Transcript Document

ACG St. Louis
The State of the Credit Markets
June 19, 2009
Ronald Kahn
Managing Director
Lincoln International LLC
(312) 580-6280
[email protected]
1
Experience with High Profile Financial Sponsors
Lincoln International’s investment bankers have worked with a number of high profile sponsors to
execute financings across a range of transaction types and capital structures
Transaction Types
 Closes concurrently with acquisition
Acquisition Financing
 Coordination and commitments are paramount
 Critical to have options available to the end
Post - Acquisition
Financing
 Initial deal is bridged / over-equitized to guarantee quick closing
 Effected post-acquisition to optimize solicitation process
and/or take advantage of credit market conditions
 Improve pricing and other terms
Refinancing
 Take out fatigued lender(s)
 Rebalance senior and junior tranches
 Creates additional availability to fund growth
Expansion Financing
 Possibly includes a delayed draw capex or acquisition line
 Proceeds to shareholders in the near-term
Dividend Recap
 ABL and mezz less sensitive to dividends
 Interim realization when a sale is not optimal or timely
Types of Capital
Placed by Lincoln
ABLs
Cash Flow
Loans
SaleLeasebacks
Second
Lien
Mezzanine/
Sub Debt
Minority
Equity
2
The Market at a Crossroads
Technical aspects of the market have been improving . . .
Average Bid and Ask of Leveraged Loans
Bloomberg US Industrial BB Yield Curve
110
12.000
All Loans
First-Lien Loans
March 31, 2009 Curve
100
June 11, 2009 Curve
10.000
Yield
(in %)
90
8.000
80
6.000
70
ay
M
25
9.
75
7.
25
6.
75
4.
25
75
5
6
7
8
9
6
7
8
9
6
7
8
9
6
7
8
9
5
5
6
6
7
7
8
8
-0 v -0 n-0 r-0 y -0
-0 v -0 n-0 r-0 y -0
-0 v -0 n-0 r-0 y -0
-0 v -0 n-0 r-0 y -0
l-0
l-0
l-0
l-0
l-0
J u Sep No
J u Sep No
J u Sep No
J u Sep No
Ju
J a Ma Ma
J a Ma Ma
J a Ma Ma
J a Ma Ma
3.
0.
05
1.
25
4.000
60
Maturity
(in years)
Source: Standard & Poor’s Leveraged Commentary and Data
Source: Bloomberg
Average First- and Second-Lien Secondary Spread
(Index of 15 Largest Issuers with Both Tranches)
Market Dynamics
L+ 4800
• Greater demand for higher-yielding debt securities has driven yields
First-Lien
L+ 4000
Second-Lien
downward
• The re-pricing of credits, in conjunction with amendments and
L+ 3200
extensions, has resulted in higher yields and, therefore, higher loan
L+ 2400
values
• A resurgence in the high-yield market has resulted in the repayment
L+ 1600
of leveraged loans, creating additional liquidity
L+ 800
l-0
9
Ju
-0
9
ay
M
9
ar
-0
9
M
n0
Ja
08
ov
N
p08
Se
l-0
8
Ju
-0
8
ay
M
8
ar
-0
8
M
n0
Ja
07
ov
N
p07
Se
Ju
l-0
7
L+ 000
Source: Standard & Poor’s Leveraged Commentary and Data (as of 4/23/2009)
3
BDC Performance
And the price per share of most BDCs is on the rise, as BV/share begins to stabilize . . .
Market Dynamics
Last 18 Months of BDC Price per Share and BV/Share
$17.00
• Lincoln created an index to monitor the price per share and book
value per share of the eleven largest business development
$14.00
corporations (“BDCs”) (market cap over $180 million)
• Since December 2007, while the BV/share of each BDC has
$11.00
deteriorated 34.4%, the average price per share of Lincoln’s BDC
$8.00
index has decreased by 63.7%
Price per Share
• Recently, the price per share index has begun to improve, and the
BV/Share
$5.00
gap between price per share and BV/share has narrowed
• Signs of returned strength to BDCs indicate potential for additional
6/
15
/2
00
9
3/
31
/2
00
9
12
/3
1/
20
08
9/
30
/2
00
8
markets
6/
30
/2
00
8
liquidity and improved conditions throughout the broader financing
3/
31
/2
00
8
12
/3
1/
20
07
$2.00
Source: Capital IQ
Last 18 Months of BDC Price per Share and BV/Share
12/31/2007
x
BV/Share
12/31/2008
Price per Share
x
BV/Share
3/31/2009
Price per Share
x
BV/Share
6/15/2009
Price per Share
x
Business Development Corporation
Price per Share
Ares Capital Corporation
Allied Capital Corporation
American Capital, Ltd.
Apollo Investment Corporation
BlackRock Kelso Capital
Compass Diversified Holdings
Hercules Technology Growth Capital, Inc.
KKR Financial Holdings
MCG Capital Corporation
MVC Capital
Prospect Capital
$
14.63
21.50
32.96
17.05
15.28
14.90
12.42
14.05
11.59
16.14
13.05
$
15.47
17.54
32.88
17.71
13.78
13.73
12.31
14.35
12.73
15.21
14.58
$
6.33
2.69
3.24
9.31
9.86
11.25
7.92
1.58
0.71
10.97
11.97
$
11.27
9.62
15.41
9.87
9.23
14.73
11.56
4.43
8.66
17.36
14.43
$
4.84
1.59
1.87
3.48
4.19
8.92
5.00
0.88
1.28
8.41
8.52
$
11.20
7.67
12.32
9.82
9.04
13.61
10.94
4.59
8.02
17.28
14.19
$
7.79
3.31
4.28
6.90
6.81
8.18
8.04
1.09
2.50
8.39
9.34
$
BV/Share
11.20
7.67
12.32
9.82
9.04
13.61
10.94
4.59
8.02
16.84
14.19
Average
$
16.69
$
16.39
$
6.89
$
11.51
$
4.45
$
10.79
$
6.06
$
10.75
Source: Capital IQ
4
Loan Volumes and M&A Activity – Waiting to Recover
However, loan volumes and M&A activity remain anemic . . .
Total Middle Market Loan Volume ($ in billions)
(Issuers with EBITDA of Less Than $50 million)
Global New-Issue Leveraged Loan Volume ($ in billions)
$900
$762.0
$750
$650.5
$600
$448.1
$450
$340.2
$300
$256.0
$264.0
$238.3
$201.1
$233.9
$218.8
$177.2
$150
$58.0
$12.5
1Q
09
1Q
08
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
19
98
$0
Source: Standard & Poor’s Leveraged Commentary and Data
Source: Standard & Poor’s Leveraged Commentary and Data
Market Dynamics
Middle Market M&A Transaction Volume (Rolling TTM)
2,500
$180
• The recent stagnation in loan volume and M&A activity is due to a
$170
2,250
combination of:
– The underwriting standards of lenders still providing capital have
Number of Transactions
– Lack of visibility into many borrowers’ future performance
2,108
2,047
2,000
$160
2,107
$150
2,001
1,997
1,900
1,752
1,750
1,799 1,797
1,758
$140
1,910
1,845
1,806
1,811
$130
1,761
$120
1,666
1,625
1,561
1,602
$110
1,508
1,500
$100
remained very tight
$90
1,279
1,250
$80
1,039
$70
-09
-08
1Q
-08
4Q
-08
3Q
-08
2Q
-07
1Q
-07
4Q
-07
3Q
-07
2Q
-06
Number of Deals
1Q
-06
4Q
-06
3Q
-06
2Q
-05
1Q
-05
4Q
-05
3Q
-05
2Q
-04
1Q
-04
4Q
-04
3Q
-04
2Q
-03
1Q
4Q
3Q
-03
$60
-03
1,000
2Q
– Mismatch of buyer and seller expectations
Transaction Value in Billions
– Continued poor economic conditions
2,139
2,168
Transaction Value
Source: Factset Mergerstat
Note: Transaction Values between $10 million and $250 million
5
Credit Quality – The Great Indicator
Despite the improvement in the technical aspects of the market, the fundamentals remain weak . . .
Percentage of Issuers with Outstandings in Payment
Default or Bankruptcy
U.S. Speculative-Grade Default Rate and 12-Month
Forward Forecast
15.0%
15.0%
10.0%
8.9%
8.6%
8.0%
7.3%
6.3%
5.3%
12.0%
5.0%
3.1%
1.3%
1.8% 2.3%
1.9%
1.2%
YE
19
98
YE
19
99
YE
20
00
YE
20
01
YE
20
02
YE
20
03
YE
20
04
YE
20
05
YE
20
06
YE
20
07
YE
20
08
6/
5/
20
09
0.0%
Market Dynamics
• Defaults have been rising and are expected to continue to increase
Default Rates
Source: Standard & Poor’s Leveraged Commentary and Data
9.0%
6.0%
throughout 2009
• Increase in defaults delayed by:
– Covenant-light transactions
3.0%
– Use of equity cures
– PIK toggle provisions
• According to LCD, EBITDA is down by an average of 15% vs. last
leverage ratios
• Significant increase in restructuring activity is anticipated
0.0%
Ju
l-8
3
Ja
n84
Ja
n86
Ja
n88
Ja
n90
Ja
n91
Ja
n93
Ja
n95
Ja
n97
Ja
n99
Ja
n01
Ja
n02
Ja
n04
Ja
n06
Ja
n08
Ja
n10
year; the reduction in EBITDA has resulted in an increase to total
U.S. Speculative-Grade Default Rate
Default Rate Forecast
Recession Bars
Source: Standard & Poor’s Ratings Direct
6
Increase in Amendment Activity
The deepening economic slump has sparked increased amendment activity
Dynamics of Amendment Activity
Leveraged Loan Market Monthly Amendments
• As of June 16, 2009, there have been 192 amendments that have
70
66
been approved vs. 54 during the same period last year
65
62
YTD Approved Amendments
2008
2009
% Change
60
54
192
256%
55
• The economic recession has resulted in a steady increase in the
number of defaults. Lenders have been able to improve their position
49
50
44
45
by providing amendments and forbearance agreements for existing
40
credits
• Recent amendment activity has shown the following dynamics:
–
Amendment Fees: On average, issuers paid 48 basis points
35
33
29
30
27
of amendment fees in May, down from 60 basis points in
25
1Q09
–
Rate Increases: Raising rates are typically the highest
21
20
19
20
17
priority for lenders who provide amendments; the average
15
15
spread increase in May was 191 basis points, down from 204
basis points in 1Q09 and 202 basis points in 4Q08
–
Reduction in line: 1Q08 through 2Q09 have shown more
12
5
5
five months of 2009 have required borrowers make a
paydown to the amount outstanding
1
8
6
4
3
5
4
2
3
5
4
2
1 1
5
6
2 2
0
Au
g06
O
ct
-0
6
D
ec
-0
6
Fe
b07
Ap
r-0
7
Ju
n07
Au
g07
O
ct
-0
7
D
ec
-0
7
Fe
b08
Ap
r-0
8
Ju
n08
Au
g08
O
ct
-0
8
D
ec
-0
8
Fe
bTh
09
ro
Ap
ug
h
r-0
6/
15 9
/2
00
9
Paydowns: Approximately 10% of amendments over the first
10
9
10
amendments requiring a reduction in line commitments
–
14
Source: Standard & Poor’s Leveraged Commentary and Data
7
Transition of Debt Capital Availability – “The Credit Bubble”
Between 2004 and early 2007, the capital markets introduced new forms of debt financing and
competition resulted in higher multiples, lower pricing and more flexible terms
Limited Sources of Debt Financing Available Prior to 2004
Revolver
Libor +
275
Term
Loan
Subordinated Preferred
Notes
Stock
Libor +
325
22%
Common
Equity
27%
30%
Increased Sources of Debt Financing and Competition by 2007
Traditional Banks
Finance
Companies
Revolver
Term Loans
Libor +
250
Libor +
350
BDCs
Hedge Funds
Insurance
Companies
Mezzanine
Funds
Private Equity
Funds
Last Out Tranche
Second
Enterprise Value
Rate Only
Sub Debt Preferred
Senior
B
Lien Loans Second Lien Loans Sub Debt W/ Warrants Stock
Libor +
400 - 900
15 - 17%
17 - 19%
21 - 25%
Common
Equity
25%+
8
Current Market Liquidity
For about the past year and one half, there has been a continual reduction in both the number of
lenders and the types of securities available
Current Landscape of Debt Financing
Traditional Banks
Revolver1
Libor +
Finance
Companies
Term Loans1
Last Out
Senior
BDCs
Hedge Funds
Tranche
B
Second
Lien Loans
Libor +
550 - 650 (Cash Flow)
600 - 700 (Cash Flow)
300 - 400 (ABL)
350 - 450 (ABL)
Insurance
Companies
Rate Only
Sub Debt
Mezzanine
Funds
Private Equity
Funds
Traditional Preferred
Sub Debt2
Stock
Common
Equity
16 - 20%
20 - 25%+
18 - 23%
1.) LIBOR floor typically established for revolver and term loans; 300 – 350 basis point floor for cash
flow loans and 200 – 250 basis point floor for asset-based loans
2.) Traditional sub-debt must include warrants or co-investment
• Continued decline in the number of active senior and second lien lenders
• Capital providers that remain are gravitating towards larger companies
• Senior debt with minimal amortization (Tranche B loans), as well as second lien loans and rate only subordinated debt, are rarely available
• Landscape gravitating back to conditions similar to those pre-“Credit Bubble”
9
Financing Sources – Current Landscape
Money Center Banks
Regional Banks
• Primarily focused on large
credits of higher quality (BB
and above)
• New issue activity remains
sparse
• Any lending to the middle
market is primarily assetbased
• Recently retrenched from
middle market lending
• Raising capital to shore up
their own balance sheet
issues
• Any lending done by
regional banks is primarily
asset-based
BDCs
• Trading under book value, restricting
ability to raise new capital
Commercial Finance
Companies
• Many have exited or
retrenched from the
market
• The few that remain are
seeing heavy deal flow
• Many are focused on
larger companies and top
tier sponsors
Hedge Funds
• Facing issues related to broader
capital markets, forcing some to exit
the financing market
• Those who remain have gravitated
towards larger deals, providing better
returns
• Continue to be opportunistic and very
yield-focused
CLO Vehicles
• CLO vehicles continue to
be capital constrained
• While some equity may
be available, obtaining
leverage is problematic
• Primarily recycling
existing capital
Mezzanine Funds
• Funding source remains constant
• Pricing has moved upwards
• Usually now require warrants or coinvest opportunities
• Proliferation of deal flow resulting in
more selectivity
Active lenders are seeing significant deal flow and have increased underwriting standards
10
Sources of Capital – A Changing Environment
While many traditional cash flow senior lenders have exited the market, senior asset-based
lending has increased in popularity
Most Active Pro Rata Investors
(Lenders that Made Ten or More Primary Commitments)
Asset-based Lending as a Percentage of All Leveraged
Loans
120
60.0%
110
53.5%
98
100
42.7%
81
80
80
40.0%
72
66
58
60
60
~54%
decline
52
49
20.4% 20.9%
20.0%
40
34
36
33
28
9.4%
7.1%
5.4%
5.3%
20
09
/2
0
4/
23
Th
ro
u
gh
1Q
09
08
20
07
20
06
20
05
20
05
20
20
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
-
04
0.0%
Source: Standard & Poor’s Leveraged Commentary and Data
Source: Standard & Poor’s Leveraged Commentary and Data
11
Senior Lenders – A Changing Landscape
Decreasing availability of senior debt has driven senior leverage downwards and pricing upwards
Average Senior Debt Multiples of LBO Middle Market Loans
5x
Average Institutional Spreads of Middle Market Loans
(Issuers with EBITDA of Less Than $50 million)
L+700
4.7x
L+600
L+600
4.0x
4x
3.5x
3.7x
3.7x
3.4x
3.4x
3.6x
3.4x
3.1x
3x
3.1x
3.0x
L+499
L+500
3.5x
L+438
3.3x
3.0x
L+400
2.9x
2.8x
L+360 L+371
L+428
L+400 L+415
L+396
L+367
L+330
L+344
L+303
L+300
L+281
2.1x
2x
L+200
L+100
1x
L+000
0.0x
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
08
1Q
08
2Q
08
3Q
08
4Q
tim
09
08
08
19
1Q
4Q
08
07
07
07
07
08
3Q
2Q
1Q
4Q
3Q
2Q
1Q
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
0x
Source: Standard & Poor’s Leveraged Commentary and Data
Note: Data on Average Senior Debt Multiples is not available for 1Q09 due to lack of market activity
LI
e
at
20
09
Es
Source: Standard & Poor’s Leveraged Commentary and Data
Market Dynamics
• Senior cash flow lending for companies with under $10 million of EBITDA is extremely limited
• Cash flow loans are limited to companies with strong fundamentals that are perceived to be recession resistant
• Currently there are no underwritten deals in the market
• “Club” deals are more the norm, with hold sizes rarely exceeding $20-$25 million and often in the $10-$15 million range
• Due to the decline in financial performance in 4Q08, lenders are now less focused on TTM performance and more focused on the last six months or
2009 run rate
• Senior lenders are increasingly focused on the “agency” role when deciding whether to participate in a transaction
• Increased amortization now required – focus on fixed charge coverage
• Any changes to the existing agreements (i.e., forbearance agreements, amendments, waivers) are resulting in a re-pricing of the outstanding loans
12
Asset-based Lending – A Market Re-emerging
Asset-based lending has been established as an attractive funding alternative
for companies with appropriate collateral
Asset-based Lending Market Dynamics
Funding Availability
• Liquidity exists in this traditional structure provided an issuer has a
Asset-based Spreads vs. BB/BB- All-in Institutional Spreads
600
Asset Based
All-in Institutional
500
significant base of assets
• However, asset-based lenders are becoming more conservative and
focused on company fundamentals
Relative Cost Advantages
• Pricing has increased in tandem with the broader credit markets;
400
300
200
100
however, it remains lower than cash flow loans by approximately 200
• Closing fees are increasing as negotiating leverage has returned to
the lending community
0
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
Th
4Q
ro
08
ug
h
1
4/ Q0
23 9
/2
00
9
- 250 bps
Not a Universal Remedy
Source: Standard & Poor’s Leveraged Commentary and Data
• Not available for service businesses or companies with little base of
Note: Data on Asset-based Spreads is not available for 1Q09 and 2Q09 due to lack of market activity
hard assets
• Increased reporting requirements
Reliability of Appraisals
• In light of the recent economic downturn, asset-based lenders have
begun questioning the reliability of asset appraisals and, as a result,
Typical Asset-based Formulas
• Accounts Receivable: 80% - 85%
• Inventory: 50% - 60%
are reducing the amount of term loans they are prepared to provide
• Real Estate: 60% - 70% of FMV
borrowers
• Machinery and Equipment: 80% - 90% of OLV
13
Second Lien Loans – Middle Market
Second lien loans relying on collateral may be a junior capital alternative when paired with
ABL first lien loans
Second Lien Quarterly Volume in the Total Market
($ in billions)
Second Lien Loans as a Percentage of Mid-Market Volume
25%
$16
$14.0
$14
$11.2
20%
17.7%
$12
$10.2
$10
15%
$8
$5.8
8.7%
5.3%
$2.4 $2.2
$1.3
5%
$0.9 $0.8
$0.0 $0.3
1.6%
1.7%
0.9%
$0
0.6%
0.6%
0.0%
20
02
20
01
20
00
19
99
19
98
19
97
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
0%
Source: Standard & Poor’s Leveraged Commentary and Data
Source: Standard & Poor’s Leveraged Commentary and Data
Market Dynamics
Second Lien Pricing
• Due to inter-creditor issues, second lien loans are no longer paired
20
08
$2.5
$1.8
20
07
$2.7
20
06
$3.1
9.2%
10%
20
05
$2
$5.7 $5.6
$4.1
$3.9
20
04
$4.4
20
03
$6
$4
12.8%
11.5%
$6.8
L+1200
with senior cash flow loans; however, opportunities are still available
L+1033
L+1069
L+1050
when matched with asset-based loans
• Market conditions have once again begun to resemble the
L+893
L+900
L+729
environment in which second lien loans originated
– Asset-based lenders are becoming more conservative, leaving
L+750
L+720
L+664 L+667
L+603 L+583
L+600
L+654
L+640 L+559 L+572 L+661
L+513
more collateral value for second lien lenders
08
4Q
08
3Q
08
07
08
2Q
1Q
4Q
07
3Q
07
07
2Q
1Q
20
06
20
05
20
04
20
03
20
02
L+300
20
01
security
L+450
20
00
– Higher priced sub-debt leaves the door open for an additional
Source: Standard & Poor’s Leveraged Commentary and Data
14
Mezzanine Debt – Growing in Popularity
Mezzanine debt has become all but essential in completing any kind of financing
Sub Debt as a Percentage of Total Leverage
(Issuers with EBITDA of Less than $50 million)
Average Total Debt Multiples of Middle Market LBOs
7x
2007
6.2x
2008
6.0x
5.6x
6x
4.7x
5.1x
4.8x
5x
4.7x 4.7x
4.7x
4.2x
4.1x
4.0x
Sub Debt
4.3%
4.5x
3.9x
4.1x
Sub Debt
12.2%
3.8x
4x
3.4x
2.6x
3x
2x
1x
All Other
Debt
95.7%
0x
97
19
98
19
99
19
00
20
01
20
FLD/EBITDA
02
20
03
20
04
20
SLD/EBITDA
05
20
06
20
07
07
1Q
2Q
07
3Q
Other Sr Debt/EBITDA
07
08
4Q
1Q
08
08
2Q
3Q
08
4Q
09
1Q
All Other
Debt
87.8%
Mezzanine/EBITDA
Source: Standard & Poor’s Leveraged Commentary and Data
Source: Standard & Poor’s Leveraged Commentary and Data
Note: Data on Average Total Debt Multiples is not available for 1Q09 due to lack of market activity
Market Dynamics
• Mezzanine debt is now being used more frequently to:
Mezzanine Pricing
• Cash coupons of 12% - 14%
– Support LBO transactions due to reduced levels of senior debt
• PIK rates of 2% - 4%
– De-leverage companies that have excess senior debt
• Closing fees of 2% - 4%
– Perform dividend recapitalizations to replace failed M&A sale
• All-in yields of 16% - 20%
processes
• Warrants are increasingly required; co-investments are becoming
less of an alternative to warrants
• Pre-payment penalties are increasingly stringent and make-whole
provisions are becoming more prevalent
15
Mezzanine Financing – A Changing Landscape
Leverage and pricing have tightened over the past three years
Overview of Transaction Terms (2007 – 2009)
2007
2008
2009
Average Cash Coupon
11.8%
12.1%
12.3%
Average PIK
2.5%
2.4%
3.0%
Average Fee
1.9%
2.3%
2.3%
6.2 years
6.1 years
5.8 years
Average Leverage (through Mezzanine)
4.0x
3.5x
3.6x
Average Equity Ownership
7.2%
9.0%
10.1%
% of Transactions with Warrants
37.5%
43.6%
55.2%
% of Transactions with Warrants or Equity Buy-In
77.3%
86.2%
84.6%
Average IRR
18.0%
18.9%
19.6%
Five-Year Treasury
4.5%
2.5%
1.9%
Average Spread
13.5%
16.4%
17.7%
Category
Average Maturity
Source: PNC Mezzanine Capital 2009 Mezzanine Market Survey
16
Private Equity Funds – Tightened Liquidity
The global credit crunch has even impacted private equity groups
U.S.-Based Fundraising by Quarter
Fund Sizes through April, 2008 and 2009
$60
$120
$56.2
(Dollars in Billions)
(Dollars in Billions)
$50
$90
$40
$60
$30
$22.3
$16.4
$20
$30
$6.2
$10
$2.6 $2.6
$2.6 $1.1 $0.8
Q1
Q2
Q3
Q4
Source: Reuters’ Buyouts
Buyouts/Corporate Finance
Fund of Funds
Other Private Equity
20
09
20
08
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
$0
20
01
20
00
$0
$1.4
Venture Capital
Mezzanine
Source: Dow Jones Private Equity Analyst
Market Dynamics
• After years of robust fund raising, private equity groups are finding LPs reluctant to commit additional capital to the sector; as a result, private equity
groups are having trouble raising new funds
• Private equity groups are also encountering issues in deploying capital:
– The “denominator” effect is causing some limited partners to back away from funding their original commitments – an unprecedented event
– Many groups have found that difficulty in finding leverage makes traditional investing problematic
– A trend has developed towards more creative investing that offsets leverage issues; an example of this is minority investments
17
LBO Middle Market Activity
Current conditions in the leveraged loan market are influencing M&A activity
Market Dynamics
• Overall M&A activity has slowed significantly
Average Purchase Price and Equity Contribution
(Issuers with EBITDA of Less Than $50 million)
12.0x
9.3x
8.5x
9.0x
7.5x
• Equity as a percentage of total capitalization is at an all time high
7.1x
6.9x
8.3x
7.2x
7.0x
6.7x
8.1x
5.9x
6.0x
• Financial buyers are having to commit higher levels of equity with a
view of refinancing when credit markets recover
3.0x
gap:
– Seller notes
– Earn outs
09
1Q
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
19
98
19
99
.0x
• The following have become useful methods of bridging the financing
Senior Debt/EBITDA
Mezzanine/EBITDA
Equity/EBITDA
Others
Source: Factset Mergerstat; Note: Transaction Values between $10 million and $250 million
Note: Data on Purchase Price and Equity Contribution is not available for 1Q09 due to lack of market activity
Average Equity Contribution by Sponsors of LBO Loans
– Purchasing less than 100% of the company
45%
– Minority equity investments
40%
35%
30%
25%
1Q
09
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
19
97
20%
Source: Standard & Poor’s Leveraged Commentary and Data
Note: Data on Purchase Price and Equity Contribution is not available for 1Q09 due to lack of market activity
18
Leveraged Loan Markets - Conclusion
Current and forthcoming market conditions call for specific keys to complete a financing
Predictions and Key Take Aways
Predictions for Market Dynamics in 2Q – 4Q
of 2009
•
Overview of financing sources for 2Q – 4Q 2009
– An increased dependence on asset-based
loans
– Minimal near-term return of cash flow
lending
– The potential return of second lien loans
(resembling more classic Second Liens)
– A continued dependence upon mezzanine
financing
•
A surge in amendment activity as covenants
begin to tighten in later years
•
A decrease in recoveries
•
Private equity groups may start getting impatient
sitting on the sidelines
•
Sellers may have to adjust to a new reality
Keys to a Successful Financing
•
Need to conduct broad process of contacting
financing sources
•
Must have relationship with an experienced deal
champion within the lending organization to
ensure reliable and timely feedback on the
transaction
•
Propose an appropriate capital structure that
meets market expectations
– In today’s market this means maximizing
ABL and subordinated debt financing
sources
•
Expect longer, more time-consuming process
with increased due diligence
19