The Syndicated Loan Market - Who is the LSTA (and what is our focus)? - PowerPoint PPT Presentation

The Syndicated Loan Market - Who is the LSTA (and what is our focus)? - Description of loan market (size, segments, lender constituency) - Secondary market (and what it shows) - Pressures in the loan market (and for borrowers) Bram Smith – bsmith@lsta.org (Interim Executive Director) Elliot Ganz – eganz@lsta.org (General Counsel) Meredith Coffey – mcoffey@lsta.org (SVP – Research) 1

Who is the LSTA? The Loan Syndications and Trading Association is the trade association for the floating rate corporate loan market. The LSTA promotes a fair, orderly, and efficient corporate loan market and provides leadership in advancing the interest of all market participants. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans and related claims. The LSTA seeks to enhance public understanding of the corporate loan market and to serve the public interest by encouraging adherence to high ethical standards by all market participants. The LSTA plays a pivotal role in monitoring and bringing consensus to this important asset class by acting as a forum for the analysis and discussion of issues and developments relating to the loan market and advocating the shared interests of its membership. The Association formulates policy through its Board of Directors after consensus is developed through the active involvement of individual officers and employees of Member firms. The LSTA stands out among financial market trade associations because it represents all segments of the market it serves: primary sales; par/near par and distressed trading; and bank and non-bank portfolio management. The LSTA membership totals more than 280 institutions. 2

U.S. Corporate loan market is a vital source Of capital for American business U.S. Corporate loan and loan commitments outstanding 3000 Total Outstanding Commits/outstandings ($Bils.) 2500 Total Committed 2000 1500 1000 500 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 According to government data, the U.S. syndicated loan market totals nearly $2.8 trillion of committed � lines and outstanding loans It is a key source of financing for many large and middle market companies in the U.S. � Source: Shared National Credit Review 3

4 key U.S. large corporate loan market segments Investment grade loan market Leveraged loan market Loans to companies rated >= BBB- Loans to companies rated < BBB-/Baa3 or • • /Baa3 AND with a relatively low LIBOR unrated & with a high spread* spread Divided into bank (pro rata) and non-bank • 2007 lending: $658 billion segments • 2008 lending: $319 billion 2007 lending : $689 billion • • 2008 lending : $294 billion • Institutional loan market Secondary loan market Leveraged loans with non-bank lenders Market in which loans trade following the • • (such as mutual funds, CLOs, insurance close of primary syndication companies, hedge funds, etc) Most U.S. loan trading involves leveraged • 2007 lending: $426 billion loans • 2008 lending: $69.6 billion 2007 trading: $442 billion • • 2008 trading: $510 billion • *Traditionally LIB+150, increased to LIB+350 in 1Q09 Source: Reuters LPC for primary lending; LSTA for secondary trading 4

U.S. Syndicated loan volumes U.S. syndicated lending volume 1800 1600 Other ($Bils.) IG ($Bils.) 1400 Loan volume ($Bils.) Lev. ($Bils.) 1200 1000 800 600 400 200 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 LTM 1Q09 Overall primary loan volume is down materially � At $764B, new loan volume in 2008 is at lowest level since 1994 � At $104B, 1Q09 loan issuance is down 41% from 1Q08 � Source: Thomson Reuters LPC 5

Non-bank term loan outstandings Non-bank term loan outstandings by year $700B 596.1 580.3 $600B 556.8 Outstandings ($Bils.) $500B 399.7 $400B $300B 247.8 192.7 $200B 132.5 117.3 148.0 101.1 129.9 73.3 $100B 34.7 13.6 $0B YE1996 YE1997 YE1998 YE1999 YE2000 YE2001 YE2002 YE2003 YE2004 YE2005 YE2006 YE2007 YE2008 2/6/2009 As of Source: S&P/LCD 6

Pressures on the secondary 2007: Supply-demand imbalance � 2008: Deleveraging � 2009: Credit? � 7

Dislocation: Loan prices decline sharply in 2008 U.S. non-bank loan bids 102 100 98 Median bid 96 94 92 90 Average bid 88 Bid (% of par) 86 84 82 80 78 76 74 72 70 68 66 64 62 60 6/19/02 1/10/03 8/1/03 2/24/04 9/14/04 4/7/05 11/10/05 6/5/06 12/21/06 7/13/07 2/1/08 8/21/08 3/13/09 Loan prices come under considerable pressure in past 18 months � This unusual behavior has impacted leveraged companies’ ability to access financing � Source: LSTA/LPC MTM Pricing 8

Loan trading activity high; more loans trade < 80 Trading volume 180 160 "Distressed" < 80 140 Par >= 80 120 Trading volume ($Bils.) 100 80 60 40 20 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 Trading activity remained relatively robust in 4Q08 � More loans are trading < 80 cents on the dollar, which was typically considered “distressed” � However, there is an increasing disconnect between price and credit quality � Source: LSTA trade data study 9

Prices have declined even for companies With high ratings and no downgrades Trade prices by rating category (4Q07 vs. 4Q08) 100 90 80 70 % of trading sample 60 50 40 4Q07 4Q08 30 20 10 0 BBB- BBB BB+ BB BB- B+ B B- CCC+ CCC CCC- D Even higher rated companies are trading at levels previously considered distressed � Typical trade price of BBB- names declined from 97.87 in 4Q07 to 85.15 in 4Q08 � Typical trade price of BB+ rated names declined from 97.7 in 4Q07 to 80.09 in 4Q08 � Source: LSTA trade data study 10

Default rates are climbing Leveraged loan default rate 9% 8% LTM $Defaults / Outstanding-12 months 7% LTM # of Issuers in default / Total Issuers-12 months 6% Default rate (%) 5% 4% 3% 2% 1% 0% 12/31/98 6/30/99 12/31/99 6/30/00 12/31/00 6/30/01 12/31/01 6/30/02 12/31/02 6/30/03 12/31/03 6/30/04 12/31/04 6/30/05 12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08 Initially defaults were defined by small companies � Defaults becoming materially larger � “Shadow” default rate higher – above 9% � Amendments are becoming more difficult � Loss given default could worsen � Source: LSTA/LPC MTM Pricing, Standard & Poor’s LCD 11

Impact on borrowers Pressures � Deleveraging � Defaults � Consolidation � Liquidity � Impact � New issue yields � Amendments � Refinancing cliff � 12

Bank consolidation impacts liquidity 13

Buyside is less active in 2008 – and may contract in 2009 Number of investor groups that made 10 or more primary commitments each year 300 261 218 # of active investors 168 150 116 98 85 76 64 54 48 42 29 22 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 *With the slow down in deal number, for the latest period LCD uses $100M of estimated allocations as a cut-off Source: Standard and Poor’s LCD 14

Leveraged loan prices fall, secondary yields increase, Primary squeezed out Secondary loan yield (yield to 3 years) Primary yields (higher rated loans) 3200 3200 320 0 2800 2800 280 0 LIB+(bps) Precision Drilling 2400 LIB+(bps) 2400 240 0 TNS BB rated loans Level 3 B rated loans 2000 2000 20 0 0 1600 1600 160 0 1200 1200 120 0 800 80 0 800 400 40 0 400 0 0 0 1Q98 5/1/1999 1/1/2000 9/1/2000 5/1/2001 1/1/2002 9/1/2002 5/1/2003 1/1/2004 9/1/2004 5/1/2005 1/1/2006 9/1/2006 5/1/2007 1/1/2008 9/1/2008 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Default rates have climbed, but currently are below peak of last cycle � Loan prices well below last downturn � Secondary spreads go into the thousands over LIBOR � Primary market cannot compete � Source: LSTA/LPC MTM Pricing, Standard & Poor’s LCD 15

Constraints: Companies need amendments And have to pay up Margin increase on amended loans Count of amendments w/fees 35 300 bp 30 250 bp 25 Count 200 bp 20 150 bp 15 100 bp 10 50 bp 5 0 0 bp Oct-08 Nov-08 Jan-08 Feb-08 Jun-08 Jul-08 Aug-08 Dec-08 Jan-09 Feb-09 Jan-08 Feb-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Apr-08 May-08 Sep-08 Apr-08 May-08 Sep-08 Mar-08 Mar-08 As the economic environment weakens, more companies are seeking amendments or covenant � waivers for their loans 48 covenant amendments tracked in Jan/Feb; annualizes to nearly 300 – and pace may quicken � With low secondary prices, reduced lender liquidity and different lenders, amendments are more � expensive * The data above comprises publicly available covenant amendment information tracked by a loan information company (S&P/LCD). It does not include information that has not been made public. Source: S&P/LCD 16