Leveraged Finance Market Update

Transcription

1 Spring 2015 Leveraged Finance Market Update Kelly Martin Michael Ward Mark Birkett Matt Thomas Jason Sutherland About William Blair Investment Banking Leveraged Finance_Current.indd 1-2 William Blair s investment banking group combines signiicant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and inancing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth inancing, inancial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From , the investment banking group completed more than 330 merger-andacquisition transactions worth $73 billion in value, involving parties in 36 countries and ive continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised nearly $100 billion in public and private inancing. 4/24/2015 8:46:33 AM

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3 William Blair & Company Spotlight on the Leveraged Finance Market The leveraged finance market experienced mixed results in 1Q15. The leveraged loan market saw increased volume relative to 4Q14, but was down 44% in volume relative to a year ago due to much reduced M&A volume and the absence of any material repricing activity. However, the High-Yield market benefited from low Treasury yields, leading to increased new issue volume from year-ago levels. Middle-market borrowers (companies with less than $50 million of EBITDA) raised $2 billion in leveraged loans in 1Q15, down from $3 billion in 1Q14. Leveraged borrowers that accessed the market in the period found strong demand. Clearing yields in the large deal syndicated term loan market compressed during the quarter, which began to translate into repricing activity in early Q The pricing environment in the middle market improved, although not to the degree seen in the institutional market. Regulatory pressures continued to ratchet up during the quarter. Leverage multiples for the broad market averaged 5.6x for 1Q15, down from the full year 2014 average of 5.8x (attributed to arrangers increasing focus on complying with the Fed/OCC guidelines). Significantly, only 3.5% of LBOs in 1Q15 had leverage of 6.75x or higher. This is down from nearly 35% of all LBOs in William Blair s Leveraged Finance Survey, which monitors conditions in the mid-market leveraged lending market, confirmed these trends in volume and pricing. Fully one-third of respondents said 1Q15 volumes did not meet their beginning-of-year expectations (most respondents cited weak M&A activity). A similar percentage said that in 1Q15 they continued to see declines in pricing for their primary loan products. However, this is the lowest percentage of respondents indicating they are experiencing pricing pressure over the past three quarters, while more than 25% reported higher pricing (the highest response to this question in the past three quarters up from 9% in 3Q14) possibly indicating we may be getting close to the tide turning in pricing. Still, lenders have been waiting a long time for a better pricing environment and loan market technical factors continue to favor borrowers. These survey results are consistent with our view of the LBO financing market from our M&A advisory business and our debt arrangement practice. We completed or announced 20 transactions in 1Q15, including six financial sponsor LBOs aggregating more than $1.1 billion in transaction value. On average, sponsors leveraged these acquisitions to approximately 5.8x during the period. Our mid-market debt arrangement teams completed over $900 million of financing in the period. These borrowers benefited from the shortage of quality deal flow in the market during the quarter. However, the variability in lender response and ability to close on proposed deal terms continues to widen. The High-Yield new issue market saw increased volumes during 1Q15, with $92 billion in new High-Yield issuance, driven by historically low Treasury rates as issuers looked to lock in low-cost, fixed-rate debt financing before conditions change. This dynamic showed itself through both healthy refinancing activity and an increased use of bonds in support of M&A activity. We hope you find the spring issue of the informative. Regards, Kelly Martin Managing Director Group Head Capital Advisory Group/Leveraged Finance Team kmartin@williamblair.com Spotlight on the Leveraged Finance Market 1

4 William Blair & Company William Blair Leveraged Finance Survey The survey reflects the views of mid-market leveraged finance professionals representing leading commercial banks, credit funds, BDCs, commercial finance companies and other credit providers. The Market Index is a measure of both the current tone and direction of the mid-market leveraged finance market. Lenders report underwriting greater leverage and looser terms during 1Q15. As with last quarter s survey, more than 85% of respondents reported leverage levels and terms either loosening (50%) or remaining the same (36%) during the quarter. Going forward, more than half of respondents expect future conditions to be consistent with the current market. On the pricing front, nearly one-third of respondents said that in 1Q15 they continued to see declines in pricing for their primary loan products. However, this is the lowest percentage of respondents indicating they are experiencing pricing pressure over the past three quarters. At the same time, more than 25% of respondents reported higher pricing in the quarter (the highest response to this question in the past three quarters up from 9% in Q3 2014), possibly indicating we may be getting close to seeing either stabilized or higher pricing in the mid-market leveraged loan market. Borrowers considering a leveraged financing may want to accelerate their plans to take advantage of the current pricing environment. Admittedly, lenders have been waiting a long time for a better loan pricing environment. Loan market technical factors continue to favor borrowers. Other highlights of the survey include: 74% of lenders responded that over the past six months, their pricing has declined (31%) or remained constant (43%). This is down from the 85% (49% declined and 36% remained constant) in last quarter s survey. On a scale of 1 to 5, with 5 being the most issuer/borrower friendly conceivable, respondents rated conditions in the credit markets as 4.1. Approximately half of respondents expect terms and leverage to remain the same over the next 12 months, while 30% expect terms to become more borrower friendly. Over the past 6 months, has pricing for your primary debt offering: For transactions involving a private equity sponsor, what is the minimum equity contribution you require? 80% 60% 40% 20% 0% 9% 58% 26% 15% Increased 3Q14 1Q15 2Q15 49% Decreased 31% 60% 40% 20% 0% 7% 23% 47% 23% Less than 25% 25-30% 30-35% Greater than 35% Did Q market activity and conditions conform to your expectations at the start of the year? If not, how did the market differ from expectations in Q1 2015? 80% 60% 40% 20% 0% 66% Yes 34% No Hyper-competitive environment Much lower volume in the market M&A market slower than expected Pricing dropped further 2 William Blair Leveraged Finance Survey

5 William Blair & Company Leveraged Loan Deal Volume Leveraged loan volume in 1Q15 rose to $91.3 billion compared with $66.7 billion in 4Q15. However, volume has significantly declined year-over-year compared with $165.8 billion in 1Q14, mainly due to lower repricing activity and increased regulatory pressure from OCC and Federal Reserve to fund transactions that meet shared national credit reviews. Consistent with the larger market, middle-market leveraged loan volume for 1Q15 was down compared with 1Q14. Slower M&A and recapitalization activity drove the decline in volume. Repricing activity remains weak, mirroring 4Q14 activity, with volume declining to $1.0 billion for 1Q15 compared with $83.9 billion in 1Q14. Most of the opportunistic refinancings have evaporated as rates rose throughout 2014 and early The volume of LBO and other acquisition related financings increased in 1Q15 to $56.7 billion compared with $38.1 billion in 4Q14. Most of this activity was focused on add-on acquisitions rather than new LBO financings. Increased regulatory pressure and market volatility in 1Q15 also affected the volume of covenant-lite activity during the quarter. Issuance of cov-lite loans in 1Q15 dropped to an 18-month low of 57% of total institutional volume, a decline from 63% in 2014 but consistent with 2013 levels. Lenders continue to be receptive to dividend recapitalization transactions, though higher rates have made them less attractive. As a result, dividend loan volume during 1Q15 was $6.3 billion, which was higher than 4Q14 of $4.1 billion but lower than 1Q14 volume of $17.0 billion. Following a record year for second lien issuance in 2014, second lien volume declined to just $2.2 billion in 1Q15, the lowest quarterly total since 4Q11, compared with $4.2 billion in 4Q14. The decline in volume for 1Q15 was driven mainly by lack of second lien utilization for LBO and recapitalization transactions. Middle-Market Leveraged Loan Volume Large Corporate Leveraged Loan Volume ($ in billions) ($ in billions) $29 $8 $5 $12 $14 $10 $13 $15 $3 $2 $506 $149 $71 $225 $362 $455 $594 $513 $166 $91 Institutional Pro Rata Institutional Pro Rata Loan Repricing Volume Recapitalization Loan Volume ($ in billions) ($ in billions) $140 $0 $0 $4 $74 $72 $282 $108 $84 $1 $49 $3 $1 $38 $36 $56 $70 $53 $17 $6 Institutional Pro Rata Leveraged Loan Deal Volume 3

6 William Blair & Company Leverage Multiples and Equity Contribution Leverage for the average large corporate LBO (borrowers with greater than $50 million of EBITDA) for 1Q15 was 5.6x, down slightly from the 2014 full-year average of 5.8x, the highest level since 2007 when LBOs averaged 6.2x. This decline is largely the result of increased regulatory pressure from the Fed and OCC, who are pushing commercial banks and arrangers toward a 6.0x total leverage cap in most situations. Debt multiples for middle-market LBOs (borrowers with less than $50 million of EBITDA) have followed a similar trend, declining to an average of 4.9x in 1Q15 compared with 5.3x in Leverage for the 20% most highly leveraged loans during 1Q15 was 6.6x, more than a full turn lower than the recent peak of 7.7x in 3Q14. Perhaps best demonstrating the impact of increased regulatory pressure, only 3.5% of large corporate LBOs in 1Q15 had leverage of 6.75x or higher. This is down from nearly 35% of all LBOs in Equity contribution levels have increased slightly to 42% during 1Q15 from 38% in 1Q14. This is largely the result of increased purchase price multiples coupled with the decline in available leverage. Purchase price multiples in 1Q15 rose to nearly 10.0x, surpassing the previous all-time high in 2007 at 9.7x. Leverage levels for dividend recap transactions softened in 1Q15 as pre- and post-dividend leverage declined to 3.1x and 4.6x, respectively. This is down from a respective 3.5x and 4.9x in However, lenders remain receptive to recapitalizations, particularly for high credit quality borrowers. The average time between the initial LBO and recapitalization compressed to 2.1 years in 1Q15 compared with 3.3 years in As leverage levels remain near historical peaks, cash flow coverage levels fell slightly as rates rose through the second half of 2014 and in the first two months of Average interest coverage (adjusted EBITDA/cash interest) measured 2.7x for large corporate LBOs in 1Q15 compared with 3.4x and 3.2x in 2014 and 2013, respectively. Despite the modest decline, coverage rate cushions remain sufficient to protect borrowers if the economy hits an unexpected bump. Middle-market LBO interest coverage remains slightly higher for 1Q15 at 3.3x, yet still down from the 2014 full-year average of 3.7x. LBO Leverage Multiples Average Equity Contributions to Leveraged Buyouts 6.2x 4.9x 4.0x 4.7x 5.2x 5.3x 5.4x 5.8x 5.5x 5.6x 5.6x 5.3x 4.5x 3.3x 4.2x 4.3x 4.5x 4.8x 4.9x 4.9x 33% 43% 51% 44% 42% 39% 37% 39% 38% 42% Large Corporate Middle Market Leveraged Loan Multiples Debt/EBITDA Ratio for the 20% Most Highly Leveraged Loans 4.9x 3.7x 4.1x 3.9x 4.4x 4.6x 4.7x 4.9x 4.9x 4.9x 4.8x 4.3x 3.4x 3.7x 4.2x 4.8x 5.0x 4.2x 4.7x 4.9x 8.4x 8.1x 5.5x 6.1x 6.9x 6.7x 6.9x 7.0x 7.2x 6.6x Large Corporate Middle Market 4 Leverage Multiples and Equity Contribution

7 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 William Blair & Company Loan Pricing Pricing for newly issued middle-market first-lien institutional leveraged loans during 1Q15 averaged approximately L+544 bps, compared with L+477 and L+476 bps for 2014 and 2013, respectively. However, rates declined materially during March 2015, as demand for loans far outstripped supply. The average premium for middle-market loans compared with large institutional loans increased from 77 bps in 2014 to 103 bps during 1Q15. The spread for single B rated institutional loans, which had been in the 475 bps range during January and February, fell to 408 bps in March. Investor demand for loans far outstripped supply, driving rates lower. LIBOR floors remain a common feature on both large and middle-market leveraged loans. For single B rated institutional loans, LIBOR floors have remained fairly stagnant from 1Q14 to 1Q15, averaging about 100bps. LIBOR spreads on large institutional sized second-lien loan tranches averaged about 875 bps for 1Q15, above 2014 and 2013 averages of 775 bps and 800 bps, respectively. The spread between first-lien and second-lien pricing widened during 1Q15 to about 400 bps compared with 350 bps in Institutional second-lien deals for middle-market transactions during 1Q15 saw an average LIBOR spread of 844 bps, above the 2014 average of 809 bps but below the 2013 level of 857 bps. Unitranche facilities are commonly being priced in the L+650 bps to L+775 bps range. In some cases, though, the strongest toptier sponsored credits or those with outsized equity contributions can secure tighter pricing. LIBOR floors for unitranche loans are almost universally 100 bps. Pricing in the asset-based loan market reflects the value of collateral coverage and robust lender competition on most transactions. Recent pricing has been in the range of L+150 bps to L+200 bps range, depending on deal size, asset quality, and liquidity. Middle-Market Loan LIBOR Spreads B+/B Rated Institutional Loan LIBOR Spreads (bps) (bps) NA 522 NA Pro Rata Institutional Loan Pricing 5

8 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 William Blair & Company High-Yield Bond Offerings The High-Yield new issue market was strong for the first quarter of 2015, with $92 billion in new High-Yield issuance. This represented a 22% increase from new issuance volume in the first quarter of Q15 boasted the second-largest volume for the first quarter in the last 10 years (1Q12 was highest with $100 billion). Historically low Treasury rates continued to buoy the High-Yield market throughout 1Q15, with companies looking to lock in low-cost debt financing before conditions change. According to Dan Hannis, Managing Director of William Blair s High-Yield Bond Trading Division, New issuance is robust and clients are willing to lend at lower rates for a good story as negative rates in Europe and beyond push people out the credit rating spectrum searching for yield. - At the end of 1Q15, the forward calendar stood at $14.9 billion, a 17.2% decline from forward levels at the end of 1Q14. Hannis also notes that the High-Yield market experienced a selloff in February due to oil re-testing lows made in However, he states that High-Yield continues to act strongly outside the energy sector. The energy sector will be touch and go and trade on a name-by-name basis while the rest of High-Yield contemplates taking out-year lows in yields. - In 1Q15, the Merrill Lynch U.S. High-Yield Index was 2.5% on a total return basis, compared with 3.0% in 1Q14. - End of 1Q15 new-issue yields were 5.0% for BB rated unsecured bonds and 6.3% for B rated unsecured bonds, respectively. Refinancings represented a large portion of High-Yield issuance through 1Q15, accounting for about 45% of dollar volume (down 13% as a percentage compared to 1Q14). Even with the decline, this continues the trend seen in 2013 of borrowers seeking to refinance more expensive debt with less expensive, fixed-rate notes. The largest jump in High-Yield issuance use of proceeds in 1Q15 was to finance M&A activity, accounting for approximately 31% of dollar volume (up 12% as a percentage compared to 1Q14). The new issue market in 1Q15 was substantially all cash pay, compared to 1Q14 where the issuance of PIK notes (including PIK toggle) represented nearly $3 billion of volume (or 4% of total issuance for the period). The volume of PIK notes today remains well below levels seen during 2007 when PIK note volume totaled approximately $4 billion for 1Q07. 1Q15 saw a material increase in 144A private-for-life issues, which allow companies to access the High-Yield market without undergoing SEC registration. These transactions comprised 42% of the total High-Yield issuances in 1Q14 and have risen to 51% of 1Q15 issuances more than double the number of registered issuances. High-Yield Bond Volume Yields of New-Issue Senior Unsecured Bonds ($ in billions) (bps) $144 $68 $164 $287 $218 $345 $322 $314 $75 $92 NA 6.26% 5.04% BB B 6 High-Yield Bond Offerings

9 Recent Market Activity William Blair & Company Select Leveraged Loan Transactions Company Sponsor(s) Sector Purpose Month LBO Transactions Corp. Rating Amount ($MM) Total Revolver 1st Lien TL 2nd Lien TL LIBOR Spread 1st Lien TL 2nd Lien TL Senior/ Total Leverage Walgreens Infusion Services Madison Dearborn Partners Healthcare LBO Mar. B/B3 $495 $80 $ x/5.9x PSA Healthcare J.H. Whitney & Co. Healthcare LBO Feb. --/-- $149 $20 $94 $ x/5.5x Hanson Building Products Lone Star Funds Building Materials LBO Feb. B/B2 $1,045 $150 $635 $ x/5.0x DBRS Limited Carlyle Group Services & Leasing LBO Feb. --/-- $275 $50 $ x/4.5x Charter NEX Films Pamplona Capital Chemicals LBO Jan. B/B2 $430 $50 $270 $ x/5.8x PODS Ontario Teachers Pension Plan Transportation LBO Jan. B/B2 $610 $50 $410 $ x/6.1x Paris Presents Wasserstein & Co. Wholesale Trade LBO Jan. --/-- $137 $15 $92 $ x/5.5x Mirion Technologies Dividend Recapitalizations Charterhouse Equity Partners Computers & Electronics Planet Fitness TSG Consumer Partners Entertainment & Leisure FullBeauty Brands Charlesbank Capital Partners Retail LBO Jan. B/B2 $315 $35 $ x/5.3x Recap/ Dividend Recap/ Dividend Coyote Logistics Warburg Pincus Transportation Recap/ Dividend Tank Intermediate Holding Corp. Par Pharmaceutical Companies Other Transactions Leonard Green Manufacturing & Machinery Recap/ Dividend Texas Pacific Group Healthcare Recap/ Dividend Mar. B+/B1 $ $ x/4.5x Mar. B/B2 $ $ x/5.0x Mar. B-/B2 $460 $100 $ x/4.4x Feb. B/B2 $510 $50 $ x/6.2x Feb. B/B2 $ $ x/5.0x Post Holdings Inc. -- Food & Beverage Acquisition Mar. B/B2 $ $ x/6.6x DPx Holdings JLL Partners Healthcare Acquisition Mar. B/B3 $20 -- $ x/4.4x Springer Science and Business Media BC Partners Printing & Publishing Merger Mar. B/B3 $ $ x/5.9x C&J Energy Services -- Oil & Gas Merger Mar. BB-/-- $1,175 $600 $ x/2.2x Headwaters, Inc. -- Building Materials Refinancing Mar. B+/B2 $ $ x/3.9x Sabre Industries Inc. Kohlberg & Co. Manufacturing & Machinery Acquisition Feb. B/B3 $320 $65 $ x/4.5x Alliant Insurance Services KKR Insurance Acquisition Jan. B/B3 $ $ x/6.0x Altice SA -- Cable Acquisition Jan. B+/B1 $ $ x/4.4x Select High-Yield Note Offerings (Less Than $300 Million) Company Sponsor(s) Sector Purpose Type Month Issue Rating Size ($MM) Coupon Yield McGraw-Hill Education Inc. Apollo Management Printing & Publishing Recap/Dividend 144a life Apr. B-/Caa1 $ % 8.748% 4 Credit Acceptance Corp. -- Services & Leasing Refinancing 144a life Mar. BB/B1 $ % 7.500% 8 Cimpress NV -- Computers & Electronics Refinancing 144a life Mar. B/Ba3 $ % 7.000% 7 Surgical Care Affiliates LLC Texas Pacific Group Healthcare Refinancing 144a life Mar. B-/Caa1 $ % 6.000% 8 Presidio Inc Apollo Management Computers & Electronics LBO 144a life Jan. CCC+/Caa1 $ % % 8 ANGUS Chemical Company Golden Gate Capital Chemicals LBO 144a life Jan. B/Caa1 $ % 8.750% 8 Speedway Motorsports -- Entertainment & Leisure Refinancing 144a Jan. BB+/Ba2 $ % 5.125% 8 Nexstar Broadcasting Group -- TV Acquisition 144a life Jan. B+/B3 $ % 6.125% 7 NCI Building Systems Inc Clayton, Dubilier & Rice Building Materials Acquisition 144a life Jan. B+/B3 $ % 8.250% 8 Tenor (Yrs.) Recent Market Activity 7

10 William Blair & Company Selected Transactions $230,000,000 Not Disclosed $50,000,000 $250,000,000 Secured Credit Facilities Equipment Lease March 2015 Senior Credit Facility March 2015 Senior Credit Facility March 2015 Senior Notes $27,500,000 Not Disclosed $67,500,000 $172,500,000 Direct Unsecured Notes January 2015 Mezzanine Debt Unitranche Credit Facility December 2014 Convertible Bond Offering December 2014 $245,000,000 Not Disclosed Not Disclosed $85,000,000 Unitranche and Revolving Credit Facilities Senior Debt November 2014 Senior and Junior Credit Facilities Senior Credit Facility Leveraged Finance and Debt Capital Markets William Blair s Leveraged Finance team structures and arranges debt capital in support of acquisitions, recapitalizations and growth through its well-established relationships with debt capital providers globally. 92 transactions closed since 2008, with over $8.0 billion arranged since 2012 Specialists who are experts in complex engagements, including those requiring insightful credit positioning and the arrangement of multiple layers of capital Extensive experience in arranging and negotiating terms for a broad range of senior, junior and structured debt products Real-time, proprietary view of the leveraged finance market from William Blair s global M&A and debt advisory practices Senior banker attention and unbiased, objective advice; senior bankers average more than 20 years of experience Thoughtful, customized financing processes that produce outstanding outcomes Our Debt Capital Markets team provides clients with access to various debt capital markets, including High-Yield notes, convertible bonds, syndicated term loans, investment grade notes, preferred stock and other debt securities purchased by institutional investors. Debt underwriting, placement and advisory services related to the public and private/144a markets 40+ institutional sales and trading professionals based in Chicago and New York Market maker in 500 High-Yield bond and investment grade issues; 400 preferred issues National account coverage of more than 700 tier-one institutional buyers and regional investors 8 Selected Transactions

11 William Blair & Company William Blair is a trade name for William Blair & Company, L.L.C. and William Blair International, Limited. William Blair & Company, L.L.C., is a Delaware company and is regulated by the Securities and Exchange Commission, The Financial Industry Regulatory Authority, and other principal exchanges. William Blair International Limited is authorised and regulated by the Financial Conduct Authority ("FCA") in the United Kingdom. William Blair & Company only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated within the United States and are not offered to persons or institutions outside of the United States. This material has been approved for distribution in the United Kingdom by William Blair International Limited, Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being Eligible Counterparties and Professional Clients). This Document is not to be distributed or passed on to any Retail Clients. No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision. William Blair & Company 222 West Adams Street Chicago, Illinois williamblair.com May 01,

12 Spring 2015 Leveraged Finance Market Update Kelly Martin Michael Ward Mark Birkett Matt Thomas Jason Sutherland About William Blair Investment Banking Leveraged Finance_Current.indd 1-2 William Blair s investment banking group combines signiicant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and inancing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth inancing, inancial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From , the investment banking group completed more than 330 merger-andacquisition transactions worth $73 billion in value, involving parties in 36 countries and ive continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised nearly $100 billion in public and private inancing. 4/24/2015 8:46:33 AM