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CORE Track Session Credit Market Update: Is the Thaw Real?

CORE Track Session Credit Market Update: Is the Thaw Real?. Wednesday, March 23, 7:45 – 8:30 a.m. Sponsored by William Blair & Company and BDO. Credit Market Update: Is the Thaw Real?. Moderator: Mark Cordes , Audax Group Panel: Juan E. Alva, Fifth Street Finance

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CORE Track Session Credit Market Update: Is the Thaw Real?

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  1. CORE Track Session Credit Market Update: Is the Thaw Real? Wednesday, March 23, 7:45 – 8:30 a.m.Sponsored by William Blair & Company and BDO

  2. Credit Market Update: Is the Thaw Real? Moderator: Mark Cordes, Audax Group Panel: Juan E. Alva, Fifth Street Finance Tom Klimmeck, Madison Capital Partners Charles F. Riceman, Golub Capital Brian Harrer, U.S. Bank Sponsored by:

  3. Private Equity Outlook Deals and Capital Invested, 2005 - 2010 Source: PitchBook

  4. Private Equity Outlook Quarterly Deals and Capital Invested, 2007 – 2011 Q1 Source: PitchBook

  5. Private Equity Outlook PE Backed Companies by Vintage, 2000 - 2010 Source: PitchBook

  6. Private Equity Outlook PE Exits, 2000 - 2010 Source: PitchBook

  7. Private Equity Outlook PE Backed Companies, 2004 - 2010 Source: PitchBook

  8. Loan Market Update Middle Market Loan Volume, 2004 - 2010 Market Loan Volumes – New Issues • Increased volume driven by: (i) economic recovery; (ii) tax driven M&A activity; and (iii) increased liquidity • Refinancings (32% share) and dividend recaps (20%) were largest use of proceeds • LBO’s in ‘10 represented 16% of volume vs. 49% in ‘07 • Healthcare is largest industry segment at 12% share, up from 10% in ‘07 • Computer/electronics, chemicals and food/beverage were biggest share gainers in ‘10 vs. ‘07 • Services/leasing, utilities, printing/publishing, and oil/gas were biggest share losers in ‘10 vs. ‘07 Middle Market Sponsored Volume Source: Standard & Poor’s 4Q10 Review

  9. Loan Market Update 2010 2011 2012 2013 2014 2015 2016 2017 Total Additions New Deals 1.4 1.1 0.4 5.7 20.3 29.0 80.4 22.7 161.0 Facility Increases 0.0 0.0 0.0 0.4 0.7 0.3 0.6 0.0 2.0 Amend/Extend 0.0 0.1 1.3 1.6 3.1 7.7 18.4 11.7 43.8 Subtractions Paydowns 1.9 5.6 17.9 19.0 17.0 3.7 1.9 0.0 67.1 Partial Paydowns 0.5 1.1 6.8 5.9 10.4 2.9 1.4 0.4 29.3 HY Take-outs 0.1 0.9 6.6 16.5 15.3 2.2 0.2 0.8 42.7 Defaults 0.2 0.2 0.6 3.8 3.3 0.7 0.0 0.0 8.9 Amend/Extend 1.6 0.7 5.0 16.5 20.0 0.0 0.0 Distribution of Loan Maturities, 2010 - 2017 Market Loan Volumes – New Issues • Significant progress was made in extending near-term loan maturities in 2010. • In addition to nearly $50 billion of Amend-to-Extend (“A-to-E”) deals, issuers printed more than $114 billion of bond-for-loan takeouts, $43 billion of which repaid loans. • Arrangers expect A-to-E activity to remain strong in 2011 as issuers look to address 2013 / 2014 loan maturities through IPO’s, M&A activity, cash flow or full refinancings. Middle Market Sponsored Volume Loan Maturity Additions and Subtractions, 2010 - 2017 0.0 43.8 As of 12/31/09 3.3 10.5 56.3 124.8 223.4 37.5 13.0 0.0 468.8 As of 12/17/10 0.4 3.2 21.1 70.9 181.4 64.8 108.8 33.3 483.9

  10. Loan Market Update Middle Market Pricing, 2004 - 2010 Primary Spreads for B+/B Credits Vs. New Issue MM Sponsor Deals All-In Cash Coupon (B+/B credits) Source: Standard & Poor's 4Q10 Review, Fannie Mae, Bloomberg and Madison Capital Source: Standard & Poor's 4Q10 Review and Madison Capital *MM Sponsor pricing is primary issuance, tranche weighted, and includes upfront fees amortized over three years.

  11. Loan Market Update Debt Multiples / Equity Contributions Average Leverage Multiples of LBO Loans Deals < $50MM in EBITDA LBO Purchase Multiples & Equity Contributions Deal < $50MM in EBITDA Source: Standard & Poor’s 4Q10 Review

  12. Loan Market Update Institutional Loan Investors • Health of the lending market improved significantly in 2010 • Default rates at < 2%; recovery rates > 60% • Increasing liquidity into the mid-market is being driven by: • Accelerating repayment rates • Improved CLO balance sheets • Improved commercial bank balance sheets • Revitalization of structured products groups within banks • Growing hunger for yield • Optimism continues to build for both large market and mid-market CLO issuance; ~50% of CLO’s reach the end of their investment period by 2012 • “Loan ratings” management remains key issue for mid-market CLO managers • Loan mutual funds are biggest driver of new money into large, liquid market Investor Market Share for Highly Leveraged Issuers < $50 million in EBITDA Source: Standard & Poor’s 4Q10 Review

  13. Coming Up Next . . . • ACG Core Track (Elizabeth G) • 8:45 - 9:30 a.m. Capital Markets Update: From Leverage to IPO • 10:00 – 11:00 a.m. The Sell Side Process: Tactics for a Changing Game • 11:15 a.m. – NoonLower Middle Market Update • 2:00 – 3:00 p.m.Strategies for Add-On Acquisitions • Noon – 1:45 p.m. Lunch & Keynote with General Stanley McChrystal (Ret)Sponsored by Fifth Street Capital (Elizabeth Ballroom)

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