THOMSON REUTERS LPC’S FOURTH ANNUAL MIDDLE MARKET LOANS ...share.thomsonreuters.com/loanpricing/2016_MM_Conf/9.00_Barza.pdf · Dec 15. Jan-16. Feb-16. Mar 16. Weighted avg. trade

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

THOMSON REUTERS LPC’S FOURTH ANNUAL MIDDLE MARKET LOANS CONFERENCE

OVERVIEW

April 27, 2016 4th Annual Middle Market Loans Conference

2

Global lending: losing momentum under clouds of uncertainty 3

U.S. Leveraged lending: How fragile is the recovery? 7

U.S. Middle Market: Tracking the widening bifurcation among players 27

Global lending activity drops off as opportunistic refis slow significantly M&A-related lending trails off on broader market volatility

Risk aversion reigns but remains sector specific However, concerns grow over broader deterioration in credit quality Is the pick-up in CLO formation enough? Are retail fund outflows here to stay?

Syndicated and private/club lending drop as both refi’s and M&A stall Is mezzanine gaining traction? How often do sponsors opt for unitranches? How is the risk/return equation changing and how are banks adapting?

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1Q03

3Q

03

1Q04

3Q

04

1Q05

3Q

05

1Q06

3Q

06

1Q07

3Q

07

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

Issu

ance

($B

.)

Americas EMEA Asia-Pacific (excl. Japan) Japan

AT $630B, 1Q16 GLOBAL LOAN ISSUANCE WAS DOWN 43% VS. 4Q15 AND DOWN 30% YOY

4th Annual Middle Market Loans Conference

3

GLOBAL LOAN ISSUANCE

MARKET O

VERVIEW

April 27, 2016

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

1Q05

2Q

05

3Q05

4Q

05

1Q06

2Q

06

3Q06

4Q

06

1Q07

2Q

07

3Q07

4Q

07

1Q08

2Q

08

3Q08

4Q

08

1Q09

2Q

09

3Q09

4Q

09

1Q10

2Q

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

Issu

ance

($B

.)

Americas EMEA Asia-Pacific (excl. Japan) Japan

AT $142B, 1Q16 GLOBAL M&A LOAN ISSUANCE FELL 56% VS. 4Q15 AND 18% YOY


4

GLOBAL M&A LENDING

MARKET O

VERVIEW

April 27, 2016

U.S. LOAN ISSUANCE DROPPED TO $312B IN 1Q16, DOWN 37% VS. 4Q15 AND DOWN 19% YOY

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1Q00

3Q

00

1Q01

3Q

01

1Q02

3Q

02

1Q03

3Q

03

1Q04

3Q

04

1Q05

3Q

05

1Q06

3Q

06

1Q07

3Q

07

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

Issu

ance

($B

.)

I-Grade Leveraged Other


5

U.S. LOAN ISSUANCE

MARKET O

VERVIEW

April 27, 2016

U.S. M&A LENDING DROPPED TO $89B IN 1Q16, DOWN 39% VS. 4Q15 AND DOWN 18% YOY

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

1Q96

3Q

96

1Q97

3Q

97

1Q98

3Q

98

1Q99

3Q

99

1Q00

3Q

00

1Q01

3Q

01

1Q02

3Q

02

1Q03

3Q

03

1Q04

3Q

04

1Q05

3Q

05

1Q06

3Q

06

1Q07

3Q

07

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

Issu

ance

($B

.)

Leveraged (excl. LBO) LBO Non-Leveraged


6

U.S. M&A LOAN ISSUANCE

MARKET O

VERVIEW

April 27, 2016

LEVERAGED FINANCE

7

“Let us enjoy this moment. Spreads have been elevated. There absolutely was pushback where possible but on the flipside, there seems to be the need for paper again for some people so it may be a zero sum game at the end of the day.” - CLO manager at the end of March

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5 A

ug-1

5 Se

p-15

O

ct-1

5 N

ov-1

5 D

ec-1

5 Ja

n-16

Fe

b-16

M

ar-1

6 A

pr-1

6

Ave

rage

flex

sco

re

TRLPC’S FLEX FACTOR REFLECTS PRICE AND STRUCTURAL CHANGES IN THE LEVERAGED LOAN MART


8

LPC’S FLEX FACTOR: MONTHLY LPC’S FLEX FACTOR: MONTHLY VERSUS YIELDS

LEVERAGED

FINAN

CE

Issuer friendly

Investor friendly

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5 A

ug-1

5 Se

p-15

O

ct-1

5 N

ov-1

5 D

ec-1

5 Ja

n-16

Fe

b-16

M

ar-1

6 A

pr-1

6

B-R

ated

yie

lds

Ave

rage

flex

sco

re

Avg. flex score per deal B-rated yields

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.

CLOS REMAIN BIGGEST LOAN BUYER IN INSTITUTIONAL LOAN MARKET

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Aug

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Inve

stor

sha

re o

f ins

titu

tion

al lo

an

outs

tand

ings

(%)

CLOs Loan Funds (mutual funds & ETFs) Other


9

INSTITUTIONAL LOAN MARKET OUTSTANDINGS BY INVESTOR

LEVERAGED

FINAN

CE

April 27, 2016

CLOS’ LOAN TRADES ARE GENERALLY $1.25M OR LESS


10

DISTRIBUTION OF TRADE SIZE – U.S. CLOS

LEVERAGED

FINAN

CE

0%

5%

10%

15%

20%

25%

30%

35%

40%

<0.2

5

0.25

to <

0.5

0.5

to <

0.75

0.75

to <

1

1 to

<1.

25

1.25

to <

1.5

1.5

to <

1.75

1.75

to <

2

2 to

<2.

25

2.25

to <

2.5

2.5

to <

2.75

2.75

to <

3

3 to

<3.

25

3.25

to <

3.5

>=3.

5

Shar

e of

buy

/sel

l tra

des

Buys

Sells

Trade size ($Mils.)

April 27, 2016

CLOS BOUGHT AND SOLD LOANS AT LOWER PRICES DURING 4Q AND EARLY 1Q16, REFLECTING VOLATILITY

91

92

93

94

95

96

97

98

99

100

101

102

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4 A

ug-1

4 Se

p-14

O

ct-1

4 N

ov-1

4 D

ec-1

4 Ja

n-15

Fe

b-15

M

ar-1

5 A

pr-1

5 M

ay-1

5 Ju

n-15

Ju

l-15

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Wei

ghte

d av

g. tr

ade

pric

e (%

of p

ar)

Buys

Sells


11

U.S. CLO WEIGHTED AVERAGE TRADING PRICES

LEVERAGED

FINAN

CE April 27, 2016

SECOND-LIEN TRADE PRICES DROPPED SIGNIFICANTLY

74

79

84

89

94

99

104

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 to date*

Avg

. tra

de p

rice

(% o

f par

)

Trad

ed v

olum

e ($

B.)

Sell

Buy

Avg. buy trade price

Avg. sell trade price


12

SECOND-LIEN TRADING VOLUME - U.S.CLOS

LEVERAGED

FINAN

CE

*1Q16 data is still being collected.

April 27, 2016

BUT TRADING WAS WIDELY DISPERSED ACROSS SECTORS


13

MOST ACTIVELY TRADED INDUSTRIES - U.S. CLOS

LEVERAGED

FINAN

CE

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Hea

lthca

re

Elec

tron

ics

Reta

il St

ores

M

edia

Se

rvic

es

Beve

rage

/Foo

d Ch

emic

als

Oth

er

Leis

ure

& E

nter

tain

. Bl

dg. &

Rea

l Est

ate

Util

ities

M

inin

g &

Met

als

Oil

and

Gas

Fi

nanc

e H

ouse

war

es

Mac

hine

ry

Aut

omot

ive

Pack

agin

g

Tele

com

H

otel

& G

amin

g In

sura

nce

Tran

spor

tatio

n A

eros

pace

and

Def

ense

G

roce

ry

Carg

o Tr

ansp

ort

Bank

ing

Text

iles a

nd L

eath

er

Mis

c. S

ervi

ces

Ecol

ogic

al

Cons

umer

Pro

d. (n

on-d

ur)

Farm

ing

& A

g.

Trad

ed v

olum

e ($

B.)

Sells

Buys

April 27, 2016

TECH, HEALTHCARE AND RETAIL MAKE UP ONE THIRD OF INSTITUTIONAL LOAN OUTSTANDINGS

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Tech

nolo

gy

Hea

lthca

re

Reta

il &

Sup

erm

arke

ts

Gen

eral

Man

ufac

turin

g Br

oadc

astin

g Ch

emic

als &

Pla

stic

s Fi

nanc

ial S

ervi

ces

Busi

ness

Ser

vice

s U

tiliti

es

Tele

com

mun

icat

ions

Se

rvic

es

n/a

Oil

and

Gas

H

otel

& G

amin

g Le

isur

e &

Ent

erta

in.

Aut

omot

ive

Med

ia

Who

lesa

le

Min

ing

Food

& B

ever

age

Aer

ospa

ce a

nd D

efen

se

Tran

spor

tatio

n Re

stau

rant

s Pa

per &

Pac

kagi

ng

Cons

truc

tion

Ship

ping

RE

ITS

Text

iles a

nd A

ppar

el

Real

Est

ate

Agr

icul

ture

G

over

nmen

t

Shar

e of

inst

itut

iona

l loa

n m

arke

t


14

INDUSTRY BREAKDOWN

LEVERAGED

FINAN

CE April 27, 2016

MARCH SURVEY: ARE YOU STARTING TO SEE CRACKS?

0% 10% 20% 30% 40% 50% 60% 70%

Very concerned; recession is around the corner

Market volatility is overblown; economy will perform well

Starting to see some concerning cracks across several sectors/issuers

Energy and commodities will continue to struggle but otherwise the economy will muddle

along slowly


15

MARCH SURVEY: HOW ARE YOU FEELING ABOUT THE U.S. ECONOMY?

LEVERAGED

FINAN

CE

% of respondents

LIVE POLL #1

Are you seeing cracks in your portfolio? – Yes, some companies are falling below targets – Maybe, pace of growth has slowed down – No, EBITDA growth remains steady


16


17

SHARE OF LBOs WITH TOTAL LEVERAGE >6X SURVEY: CREDIT QUALITY WATCH

0%

10%

20%

30%

40%

50%

60%

70%

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2015

20

16

Shar

e of

LB

O d

eals

Leverage > 6x Leverage > 7x Respondents are mixed on whether defaults will pick up in areas other than energy/metals & mining including tech, retail, healthcare, auto suppliers.

Compared to the historical average, loan recoveries will be… – 10% say somewhat higher – 40% say the same – 30% say somewhat lower – 20% say significantly lower

Many believe recoveries are more likely to take the form of equitization

LEVERAGED

FINAN

CE

SURVEY: CREDIT OUTLOOK IS MIXED

RETAIL FUND FLOWS TURNED POSITIVE IN MARCH; AVERAGE PRIMARY YIELDS REMAIN ELEVATED


18

SINGLE-B PRIMARY LOAN YIELDS VS. LOAN FUND FLOWS

LEVERAGED

FINAN

CE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

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

Sing

le-B

yie

ld to

3 y

ears

Mon

thly

loan

fund

flow

s ($

B.)

Loan fund flows Single-B loan yield

UPWARD FLEX DOMINATED FOR FIVE MONTHS ENDING IN FEBRUARY; TABLES TURNED IN MARCH AND APRIL

-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

Ave

rage

flex

Num

ber o

f fle

xes

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


19

MONTHLY INSTITUTIONAL LOAN FLEX ACTIVITY

LEVERAGED

FINAN

CE April 27, 2016

1Q16 LEVERAGED LOAN REFINANCINGS WERE LOWEST SINCE 3Q10 AT $39B


20

LEVERAGED

FINAN

CE

LEVERAGED REFINANCINGS LEVERAGED NEW MONEY

0.0

50.0

100.0

150.0

200.0

250.0

1Q03

1Q

04

1Q05

1Q

06

1Q07

1Q

08

1Q09

1Q

10

1Q11

1Q

12

1Q13

1Q

14

1Q15

1Q

16

Issu

ance

($B

.)

April 27, 2016

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1Q03

1Q

04

1Q05

1Q

06

1Q07

1Q

08

1Q09

1Q

10

1Q11

1Q

12

1Q13

1Q

14

1Q15

1Q

16

Issu

ance

($B

.)

New Money-M&A

New Money-Other

WILL ISSUANCE GAIN MOMENTUM?


21

LEVERAGED

FINAN

CE

LEVERAGED LOAN ISSUANCE

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Jan-

10

Mar

-10

May

-10

Jul-1

0 Se

p-10

N

ov-1

0 Ja

n-11

M

ar-1

1 M

ay-1

1 Ju

l-11

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2 Se

p-12

N

ov-1

2 Ja

n-13

M

ar-1

3 M

ay-1

3 Ju

l-13

Sep-

13

Nov

-13

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

Issu

ance

($B

.)

Refinancings Dividend recap M&A New money (other)

April 27, 2016

A TALE OF TWO MARKETS IN 1Q…


22

LEVERAGED

FINAN

CE

MONTHLY CLO ISSUANCE VS. RETAIL FUND FLOWS

-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

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

$ B

ils.

CLO Issuance Loan fund flows

ASSETS UNDER MANAGEMENT GREW FOR FUNDS AND CLOS IN MARCH


23

U.S. LOAN MUTUAL FUND & ETF ASSETS UNDER MANAGEMENT

0%

10%

20%

30%

0.0

50.0

100.0

150.0

200.0

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep-

13

Feb-

14

Jul-1

4

Dec

-14

May

-15

Oct

-15

Mar

-16 R

etai

l fun

ds a

s %

of

inst

itut

iona

l loa

n ou

tsta

ndin

gs

Loan

mut

ual f

und

&

ETF

AU

M ($

B.)

Retail Funds AUM ($B.) Retail Funds' Share of Outstandings

U.S. CLO AGGREGATE PRINCIPAL BALANCE BY VINTAGE

LEVERAGED

FINAN

CE

0 50

100 150 200 250 300 350 400 450

Jul-1

2 A

ug-1

2 Se

p-12

O

ct-1

2 N

ov-1

2 D

ec-1

2 Ja

n-13

Fe

b-13

M

ar-1

3 A

pr-1

3 M

ay-1

3 Ju

n-13

Ju

l-13

Aug

-13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4 A

ug-1

4 Se

p-14

O

ct-1

4 N

ov-1

4 D

ec-1

4 Ja

n-15

Fe

b-15

M

ar-1

5 A

pr-1

5 M

ay-1

5 Ju

n-15

Ju

l-15

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16 CL

O A

ggre

gate

Pri

ncip

al

Bal

ance

($B

.)

<=2008 2009-2013 >=2014

*Based on year issued

LIVE POLL #2

Does this recovery have legs? – No, there are too many unknowns – Maybe, CLOs have picked up which is a sign in the right direction – Yes, CLO formation will pick up more and create new demand


24

SURVEY: MIXED VIEW ON VOLATILITY


25

LEVERAGED

FINAN

CE

SURVEY RESULTS: 2Q16 OUTLOOK FOR INSTITUTIONAL MARKET

WILL VOLATILITY SUBSIDE IN THE LEVERAGED LOAN MARKET IN 2Q16?

0% 20% 40% 60%

Yes - expect the market will

recover in 2Q16

Maybe - Too much uncertainty

to decide

No - Volatility will continue due to weak technicals

% of respondents

0%

10%

20%

30%

40%

50%

60%

(> 3

0%)

(10

- 20%

)

(0 -1

0%)

0 -1

0%

10 -

20%

20 -

30%

> 30

%

% o

f sur

vey

resp

onde

nts

Percentage change from 1Q16 to 2Q16

Loan issuance Spreads

PRO RATA APPETITE REMAINS STRONG AND STEADY BUT LIMITED TO HIGHER QUALITY CREDITS


26

PRO RATA MONTHLY INSTITUTIONAL MONTHLY

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

Issu

ance

($B

.)

J F M A M J J A S O N D

LEVERAGED

FINAN

CE

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

Issu

ance

($B

.)

J F M A M J J A S O N D

MIDDLE MARKET LENDING

27

Syndicated and private/club lending drop as both refinancings and M&A stall Is mezzanine gaining traction? How often do sponsors opt for unitranches? How is the risk/return equation changing and how are banks adapting?

BOTH SPONSORED & NON-SPONSORED LENDING TRENDED DOWN 30% IN 2015

April 27, 2016

28

MM LOAN ISSUANCE MM 2016 ISSUANCE FORECAST

MID

DLE M

ARKET

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

->30

%

-20-

30%

-10-

20%

0-10

%

+0-1

0%

+10-

20%

+20-

30%

+>30

%

% o

f res

pond

ents

YOY Percentage change in issuance

Banks Non-banks


Middle Market definition: Borrower sales size <=$500 million and total loan size <=$500 million

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

Issu

ance

($B

.)

Non-sponsored Sponsored

PRESSURE BUILDS AS MARCH SURVEY REVEALED MORE LIQUIDITY, BIG HOLDS FOR THIS YEAR


29

MID

DLE M

ARKET

HOW MUCH MORE CAPITAL ARE YOU ALLOCATING TO LEND IN THE MM IN 2016?

WHAT IS YOUR MAXIMUM HOLD SIZE FOR MIDDLE MARKET DEALS?

0%

10%

20%

30%

40%

50%

60%

70%

->30

%

-20-

30%

-10-

20%

0-10

%

+0-1

0%

+10-

20%

+20-

30%

+>30

%

% o

f res

pond

ents

YOY Percentage change

Banks Non-banks

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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

% o

f res

pond

ents

Max. hold size for a MM deal ($M)

Banks Non-banks

BUT…CLOSE TO 60% OF RESPONDENTS FELL BELOW LENDING GOALS IN 1Q16


30

DID YOU REACH YOUR 1Q16 LENDING GOAL? WHAT FACTORS CONTRIBUTED TO THIS?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Yes No

% o

f res

pond

ents

Banks Non-banks Those who fell below goals attributed to: – Lack of quality deals – Limited volume – Soft economy – Disciplined approach – No opportunistic issuance – Tight internal credit parameters – Auctions slowed – Limited borrower demand – Structures too aggressive – Limited ancillary business – Highly competitive market

Those who met goals attributed to: – Overflow/backlog from 4Q15 – Low budget growth expectations – Strong PE sponsor relationships – Add-on activity – Higher win rates – Relationships – More opportunities – Luck – Larger arrangers pulled back

MID

DLE M

ARKET

Banks: 80% said No, 20% said Yes Non-Banks: 39% said No, 61% said yes

MIDDLE MARKET ISSUANCE COLLAPSED TO $22.6B IN 1Q16, ITS LOWEST LEVEL SINCE 1Q10


31

1Q16 new money of $11.8B was down 26% from 4Q15 and 11% from 1Q15 1Q16 refinancings of $10.8B were down 56% from 4Q15 and 36% from 1Q15

MID

DLE M

ARKET

QUARTERLY MIDDLE MARKET LOAN ISSUANCE ANNUAL MIDDLE MARKET LOAN ISSUANCE

0.0

50.0

100.0

150.0

200.0

250.0

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

1Q16

Issu

ance

($B

.)

Refinancing New money (beg. 1Q03)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1Q03

2Q04

3Q05

4Q06

1Q08

2Q09

3Q10

4Q11

1Q13

2Q14

3Q15

Issu

ance

($B

.)

Refinancing New money

MM ISSUANCE DECLINED ACROSS ALL DEAL SIZES, MORE SO FOR DEALS SIZED $251-500M (DOWN 70%)


32

MIDDLE MARKET VOLUME BY DEAL SIZE

MID

DLE M

ARKET

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1Q01

3Q

01

1Q02

3Q

02

1Q03

3Q

03

1Q04

3Q

04

1Q05

3Q

05

1Q06

3Q

06

1Q07

3Q

07

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

Issu

ance

($B

.)

$0-$100M $101-$250M $251-$500M

LENDERS EXPECT BOTH SPONSORED & NON-SPONSORED LENDING WILL BE FLAT TO UP IN 2Q16


33

QUARTERLY SYNDICATED MM ISSUANCE SURVEY: 2Q16 ISSUANCE OUTLOOK

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1Q00

4Q

00

3Q01

2Q

02

1Q03

4Q

03

3Q04

2Q

05

1Q06

4Q

06

3Q07

2Q

08

1Q09

4Q

09

3Q10

2Q

11

1Q12

4Q

12

3Q13

2Q

14

1Q15

4Q

15

Issu

ance

($B

.)


MID

DLE M

ARKET

0%

10%

20%

30%

40%

50%

60%

Significant decrease

(>15%)

Moderate decrease (5-15%)

Flat Moderate increase (5-15%)

Significant increase (>15%)

% o

f res

pond

ents


M&A IS THE ENGINE…


34

MID

DLE M

ARKET

PE-BACKED M&A NON-SPONSORED M&A

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1Q03

1Q

04

1Q05

1Q

06

1Q07

1Q

08

1Q09

1Q

10

1Q11

1Q

12

1Q13

1Q

14

1Q15

1Q

16

MM

Spo

nsor

ed M

&A

vol

ume

($B

)

LBO

Add-on acquisition

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1Q00

4Q

00

3Q01

2Q

02

1Q03

4Q

03

3Q04

2Q

05

1Q06

4Q

06

3Q07

2Q

08

1Q09

4Q

09

3Q10

2Q

11

1Q12

4Q

12

3Q13

2Q

14

1Q15

4Q

15

MM

Non

-spo

nsor

ed M

&A

vol

ume

($B

.)

M&A Average

Pre credit crisis Post credit crisis

LIVE POLL #4

In the next two months, non-sponsored M&A deal flow will pick up – Significantly – Moderately – Will not pick up at all


35

FEW BELIEVE PIPELINE IS ROBUST


36

Over 80% of survey respondents said they are expecting an improvement in PE-backed M&A in 2Q16, however activity will still be rather weak

MID

DLE M

ARKET

PLEASE DESCRIBE CORPORATES’ WILLINGNESS TO PULL THE TRIGGER ON M&A IN 2016?

WHAT IS YOUR EXPECTATION FOR PE-BACKED M&A IN 2Q16?

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

Pipeline is strong; expecting a nice pick up

Expecting an improvement from 1Q16; but activity will

still be rather weak

Expecting deal activity to slow further

% of respondents

0% 25% 50% 75%

Remain flat or decline: Too much uncertainty

Moderate increase: seeing more deals here and there

Significant increase: the floodgates have finally

opened

% of respondents

IF NOT M&A THEN….DIVIDEND RECAPS?

April 27, 2016

37

MIDDLE MARKET DIVIDEND RECAP VOLUME 2016 DIVIDEND RECAP EXPECTATIONS

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0 12.0 13.0 14.0

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2015

1Q

16

2016

E

MM

div

iden

d re

cap

issu

ance

($B

.)

0%

10%

20%

30%

40%

50%

60%

< $3.0B $3.0-$5.0B $5.0-$7B > $7.0B

% o

f res

pond

ents

MID

DLE M

ARKET 4th Annual Middle Market Loans Conference

MUCH DEPENDS ON YOUR VIEW OF THE ECONOMY…

0% 10% 20% 30% 40% 50% 60% 70% 80%

Weakness: Defaults & amendments pick up

Modest Weakness: cracks in issuer/sector performance

Modest Strength: slow and steady, varied by sector

Strength: expecting accelerated growth

% of respondents

2Q16 Survey 2Q15 Survey


38

WHAT IS YOUR VIEWPOINT ON THE U.S. ECONOMY IN 2016?

MID

DLE M

ARKET

OR DOES IT? … WHAT IS HOLDING ISSUERS BACK?


39

MID

DLE M

ARKET

SURVEY: WHAT WOULD YOU RANK AS THE #1 FACTOR HOLDING BACK M&A?

SURVEY: WHAT WOULD YOU RANK AS THE #2 FACTOR HOLDING BACK M&A?

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

Too much competition

Not enough assets for sale

Not enough economic growth

Regulation is limiting leverage levels

Mismatch between buyer and sellers valuation expectations

Market volatility causing buyers and sellers to sideline

% of respondents

Non-banks Banks

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

Too much competition

Regulation is limiting leverage levels

Not enough assets for sale

Not enough economic growth

Market volatility causing buyers and sellers to sideline

Mismatch between buyer and sellers valuation expectations

% of respondents

Non-banks Banks

PURCHASE PRICE MULTIPLES REMAIN HIGH ACROSS MARKETS


40

QUARTERLY ANNUAL

MID

DLE M

ARKET

7.0x 7.5x 8.0x 8.5x 9.0x 9.5x

10.0x 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x 13.5x 14.0x

1Q13

2Q

13

3Q13

4Q

13

1Q14

2Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

Pur

chas

e pr

ice

mul

tipl

e

Large Corp. Inst. MM Club MM

Not enough institutional middle market buyout data points in 1Q16 to show PP multiples or equity contributions

7.0x

7.5x

8.0x

8.5x

9.0x

9.5x

10.0x

10.5x

11.0x

2013 2014 2015 2016

Pur

chas

e pr

ice

mul

tipl

e


LBO LEVERAGE LEVELS COME DOWN IN ALL MARKETS


41

QUARTERLY ANNUAL

MID

DLE M

ARKET

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

2013 2014 2015 2016

Tota

l LB

O d

ebt t

o EB

ITD

A


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

Tota

l LB

O d

ebt t

o EB

ITD

A


NON-BANK LENDERS CONTINUE TO EXHIBIT MUCH HIGHER TOLERANCE FOR LEVERAGE

April 27, 2016 M

IDD

LE MARKET

SPONSORED: SENIOR DEBT TO EBITDA SPONSORED: TOTAL DEBT TO EBITDA

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

< 3x 3x - 3.5x 3.5 - 4x > 4x

% o

f non

-ban

k re

spon

dent

s

1st lien debt to EBITDA

Banks Non-banks

42


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

< 4x 4x - 4.5x 4.5 - 5x 5 - 5.5x 5.5 - 6x > 6x

% o

f non

-ban

k re

spon

dent

s

Total debt to EBITDA

Banks Non-banks

UNITRANCHE LEVERAGE STAYS STEADY AT HIGHER LEVELS FOR SMALLER ISSUERS

15

20

25

30

35

40

45

50

55

60

0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 6.0x

2013

1Q

14

2Q14

3Q

14

4Q14

1Q

15

2Q15

3Q

15

4Q15

1Q

16

2013

1Q

14

2Q14

3Q

14

4Q14

1Q

15

2Q15

3Q

15

4Q15

1Q

16

2013

1Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

2013

1Q

14

2Q14

3Q

14

4Q14

1Q

15

2Q15

3Q

15

4Q15

1Q

16

Avg

. EB

ITD

A ($

Mils

.)

Deb

t to

EBIT

DA

Avg. Senior Leverage Avg. Junior Leverage Average EBITDA


43

LEVERAGE & EBITDA BY CAPITAL STRUCTURE

MID

DLE M

ARKET

All Senior 1st Lien / Mezz 1st Lien / 2nd Lien Unitranche

LARGER MM COMPANIES SEE MORE DRAMATIC REIGNING IN OF LEVERAGE

3.0x 3.3x 3.5x 3.8x 4.0x 4.3x 4.5x 4.8x 5.0x 5.3x 5.5x 5.8x 6.0x 6.3x

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

Tota

l deb

t to

EBIT

DA

< $15M $15-$25M $25-$40M > $40M Institutional MM*


44

LEVERAGE BY EBITDA SIZE

MID

DLE M

ARKET

Institutional MM are large middle market TLB credits that are mostly rated and syndicated to a wide investor base; Avg. EBITDA around $50M

STRETCH SENIOR STRUCTURE DOMINATES CLUB MARKET


45

DEAL COUNT BY STRUCTURE

VOLUME BY STRUCTURE ($B.)

MID

DLE M

ARKET

0%

25%

50%

75%

100%

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

Dea

l cou

nt

1st Lien / Mezz All Senior/Stretch 1st Lien / 2nd Lien Unitranche

0%

20%

40%

60%

80%

100%

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

Issu

ance

($B

.)

1st Lien / Mezz All Senior/Stretch 1st Lien / 2nd Lien Unitranche

WILL MEZZANINE MAKE A COMEBACK?


46

WHAT STRUCTURE WILL SPONSORS FAVOR? MEZZ ACTIVITY

0.00 0.25 0.50 0.75 1.00 1.25 1.50

1Q13

2Q

13

3Q13

4Q

13

1Q14

2Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

Issu

ance

($B

.)

Mezzanine Seller Note (breakout beg. 2015)

CLUB/PRIVATE MM ISSUANCE

MID

DLE M

ARKET

0.0 2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0

1Q13

2Q

13

3Q13

4Q

13

1Q14

2Q

14

3Q14

4Q

14

1Q15

2Q

15

3Q15

4Q

15

1Q16

Issu

ance

($B

.)

New money Refi

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

1st / 2nd lien

Stretch senior

1st lien / mezz

Unitranche

% of survey respondents

2016 Survey

2015 Survey

2014 Survey

2013 Survey

YIELDS ARE FLAT TO UP ACROSS STRUCTURES

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

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

All-

in-y

ield

(3-y

ear)

MM Institutional 1st Lien TL Yield

MM Private Deal TLA*

MM Private TLB*

Unitranche

MM Second Lien

Mezz (Cash)

Mezz (Cash + PIK)

April 27, 2016

47

QUARTERLY MIDDLE MARKET TERM LOAN YIELDS (3-YEAR)

MID

DLE M

ARKET


*Private TLA – combines 1st lien term loan As submitted by regional banks & finance companies (excludes unitranche) *Private TLB – combines all 1st lien term loans submitted by institutional lenders & TLBs submitted by banks & finance companies (excludes unitranche)

SURVEY: WHICH INVESTORS ARE YOU TARGETING?


48

WHICH INVESTORS ARE YOU TARGETING?

MID

DLE M

ARKET

0% 20% 40% 60% 80%

Hedge Funds

Asset-Based Lenders

Other Investors

CLOs

Foreign Banks

BDCs

Regional Banks

Specialty Finance Co's

% of respondents

2014 Survey 2015 Survey 2016 Survey

DID BDCS’ PULLBACK CREATE AN ONGOING OPPORTUNITY?

April 27, 2016

49

BDCS: PRICE TO BOOK VALUE PER SHARE

MID

DLE M

ARKET


0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

11-M

ay-1

1 25

-Jun

-11

9-A

ug-1

1 23

-Sep

-11

7-N

ov-1

1 22

-Dec

-11

5-Fe

b-12

21

-Mar

-12

5-M

ay-1

2 19

-Jun

-12

3-A

ug-1

2 17

-Sep

-12

1-N

ov-1

2 16

-Dec

-12

30-J

an-1

3 16

-Mar

-13

30-A

pr-1

3 14

-Jun

-13

29-J

ul-1

3 12

-Sep

-13

27-O

ct-1

3 11

-Dec

-13

25-J

an-1

4 11

-Mar

-14

25-A

pr-1

4 9-

Jun-

14

24-J

ul-1

4 7-

Sep-

14

22-O

ct-1

4 6-

Dec

-14

20-J

an-1

5 6-

Mar

-15

20-A

pr-1

5 4-

Jun-

15

19-J

ul-1

5 2-

Sep-

15

17-O

ct-1

5 1-

Dec

-15

15-J

an-1

6 29

-Feb

-16

14-A

pr-1

6

Pri

ce to

boo

k va

lue

per s

hare

LENDER SURVEY: Where will BDCs be trading by year-end? 23% say even further below NAV as investors have lost interest 36% say at the same level 40% say BDC prices will rebound but will continue to trade below NAV No one expects that BDCs will trade up meaningfully to above book

value by end of 2016

WHAT IS YOUR OUTLOOK FOR MIDDLE MARKET CLOS?


50

MIDDLE MARKET CLO ISSUANCE SURVEY: MIDDLE MARKET CLO FORECAST

0.0

5.0

10.0

15.0

20.0

25.0

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

MM

CLO

issu

ance

($B

.)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Up

to $

1B

$1-$

2.5B

$2.5

-$5B

$5-$

10B

>$10

B

% o

f sur

vey

resp

onde

nts

Annual MM CLO issuance estimates

2014 2015 2016

MID

DLE M

ARKET

From YE survey

WHAT WILL BE THE MOST IMPORTANT ISSUES IN 2Q16?


51

AGGREGATED RESPONSES REVEAL MAJOR THEMES

MID

DLE M

ARKET

Volume - will it improve? – Sellers may take a “wait and see” approach – If volume fails to pick up, irrational behavior will return – M&A – what will kick start it? – Terms are still too favorable to sponsors in a down market

Increased uncertainty – Concerns regarding recession are waning – Portfolio health – How will energy issuers perform? – Market appetite still unknown, difficult to take on syndication/underwriting risk

Funding & CLO markets – Improvement in broadly syndicated loan market, is it sustainable? – Where will pricing go? – How competitive will lenders be? – Lots of “unregulated” players out raising new capital

Bank appetite – Downward pressure on pricing in non-sponsored market as banks shift away from sponsored deals – Cross-selling is a must have, how do you achieve return hurdles without ancillary business? – Still too much variability in how the banks are interpreting Leveraged Lending Guidance – Will borrower appetite for credit pick up?

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