Spotlight on the Upper End of Mezzanine

Transcription

1 Spotlight on the Upper End of Mezzanine Robert Rubino Executive Vice President Bank of America Susan Kasser Vice President The Carlyle Group 1

2 Second Lien Market Issuers seeking callable, flexible debt, increasingly turn to the second lien market Provides flexibility for near-term recapitalizations involving future acquisitions, initial public offerings or dividends 2006 saw record breaking second lien issuance of 28.3 billion, up 74% over 2005 volume Second liens are a viable financing alternative to the high yield bond market and to private mezzanine Growth in second lien activity has kept pace with the explosive growth in LBO volume as issuers gain comfort with the benefits of second liens as part of a leveraged financing structure 2

3 Second Lien Loans: 3Q03 through 4Q nd liens represent less than 3% of market (2nd lien + HY bonds) 2nd liens represent over 7% of market (2nd lien + HY bonds) 2nd liens represent 13% of market (2nd lien + HY bonds) YE avg total lev: : 5.0x YE avg spread: L+637 bps Average leverage thru 2nd lien of 4.2x Average spread of 668 bps (Bn Bn) 6 4 Avg spread of (Bn Bn) Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 0 (# of deals) (Avg Size MM) nd Lien Volume LBO Volume 3

4 Growth in Senior Debt Crowding Out Sub Debt (Debt/EBITDA) 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 4.2x 0.50x 0.10x 1.30x 2.30x 4.7x 0.32x 0.20x 1.20x 2.90x 5.3x 0.16x 0.20x 1.80x 1.40x 3.20x 5.0x 0.10x 0.10x 3.40x 0.0x First Lien Bank Debt Second Lien Bank Debt Other Senior Debt Sub Debt Note: Average Debt/EBITDA ratio for deals with second lien loans. Source: Bank of America: S&P/LCD 4

5 Use of Mezzanine Continues, Especially in Smaller Transactions Company EBITDA >50M Company EBITDA <50M 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Bank Debt Mezzanine High Yield Equity Bank Debt Mezzanine High Yield Equity 5

6 Second Lien Loans vs. Mezzanine Size Terms (typical) Pricing Investor Base Key Considerations 5-77 years 103/2/1 L bps Second Lien million CLOs Hedge funds Distressed investors Mezzanine funds Medium term financing Flexibility around total financing Instrument is callable Does require ratings Mezzanine Financing 15-[100]million, [100]million, generally 7-88 years NC-1, 103/2/1 Low to mid-teens, may include PIK Coinvest may be needed Mezzanine funds Insurance companies Some hedge funds Medium term financing Doesn t t require ratings Investors may require more diligence Flexible, highly negotiated terms 6

7 Broadly Syndicated versus Highly Negotiated Benefits Second Lien Term Loan Retain pre-payment payment flexibility with a small premium Slightly cheaper financing Ease of documentation Single lender/investor meeting Generally incurrence covenants Increasing acceptance of CCC ratings Mezzanine Financing Fixed rate Highly negotiated to suit specific credits Greater flexibility on cash versus PIK coupon Known investor base Does not require ratings Considerations Ratings of B3/B- or better recommended to attract CLO investors Broadly syndicated and freely transferable Unknown investor base Slightly higher call protection Requires maintenance-based covenants May require higher returns, particularly for HoldCo loans or PIK instruments May require equity co-invest May require board observation rights Limited syndication to a known group of like minded lenders 7

8 Second Liens Are An Increasing Component of Total Issuance 30 Historical Second Lien Volume ( Bn) % CAGR High Yield Volume 2nd Lien Volume nd Lien as % of Total Issuance 1.0% 2.1% 7.1% 12.5% 16.3% 8

9 Public vs. Private High Yield Size Terms (typical) Pricing Investor Base Key Considerations 5-10 years 3-55 year non call, followed by varying call premiums 8-12% Public High Yield million Institutional lenders CDOs, CLOs Hedge funds Long term financing Incurrence covenants Limited prepayment Requires ratings Public filing requirements Private High Yield million 7-10 years 3-55 year non call, followed by varying call premiums Low- to mid-teens, may include PIK Coinvest may be needed Large mezzanine funds Hedge funds Long term financing Incurrence covenants Limited prepayment Doesn t t require ratings Investors may require more diligence Flexible, highly negotiated terms 9

10 Longer Term versus Easier Issuance Benefits Public High Yield Historically attractive credit spreads and yields Long term, permanent capital Liquid, active market Private High Yield Avoid public filings and disclosure No ratings required Lower issuance costs Highly negotiated to suit specific credits Ease of documentation and syndication Known investor base Considerations Expensive to retire in the non-call period Higher issuance costs 5-77 day roadshow required to successfully market the notes Ongoing public filing requirements and SOX compliance Requires ratings Expensive to retire in the non-call period Slightly higher pricing May require an equity co-invest Limited syndication to a known group of like minded lenders 10

11 Historical Trends Indicate Increased High Yield Default Rates Are Ahead in bil % 16% 14% 12% 10% 8% 6% 4% 2% % New HY Bond Issuance Default Rates Source: Merrill Lynch & Co., Altman High Yield Bond and Return Report. R 11

12 Increased Issuance of Low Rated Bonds ( in Billions) High Yield New Issues Rated B-B or Lower 44% of Defaulted Issuers Default 3 Years After Issuance 25% 20% 15% 10% (% of Defaulted Issuers) 10 0 % of High Yield New Issues % 20% 40% 46% 54% 39% 47% 19% 25% 37% 52% 44% 39% 5% 0% Years to Default After Issuance Source: Merrill Lynch & Co. Note: Data for Source: Altman High Yield Bond and Return Report. 12