Institutional investors in Europe’s deleveraging credit landscape The role of private debt in financing Europe’s future growth Rolf Nuijens, Intermediate Capital Group plc 27 February 2014 Debt Firm of the Year Specialist Lender of the Alternative Debt Provider Lender of the Year – CLO Manager of the Fundraising of the Year – 2013 Year of the Year EMEA Year – EMEA EMEA 2013 2013 2013 2013 2013 Intermediate Capital Group plc
Topics Macro lending Macro lending en environment vironment Dif Different f erent forms s of of credit and t credit and their place heir place in the capital in the capital str structure ucture What does it tak does it take to e to execute? ecute? Intermediate Capital Group plc 2
Macro lending environment Intermediate Capital Group plc
Macro lending environment Private sector lending in the Netherlands Growth in bank lending in the Nether Growth in bank lending in the Netherlands lands Growth in bank lending to fir Growth in bank lending to firms s inter internationall ionally % % % Source: Dutch National Bank Source: Dutch National Bank, ECB Please note: Please note: 1) Foreign data calculated on a quarterly rolling basis and is adjusted for securitisations 1) Data calculated on a monthly rolling basis and is adjusted for securitisations and and data series breaks. data series breaks. 2) GIIPS = Greece, Ireland, Italy, Portugal and Spain Growth in lending in the Netherlands has fallen sharply since 2009 Annual European bank lending to the private sector has fallen by over 2% year on year for the last two years¹ Comparing lending patterns across geographies suggests that this theme is set to persist across the core and periphery countries of the Eurozone The declining role of bank lending signals a major shift in the European debt landscape Note: 1. Source, Thomson Datastream Intermediate Capital Group plc 4
Macro lending environment Europe vs. US Dependence of Dependence of Europe on banks Europe on banks rela relativ tive to the US to the US Bank balance sheet a Bank balance sheet assets as percentage ssets as percentage Bank lending as percentage Bank lending as percentage of of e exter ternal long ter nal long term of of GDP GDP financing financing 100% 400% 366% 81% 80% 300% 60% 200% 40% 19% 78% 100% 20% 0% 0% EU US EU US Source: LSE, IMF and UN 2012, McKinsey Global Institute and Group of Thirty (2013) Source: LSE, IMF and UN 2012, McKinsey Global Institute and Group of Thirty (2013) In contrast to the US, Europe remains primarily a banking market In general, non-bank financing in the US is provided by the public bond markets, non-bank loans and private placements supported by a very deep institutional investor base The European institutional market is still expanding Intermediate Capital Group plc 5
Macro lending environment Europe vs. US Sources of Sources of non financial non financial cor corpora porate financing e financing US (USDbn) 1.641 5.415 Euro Area (EURbn) 4.640 978 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Bank loans (excl. mortgages) Outstanding corporate bonds Source: Societe Generale cross asset research: “In the Mood For Loans”, April 2013) Historically, the only significant non-bank lenders in the European private debt market have been CLOs, some credit funds and the independent mezzanine funds As these traditional lenders exit the market, we are seeing a new breed of non-bank lenders coming to the fore across each of the loan, high yield and direct lending markets The European market will continue to shift towards the US model as institutions continue to enter the market and provide alternative sources of credit Intermediate Capital Group plc 6
Macro lending environment Scarcity of capital for new loans Bank balance Bank balance sheets as a sheets as a propor proportion tion of of GDP¹ GDP¹ 250% 200% 150% 100% 50% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: S&P LCD, ECB Note: 1. Europe Bank balance sheets over expanded but now must de- Bank appetite for non-investment grade loans down gear – Hold sizes materially reduced – Basel III – Retrenched to domestic markets – Domestic regulations Flight to quality – ECB financial stability review Intermediate Capital Group plc 7
Macro lending environment The increasing role of institutional investors €billion 180 160 140 120 100 80 60 40 20 NA¹ 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 European Banks Non-European Banks Institutional Investors Securities Firms Source: S&P LCD Note: 1. Given the lack of primary issuance, LCD did not track enough observations to compile a meaningful sample for 2009 Intermediate Capital Group plc 8
Different forms of credit and their place in the capital structure Intermediate Capital Group plc
Different forms of credit Senior secured loans overview Senior secured loans and high yield bonds are a defensive route to access yield in a low-growth environment – Loans have security and step-in rights limit downside risk Senior Debt (senior Senior Debt (senior loans, etc.): loans, etc.): – Equity cushion and covenants support loans and high yield c.45-55% c.45-55% – UK legal regime supportive of high recovery rates risk ter risk Gross yields of 5-7% currently in loans Greater Grea Subordinate Subordinated Debt Debt : : Attractive risk/reward Attractiv e risk/reward c.15-20% c.15-20% Loans are senior in the LBO capital structure Typically c. 50% embedded subordination Security, documentation and ranking in capital structure result in higher recovery rates in case of Equity: Equity: default c.30-50% 30-50% FUNDING STRUCTURE FUNDING STR UCTURE Intermediate Capital Group plc 10
Different forms of credit Risk/return profile Indica Indicativ tive risk/retur risk/return profiles profiles Return Return 20% CLO Debt Distressed Debt (15%-20%) (15%-18%) Corporate Mezzanine (14%-17%) Real Estate Mezzanine Direct Lending Direct Lending Funds Funds (10%-12%) 10% (6%-12%) (6%-12%) High Yield Bonds (8%-10%) Syndicated Loans (4%-12%) Real Estate Senior Debt Infrastructure Senior (3%-4%) Debt (2%-4%) 0% More R More Risk sk Source: ICG Credit strategies can be tailored to fit a broad range of risk return profiles Intermediate Capital Group plc 11
Different forms of credit Structural characteristics of asset classes Directly originated Directly originated Senior secured high Senior secured high Investment Grade Investment Grade Attribute Attribute Liquid loans Liquid loans senior loans senior loans yield bonds yield bonds Corporate Bonds Corporate Bonds Mezzanine Mezzanine Issuers Issuers Across full Across full capitalisation range Mid-market companies Mid to large cap Large cap companies capitalisation range companies Ranking/ Ranking/ First ranking First ranking Ranks below senior debt. Can Variable, often lower Generally be secured or unsecured than loans subordinated and security security depending on whether junior or unsecured senior mezzanine. Covenants Covenants Strong Very strong Very strong Less strong None Information / Information / Monthly Monthly management Monthly management accounts Public info only Public info only management accounts and board packs where board Due Due accounts representation present. Diligence Diligence Full Due Diligence Full Due Diligence Very limited Due No Due Diligence Full Due Diligence Diligence Term Term 5 – 7 years 5 – 7 years 7 - 8 years 5 - 7 years 3 – 30 years Coupons Coupons Floating based on Floating based on base rate Floating based on base rate Predominantly fixed Fixed coupon base rate plus a plus a spread plus a spread and a PIK coupon spread margin. Can be structured with the addition of warrants. Current Current EURIBOR + 350- EURIBOR + 500-600bps 4%-9% 1%-4% EURIBOR + 1050-1200bps 550bps yields yields Arrangement Arrangement Low or none c. 400 bps 400 bps None None fees fees Source: ICG Intermediate Capital Group plc 12
How to execute Intermediate Capital Group plc
How to execute Invest via sound structures Vola latility in European senior tility in European senior de debt bt prices¹ prices¹ Market Mar et vola latility in European tility in European Le Leveraged Loans raged Loans 110,0 100,0 90,0 80,0 70,0 60,0 50,0 2005 2006 2007 2008 2009 2010 2011 Source: Credit Suisse Note: 1. Credit Suisse European Leveraged Loans Index (“ELLI”) single B Loan prices have been used to represent European senior debt prices Fixed Income investors should avoid getting caught in market hysteria which surrounds periods of market volatility Investing in loans is therefore best done via sound structures Intermediate Capital Group plc 14
How to execute Proceed with caution Take advantage of local knowledge Ensure credit discipline Administration Workout/ recovery – getting money back Contact with advisors Regulation Banks - proceed with caution Intermediate Capital Group plc 15
Case studies Intermediate Capital Group plc
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