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…Expect to see similar trends during the balance of 2015.
Sources: S&P LCD, TM Capital
…M&A and pro rata activity remained relatively strong while opportunistic and institutional volume lagged…
• New-issue volume was $112.3 billion during Q3 2015, including $67 billion of institutional tranches, down from
$140.2 billion/$85.3 billion during Q2 2015 and $133.6 billion/$92.1 billion during Q3 2014
• Second-lien volume grew to a one-year high of $4.3 billion during Q3 from $3.4 billion during Q2
• Rising share of higher quality paper – loans rated at least BB- or Ba3 remained elevated at 37% of total during Q3
• S&P/LSTA Index of loans outstanding expanded by $13.9 billion, or 1.7% during YTD 2015, a significant decline
from 2014 which had expanded $149 billion, or 22%
– Downshift reflects falling institutional volume and a sharp rise in loan repayments, largely from corporate M&A
• High-yield market was impacted by volatility in the capital markets, uncertainty around rate increases and
weakness in the energy sector
– With prices down and clearing yields up, volume fell to a 3.75-year low of $39.8 billion during Q3, from $94.1
billion in Q2 and $68.9 billion through 3Q in 2014
• CLO formation dropped to $77.6 billion during YTD 2015, from $93.4 billion during YTD 2014
• Many of the themes seen during 1H15 continued into Q3
• Shift from institutional to pro rata financing – pro rata facilities accounted for 40% of new-issue paper in the Q3
– Pro rata volume fell to $45.3 billion in Q3, from $54.8 billion in Q2, but it exceeded Q2 2014 total of $41.5
billion
• M&A related loan activity climbed to a one-year high of $82.6 billion during Q3, up from $60.1 billion during Q2
• LBO loan volume increased modestly to $20.5 billion during Q3, up from $19.3 billion during Q2 and $16.9 billion
during Q3 2014
• Traditional banker-led M&A loan market continues to face headwinds due to historically high purchase price
multiples and regulatory pressures
• Private-equity-backed issuers accounted for 43.4% of new leveraged loan volume during YTD 2015 (and 46.9%
during Q3) down from 2014’s multiyear high of 54.5% and marking the lowest reading since 2009
• Add-on activity dropped to $9.2 billion during Q3 from $17.7 billion during Q2 and $12.1 billion during Q3 2014
• Falling opportunistic volume during Q3 – significant downshift in refinancing/recap volume this year
Leveraged Lending Market ReportQuarterly Commentary
Q3 2015
Leveraged loan volume declined in Q3 versus Q2 and year-over-year…
• Q4 volume expected to continue at moderate pace set during Q3
– Leverage lending guidelines will continue to impact LBO and recap activity
– Technical conditions, while solid, are far from the levels generally associated with strong refinancing and
repricing activity
– Weakness in the high-yield market is expected to put downward pressure on leveraged M&A activity
• If the current pace continues through year-end, new-issue activity will gain some ground on 2014
Key Themes
Sources: S&P LCD, CapitalIQ, TM Capital
• High-yield spreads have been surging – Energy sector (roughly 15% of total HY market)
impacted significantly by depressed oil prices• The issues facing the junk bond market could cause
problems in the economy and the rest of the markets – Issues in the bond market could cause tighter bank
lending – Trend toward conservatism results in less bank
liquidity available for businesses• Tighter financial conditions could make it less likely that the
Federal Reserve will increase interest rates
High-Yield Market Showing Signs of Disruption
80.0%
85.0%
90.0%
95.0%
100.0%
105.0%
Jul-2015 Aug-2015 Sep-2015 Oct-2015
Merrill Lynch High Yield Master II Constrained (Total Return) Index
Barclays High Yield Energy Index
High-Yield Market Indices Performance
• Middle market M&A and financing conditions remain favorable despite market volatility and uncertainty
• We are still seeing aggressive bidders and lenders on a variety of transactions
• Uncertain how long the current attractive deal environment will persist
• Corporate issuers should be proactive about managing liquidity
• Market continues to be frothy for borrowers, though benign workout environment could end abruptly if the economy weakens
Observations from the Front Line
LBO Purchase Price Multiples – Middle Market
1850
1900
1950
2000
2050
2100
2150
Jul-2015 Aug-2015 Sep-2015 Oct-2015
4.1x5.4x
3.6x 2.6x 3.3x 3.8x 3.8x 4.5x 5.1x 5.1x 5.8x
0.6x0.4x
0.9x0.7x
1.0x 0.6x 0.8x 0.1x0.1x 0.3x
0.1x3.3x3.4x
3.8x3.4x
4.1x 3.7x 3.3x 4.1x4.3x 5.3x
6.2x8.1x
9.3x8.3x
6.6x
8.4x 8.2x 7.9x8.8x
9.6x10.7x
12.1x
—
2x
4x
6x
8x
10x
12x
14x
2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q-3Q15
3Q15
Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others
S&P500 Index
Significant Market Volatility During Q3 Amidst Uncertainty
• Slowing global growth – primary concern being China’s economy and the Shanghai exchange downturn
• Greek debt crisis and arduous negotiations with creditors• Uncertainty around Federal Reserve policy regarding
tightening given market volatility, low inflation rate and global economy risks due to China’s slowdown
• While there has clearly been significant volatility in the markets, it has been more muted in loans than for high-yield bonds
2015 Sep 2015 SepSep Aug Jul Jun 2014 Sep Aug Jul Jun 2014
Indices Commodities10-Year Treasury 2.06% 2.21% 2.20% 2.35% 2.52% Crude Oil $45.09 $49.20 $47.12 $59.47 $91.16DJIA 16,285 16,528 17,690 17,620 17,043 Natural Gas $2.52 $2.69 $2.72 $2.83 $4.12S&P 500 1,920 1,972 2,104 2,063 1,972 Gold $1,115 $1,132 $1,095 $1,172 $1,212NASDAQ 4,620 4,777 5,128 4,987 4,493iShares HY Corporate Bond Fund 82.8 85.8 87.8 88.7 91.0 CurrenciesiShares Barclays Aggregate 109.5 108.9 109.4 108.8 109.0 GBP in USD $1.51 $1.54 $1.56 $1.57 $1.62
Bond Index EUR in USD $1.12 $1.12 $1.10 $1.11 $1.26Total Return*10-Year Treasury 1.31% (0.24%) 2.66% (1.35%) (1.24%) USD in JPY 119.74 121.30 123.88 122.30 109.70DJIA 1.51% (6.20%) (0.31%) (2.22%) (0.23%) USD in CNY 6.36 6.38 6.21 6.20 6.14S&P 500 0.49% (6.03%) 1.37% (2.15%) (1.40%)NASDAQ (0.27%) (6.70%) 2.33% (1.82%) (1.82%) Average New-Issue Pricing - B+/BiShares HY Corporate Bond Fund (2.68%) (1.52%) (0.51%) (2.05%) (1.98%) Total Spread 542.0 484.6 501.8 489.0 520.6iShares Barclays Aggregate 0.51% (0.34%) 1.12% (0.80%) 2.51% YTM 5.72% 5.13% 5.30% 5.21% 5.43%
Bond Index
Leveraged Lending Market ReportOctober 2015
Key Market Indicators
Sources: S&P LCD, Bloomberg, TM Capital
New-Issue Loan Volume by Month Default Rates of Leveraged Loans
$22 $30
$15
$34
$22
$38
$48 $42
$50
$63
$15
$36
—$10$20$30$40$50$60$70
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2014 2015Institutional Pro Rata
($ in billions)
1.27%
—
2%
4%
6%
8%
10%
12%
Average Debt Multiples of Highly Leveraged Loans (% of Total) LBO Purchase Price Multiples - All (% of Total)
53%57%
45%39%
48% 52% 56% 59% 59% 54% 53% 54%
36%36%
44%
49%45% 42% 40% 39%
40% 42% 43%45%
8.4x
9.7x9.1x
7.7x8.5x 8.8x 8.7x 8.8x
9.7x 10.1x 10.3x11.2x
—
2x
4x
6x
8x
10x
12x
2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q152Q153Q15
Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others
83% 81% 82% 77% 82% 75% 80% 85% 73% 77% 75% 79%
11% 11% 9% 13% 11%9% 13% 8%
6% 9% 8% 10%
5% 7% 7% 9% 5%13% 7% 6% 21% 11% 13% 7%
4.9x 5.1x 5.2x 5.2x 5.2x 5.1x 4.9x 4.8x5.0x 5.0x 5.1x
4.7x
—
1x
2x
3x
4x
5x
6x
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2014 2015
77% 82% 75% 80% 85% 73% 77% 75% 79% 82% 72% 75%
13% 11%9% 13% 8%
6% 9% 8% 10%12%
12% 15%9% 5%
13% 7% 6% 21% 11% 13% 7%6% 13% 9%
5.2x 5.2x 5.1x 4.9x 4.8x 5.0x 5.0x 5.1x4.7x 5.0x 5.1x 5.1x
—
1x
2x
3x
4x
5x
6x
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2015
FLD / EBITDA SLD / EBITDA
Other Sr Debt / EBITDA Sub Debt / EBITDA
53%57%
45%39%
48% 52% 56% 59% 59% 54% 53%
36%36%
44%
49%45% 42% 40% 39%
40% 42% 43%
8.4x
9.7x9.1x
7.7x8.5x 8.8x 8.7x 8.8x
9.7x 10.1x 10.3x
—
2x
4x
6x
8x
10x
12x
2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q15 2Q15
(6%)
(4%)
(2%)
—
2%
4%
—
20
40
60
80
100
120
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Jul Aug Sep
2012 2013 2014 2015
Consumer Confidence % Change in Disposable Income
(50%)
(40%)
(30%)
(20%)
(10%)
—
10%
20%
30%
Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
S&P GSCI Agriculture Index S&P GSCI All Metals Index
S&P GSCI Energy Index Dow Jones FXCM Dollar Index
0.3%
2.1%
2.9%
—
1%
2%
3%
4%
Jan-14 Jul-14 Jan-15 Jul-15
1 Mon 10 Yr 30 Yr
—
10
20
30
40
50
(10%)
(5%)
—
5%
10%
15%
20%
25%
Sep-14 Nov-14 Jan-15 Mar-15 Jun-15 Aug-15
Volatility (VIX)Mar
ket I
ndic
es
S&P 500 NASDAQ VIX
www.tmcapital.com
New York641 Lexington Avenue30th FloorNew York, NY 10022Tel: 212.809.1360
Boston201 Washington Street32nd FloorBoston, MA 02108Tel: 617.259.2200
Atlanta3575 Piedmont Rd NE Suite 1010Atlanta, GA 30305 Tel: 404.995.6230
TM Capital’s Leveraged Finance ContactsRecent TM Capital Financing Experience
Jerome Romano Managing Director
[email protected] 617-259-2206
Robert Grien Managing Director
[email protected] 212-809-1434
Stock Market Indices U.S. Treasury Yields
Commodities Prices U.S. Trade Deficit & Dollar Index
$100
$105
$110
$115
$120
$125
—
$50
$100
$150
$200
$250
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2014 2015
U.S. D
ollar Index
Trad
e D
olla
rs in
Bill
ions
Series1 Series2 Series3
(50%)
(40%)
(30%)
(20%)
(10%)
—
10%
20%
30%
Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
S&P GSCI Agriculture Index S&P GSCI All Metals Index
S&P GSCI Energy Index Dow Jones FXCM Dollar IndexConsumer Confidence Index & % Change in DPI Housing Starts & Mortgage Rates
—
2%
4%
6%
8%
—
500
1,000
1,500
2,000
Aug-2007 Aug-2009 Aug-2011 Aug-2013 Aug-2015
Housing Starts 30 Year Fixed Mortgage Rate
Sources: S&P LCD, Capital IQ, US Census Bureau, TM Capital
$95
$100
$105
$110
$115
$120
$50
$100
$150
$200
$250
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
2014 2015
U.S. D
ollar Index
Trad
e D
olla
rs in
Bill
ions
Exports Imports Nominal Broad Dollar Index