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The Current Restructuring Cycle: Meltdown or Metamorphosis?
Monday, April 27, 2009
4:00 PM -
5:15 PM
Michael Henkin
(Moderator)Managing Director and Co-Head of Recapitalization & RestructuringJefferies & Company, Inc.
Paul AronzonCo-Practice Group Leader, Financial Restructuring
Milbank, Tweed, Hadley & McCloy
LLP
Doug TeitelbaumManaging Partner
Bay Harbour
Management
Carl GoldsmithManaging Partner and Portfolio Manager
Beach Point Capital Management
David HollanderPartnerTennenbaum
Capital Partners LLC
John R. CastellanoManaging DirectorAlixPartners
Today’s Speakers:
Leveraged loan spreads remain at historical highs
B Loans
All BB/B Loans
BB Loans
L+0
L+500
L+1000
L+1500
L+2000
L+2500
L+3000
L+3500
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index.
Note: Excludes facilities in default.
2009 speculative grade default rates expected to be nearly as high as the Great Depression
Source: Moody’s.
Communications and media represented 50.4% of all corporate bond defaults in 2001/02
2001/2002 ($ Millions) Percentage of Total Defaults
Auto/Motor Carrier 4,022 2.4%
Energy 8,285 5%
Financial Services 8,865 5.4%
Leisure/Entertainment 24,679 15%
Manufacturing 5,593 3.4%
Health Care 807 0.5%
Miscellaneous Industries 15,309 9.3%
Real Estate/Construction 2,198 1.3%
Retailing 5,678 3.5%
Communications/Media 82,780 50.4%
Transportation (Non Auto) 6,141 3.7%
Source: NYU Salomon Center.
0
100
200
300
400
500
600
700
800
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
20
40
60
80
100
120
CLO
Institutional
Pro rataHigh-yield
Source: S&P/LCG and Merrill Lynch Global High Yield Strategy.
After enormous growth, CLO formation and institutional loan issuance has evaporatedDebt market/US$ billions CLO/US$ billions
2007 saw the explosion of covenant-lite
and 2nd-lien issuance that has essentially ceased
0
20
40
60
80
100
Jan-
04Fe
b-04
Mar
-04
Apr-0
4M
ay-0
4Ju
n-04
Jul-0
4Au
g-04
Sep-
04O
ct-0
4No
v-04
Dec-
04Ja
n-05
Feb-
05M
ar-0
5Ap
r-05
May
-05
Jun-
05Ju
l-05
Aug-
05Se
p-05
Oct
-05
Nov-
05De
c-05
Jan-
06Fe
b-06
Mar
-06
Apr-0
6M
ay-0
6Ju
n-06
Jul-0
6Au
g-06
Sep-
06O
ct-0
6No
v-06
Dec-
06Ja
n-07
Feb-
07M
ar-0
7Ap
r-07
May
-07
Jun-
07Ju
l-07
Aug-
07Se
p-07
Oct
-07
Nov-
07De
c-07
Jan-
08Fe
b-08
Mar
-08
Apr-0
8M
ay-0
8Ju
n-08
Jul-0
8Au
g-08
Sep-
08O
ct-0
8No
v-08
Dec-
08Ja
n-09
Feb-
09As
of 3
/13/
09
Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index.
Note: Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service. Vast majority are institutional tranches.
Second-lien
Covenant-lite
Global hedge fund assets quadrupled from 1999-
2007 before falling sharply in 2008
0200400600800
1,0001,2001,4001,6001,8002,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
2,000
4,000
6,000
8,000
10,000
12,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Estimated assets Estimated number of funds(including funds of funds)
Source: HFR Global Hedge Fund Industry Report.
US$ billions
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 200802040
6080100120
140160180
The combined debt and equity markets are closed relative to activity in prior recessions
Source: Dealogic
and S&P LCD.
High-yield debt offerings
Number of IPOs(left axis)
(right axis)
Recession US$ billions
L + 656
L + 1100
L + 1881
L + 650
L + 1000
L + 625
L + 1050
L + 1200
L + 800
L + 1281
L + 750
L + 1200
L + 481
L + 1250
L + 1500L + 1381
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Key Plastics EZ Lube Merisant Special Devices Smurfit-Stone Lyondell Greektown Pacific Energy Milacron Magna Entertainment Aleris Foamex Chemtura Pliant G.I. Joe's Qimonda
Richmond
Date 1/6/2009 1/13/2009 1/13/2009 1/14/2009 2/23/2009 3/1/2009 3/3/2009 3/10/2009 3/11/2009 3/13/2009 3/18/2009 3/18/2009 3/20/2009 3/20/2009 3/23/2009 3/27/2009Size ($millions) $20 $54 $20 $23 $435 $6,500 $26 $143 $80 $63 $500 $95 $250 $75 $1 $40Pricing 15% Base+450 L+1100 20% L+650 L+1000 L+625 L+1050 L+1500 L+1200 L+1000 14.0% L+750 L+1200 Base+275 L+1250LIBOR Floor N/A N/A 5.00% N/A 3.50% 3.00% 3.50% 4.00% 4.00% N/A 3.00% N/A 3.00% 4.00% N/A 2.50%Maturity (mos) 3 6 7 7 12 11 4 6 6 6 12 4 12 9 1 12
In Q1 2009 the average rate on DIP financing was L + 1050 and as high as 20%
Mean: L + 1050 bps
Median: L + 1075 bps
Summary of DIP Term Loans (Q1 2009)
LIBO
R S
prea
d
Source: Public filings.
Additional slides
Projected default rates are 4x the 10-year average
0%
2%
4%
6%
8%
10%
12%
14%
16%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E
Source: J.P. Morgan, S&P LCD.
Def
ault
rate High-yield bondsLoans
U.S. consumer credit (excl mortgages) exceeds $2.5 trillion
Source: Federal Reserve.
US$ billions
0
500
1000
1500
2000
2500
3000
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
U.S. mortgage debt surpassed GDP in 2005
0
2000
4000
6000
8000
10000
12000
14000
16000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US$ billions
Source: Federal Reserve and Bureau of Economic Analysis.
All U.S. Mortgage debt outstanding
GDP
Consumer credit outstanding
U.S. high-yield debt offerings
Source: S&P LCD.
0
20
40
60
80
100
120
140
160
180
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US$ billions Recession
0
100
200
300
400
500
600
700
800
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Number of IPO transactionsRecession
Source: Dealogic.
U.S.
Europe
How long until the market recovered in past downturns?
0
100
200
300
400
500
600
700
800
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
50
100
150
200
250
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
U.S. Leveraged loan issuance U.S. LBO loan issuance$ billions$ billions
Source: Thomas Reuters LPC.
Institutional
Bank
