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CLOs in the Heartland April 26, 2016 Opening Remarks Jill Zelter, - PowerPoint PPT Presentation

CLOs in the Heartland April 26, 2016 Opening Remarks Jill Zelter, Managing Director, Fitch Ratings State of the Capital Markets: First Quarter 2016 Review and Second Quarter 2016 Outlook April 26, 2016 Randy Schwimmer Senior Managing


  1. CLOs in the Heartland April 26, 2016

  2. Opening Remarks Jill Zelter, Managing Director, Fitch Ratings

  3. State of the Capital Markets: First Quarter 2016 Review and Second Quarter 2016 Outlook April 26, 2016 Randy Schwimmer Senior Managing Director Head of Origination & Capital Markets Churchill Asset Management T (212) 478-9203 M (646) 584-1362 randy.schwimmer@churchillam.com

  4. Capital Markets Review – First Quarter 2016 Volatility eases as market conditions stabilize • US public markets recovered from 4Q lows; dovish Fed eases investor worries about inflation; China, commodities, and energy take back seat • HY issuance has modest comeback as fund flows reverse; bond volume at $35.5B, flat to last quarter, but off sharply from $91.6B for 1Q 2015 • $41B of US leveraged loans was 18.6% off previous quarter ($50.4B) – worst • $41B of US leveraged loans was 18.6% off previous quarter ($50.4B) – worst quarterly performance since 2011; retail loan funds broke a 32-week streak of outflows in March; YTD still negative at $4.9B • Middle market sponsored volume of $6B (est.) is lowest in six years • Risk retention worries and below-hurdle equity returns grind new CLO formation to near-standstill of $7.1B (vs $25.3 for 1Q 2015) Sources: S&P Capital IQ, Thomson Reuters LPC CLOs in the Heartland 4

  5. Capital Markets Review – First Quarter 2016 What’s the setting for debt and equity INVESTORS? • Low-rate, low-growth environment remains challenging for PE returns; purchase price multiples close to record highs • 1Q saw advantage swing to the buy-side as spreads remained wide • Private credit funds continue to fundraise and invest; regulated banks retreat from highly leveraged transactions highly leveraged transactions • Chase for yield winning out over liquidity or credit concerns; institutional investors have swung back to higher risk alternatives • With BDCs cash-constrained, second lien has been disintermediated by mezzanine; unitranche and senior stretch taking larger structure shares CLOs in the Heartland 5

  6. Capital Markets Review – First Quarter 2016 How about debt and equity ISSUERS? • Known large cap borrowers getting good terms in broadly syndicated market; story credits still struggling amid constrained market liquidity • Larger middle market arrangers with higher holds offering “club execution” alternative to syndication for increasingly bigger deals (“cargo pants” strategy”) • Sponsors getting one-stop shop solutions from private credit providers; unitranche • Sponsors getting one-stop shop solutions from private credit providers; unitranche financings providing certainty of execution • Borrowers and sponsors seeking flexibility at a price; covenants, debt baskets, and structures all continue to be issuer-friendly CLOs in the Heartland 6

  7. Capital Markets – Behind the Scenes CLOs remain a significant share of the institutional market Institutional investor market share 11.0% 2.3% 6.8% 21.1% 58.8% Finance Co. Insurance Co. Hedge, Distressed & High-Yield Funds Loan Mutual Funds CLO Institutional investor market share Source: S&P LCD, Capital IQ CLOs in the Heartland 7

  8. Capital Markets – Behind the Scenes With deal flow down, banks’ share of loans has rebounded Primary market for highly leveraged loans (banks vs. non-banks) 100% 90% 80% 70% 60% Institutional investors and finance companies 50% Banks & securities firms 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 Institutional investor market share Source: Wells Fargo, S&P LCD Capital IQ CLOs in the Heartland 8

  9. Capital Markets – Behind the Scenes Correlation between asset classes has grown since the credit crisis Correlation between asset classes 100% 90% Loans vs High Yield Loans vs Equity 80% 70% 60% 50% 40% 30% 20% 10% 0% Shows cumulative correlation between indicated asset classes Source: LSTA, S&P LCD CLOs in the Heartland 9

  10. Capital Markets – Behind the Scenes PE fundraising remains healthy, as expected… $90 120 105 05 $80 100 92 90 89 $70 81 77 77 $60 80 75 71 74 71 71 70 69 66 66 63 63 $50 $50 61 61 61 60 52 $40 49 45 $30 40 $20 20 $10 $36 $34 $25 $20 $35 $36 $27 $36 $37 $82 $35 $77 $54 $60 $41 $59 $46 $36 $45 $65 $57 $0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 2016 Capital Rais ised ($B) # of Fund unds Clos osed Source: PitchBook; data for North America CLOs in the Heartland 10

  11. Capital Markets – Behind the Scenes …while deal flow declines for third consecutive quarter $250 1,200 1,117 1,0671,060 1,02 1,070 028 1,03 030 1,02 024 985 85 956 56 957 1,000 $200 908 857 57 829 813 13 785 85 800 760 60 814 763 63 767 67 $150 $150 745 745 45 45 695 600 $100 400 $50 200 $108 $113 $101 $126 $104 $194 $106 $125 $149 $183 $159 $162 $172 $174 $160 $155 $198 $147 $141 $93 $99 $0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 2016 Capital Inve vested ($B) # of Deal als Source: PitchBook; data for North America CLOs in the Heartland 11

  12. Capital Markets – Behind the Scenes Sense of market stability causes investors to reverse out-flows Prime-fund flows (weekly reports only) $2B $1B 0.51 0.39 0.25 0.17 $0B -0.75 -$1B -1.19 -1.17 -1.53 -$2B -2.12 -2.49 -2.54 -$3B -3.46 -$4B -4.66 -$5B Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2016 2016 2016 Source: S&P/LCD CLOs in the Heartland 12

  13. Capital Markets – Behind the Scenes New CLO formation building slowly; lowest volume in four years Monthly CLO Volume $18B 16.24 $16B $14B 13.39 12.74 $12B 11.30 11.16 11.29 10.18 $10B 9.38 8.26 7.73 $8B 7.46 7.33 7.35 6.02 5.57 5.66 $6B 5.15 4.81 4.20 $4B 2.07 $2B 0.83 $0B Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 Jan 2016 Mar 2016 Source: S&P/LCD CLOs in the Heartland 13

  14. Capital Markets – Behind the Scenes Financing activity with sponsors slumps amid uncertainty Sponsored Middle Market Volume 30.0 Sponsored 25.0 20.0 ($B.) Issuance ($B 15.0 10.0 5.0 0.0 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 Source: Thomson Reuters LPC CLOs in the Heartland 14

  15. Capital Markets – Behind the Scenes LBO leverage is down, thanks to Leveraged Lending Guidance 7.5x 55% Institutional MM Large Corp. Institutional MM Large Corp. 7.0x 50% 6.5x EBITDA (x) 45% ibutions 6.0x LBO Debt to EB Equity Contribu 40% 40% 5.5x 5.0x 35% 4.5x 30% 4.0x 25% 3.5x 3.0x 20% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 Source: Thomson Reuters LPC CLOs in the Heartland 15

  16. Capital Markets – Behind the Scenes Supply/demand dynamics continue favoring investors 10.0 10.0% 8.0 9.0% 6.0 8.0% (3 years) 4.0 7.0% ws ($B) 2.0 2.0 6.0% 6.0% Loan fund flows Single B-yields (3 0.0 5.0% -2.0 4.0% -4.0 3.0% -6.0 2.0% Loan fund flows Single- B loan yields -8.0 1.0% -10.0 0.0% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Source: Thomson Reuters LPC CLOs in the Heartland 16

  17. Capital Markets – Behind the Scenes Better credits get better pricing; liquidity challenged regardless New-issue yield to maturity for leveraged loans 7.0% 6.5% BB B 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Source: S&P LCD CLOs in the Heartland 17

  18. Capital Markets – Behind the Scenes Middle market illiquidity premium remains around 75 bps L+700 L+600 L+500 L+400 L+300 L+200 Large Cap Middle Market L+100 L+0 Source: S&P LCD; institutional spreads, sponsored transactions; LC = >$50mm ebitda, MM = <$50mm ebitda CLOs in the Heartland 18

  19. Capital Markets – Behind the Scenes Middle market leveraged loan yields up fourth straight quarter 12% LIB/LIB Floor LIB Spread Spread due to OID 11% 10% 9% 3-year) 8% 7% 7% All-in-yield (3 6% 5% 4% 3% 2% 1% 0% 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 2008 1Q-3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Source: Thomson Reuters LPC; all-in middle market institutional yields (3 year) CLOs in the Heartland 19

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