13

2Q14

4Q

14

2Q15

4Q

15

2Q16

4Q

16

Equi

ty c

ontr

ibut

ions

(%)

Equity contributions for large corporate LBOs

27


Where are leverage levels and equity contributions heading in 2Q17?

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

25%

30%

35%

40%

45%

50% 1H

03

2H03

1H

04

2H04

1Q

05

2Q05

3Q

05

4Q05

1Q

06

2Q06

3Q

06

4Q06

1Q

07

2Q07

3Q

07

4Q07

20

08

2009

1H

10

3Q10

4Q

10

1Q11

2Q

11

3Q11

4Q

11

1Q12

2Q

12

3Q12

4Q

12

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

LBO

deb

t to

EBIT

DA

(X:1

)

Equi

ty c

ontr

ibut

ions

(%)

Equity contributions vs. leverage levels

Equity Contribution Debt to EBITDA

28


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

1Q97

4Q

97

3Q98

2Q

99

1Q00

4Q

00

3Q01

2Q

02

1Q03

4Q

03

3Q04

2Q

05

1Q06

4Q

06

3Q07

1Q

-3Q

09

2Q10

1Q

11

4Q11

3Q

12

2Q13

1Q

14

4Q14

3Q

15

2Q16

1Q

17

Avg

. fir

st li

en s

prea

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

Num

ber o

f ins

titu

tion

al fa

cilit

ies

# of downward flexes

May ‘13

29


Primary yields dropped in 1Q17 on refi wave

0%

2%

4%

6%

8%

10%

12%

1Q97

4Q

97

3Q98

2Q

99

1Q00

4Q

00

3Q01

2Q

02

1Q03

4Q

03

3Q04

2Q

05

1Q06

4Q

06

3Q07

1Q

-3Q

09

2Q10

1Q

11

4Q11

3Q

12

2Q13

1Q

14

4Q14

3Q

15

2Q16

1Q

17

Yie

ld (3

-yea

r ter

m)

U.S. institutional primary yields

LIB/LIB floor LIB spread OID

3% 4% 5% 6% 7% 8%

Jan-

14

Mar

-14

May

-14

Jul-1

4 Se

p-14

N

ov-1

4 Ja

n-15

M

ar-1

5 M

ay-1

5 Ju

l-15

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6 Se

p-16

N

ov-1

6 Ja

n-17

M

ar-1

7 Yie

ld (3

-yea

r ter

m)

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

-yea

r ter

m)

B, BB yields: quarterly

B BB

30


Downward flex continued 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-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

Ave

rage

flex

Num

ber o

f fle

xes

Monthly institutional loan flex activity

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

31


2Q17 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

ctua

l

2014

A

ctua

l

2015

A

ctua

l

2016

A

ctua

l

2017

A

ctua

l

2015

Fo

reca

st

2016

Fo

reca

st

2017

Fo

reca

st

M&

A s

hare

of i

ssua

nce

M&A as % of leveraged loan issuance

0%

10%

20%

30%

40%

50%

60%

70%

Go

dow

n

Stay

the

sam

e

Go

up

M&

A

Mix

Refis

% o

f sur

vey

resp

onde

nts

2Q17 Outlook

The institutional calendar will…

What will be the driver?

32


What was the biggest change in the middle market in the last 6 months?

Accelerated fundraising has resulted in severe supply/demand imbalance Proliferation of new platforms Large fundraising by direct lenders equated to more LBOs going to clubbed transactions Technical imbalance with large influx of SMAs and lackluster deal supply New players with large hold levels gaining "respectability" with traditional sponsor community

Lack of quality: supply of deals that meet the risk appetite of lenders and also meet return requirements

With the strength of the current markets and investor appetite, it appears that issuers are exploring and leaning to stretch senior deals and 1st/2nd lien deals versus unitranche

Rapid spread compression in core middle market loans

Survey responses are aggregated across themes

33

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Documents

1Q17 REVIEW/2Q17 PREVIEW & SURVEY RESULTSshare.thomsonreuters.com/...trlpc_large...preview.pdf · 3 1Q17 Review/2Q17 Preview April 5th, 2017 At $166B in 1Q17, global M&A-related lending