Capital Structure Matters - Milken Institute...Liquidity freeze: spread between 3-month LIBOR and...
Transcript of Capital Structure Matters - Milken Institute...Liquidity freeze: spread between 3-month LIBOR and...
Dan
Hesse
Dan
HesseMike
Milken
Mike Milken
Marc Rowan
Marc Rowan
Scott Sperling
Scott Sperling
Capital Structure MattersCapital Structure Matters
Randall Wooster
Randall Wooster
U.S. corporate bond issuance started to catch up in recent quarters
United States
$156$136
$154 $141
$202$182 $169
$222$260 $268
$172 $177 $175
$265
$71
$170
$259
0
50
100
150
200
250
300
2005 2006 2007 2008 2009
Quarterly corporate bond issuance, US$ billions
Sources: Dealogic, Milken Institute.
Companies worldwide raised $900 billion in Q1 2009 through corporate bond issuance
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US$ trillions 2009: annualized based on Q1 data
Sources: Dealogic, Milken Institute.
U.S. companies raised $316 billion worldwide
in Q1 2009 through corporate bond issuance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US$ trillions 2009: annualized based on Q1 data
Distressed bonds
Daily, January 17, 2008–April 16, 2009
0
500
1000
1500
2000
2500
3000
01/2008 04/2008 07/2008 10/2008 01/2009 04/2009
Number of distressed bonds traded during the day
Distressed is defined as any bond that trades at 1,000 bps or more over the benchmark treasury.
March 13, 2009: 2,674
Sources:
Bloomberg, Milken Institute.
Liquidity freeze: spread between 3-month LIBOR and overnight index swap
rate Daily, July 1, 2007—March 31, 2009
0
50
100
150
200
250
300
350
400
07/2007 09/2007 11/2007 01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009 03/2009
Average since December 2001: 31 bps
October 10, 2008: 364 bps
Basis points
Average since July 2007: 94 bps
Sources: Bloomberg, Milken Institute.
TED Spread reached historical high in 2008
Daily, December 31, 2005—March 31, 2009
Sources: Bloomberg, Milken Institute.
050
100150200250300350400450500
12/2005 12/2006 12/2007 12/2008
Historical high before 2008November 1987: 255 bps
August 20, 2007: 240 bps
Average since 2005: 93 bps
Average since August 2007: 146 bps
Basis pointsOctober 10, 2008: 463.6 bps
Aug. 16, 2007: Countrywide takes emergency loan of $11 billion from a group of banks.
Sept. 16, 2008: Fed rescues AIG for $85 billion.
Sources: Federal Reserve, Moody’s Economy.com, Milken Institute.
Commercial paper issuance dries up
-300-250-200-150-100
-500
50100150
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Issuers of asset-backed securities
Other issuers
Quarterly change in outstanding amount, US$ billions
Global IPO market froze in first quarter 2009
Source: Dealogic.
8 24 315
83
299
256
174137
515988
209163
105107105747568
0
50
100
150
200
250
300
350
1990 1994 1998 2002 2006
Amount raised, US$ billions
* 2009 number is annualized.
2009*
Does low price-earning ratio imply great investment opportunity?
Monthly, January 1954–March 2009
0
5
10
15
20
25
30
35
1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Price-earning ratio for S&P 500 index
June 1999: 29.7x
March 2009: 11.8x
April 1980: 7.0x
Average since 1954: 16.4x
Sources: Bloomberg, Milken Institute.
Costly stock buybacks
Selected companies, 2006-2008
Shares repurchased in 2006, 2007 and
2008 (millions)
Average purchase
price (US$)
Total paid (US$ billions)
Stock price on March 15, 2009
(US$)
Loss to stockholders (US$ billions)
General Electrics 785 36.09 28.3 10.13 20.4Disney 544 31.90 17.4 17.70 7.7
Home Depot 492 36.51 18.0 22.44 6.9Macy's 148 39.42 5.8 8.76 4.5Alcoa 113 35.24 4.0 6.40 3.3Sears 39 115.82 4.5 40.09 2.9Yahoo 123 28.05 3.4 13.74 1.8
Nordstrom 51 42.32 2.2 15.26 1.4Altria 54 21.81 1.2 16.69 0.3
Sources: Companies’
financial reports, Milken Institute.
S&P 500 companies spent $1.4 trillion on stock buybacks and dividends in 2007 and 2008
0
100
200
300
400
500
600
700
1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
200
400
600800
1000
1200
1400
1600
Stock buybacks (left axis)
Dividends (left axis)
S&P 500 index (year-end level, right axis)
US$ billions S&P 500 composite index
Sources:
S&P, Milken Institute.
Companies leveraged up in the past 30 years
Sources: Bloomberg, Milken Institute.
0.0
1.5
3.0
4.5
6.0
7.5
9.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Asset-to-equity ratio for Dow Jones industrial average component companies
Companies leveraged up in the past 30 years
Sources: Bloomberg, Milken Institute.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
LT debt-to-equity ratio for Dow Jones industrial average component companies
Companies rely more on short-term financing
Sources: Bloomberg, Milken Institute.
0.0
0.2
0.4
0.6
0.8
1.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Long-term debt-to-total debt ratio for Dow Jones industrial average component companies
Banks lend less, while businesses and individuals draw upon existing credit lines Quarterly, Q1 2000–Q4 2008
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007 20080
100
200
300
400
500
600US$ trillions US$ billions
Unused loan commitments (right axis)Change from Q1 2008 to Q4 2008: -11%
Total loans and leases (left axis)Change from Q1 2008 to Q4 2008: -21%
Sources: Moody’s Economy.com, FDIC, Milken Institute.
Declining leverage at all U.S. commercial banks
89
101112131415161718
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Percent
Sources: FDIC.
Leverage ratios of selected financial firms December 2008
9.3
10.6
11.1
31.6
26.2
21.5
67.9
0 10 20 30 40 50 60 70 80
Credit unions
Commercial banks
Saving institutions
Brokers/hedge funds
Federal Home Loan Banks
Fannie Mae
Freddie Mac
Leverage ratio, total assets/common equity
Note: Leverage ratios for
Freddie Mac and Fannie Mae are as of June 2008. The two institutions have negative common equities as of December 2008.Sources: FDIC, FHL Banks Office of Finance, National Credit Union Administration, Freddie Mac, Fannie Mae, Milken Institute.
(June 2008)
(June 2008)(June 2008)
Savings institutions
Too much dependence on debt?
Leverage ratios at biggest investment banks
2219
28 26
18
31
19
2724 23
33 32 3431
13
33 34
2422
13
0
5
10
15
20
25
30
35
40
Morgan Stanley Merrill Lynch Bear Stearns Lehman Brothers Goldman Sachs
2000 2005 2007 2008
Total assets/total shareholder equity
March 2008
June 2008
Sources: Bloomberg, Milken Institute.
Marc RowanCo-Founding Partner Apollo
Capital Structure Matters!
•
Leverage Levels Depend on Stability of Cashflow–
Cable vs. semiconductor cash flow•
Liquidity–
Short term vs. long term•
Maturity –
Required refinance “during”
or “after”
a business cycle•
Bank Debt vs. Bonds –
“Pro-rata”
provisions vs. freely available •
Flexibility–
PIK Toggle / Equity Cures / Second Lien Capability–
Covenant vs. “Covenant Light”
Large LBOs
2005–2007Original Mark to Market
LBO Date TEV Purchase Multiple Equity DebtCurrent Equity
Current Debt
TXU 10/01/07 $43.5 10.2x $8.5 $35.0 n/a $20.3HCA 07/24/06 33.1 7.6x 4.8 28.3 n/a 24.8Harrah’s 01/25/08 30.0 10.4x 6.1 23.9 n/a 12.2First Data 09/24/07 29.0 12.0x 5.6 23.4 n/a 16.1Hilton 10/24/07 26.9 16.4x 5.6 21.3 n/a 10.7Clear Channel 07/30/08 26.7 10.7x 3.2 23.5 n/a 9.9Alliance Boots 06/27/07 24.5 12.8x 7.6 16.8 n/a 11.4Freescale
Semiconductor 12/04/06 19.7 8.4x 8.2 11.5 n/a 5.2Intelsat 02/04/08 16.4 9.7x 1.5 14.9 n/a 13.2Univision 03/29/07 14.0 17.2x 4.0 10.0 n/a 5.3SunGard Data Systems 08/11/05 11.8 10.0x 3.9 7.9 n/a 7.2Nielsen 03/08/06 11.0 11.4x 3.4 7.6 n/a 6.4Dollar General 07/06/07 7.5 11.4x 2.8 4.7 n/a 4.5US Foodservice 06/26/07 7.3 12.7x 2.2 5.1 n/a 3.9Servicemaster 07/24/07 5.7 12.0x 1.4 4.3 n/a 2.8
$307.1 11.5x $68.9 $238.1 ? $153.9Average Equity % = 24.9% Average S&P Decline Since LBO Avg. Close = -43.7%Note: Totals may not add due to rounding. Current debt as of 4/17/09
Capital Structures Are Not Fixed
•
Exchange Offers
•
Amendments/modifications
•
Asset Swaps
•
Restructuring In/Out of Court
Maturity Waves
$1,388 $1,807 $2,557 $6,101
$48,644 $52,191
$17,752 $12,754 $5,310
$69,369
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Aggregated Maturities of Large –
LBOs
2005–2007
Weighted Average Maturities of Large LBOs
2005–2007
20092010201120122013201420152016
Hilton HCANielsen
FreescaleSunGard
Univision
Servicemaster
US Foodservice
Clear ChannelFirst Data TXU
Dollar General
Alliance BootsIntelsat
Harrah's
0%
20%
40%
60%
80%
100%
Univision
Allianc
e Boots
Clear Cha
nnel
Nielsen
Freesca
le
Service
Master
Sunga
rdTXU
US Foods
ervice
Dollar G
enera
lFirs
t DataHCA
Harrah's
Hilton
Intels
atBank Debt vs. Bonds
Average
56%% o
f Tot
al D
ebt
Bank Debt
Bonds
0%
20%
40%
60%
80%
100%
Dollar G
enera
lSun
gard
Intels
atHCA
Nielsen
US Foods
ervice
First D
ata
Allianc
e Boots
Service
Master TXU
Univision
Harrah's
Hilton
Freesca
le
Clear Cha
nnel
Average
65%
% o
f Par
Current market valueas of 4/17/09
Opportunity to capture discount
Mark-to-Market Discount
Surviving Market Downturns
Headlines
Performance Reality
“Buyout Deals Take a Hit During Debt Woes”
11%3%
-3%
Upper Medium Lower
“Even the Smartest Money Can Slip Up”
The New York TimesDecember 2001
“Market Volatility Derails LBOS”
High Yield ReportDecember 2000
Buyouts January 2001
1998 Vintage IRRs
Source:
Venture Economics Vintage Year Performance as of 12/31/08. Represents all private equity funds. Returns are net of fees and expenses.
Randy Wooster slides
Randy WoosterCo-FounderImperial Capital Group
Capital structure opportunities in today’s market environment
Debt repurchase
•
Deleveraging/ increase of shareholders equity
•
Reduce interest expense
•
Stimulus plan tax benefits
•
Best bid in an illiquid market
Corporate acquisitions
•
Distressed debt creates purchase at significant discounts
•
Debt for asset swaps
•
Avoid 13D disclosures
Off balance sheet
•
Completion guarantees
•
Trade claims
Source: Imperial Capital.
Expertise in legal and regulatory process
Legal Regulatory
•
Deep understanding of the entire capital structure
•
Structured to avoid characterization as tender or exchange
•
Use of “Big Boy”
letters
•
Pure debt repurchases are less burdensome than equity buy backs–Not on an exchange–Not subject to price/volume restrictions
•
Regulation FD –
Disclosure of material non-public information in private negotiations
Source: Imperial Capital.
The “Imperial”
model
Back Office•
Experienced settlement team
•
Bank of New York clearing agent
Capital Markets•
Comprehensive understanding of current pricing environment
•
Significant experience in developing strategy based on current market conditions
Research, Sales & Trading•
Daily contact with over 1,200 institutions
•
Reputation for discreet execution
•
Open market purchase expertiseInvestment Banking
•
Leverage corporate relationships across Sales & Trading platforms
•
Expertise in M&A financings and Restructuring
•
Significant Industry experience
Client
Source: Imperial Capital.
American Greetings Case Study
•
Exclusive financial advisor to American Greetings in its $140 million acquisition of Recycled Paper Greetings (RPG), completed in February 2009
•
Imperial identified the opportunity to gain control of RPG through the purchase of bank debt and proposed the transaction to American Greetings management
•
Imperial’s Sales and Trading Group created a market for RPG’s bank debt and executed anonymous purchases of its 1st Lien Term Loan through a holding company on
behalf of American Greetings
•
American Greetings ultimately acquired 54% of the 1st Term Loan at an average price of 67% of face value
•
Imperial’s Investment Banking Group then leveraged American Greeting’s position as creditor to negotiate a consensual transaction with RPG and remaining creditors
•
American Greetings acquired RPG through a pre-packaged Chapter 11 reorganization process endorsed by RPG’s secured creditors
•
The Chapter 11 reorganization is expected to provide meaningful tax benefits compared to alternative acquisition structures
Source: Imperial Capital.
The model In practice
Back Office•
Assisted Investment Banking in creating SPV to acquire securities
•
Settled transaction in timely manner
•
Coordinated settlement with counsel
Capital Markets•
Used proprietary “Imperial”
database which identified capital structure opportunity\
•
Communicated opportunity to company management
Research, Sales & Trading•
Maintained database for pricing distressed private securities•
Identified holders of securities•
Discretely contacted potential sellers•
Discussed with Management appropriate levels
to bid for securities•
Executed trade at proper priceInvestment Banking
•
Advised Company Management and board to optimal structure and approach
•
Worked with Back Office to form “Special Purpose Vehicle (SPV)”
to acquire securities in a discrete manner
•
Advised Company on pre-packaged chapter 11 process
Source: Imperial Capital.
Scott Sperling
slides
Scott Sperling
6.3x 6.1x6.5x
7.1x 7.4x8.2x
8.6x
9.8x 9.5x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
2000 2001 2002 2003 2004 2005 2006 2007 2008
LBO Purchase Price Multiple
Source: S&P Q1 2009 Leveraged Buyout Review
TEV / LTM EBITDA(Average of Issuers with EBITDA greater than $50 million)
4.2x 4.1x 4.0x
4.6x4.8x
5.3x 5.4x
6.2x
4.9x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: S&P Q1 2009 Leveraged Buyout Review
Total Debt / LTM EBITDA(Average of Issuers with EBITDA greater than $50 million)
Leverage Multiple
(excludes Media and Telecom loans)
50%43%
37% 38%44%
52% 55% 57%46%
14%19%
22% 23%23%
15% 10% 6%
9%
34% 38% 39% 36%32% 31% 33% 36%
43%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Senior Debt Sub Debt Equity Other
3.2x 2.6x 2.4x 2.7x 3.2x4.3x 4.7x
5.6x4.4x
0.9x1.1x 1.4x
1.6x1.7x
1.2x 0.9x0.6x
0.8x2.2x 2.3x 2.5x
2.6x2.3x
2.6x 2.9x
3.5x4.1x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
2000 2001 2002 2003 2004 2005 2006 2007 2008
Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Other
Purchase Price Breakdown
Source: S&P Q1 2009 Leveraged Buyout Review
Multiple of LTM EBITDA % Contribution
US Business Debt
US Business Debt Outstanding US Business Debt Outstanding / GDP
Source: Federal Reserve, US Bureau of Economic Analysis
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Nonfinancial Business Debt Financial Business Debt
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Nonfinancial Business Debt Financial Business Debt
($ billions) (%)
US Household Debt
US Household Debt Outstanding
Source: Federal Reserve, US Bureau of Economic Analysis
US Household Debt Outstanding / GDP
($ billions)
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mortgage Debt Consumer Debt Other Household Debt
0%
20%
40%
60%
80%
100%
120%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mortgage Debt Consumer Debt Other Household Debt
(%)
SocietySociety
Econ
omy
Econ
omy
Industry
Industry
Capital
MarketsCapital
Markets
RegulationRegulation
CompanyCompany
Fallacy:“Any loan to real estate is a good loan … ”
Fallacy:“Any loan to real estate is a good loan … ”
19901990
The latest run-up of home prices
was extraordinary
The latest run-up of home prices
was extraordinary
Sources: Robert Shiller, Milken Institute (Annualized growth rate of nominal home index: 3.4%)
18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010
WWIWWI WWIIWWIIGreat
Depression
Great
Depression70’s
Boom
70’s
Boom80’s
Boom
80’s
Boom
Latest
Boom
Latest
Boom250250
200200
150150
100100
5050
Index: 2000 = 100
Long-term
trend line
Long-term
trend line
19901990
Home prices don’t go up forever
Change in home prices in 100-plus years
Home prices don’t go up forever
Change in home prices in 100-plus years
Sources: Robert Shiller, Milken Institute.
18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010
WWIWWI WWIIWWIIGreat
Depression
Great
Depression70’s
Boom
70’s
Boom80’s
Boom
80’s
BoomLatest
Boom
Latest
Boom30%30%
20%20%
10%10%
0%0%
-10%-10%
-20%-20%
First RepublicBank CorporationFirst RepublicBank Corporation
Most Texas Banks were AAA in the 1980sMost Texas Banks were AAA in the 1980s
The prices of residential estate in Houston (in real terms) declined 40% from 1983-1988.
-
OFEHO Housing Index / FRB study
The prices of residential estate in Houston (in real terms) declined 40% from 1983-1988.
-
OFEHO Housing Index / FRB study
Foreclosures in HoustonForeclosures in Houston
30,00030,000
20,00020,000
19801980
10,00010,000
1,0001,00019861986 19921992
Source: Harris County Foreclosure Listing ServiceSource: Harris County Foreclosure Listing Service
Annual U.S. Bank Failures 1979-2007Annual U.S. Bank Failures 1979-2007
Source: FDIC
200200
150150
100100
5050
19801980 19851985 19901990 19951995 20002000 20052005
The Mortgage Problem in PerspectiveThe Mortgage Problem in Perspective
80 million houses80 million houses25 million (31%) are paid off25 million (31%) are paid off
55 million have mortgages 55 million have mortgages 49 million (89%) are paying on time49 million (89%) are paying on time
6 million are behind6 million are behind(11% of 55 million with 3% in foreclosure)(11% of 55 million with 3% in foreclosure)
Sources: U.S. Treasury, Milken Institute / 4-23-09
The Mortgage Problem in PerspectiveThe Mortgage Problem in Perspective
(9.2% of 53 million with 2.8% in foreclosure)(9.2% of 53 million with 2.8% in foreclosure)
This compares to 50%
seriously delinquent in
the 1930s.
80 million houses80 million houses
55 million have mortgages 55 million have mortgages 49 million (89%) are paying on time49 million (89%) are paying on time
6 million are behind6 million are behind
Sources: U.S. Treasury, Milken Institute / 4-23-09
25 million (31%) are paid off25 million (31%) are paid off
•
Microsoft•
ADP•
Exxon-Mobil•
Johnson &
Johnson
•
Microsoft•
ADP•
Exxon-Mobil•
Johnson &
Johnson
AAA-rated Industrial Companies
in the U.S.
AAA-rated Industrial Companies
in the U.S.
AAA
16,907AA+
240AA
2,098AA-
3,414A 2,602A-
2,027BBB+
903BBB
1,371BBB-
1,359
AAA
16,907AA+
240AA
2,098AA-
3,414A 2,602A-
2,027BBB+
903BBB
1,371BBB-
1,359
BB+
238BB
313BB-
331B+
339B
330B-
1,189CCC+
293CCC
214CCC-
104CC
36C 11
BB+
238BB
313BB-
331B+
339B
330B-
1,189CCC+
293CCC
214CCC-
104CC
36C 11
Investment-Grade SecuritiesInvestment-Grade Securities Non-investment Grade SecuritiesNon-investment Grade Securities
Source: Bloomberg 11/6/08
Standard &
Poor’s Ratings
New Issues: 1/1/2000 to 9/30/2008
Standard &
Poor’s Ratings
New Issues: 1/1/2000 to 9/30/2008
2%BB-Unrated3%BBB4%A11%AA80%AAA
1%Unrated1%BBB2%A3%AA5%Junior AAA88%Senior AAA
Mortgage bondsMortgage bonds
Mortgage loansMortgage loans
High-grade structured-finance CDOHigh-grade structured-finance CDO
4%Unrated6%BBB6%A8%AA14%Junior AAA62%Senior AAA
2%Unrated3%BBB3%A4%AA27%Junior AAA60%Senior AAA
Mezzanine structured-finance CDOMezzanine structured-finance CDO CDO-SquaredCDO-Squared
Source: International Monetary Fund.
When is a AAA not a AAA?When is a AAA not a AAA?
Secondary Market Prices of Third-World Debt
Secondary Market Prices of Third-World Debt
2020
3030
4040
5050
6060
7070
8080
100100
19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989
Cents on the dollarCents on the dollar
U.S. Lending to Third-World Countries
At Face Value
U.S. Lending to Third-World Countries
At Face Value
$700$700
$900$900
$1,100$1,100
$1,300$1,300
$1,500$1,500
19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989
$ billions$ billions