The U.S. Leveraged Loan Market

Transcription

1 The U.S. Leveraged Loan Market Meredith Coffey, LSTA Jonathan Insull, Crescent Capital Linda Pace, Carlyle Keith Read, Cerberus

2 Presentation Overview How we got here: The technicals and the buyer base Is it 2007 all over again? How regulation has the potential to change market The loan market today and tomorrow 2

3 The Technicals and the Buyer Base 3

4 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Issuance ($Bils.) Outstandings ($Bils.) Institutional loan issuance and outstandings climb Institutional loan issuance S&P/LSTA Loan Index Outstandings $800 $700 $ $ $ $ $ $100 0 $0 Source: S&P/LCD, S&P/LSTA Leveraged Loan Index 4

5 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Flows/Issuance ($Bils.) Visible (and invisible) investor demand climbs CLO issuance and loan mutual fund flows 20 Loan fund flows 15 CLO Issuance Source: Thomson Reuters LPC 5

6 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Assets Under Management ($Bils.) CLO AUM climbs moderately; Loan mutual fund AUM more than doubles CLO and loan mutual AUM Loan Funds CLOs Source: Thomson Reuters LPC 6

7 01/01/10 04/01/10 07/01/10 10/01/10 01/01/11 04/01/11 07/01/11 10/01/11 01/01/12 04/01/12 07/01/12 10/01/12 01/01/13 04/01/13 07/01/13 10/01/13 01/01/14 04/01/14 Loan fund flows ($Bils.) 01/06/ /14/ /21/ /27/ /02/ /11/ /17/ /23/ /29/ /06/ /12/ /19/ /27/ /03/ /09/ /15/2014 Bid (% of par) Is the loan market susceptible to a rapid shift? Loan Mutual Fund weekly flows Secondary loan market prices (0.50) 90 (1.00) (1.50) (2.00) (2.50) Source: Thomson Reuters LPC, S&P/LSTA Loan Index 7

8 Is it 2007? 8

9 1Q98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 1Q98 (90) 4Q98 (83) 3Q99 (106) 2Q00 (92) 1Q01 (58) 4Q01 (18) 3Q02 (47) 2Q03 (64) 1Q04 (149) 4Q04 (159) 3Q05 (113) 2Q06 (194) 1Q07 (232) 4Q07 (133) 3Q08 (40) 2Q09 (32) 1Q10 (67) 4Q10 (111) 3Q11 (54) 2Q12 (111) 1Q13 (304) 4Q13 (274) Spread (bps) Coupon (%) All in institutional spreads and coupons All-in spreads above 2007 Coupons low due to LIBOR % BB-/BB- B+/B 10% 8% Institutional Spread 3-Month Libor % 400 4% % 0% Source: S&P/Capital IQ/LCD 9

10 Q Q14 Leverage (x:1) Coverage (x:1) Leverage multiples climbing, coverage strong LC LBO debt multiples rising Coverage ratios very strong Sub Debt/EBITDA Other Sr Debt/EBITDA SLD/EBITDA FLD/EBITDA EBITDA/Cash Interest EBITDA-Capex/Cash Interest Source: S&P/Capital IQ/LCD 10

11 Q Q14 Issuance ($Bils.) Issuance ($Bils.) Covenant lites and second liens loans climb Covenant-lite loan issuance Second-lien loan issuance Source: S&P/Capital IQ/LCD 11

12 Leveraged Lending Guidance 12

13 Leveraged Lending Guidance: The two universes Leveraged Loans redefined to include (maybe) 3x senior leverage, 4x total leverage Purpose test?... Loans to financial vehicles that make leveraged loans Fallen angels that have been modified Criticized Loans redefined to include (maybe) Inability to repay all senior secured debt or half of total debt in 5-7 years from base cash flows Leverage > 6x Covenant lite? 70% 60% 50% 40% 30% 20% 10% 0% All LC Lev Cos LC LBOs Companies with leverage >= 6x Q14 Source: S&P/Capital IQ/LCD 13

14 Leveraged Lending Guidance: Message from the regulators on criticized assets Core objectives of Leveraged Lending Guidance Safety and soundness of banks (tied to positions held by banks) Reducing systemic risk and ensuring that bubbles or other large events don t occur e.g., don t want high risk loans in the system (tied to underwriting) How to define systemic risk Tied to Probability of Default (PD), not Loss Given Default (LGD) or Expected Loss (EL) Thus, it s not the safety of the banks position (EL) that they are focusing on, but rather PD What do we hear that regulators are scrutinizing? Ability to repay all senior secured debt or 50% of total debt from base cash flows in 5-7 years Leverage over 6x causes concern for most industries Covenant lite loans lack of maintenance covenants reduces bank oversight and thus increases PD How does this affect lending Because they are looking at systemic risk, it s not just about the bank s position If a bank underwrites a risky loan and holds nothing, it can still be tagged for unsound underwriting practices Do banks blink? Do regulators blink? Does criticized lending migrate to non-bank originators? 14

15 The Loan Market Today and Tomorrow 15

16 Q14 01/04/ /08/ /14/ /18/ /23/ /27/ /01/ /05/ /10/ /14/ /19/ /23/ /27/ /03/ /08/ /12/ /17/ /21/ /25/ /30/ /04/ /08/ /12/ /19/2014 Share (%) Flows ($Bils.) Demand: Investor base in flux? CLO and Loan fund primary market share Loan mutual fund flows (Jan 2012-April 2014) 80% % 60% % 40% Loan mutual funds % 20% CLOs % - 0% (0.50) Source: S&P/Capital IQ/LCD, Thomson Reuters LPC 16

17 Jan Jan Feb Mar Mar Apr May May Jun Jul Aug Aug Sep Oct Oct Nov Dec Jan Jan Feb Mar Apr Apr May Jun Jun Jul Aug Aug Sep Oct Oct Nov Dec Jan Feb Feb Mar Apr Pipeline ($Bils.) Supply: Institutional calendar climbs 90 Institutional new issue calendar ( ) Source: Thomson Reuters LPC 17

18 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 Bid (% of par) Bid (% of par) Loan bids climb over past few years a little softer lately 100 S&P/LSTA Loan Index bids (12/31/11-4/16/14) 99 S&P/LSTA Loan Index bids (LTM) Source: S&P/LSTA Leveraged Loan Index 18

19 1/31/2010 3/31/2010 5/31/2010 7/31/2010 9/30/ /30/2010 1/31/2011 3/31/2011 5/31/2011 7/31/2011 9/30/ /30/2011 1/31/2012 3/31/2012 5/31/2012 7/31/2012 9/30/ /30/2012 1/31/2013 3/31/2013 5/31/2013 7/31/2013 9/30/ /30/2013 1/31/2014 3/31/2014 Yield (%) Primary loan yields tick up. Primary institutional loan yields 10% 9% 8% All-BB All-B 7% 6% 5% 4% 3% 2% Source: S&P/Capital IQ/LCD 19

20 05/03/02 10/03/02 03/03/03 08/03/03 01/03/04 06/03/04 11/03/04 04/03/05 09/03/05 02/03/06 07/03/06 12/03/06 05/03/07 10/03/07 03/03/08 08/03/08 01/03/09 06/03/09 11/03/09 04/03/10 09/03/10 02/03/11 07/03/11 12/03/11 05/03/12 10/03/12 03/03/13 08/03/13 01/03/14 Spread (bps) Loan and bond yields very close Loan and bond swapped spreads Loan Spread Bond Swapped Spread Source: Thomson Reuters LPC 20