MIDDLE MARKET PANEL DISCUSSION LSTA’S 18TH ANNUAL …share.thomsonreuters.com/pr_us/IoanaBarza_LSTAOct2013_MMPan… · MIDDLE MARKET PANEL DISCUSSION LSTA’S 18TH ANNUAL CONFERENCE

MIDDLE MARKET PANEL DISCUSSION LSTA’S 18TH ANNUAL CONFERENCE Ioana Barza

Director of Analytics

[email protected]

2013 GLOBAL M&A LOAN ISSUANCE REACHES $370B; U.S. M&A LENDING REACHES $250B

October 17, 2013 Middle Market Panel - LSTA Annual Conference

2

GLOBAL M&A LENDING PICKS UP U.S. M&A LENDING: GAINING TRACTION

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 20

02

2003

20

04

20

05

200

6

200

7 20

08

20

09

20

10

2011

20

12

2013

Issu

an

ce ($

Bil

s.)

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

BIG

PIC

TU

RE

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1987

19

89

19

91

199

3 19

95

199

7 19

99

20

01

2003

20

05

200

7 20

09

20

11

2013

Issu

an

ce ($

Bil

s.)

Non-Lev. Lev. LBOs

M&A OUTLOOK


3

TR LPC SURVEY TR LPC SURVEY

When might M&A lending reach 2007 levels?

– 10% of respondents said 2014

– 20% said 2015

– 17% said 2016

– 31% said >2016

– 22% said never

When will M&A gain traction?

– 1% said 4Q13

– 8% said 1H14

– 19% said 2H14

– 72% said after 2H14

Global M&A was:

– 2011 - $450 billion

– 2012 - $450 billion

– 1-3Q13 - $370 billion

This year, global M&A lending will reach…

– 17% of respondents said $350-$400 billion

– 34% said $400-$450 billion

– 35% said $450 - $500 billion

– 14% said > $500 billion

BIG

PIC

TU

RE

October 17, 2013

New money / M&A volume

Will structure and price continue to erode due to demand/supply imbalance

Credit standards

Leverage lending guidance

Deteriorating documentation

Lack of risk assessment due to folks chasing yield

Aggressiveness of institutions that need to meet budgets

Lack of quality dealflow

Waiting for new LBOs as opposed to sponsor-to-sponsor deals

Maintaining structures

Price compression

Need higher quality deals

Fiscal policy / QE issue

Budget debate

Meeting return hurdles

Getting deals to close as scheduled

WHAT WAS THE BIGGEST CHANGE IN 3Q13?

Lack of supply

Limited new money dealflow

Too much refi activity

A modest pick up in M&A

Commercial bank regulation

Leverage lending guidance

More competition

Aggressive terms and conditions

Aggressive leverage multiples

Prevalence of structures going covenant lite

Loose terms on large cap deals trickling down market

Arranger fees going down

Large institutional investors searching down market for deals

Pricing continues lower

Not enough non-sponsored opportunities

Increasing hold levels

TR LPC QUARTERLY MIDDLE MARKET BANK & INVESTOR SURVEY RESULTS/4Q13 OUTLOOK

4Q

13 MID

DLE

MA

RK

ET

SU

RV

EY

MOST IMPORTANT ISSUE IN 4Q13?

4

Middle Market Panel - LSTA Annual Conference

VAST MAJORITY OF RESPONDENTS WERE UNABLE TO LEND AS MUCH AS THEY DESIRED IN 3Q13


5

DID YOU REACH YOUR 3Q13 LENDING GOAL? WHAT FACTORS CONTRIBUTED TO THIS?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yes No

% o

f re

spo

nd

en

ts

Bank respondents Non-bank respondents Those who fell below goals attributed to: – Not enough M&A

– Slow issuance

– Too much competition

– Strategics took away M&A

– Sponsors lost deals on price

– Buyer / seller mismatch

– Aggressive market

– Some capex projects put on hold

– Repayments

– Lack of quality dealflow

– Banks underpriced non-bank lenders

– Loose structures / weak covenants

– Low allocations / shrinking bank groups

– More amendments rather than new lending

Those who met goals attributed to: – Strong pipeline

– Strong relationships with sponsors

– Flexible capital on structure and yield (one-stop shop)

– Sector focused – healthcare, energy

– Lucky that our sponsors won their deals

– Focused on smaller EBITDA companies

4Q

13 MA

RK

ET

SU

RV

EY

MIDDLE MARKET LENDING DRIVEN BY REFINANCINGS


6

MID

DLE

MA

RK

ET

STA

TS

QUARTERLY MIDDLE MARKET ISSUANCE ANNUAL MIDDLE MARKET ISSUANCE

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

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

Issu

an

ce ($

Bil

s.)

Refinancing New money (beg. 1Q03)

Middle Market definition: 1) Borrower sales size $500 million or less & deal size $500 million or less 2) See additional exclusionary criteria on LoanConnector.com

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

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

Issu

an

ce (

$B

ils.

)

Non-sponsored Sponsored

RESPONDENTS PREDICT SPONSORED VOLUME WILL RISE MODESTLY IN 4Q13; NON-SPONSORED LIKELY FLAT

0%

10%

20%

30%

40%

50%

60%

Significant decrease (more

than 15%)

Moderate decrease (between

5-15%)

Remain flat Moderate increase (between 5-15%)

Significant increase (more

than 15%)

% o

f re

spo

nd

en

ts

Non-Sponsored

Sponsored

October 17, 2013

4Q13 ISSUANCE EXPECTATIONS

Sponsored: Over half of respondents believe we will see a moderate pick up (5-15%) in 4Q13

Non-sponsored: Half of respondents believe volume will remain unchanged in 4Q13

4Q

13 MA

RK

ET

SU

RV

EY

7

Middle Market Panel - LSTA Annual Conference

MAJORITY EXPECTS THAT LOAN SUPPLY WILL NOT MEET LOAN DEMAND IN 4Q13


8

Respondents feel that neither sponsored nor non-sponsored volume will be sufficient to meet lenders’ demand in 4Q13

How will the ongoing imbalance impact structures?

4Q

13 MA

RK

ET

SU

RV

EY

SPONSORED NON-SPONSORED

0% 20% 40% 60% 80% 100%

Yes, lenders will be able to pick and

choose

Loan supply and loan demand will be

balanced

No, loan demand will outstrip loan supply

% of respondents

0% 20% 40% 60% 80%

Yes, lenders will be able to pick and

choose

Loan supply and loan demand will be

balanced

No, loan demand will outstrip loan supply

% of respondents

MIDDLE MARKET COV-LITE VOLUME – THE FUTURE IS HERE?


9

COV-LITE VOLUME: MM VS. LC MIDDLE MARKET COV-LITE VOLUME

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1Q0

6

4Q

06

3Q0

7

2Q

08

1Q0

9

4Q

09

3Q10

2Q

11

1Q12

4Q

12

3Q13

Issu

an

ce ($

Bil

s.)

MID

DLE

MA

RK

ET

STA

TS

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1Q0

6

3Q0

6

1Q0

7

3Q0

7

3Q0

8

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

Issu

an

ce ($

Bil

s.)

Large Corp.

Middle Market

EQUITY CONTRIBUTIONS DROP MORE STEEPLY FOR LARGE DEALS, LEVERAGE CREEPS UP FOR MM LBOS


10

DEBT TO EBITDA: MM VS. BSL LBOs EQUITY CONTRIBUTIONS: MM VS. BSL LBOs

20%

25%

30%

35%

40%

45%

50%

55%

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

s

MM BSL

MID

DLE

MA

RK

ET

STA

TS

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

2003

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

LB

O D

eb

t to

EB

ITD

A (

x)

MM BSL

TR LPC SURVEY: SPONSORS PICK FROM WIDER ARRAY OF FINANCING OPTIONS AND FUNDING SOURCES


11

4Q

13 MA

RK

ET

SU

RV

EY

4Q13 OUTLOOK: WHAT STRUCTURE WILL SPONSORS FAVOR?

4Q13 OUTLOOK: WILL THE UNITRANCHE GAIN MARKET SHARE?

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

Stretch senior

1st Lien / mezz

Unitranche

1st / 2nd lien

% of LPC survey respondents

0%

10%

20%

30%

40%

50%

60%

70%

Increase as more lenders

offer the unitranche

Remain unchanged

Decrease - the unitranche is losing favor

% o

f re

spo

nd

en

ts

STRONG DEMAND ALSO DRIVES YIELDS LOWER BUT, YIELD PREMIUM VS. BSL STAYS STEADY


12

U.S. QUARTERLY TERM LOAN YIELDS MIDDLE MARKET VERSUS LARGE CORPORATE

0%

2%

4%

6%

8%

10%

12%

1Q9

9

1Q0

0

1Q0

1

1Q02

1Q03

1Q0

4

1Q0

5

1Q0

6

1Q0

7

200

8

2Q

10

2Q

11

2Q

12

2Q

13

Yie

ld (

3-y

ea

r te

rm t

o r

ep

ay

me

nt)

LIB/LIB floor LIB spread OID

LPC

MID

DLE

MA

RK

ET

PA

NE

L

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

1Q02

4

Q02

3Q

03

2Q

04

1Q

05

4Q

05

3Q0

6

2Q

07

1H0

8

3Q0

9

Ap

r-10

Ju

l-10

O

ct-1

0

Jan

-11

Ap

r-11

Ju

l-11

O

ct-1

1 Ja

n-1

2

Ap

r-12

Ju

l-12

O

ct-1

2

Jan

-13

Ap

r-13

Ju

l-13

All

-in

-yie

ld (

3-y

ea

r)

Large Corp.

Middle Market

IN A HYPER-COMPETITIVE ENVIRONMENT, LENDERS’ MINIMUM YIELD REQUIREMENTS ARE COMING DOWN


13

SPON. MINIMUM YIELD REQUIREMENT IN 4Q13 BSL INVESTORS’ APPETITE FOR MM IN 4Q13?

0%

10%

20%

30%

40%

50%

< 4% 4-5% 5-6% 6-7% 7-8% 8-9%

% o

f re

spo

nd

en

ts

Banks Non-banks

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

Weak - investors are not showing interest

Moderate - investors buying smaller deals occassionally

Somewhat strong - showing interest if yield is enticing

Very strong - lack of BSL dealflow forcing investors down market

% of respondents

4Q13

4Q12

MIN. SPREAD REQUIREMENT IN 4Q13

4Q

13 MA

RK

ET

SU

RV

EY

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

< 100 100-200

200-300

300-400

400 - 500

500 - 600

> 600

% o

f re

spo

nd

en

ts Banks non-spon. Banks - spon.

Non-banks spon.

HOW HAS BANKS’ BEHAVIOR CHANGED FOLLOWING FINALIZED LEVERAGED LENDING GUIDANCE?


14

Based on a survey conducted by Thomson Reuters LPC in 4Q13, the majority of respondents believe banks will still participate in leveraged lending but will have to limit the amount of deals they buy

4Q

13 MA

RK

ET

SU

RV

EY

BANK VERSUS NON-BANK PERSPECTIVE LEVERAGED LENDING GUIDANCE SUMMARY

0% 20% 40% 60% 80% 100%

Banks will be shut out of the leveraged market

Banks will still participate but will have to limit the

amount of leveraged deals they buy

No change in banks behaviour is expected

% of survey respondents

Non Banks

Banks

Final guidance issued in March 2013 by the OCC and FDIC

Deals treated as “leveraged” include: – Proceeds used for buyouts, dividends, etc.

– Senior debt/EBITDA > 3x

– Total debt/EBITDA > 4x

– Loans to vehicles that engage in leveraged finance (CLOs, BDCs, etc.)

– Fallen angels*

– ABL*

Deals treated as “criticized” include: – If a company cannot show the ability to

amortize 100% of its senior debt or 50% of its total debt within 5 to 7 years, it would be treated as “criticized”

– Issuers with leverage in excess of 6x debt/EBITDA after asset sales

BDCS PUT $21B TO WORK IN SR. LOANS, MEZZ IN LAST TWELVE MONTHS


15

$30BILLION IN BDC EQUITY CAPITAL ISSUED SINCE INCEPTION

TRAILING TWELVE MONTH GROSS ORIGINATIONS

MID

DLE

MA

RK

ET

STA

TS

0.0

5.0

10.0

15.0

20.0

25.0

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

($B

ils.

)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

($

Bil

s.)

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.

THOMSON REUTERS LPC COPYRIGHT NOTICE

Documents

MIDDLE MARKET PANEL DISCUSSION LSTA’S 18TH ANNUAL …share.thomsonreuters.com/pr_us/IoanaBarza_LSTAOct2013_MMPan… · MIDDLE MARKET PANEL DISCUSSION LSTA’S 18TH ANNUAL CONFERENCE