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Testimony Before the ABI Chapter 11 Reform Commission. Field Hearing 17 th Annual LSTA Conference New York October 17, 2012. Ted Basta SVP, Analysis and Data The Loan Syndications and Trading Association (LSTA). The Size and Importance of the Leveraged Loan and High Yield Bond Markets.

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testimony before the abi chapter 11 reform commission

Testimony Before the ABI Chapter 11 Reform Commission

Field Hearing

17th Annual LSTA Conference

New York

October 17, 2012

Ted Basta

SVP, Analysis and Data

The Loan Syndications and Trading Association (LSTA)

leveraged loans and high yield bonds represent more than 6 of u s fixed income assets
Leveraged Loans and High Yield Bonds RepresentMore than 6% of U.S. Fixed Income Assets

Leveraged Loans 3%

High Yield Bonds 3%

Asset Backed 5%

High Grade Bonds 18%

Mortgage-Related 23%

Total Size of Fixed Income Market $38 Trillion

slide4

In 2001 the Wall Street Journal Began Covering the Leveraged Loan Market - Today the Leveraged Loan Market Provides Funding to Almost 1,500 Individual Companies

Source: Wall Street Journal

slide5

There is More Than $1.5 Trillion in Total Leveraged Debt Outstanding (HY Bonds & Institutional Loans) - With an Estimated $2.7 Trillion Traded Annually by Year-End 2012

Leveraged Debt Outstanding

Leveraged Debt Secondary Trading Volume

Source: Thomson Reuters & LSTA Trade Data Study

Source: S&P Capital IQ LCD

slide6
Since 2010, The Leveraged Loan and High Yield Bond MarketsHave Provided Corporate Borrowers With $1.7 Trillion in Funding

Source: S&P Capital IQ LCD

slide7

Senior Secured Loans sit Atop the Capital Structure and

Offer Corporate America a Private and Cheaper Source of Funding

Senior Secured Loans

High

  • Primary Market Yields for B-Rated Unsecured Bonds and Institutional Loans

High Yield Bonds

Convertible Securities

Payment Seniority

Preferred Stock

Common Stock

Low

Source: S&P Capital IQ LCD

slide8
The Last Three Default Cycles (1,000 Corporate Defaults)Illustrate the Significance of Capital Structure
  • Leveraged loans are typically the most senior debt in a company’s capital structure and often have first-lien claim to the company’s assets in the event of bankruptcy.

Historical US Spec. Grade Default Rate

Average Recoveries in Three Default Cycles

Source: Moody’s Investor Services

slide9
The Distribution of Recoveries Over the Past Two Years AcrossBoth Markets Illustrates the Importance of Senior Security

Source: Fitch Ratings

slide10
As the Leveraged Loan and HY Unsecured Bond Markets Seized upin 2009, the Secured Bond Market Became a Major Source of Funding

Source: S&P Capital IQ LCD

the leveraged loan market

The LeveragedLoan Market

Liquidity and the Lender Base

slide12
Over the Past 12 Years, The Primary Source of LeveragedLending has Been the Institutional Lender Base

Source: S&P Capital IQ LCD

slide13
Secondary Trading Liquidity Levels Remained MostlyConstant Before, During and After the US Recession

Source: S&P/LSTA LLI & LSTA Trade Data Study

Source: S&P Capital IQ LCD

slide14
The Secondary Leveraged Loan Market Allows Managersto Actively Trade in Order to Shift Around Risk Allocation

Source: LSTA Trade Data Study

Source: S&P/LSTA LLI & LSTA/TR LPC MTM

as market conditions change so does the lender base for leveraged loans
As Market Conditions Change so Doesthe Lender Base for Leveraged Loans

Share of Non-Bank Leveraged Primary Lending

Source: S&P Capital IQ LCD

hedge dis hy funds are critical in the effective and efficient transfer of risk
Hedge, Dis. & HY Funds are Critical in theEffective and Efficient Transfer of Risk

Source: S&P Capital IQ LCD & LSTA/TR LPC MTM Pricing

slide18

Idearc (Orig. Deal Size = $6.5B) & Masonite (Orig. Deal Size = $1.5B) Filed For Bankruptcy in March 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened

Source: LSTA Trade Data Study & LSTA/TR LPC MTM

slide19

Chrysler Corp. (Orig. Deal Size = $9.5B) & General Growth Prop.(Orig. Deal Size = $2B) Filed For Bankruptcy in April 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened

Source: LSTA Trade Data Study & LSTA/TR LPC MTM

slide20

Delphi Automotive Corporation Filed for Bankruptcy October, 2005~Hedge Funds Recapitalize the Companyto Allow it to Re-Organize Despite Heavy Volatility

Completed its Post-Re-Org

IPO on 11/11 at $22

Filed for Bankruptcy 10/05

Hedge Funds

Recap Company

Source: LSTA/TR LPC MTM

debtor in possession dip f inancing

Debtor-In-Possession (DIP) Financing

Liquidity and Performance

slide22

The LSTA Has Tracked 56 Companies That Have Accessed the DIP Market Since 2006, Providing Them With the Liquidity Needed to Operate and Restructure While in Bankruptcy~Only 2 Companies Liquidated

dip lending is critical to the preservation and subsequent appreciation of enterprise value
DIP Lending is Critical to the Preservationand Subsequent Appreciation of Enterprise Value

Source: LSTA Trade Data Study & LSTA/TR LPC MTM