THANH XUAN ORGANIC VEGETABLE COOPERATIVE Vietnam Farmers’ Union - VNFU.
2009 Farmers Cooperative Conference Credit Markets Update November 9, 2009
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Transcript of 2009 Farmers Cooperative Conference Credit Markets Update November 9, 2009
2009 Farmers Cooperative Conference
Credit Markets UpdateNovember 9, 2009
2
Debt Market Overview
Economy emerging from recession, but
Expectation for low-growth economic recovery
Strong recent rally in equity markets, relatively strong quarterly earnings
Sidelined cash looking for risk beyond US Treasuries
Leveraged finance (loans and bonds) rallying as well YTD net HY bond inflows of $15.6 billion, highest since 2003 Bond market adding technical support to loan market through deal refinancing Secondary market trading spreads have narrowed off of unprecedented high levels at
beginning of the year but still remain very high for any market cycle Dispersion of spreads for any given credit profile very wide, lack of market consensus
on pricing
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Debt Market Overview
Loan market still somewhat sluggish due to on-going problems of banks
Consumer lending portfolios tied to deteriorating unemployment fundamentals Commercial real estate portfolios also deteriorating now Corporate loan demand is off as well as companies are slashing cap-x
budgets Corporate defaults are on the rise Very large debt maturities over next five years
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Percent of Leveraged Loans in Payment Default or Bankruptcy
0.0%1.0%1.0%
11.3%
3.7%
0.6%
1.9%
3.6%
7.4%
10.0%
4.0%
9.9%
7.0%
2.6%
0%
3%
6%
9%
12%
15%
YE1996
YE1997
YE1998
YE1999
YE2000
YE2001
YE2002
YE2003
YE2004
YE2005
YE2006
YE2007
YE2008
10/16
/200
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As of
5
High Yield Bond and Lev. Loan Maturities
0
50
100
150
200
250
300
350
2009 2010 2011 2012 2013 2014 2015 2016
Institutional Loans High Yield Bonds
($billions)
66
Loan Spreads Over LIBOR for BB/BB-
6
Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of BB/BB- Loans
L+100
L+200
L+300
L+400
L+500
L+600
Pro Rata Institutional
77
Loan Spreads Over LIBOR for B+/B
7
Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of B+/B Loans
L+150
L+250
L+350
L+450
L+550
Pro Rata Institutional
88
Middle Market Spreads (Cash Flow < $50MM)
8
L+200
L+300
L+400
L+500
L+600
Institutional
Pro Rata
99
Secondary Market Trading Spreads By Rating
9
L+0L+200L+400L+600L+800
L+1000L+1200L+1400L+1600L+1800L+2000L+2200L+2400L+2600L+2800L+3000L+3200
B Loans
All BB/B Loans
BB Loans
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Deal Structure Trends
Lower leverage, higher equity levels required
Tighter covenants and security packages More asset-based financing Borrowing bases
Shorter maturity loans
Very few dividend recapitalization deals
Original-issue discounts, higher up-front fees
Libor floors often set at 2 to 2.5%
More rigorous excess cash flow sweeps
1111
Average Debt to Cash Flow Multiples
11
8.8
7.16.7
5.35.0 5.1 5.3 5.2
5.8 5.65.2
4.54.0
3.7 3.8 3.94.2 4.3 4.4
4.9
3.84.3
3.63.9
3.1
4.1 3.93.6 3.6 3.5
4.1 3.94.3 4.4
3.7 3.73.5 3.6
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
1987198
8198
9199
0199
2199
3199
4199
5199
6199
7199
8199
9200
0200
1200
2200
3200
4200
5200
6200
7200
81Q08
2Q083Q08
4Q08
Oct-08
Nov-08
Dec-0
8
Jan-
09
Feb-09
Mar-
09
Apr-09
May
-09
Jun-0
9Ju
l-09
Aug-09
Sep-09
ME 10
/22/09
FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA
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Food and Beverage Company Credit Stats
0.0x
2.0x
4.0x
6.0x
Debt/EBITDA Senior Debt/EBITDA EBITDA/Cash Interest EBITDA - Capex/CashInterest
2000 (26) 2001 (22) 2002 (29) 2003 (38) 2004 (41) 2005 (28)
2006 (39) 2007 (22) 2008 (17) 1Q-3Q09 (9)
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Credit Crisis Impact on Agribusiness
Financing liquidity and working capital
Volatile grain, petroleum and fertilizer prices
Impact on agricultural futures prices
Financial investors’ positive long term view Funds flow related volatility: hedge funds, commodity index funds and ETFs Commodities as a low correlation asset class
Deflation bad for commodities, inflation good
How long will deflation last?
Fiscal and monetary stimulation vs. recession and deleveraging
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Investor Focus and Managing Bank Groups
Credit risk
Liquidity requirements and sources Leverage, debt service coverage Asset quality and collateral
Risk management
More disclosure, due-diligence questioning Hedging policies and procedures
• Written policies that are updated regularly
• Board approved policies
• Hedging performance, earnings/cash flow volatility
15
Investor Focus and Managing Bank Groups
Communication
More updates with bank groups Improved forecasting models, compliance reporting Many companies making the effort to visit their key banking relationships Understanding the credit underwriting process
Loyalty in awarding non-lending business
Balance best product providers with largest financial commitments Many banks are demanding about “other business” before committing their
balance sheets
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Investor Segments
Commercial banks
Supportive of top tier relationships Reconsidering desired business lines, markets, industries, corporate
relationships Distracted by mergers and comprehensive restructuring events Focused on
• Credit quality and risk
• Conservative structures: shorter tenors, tighter covenants, cash flow sweeps, hedging requirements, borrowing bases, and security packages
• Loan purpose important
• Higher loan spreads and fees, OID discounts, Libor floors
• Ancillary business
Some banks implementing capital allocation committees in addition to credit committees as second level of relationship evaluation
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17
Investor Segments
Insurance companies
Private placement market following recovery of public bond market Selectively returning to the investment grade market Sub-investment grade market (NAIC 3 and below) effectively non-existent Only very small allocations for floating rate market
CLOs
Enjoying strong technical factors (loans converting to bonds), loan repayment net inflows Loan funding costs still very high Some fund merger/consolidation and liquidation
Hedge funds and private equity firms
More stable now Deleveraging at slower pace Shifting emphasis to bankruptcy, restructuring, advisory, and distressed trading Merger and acquisition activity slowly returning
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Farm Credit System
Generally FCS institutions have strong capitalization ratios
Relatively clean loan portfolios with historically high credit statistics going into the credit crisis
Relatively strong GSE funding source
Virtually all buy-side participants open for new business
Most buy-side groups have annual asset growth objectives of mid to upper single digits
Some credit stress in dairy, ethanol, protein, and building products sectors
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Farm Credit System
High degree of familiarity with all the agribusiness segments
Long term dedication to the industry (commit and hold investors)
Flexible to fund a broad range of credit profiles
Longer tenors and customized, one-off structures
Large, early FCS commitments add significant “industry-savvy” momentum to the deal
Quick response time, localized decision making
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Investor Selection Criteria
Industry expertise: experience with specific agribusiness segments and commodities
Comfort with financing commodity cycles
Consistent underwriting standards and market presence
Regional presence, relationship with producers/members
Investor relationship with borrower and CoBank
Voting history on amendments/waivers
Unique structures, quick response time
Capacity: generally have view that the fewer the investors the better
21
Credit Market Outlook
Global Unwinding of Leverage
Banks, hedge funds, private equity, and consumers, all in process of unwinding leverage
Rapid unwinding of leverage associated with the structured finance (securitization) industry
Government sector taking on new debt, risk of crowding-out of private sector Derivative exposure concentrations still unknown
Commercial/investment banks likely to remain under extreme pressure through 2009 and likely into 2010
Higher minimum capital requirements for all financial institutions likely Need to raise more capital, who will provide it? Rethinking risk management models Substantial internal restructuring and deleveraging How will regulatory environment change?
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Credit Market Outlook
Fundamentals of real estate and consumer credit problems likely to have a long tail and tied to unemployment dynamics and deleveraging
Lender perspective that the economy is poised for recovery. But will it be a jobless recovery?
Expectation of higher credit losses in many segments
Credit spreads likely to tighten from current levels as economy continues to recover but refinancing calendar likely to put floor on spreads
Multiple levels of uncertainty: global economy, role of government (ownership), credit availability, dollar value, financial strength of institutions/counterparties, derivative exposure concentrations, risk management (model) risks, regulatory changes, etc.
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