Harry Sugiarto, CFA Managing Director, ICG...Confidential & Trade Secret 3 European senior secured...

European senior secured loans: A portfolio contextHarry Sugiarto, CFA – Managing Director, ICG

June 2019

Biography

16 years in credit investing

Multi-credit portfolio manager

CFA charterholder

3Confidential & Trade Secret

European senior secured loans: A portfolio context

Comparing European high yield to loans: The value of diversification

Diversification by name

Diversification by sector

The long-term risk & return profile of European senior secured loans

A cross-asset class perspective

Comparing private equity to senior secured loans: First loss vs Last loss

Evaluating risks in European senior secured loans today

Putting cov-lite in perspective

Diversification benefits

European high yield has become a mainstream credit allocation

Europe: Size of European high yield market1

Index value (€ billion)

Note:

1. Source: ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.


European loans & high yield: Market development

0

50

100

150

200

250

300

350

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

European high yield market (ICE BAML HY ex-financials)

European loans are a less common allocation, but similar size

Europe: Size of high yield and loan markets1

Index value (€ billion)

Note:

1. Source: Credit Suisse, Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and

definition of the indices are provided in the index disclaimer in the Notes section.


European loans & high yield: Market development

0

100

200

300

400

500

600

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

European loan market (CS WELLI) European high yield market (ICE BAML HY ex-financials)

Low overlap between European loan & HY issuer pools

European loan & high yield indices: Ticker overlap (indices at 30 September 2018)

Note:

1. Source: Credit Suisse, ICE Bank of America Merrill Lynch. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and definition of the

indices are provided in the index disclaimer in the Notes section.


European loans & high yield: Diversification benefits

35246 310

High yield

only tickers

Loan only

tickers

Common

tickers

Uneven sector distribution between European loans & HY

European loan & high yield indices: Sector distribution (common classification: CS), % index weight

Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data at 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and




0

10

20

30

40

50

60

70

80

90

100

HY Loans

UTILITY

TRANSPORTATION

SERVICE

RETAIL

METALS/MINERALS

MEDIA/TELECOM

MANUFACTURING

INFORMATION TECHNOLOGY

HOUSING

HEALTHCARE

GAMING/LEISURE

FOREST PROD/CONTAINERS

FOOD/TOBACCO

FOOD AND DRUG

FINANCIAL

ENERGY

CONSUMER NON-DURABLES

CONSUMER DURABLES

CHEMICALS

AEROSPACE

European loan & high yield indices: Sector distribution (common methodology), % index weight

Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and




11.9

3.1

0

10

20

30

40

50

60

70

80

90

100

HY Loans

UTILITY

TRANSPORTATION

SERVICE

RETAIL

METALS/MINERALS

MEDIA/TELECOM

MANUFACTURING

INFORMATION TECHNOLOGY

HOUSING

HEALTHCARE

GAMING/LEISURE

FOREST PROD/CONTAINERS

FOOD/TOBACCO

FOOD AND DRUG

FINANCIAL

ENERGY

CONSUMER NON-DURABLES

CONSUMER DURABLES

CHEMICALS

AEROSPACE

Default risks often cluster in a single sector

2018 European high yield index returns by sector

Source: ICE Bank of America Merrill Lynch (HPID).


European loans & high yield: Diversification benefitsSignificant sector dispersion within 2018 high yield returns

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Au

tom

otiv

e

Bas

ic In

du

stry

Cap

ital G

oo

ds

Co

ns

um

er G

oo

ds

En

erg

y

Hea

lthc

are

Le

isu

re

Me

dia

Rea

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tate

Reta

il

Se

rvic

es

Te

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y &

Ele

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Te

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om

mu

nic

atio

ns

Tra

nsp

orta

tion

Utility

Security & seniority value across credit

1. Source: S&P LCD, December 2018.

2. Source: Moody’s Corporate Default & Recovery Rates, February 2018.


European loans & high yield: Risk mitigation

Global Average Corporate Debt Recovery Rates Measured by Ultimate Recoveries (%)2

0%

20%

40%

60%

80%

100%

Loans Sr. SecuredBonds

Sr. UnsecuredBonds

SubordinatedBonds

1987-2017

Illustrative LBO capital structure 1

Equity 47.80%

First lien 4.8x

Second lien & other debt 0.6x

Long-term risk & return profile

European loans & high yield: Risk & returnA cross-asset perspective: Standalone efficiency

Returns versus volatility across asset classes (5 years, USD Hedged)

Source: European Loans – CS WELLI. European HY - ICE BAML HEAG. EUR Gvmt – Euro 1-10yr index, E5AS. EUR IG – Euro investment grade non-financials index, EN00. US Loans – CS LLI. US HY – ICE BAML HCNF.

US IG – US Investment grade non-financials, CF0X. US Treasuries – 7-10yr index, G0Q0. 3M US Libor – US0003M. Emerging Market Debt – EM Euro Corporate index, EMEB. Stoxx 600 – SXXHUN. S&P 500 – SPXT.

Global Aggregate – Bloomberg Barclays Global Aggregate – LEGATRUH.

See index disclaimer in at the end of the presentation. Data as at 31 May 2019.


European HY

US HY

European Loans

US Loans

US Treasuries (7-10yrs)

Stoxx 600

S&P 500

Global Agg

EUR IG US IG

EUR Gvmt (1-10yrs)

Emerging Market Debt

3M US Libor

0%

2%

4%

6%

8%

10%

0% 2% 4% 6% 8% 10% 12%

Returns

Standard deviation

European loan index returns more tightly distributed

1. Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail

and definition of the indices are provided in the index disclaimer in the Notes section.


European loans & high yield: Risk & return

3

5

13

22

10

5

21

15

38

5

1

0

10

20

30

40

-5,-4 -4,-3 -3,-2 -2,-1 -1,-0 0,+1 +1,+2 +2,+3 +3,+4

HPID (European HY) CS WELLI (European loans)

Distribution of monthly index returns (EUR hedged), May 2014 - April 2019 (60 observations)

Fundamental & technical drivers of return distribution


European loans & high yield: Risk & return

Fundamental drivers

• Interest rates

• Floating vs fixed

• Default & Recovery outcomes

• Secured vs unsecured

• Sector distribution

• Geography

• Sponsorship

• Private equity vs corporate vs family-owned

Technical drivers

• Investor base & fund flows

• UCITS eligibility

• CLO creation

European loans & high yield: Risk & returnA cross market perspective: provision of yield

Yield versus rating by asset class

BAAA

Source: ICE BAML, Credit Suisse, Bloomberg, S&P ratings, 31 March 2019. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.


5-year Bund

10-year Bund

5-year BTP (Italy)

5-year Bonos (Spain)

BAML Euro corp IG ABAML Euro corp IG BBB

BAML Euro corp HY BB

CS WELLI loan index

BAML Euro corp HY B

-1%

0%

1%

2%

3%

4%

5%

6%

European loans & Private equity relationshipPE-owned companies dominate European loan issuance

European senior secured loan issuance: Sponsored (Private equity) vs non-sponsored

Notes

1. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

Source: S&P ratings, 31 March 2019.


90% 91% 88%84%

80%85% 86% 84% 87% 89%

85% 85%

76%71% 71% 73%

77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Not Sponsored Sponsored

High overlap between European loan & PE investee pools

Source: ICG


European loans & Private equity relationship

High yield Loans

Private equity

Strong flows into private equity funds

Private equity dry powder: All buyout funds globally, USDbn

Source: Prequin, December 2018


European loans & private equity relationship

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Is it consistent to be positive on PE & negative on loans?


European loans & private equity relationship

Se

nio

r se

cu

red

loa

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qu

ity

Se

nio

r se

cu

red

loa

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qu

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Se

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cu

red

loa

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Se

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r se

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red

loa

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Se

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r se

cu

red

loa

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Se

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red

loa

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Se

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red

loa

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0-50% Enterprise value

Target return 4-6%

“Last loss”

50-100% Enterprise value

Target return 15+%

“First loss”

Source: ICG

This metric gets a lot of focus today

Cov-lite % of institutional loan issuance in Europe

Source: S&P LCD, December 2018



7%0%

9%

21%

36%

51%

62%

76%

87%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008-2011 2012 2013 2014 2015 2016 2017 2018

Only one of many important metrics in credit

Example risk factors when making a credit call



Source: ICG

Loan-to-value significantly lower now than pre-crisis

Equity as a percentage of total sources in European LBOs

Source: S&P LCD, December 2018



32.7% 32.9% 32.5%

42.1%

45.4%

46.9%

44.2%

47.7%

42.4%41.2%

41.7%

48.6%

44.2%

47.8%

20%

25%

30%

35%

40%

45%

50%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Putting cov-lite in perspectiveWill recovery rates improve or deteriorate versus history?

Comparison of new issue loan metrics: 2007 & 2018

Source: Moody’s, S&P LCD, Prequin. 31 March 2019.* Recovery % is 1987-2017 Moody’s global average


2007 2018

Cov-lite % 7% 87%

Proforma Leverage (xEBITDA), primary 6.0x 5.4x

Proforma EBITDA / Int. cover, primary 2.5x 4.2x

Equity, % of EV, primary 32.5% 47.8%

Global PE buyout dry powder $438bn $694bn

New issue TLB/C loan spread 265 376

Recovery % 80* ?

Index Disclaimer:

HEAG: Bank of America Merrill Lynch BB-B Euro high yield non-financial fixed & floating rate constrained index. CS WELLI: Credit Suisse western leveraged loan index all denominations. CS LLI: Credit

Suisse US leveraged loan index. S&P ELLI: Standard & Poor’s European leveraged loans index. HEAD: BAML Euro non-financial high yield constrained index. HCNF: BAML US non-financial constrained.

H0EN: BAML US HY energy index. HE20: BAML single-B Euro HY index. EN00: BAML Euro non-financial index (IG corporate). CF0X: BAML US non-financial index (IG corporate). EG04: BAML 7-10 year

Euro government index. G9O2: BAML 10+ year US Treasury index. Barclays Global Agg: Barclays Global Aggregate US investment grade bond index. SPXT: S&P500 total return index. SXXGR: Stoxx 600

gross return index.

The returns for the indices are being provided for comparison purposes only and the comparisons do not mean that there necessarily will be a correlation between the returns of the fund, on the one hand, and

the indices, on the other hand. The indices have not been selected to represent an appropriate benchmark against which to compare the fund’s performance; but, rather, is disclosed to allow for comparison

of the fund’s performance to that of these well-known and widely recognized indices. The returns of the fund may differ from the indices in that, among other reasons, the fund is actively managed and may

use leverage. The indices are not available for direct investment, are unmanaged and are not subject to fees and expenses, including transaction costs, typically associated with the management of loan

accounts. In addition, the fund’s holdings will likely differ significantly from the securities that comprise the indices and the differences may be material. Past results are not necessarily indicative of future

results and no representation is made that results similar to those shown can be achieved.

Benchmarks used in these materials are broad-based indices which are used for comparative purposes only and have been selected as they are well known and easily recognizable by investors.

Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from this transaction. For example, investments made by the Issuer may

differ significantly in terms of security holdings, industry weightings and asset allocation from those of the benchmark. Accordingly, investment results and the volatility of the strategy in respect of this

transaction may differ from those of the benchmark. Also, the indices noted in this presentation are unmanaged, are not available for direct investment, and are not subject to management fees, transaction

costs or other types of expenses that the Issuer may incur. In addition, the performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore investors

should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. No party involved in or related to compiling, computing or creating the index data

makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of

originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data.

Notes


This document is being provided to you by the subsidiaries or affiliates of Intermediate Capital Group Plc (“ICG”, and together with their respective directors, officers,

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Disclaimer

Confidential & Trade Secret27

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Harry Sugiarto, CFA Managing Director, ICG...Confidential & Trade Secret 3 European senior secured...

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