Senior Loan Market Update - LarrainVial

Senior Loan Market Updat

Presented by:Presented by:

Dan NormanManaging Director, Group HeadING Senior Loan [email protected]@inginvestment.com

February 2014

e

I l i l

What are Senior Loans?In general, senior loans are …

Extensions of credit to non-invoriginated by major banksg y j

Issued by mid- to large-sized coother growth initiatives

Senior in the capital structure; sborrower’s assets

Fi t i it b ’ h First priority on borrower’s cash

Collateral typically provides hig

Fl ti t ith t Floating rate with coupon return cover LIBOR or a LIBOR “floor”

Rates reset every 45 - 60 daysy y

Structurally less liquid (longer settlestablished secondary market

Seminario Mercados Globales LarrainVialMarzo de 2014

2

vestment grade corporate borrowers

ompanies to finance acquisitions and

secured by a first priority lien on a

h flh flows

her recoveries

i d f i l dit dcomprised of a nominal credit spread

on averageg

ement times) but actively traded in an

2

Comparison of High Yield

Fl ti t i l Floating rate senior loans provide an alternative to fixed rate investments

Income

Security

Ranking

Investor Type

Senior loans are secured by a first priority lien on the borrower’s assets

Investor Type

Covenants M

Coupon Spread

Senior loans benefit from comprehensive covenants

Prepayment s

Tenor

Size (range)

Recovery rates following default are higher for senior loans compared to high yield

Liquidity A

Information

Recoveries*

loans compared to high yield bonds


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* Ultimate recovery as measured historically by Moody’s Investors Se

Asset Classes

Senior Loans High Yield Bonds Floating Fixed

Secured Unsecured

First priority Subordinated

Institutional asset managers; Institutional asset managers; Banks; CLOs; Hedge funds Hedge funds

Maintenance / comprehensive Incurrence-based; Less restrictive

250 – 600 bps over LIBOR 500 – 750 bps over Treasuries

Generally callable at any time, sometimes have 1 – 2 year call

premiumsUsually 3 – 5 years non-call period

5 – 7 years 7 – 10 years

Max $10+ billion Max $5 billion

Actively traded private market Actively traded public market

Public and private - monthly / quarterly Public - quarterly

80%+ 20% - 65%

3

ervice.

Leveraged Finance Univer

Leveraged Finance New-Issue VolumeLeveraged Finance New-Issue VolumeSource: S&P Capital IQ

2013 ($ billion)

% of Market

YTD 2014($ billion)

% ofMarke

First-Lien Institutional $426.2 54% $63.0 59% Second-lien

institutional $28.9 4% $6.6 6%

Subtotal bank debt $455.0 58% $69.6 65%

Senior secured bonds $64.7 8% $7.9 7% Senior unsecured

bonds $253.6 32% $29.3 27%

Subordinated bonds $7.0 1% $0.7 1%Subordinated bonds $7.0 1% $0.7 1% Subtotal bonds $325.5 42% $37.9 35%

Total $780.3 $107.5


4

rse by Type of Debt

Leveraged Finance Debt OutstandingLeveraged Finance Debt Outstanding

f et 6%

$2.23 trillion total outstanding

Source: S&P Capital IQ

%

%

% 30%

% 50% 1%

%13%

First-Lien Institutional

Second-Lien InstitutionalSecond-Lien Institutional

Senior Secured Notes

Senior Unsecured Notes

Subordinated Notes

4

Senior Loans – Select Issu

Note: The logos on this page are trademarks and service marks belonging to the respective companies shown below


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marks belonging to the respective companies shown below

uers

5

Compelling Investment Thand Why Now?and Why Now?

Attractive yield, even in a continued low interest rate environment

Credit spreads in excess of 10 year average, plus LIBOR “floors”

Strong value relative to other income options

All-in yields competitive with high yield bonds, without the duration risk

Key downside protections

Credit: Significantly lower historical loss rates than unsecured risk

Capital Preservation: Loan demand/prices Capital Preservation: Loan demand/prices positively influenced by rising rates (i.e., the opposite of bonds)

Upside participation in rising ratesUpside participation in rising rates

A unique asset allocation tool

Volatility and return correlations reverting t th


6

to the mean

hesis: Why Senior Loans

Senior Loan vs. HY Bond Yield DifferentialCredit Suisse and HY Bond IndicesJanuary 31, 2000 to January 31, 2014

Source: Credit Suisse, Bloomberg

4%

5%

6%

7%

Average Yield Differential = 2%

-1%

0%

1%

2%

3%

-2%

1%

1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 1/31/12 1/31/13 1/31/14

S C dit S i Bl bFloating Rate vs. Fixed Rate

%

8%

10%

12% Senior Loans

Bonds

Source: Credit Suisse, Bloomberg

0%

2%

4%

6%

6/30/04 10/31/04 2/28/05 6/30/05 10/31/05 2/28/06 6/30/06

S&P/LSTA Leveraged Loan IndexBarclays Capital US Aggregate Bond USD Index

6

Barclays Capital US Aggregate Bond USD IndexFederal Funds Target Rates

Historical 1-Month LIBOR

20De Market interest rates remain well De

below average, with LIBOR near all-time low levels

Low interest rates limit downside 6%

7%

8%

Low interest rates limit downside yield risk of floating rate assets

Opportunity to generate more income as short term rates rise

3%

4%

5%

6%

income as short-term rates rise above LIBOR floors

0%

1%

2%


7

Rate

-Year History of 1-Month LIBORecember 31 1993 to December 31 2013ecember 31, 1993 to December 31, 2013

Source: Bloomberg

h h ( )1‐Month LIBOR 1‐Month LIBOR (20‐Year Average)

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Senior Loan Performance Rates

Floating Rate vs F

Rates

Loans historically Floating Rate vs. FAnnualized Perfor

Loans historically outperform when rates rise

Loans are ultra-Periods of Rising

Rates Loans are ultra-short duration, floating rate assets

Rates

BeginsLasts

(Months)Feb 94 11

Fixed rate bonds are more interest rate sensitive

Feb-94 11

Mar-96 5

Nov-98 19

Jul-03 37 rate sensitive Jul 03 37

Apr-08 3

Nov-10 4

Jun-13 3

Average


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in Periods of Rising

Fixed Rate Asset PerformanceFixed Rate Asset Performancermance During Periods of Rising Interest Rates

Source: ING, Credit Suisse and Barclays Capital

g Interest Annualized ReturnsAnnualized Returns

Change in US 2-Year Treasury

YieldsSenior Loans

Inv. Grade Corp. Bonds

High Yield Bonds

US Govt. Bonds

+312 bps 9 33% 6 27% 3 41% 5 09%+312 bps 9.33% -6.27% -3.41% -5.09%

+61 bps 8.56% -0.51% 5.01% -0.28%

+227 bps 5.17% 0.22% 2.11% 0.68%

+365 bps 6.35% 2.39% 8.73% 1.66%+365 bps 6.35% 2.39% 8.73% 1.66%

+72 bps 18.02% -2.72% 7.23% -7.44%

+28 bps 13.67% -2.22% 13.11% -6.83%

+3 bps 2.24% -10.15% -5.41% -6.49%

+153 bps 9.05% -2.75% 3.91% -3.40%

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Percent of Outstanding Loans wiFloor

350 bps

250 bps

300 bps

150 bps

200 bps

50 bps

100 bps

0 bps

50 bps

Jan-

09Apr

-09

Jul-0

9Oct

-09

Jan-

10Apr

-10

Jul-1

0Oct

-10

Jan-

11Apr

-11

Jul-1

1OctJa Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc

Average LIBOR Floor Perc


9

ith LIBOR Floor and Average Source: S&P Capital IQ

90%

83%

60%

70%

80%

40%

50%

60%

111 bps

20%

30%

ct-1

1Ja

n-12

Apr-1

2Ju

l-12

Oct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct-1

313

-Jan

0%

10%c Ja Ap Ju Oc Ja Ap Ju Oc 13

cent With Floors by Par Amount

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Senior Loan Historical Ret

Prior to 2008, returns had been consistently

S&P/LSTApositive, a hallmark of the loan asset class

2008 and 2009 returns 60%

S&P/LSTAJanuary 1,

2008 and 2009 returns reflect unprecedented technical volatility

2011 returns driven 30%

40%

50%

2011 returns driven largely by renewed technical stress

2013 t t k d t

7.59%

3.65.25%

0%

10%

20%

2013 return tracked to historical average

-30%

-20%

-10%

997

998

999

19 19 19


1

turns

A Index 1: Total Returns by Year51

.62%

A Index 1: Total Returns by Year, 1997 to January 31, 2014


51

5.55%

9.97%

10.13

%

5.29%

6.77%

9.66%

1.52%

2.02%

5.08%

5.17%

.65%

1.91%

4.18%

4.99%

0.65%

-29.10

%

999

000

001

002

003

004

005

006

007

008

009

010

011

012

013

YTD

19 20 20 20 20 20 20 20 20 20 20 20 20 20 20

2014

Y

Total Return Average (ex. 2008-2009)

0

Senior Loan Asset Class Gr

S&P/LSTA Index 1: Par Amount OutstandingJanuary 1, 1997 to January 31, 2014

$700

$800

$500

$600

$700

248$300

$400

135

29

248191

90 11210410155

$100

$200

$0

1997

1998

1999

2000

2001

2002

2003

2004

2005


1

rowth


g ($ Billions)

Sou ce S& Cap ta Q

690685

596

529504

690685

552516

557

400

8820

06

2007

2008

2009

2010

2011

2012

2013 YTD

1

Average Price of Leveraged

S&P/LSTA Index Loan Bid HistoryJanuary 1, 2008 to February 4, 2014

100

90

80

70

S&P/LSTA Levera

60

Jan-0

8Apr-

08Ju

l-08

Oct-08

Jan-0

9Apr-

09Ju

l-09

Oct-09

Jan-1

0Apr-

10Ju

l-10

Oct-10

Jan-1

1A


1

d Loans


100.21

98.58

aged Loan Index Excluding CCC and Below

1Apr-

11Ju

l-11

Oct-11

Jan-1

2Apr-

12Ju

l-12

Oct-12

Jan-1

3Apr-

13Ju

l-13

Oct-13

Jan-1

4

2

Index Par Amount Outsta

S&P/LSTA Index Distribution by Loan FacJanuary 31, 2014

Source:

BBB

CCC+ and Below, 6%

D, 1%

Not Rated, 2%

6%

B, 48%


1

nding by Rating

cility Rating

S&P Capital IQ

B, 6%

BB, 37%

BBBBBBBBCCC+ and BelowDNot RatedNot Rated

3

Index Distribution by PriceS&P/LSTA Index Distribution by Loan Price Hi

January 1, 2008 to December 31, 2013

100%

56% 56%

75%

42%

28

50%

23% 22%25%

0%2008 2009 2010

Less Than 60 60 - 69.9 70 - 79.9


1

eistory


74%

64%

70%

25%8%

25% 24%

9%

2011 2012 2013

80 - 89.9 90 - 99.9 100 or More

4

S&P/LSTA Index Loan Spr

Average Nominal Spreads of Leveraged LoansJanuary 1, 1997 to January 31, 2014January 1, 1997 to January 31, 2014


L+450

L+500

L+350

L+400

L+450

L+435

L+200

L+250

L+300

L+312

Jan-9

7Ja

n-98

Jan-9

9Ja

n-00

Jan-0

1Ja

n-02

Jan-0

3Ja

n-04

Jan-0

5Ja

n-06

Jan-0

7Ja

n-08

Jan-0

9Ja

n-10

Jan-1

1Ja

n-12

Jan-1

3Ja

n-14

Nominal Spread Average Nominal Spread


1

read History

Average Secondary Spreads of Leveraged LoansJanuary 1, 1997 to January 31, 2014January 1, 1997 to January 31, 2014

L+2700


L+1700

L+2200

L+700

L+1200

L+470

L+200

Secondary Spread Average Secondary Spread

L+509

5

Volatility of Various Asset

AvDe Loans continue to experience less DeJan

pvolatility as compared to high yield bonds

In times of increased market 8%

9%

In times of increased market liquidity, loans experienced virtually no volatility

Volatility patterns among the major 3%

4%

5%

6%

7%

Volatility patterns among the major asset classes appear to be normalizing

h d h l

0%

1%

2%

Loans have recaptured the low volatility title Asse

S&P/LS10-yeaStandaStandaMerrill Merrill


1

t Classes

verage 12-month Lagging Standard eviation of Returnseviation of Returnsnuary 1, 2006 to January 31, 2014


S&P/LSTA Leveraged Loan Index Merrill Lynch High Yield Master II Index10-Year Treasuries S&P 500 IndexMerrill Lynch High Grade Corporate Master Index

t Class

Pre-July 2007Post-July

2007Last 12 Months

Change over Period

Average (1997 to date)

STA Leveraged Loan Index (U.S.) 0.5% 2.1% 0.4% -79.5% 1.1%r Treasuries 1.4% 2.3% 2.0% -12.3% 2.1%

ard and Poors 500 Index 4 1% 4 5% 2 8% -38 3% 4 3%

Volatility

ard and Poors 500 Index 4.1% 4.5% 2.8% -38.3% 4.3%Lynch High Grade Corporate Master Index 1.3% 1.6% 1.5% -9.4% 1.4%Lynch High Yield Master II Index 1.9% 2.8% 1.4% -51.5% 2.2%

6

S&P/LSTA Index Default H

LS The Index default rate by principal SD

The Index default rate by principal amount peaked in November 2009

2009 peak exacerbated by small b f l LBO d f l

12%

number of large LBO defaults

Default risk has declined rapidly, but tail risk remains

%

8%

10%

Consensus estimates suggest that principal weighted default rates for 2014 and 2015 will range from 2% 2%

4%

6%

gto 3% 0%

Jan


1

History

Lagging 12-Month Default RateS&P/LSTA U.S. Leveraged Loan IndexS&P/LSTA U.S. Leveraged Loan IndexDecember 31, 1998 to January 31, 2014


%

%

%

%

%

%

%

1.88%3.32%

%n-9

9Ja

n-00

Jan-0

1Ja

n-02

Jan-0

3Ja

n-04

Jan-0

5Ja

n-06

Jan-0

7Ja

n-08

Jan-0

9Ja

n-10

Jan-1

1Ja

n-12

Jan-1

3Ja

n-14

Default Rate by Principal Amount Average Default Rate by Principal AmountDefault Rate by Principal Amount Average Default Rate by Principal Amount

7

Ultimate Recoveries – Loa

AUltimate eco e meas es the AveMea198

Ultimate recovery measures the value creditors realize at the resolution of a default event

Significant value created for secured lenders through the bankruptcy process

60%

70%

80%

90%

Can still understate true ultimate or terminal recovery on senior secured obligations 30%

40%

50%

0%

10%

20%


1

ans vs. Bonds

C t D bt R R terage Corporate Debt Recovery Ratesasured by Time of Default and Ultimate Recovery1

87 to 2012 (Data as of December 31, 2012)Source: Moody’s Investors Service

66.0%

51 6%

80.6%

63.7%

51.6%

37.0%31.5%

48.6%

28.5%

Senior SecuredLoans

Senior SecuredBonds

SeniorUnsecured

SubordinatedBondsLoans Bonds Unsecured

BondsBonds

Time of Default Ultimate Recovery

8

Loan Maturities and Repay

S&P Index Distribution by Year of Maturity2011, 2012 and Current Vintagegas of January 31, 2014


$250

26%

29%

31%

25%

$150

$200

22%21%

23%

19%16%

26%

15%

18%

16%

$100

($ b

illio

ns)

7%

.5% 0%.5%

8%

4%

1%

6%

1%

$

$50

014

015

016

017

018

019

020

20 20 20 20 20 20 20

12/31/11 12/31/12 1/31/2014


1

yments

S&P Index Repayment Rates by YearJanuary 1, 1997 to January 31, 2014


60%

50%

34%

42%

35%

47%49%

42%

34%

40%42%

44%

37%40%

30%

23%

31%

16%

28%

20%

8%

0%19

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2

LTM

2

9

Average Debt Multiples of

8.8

7 18x

10x

7.16.7

5.35.0 5.1 5.3 5.2

5.8 5.65.2

6x

4.54.0

3.74x

0x

2x

0x

1987

1988

1989

1990

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

200

FLD/EBITDA SLD/EBITDA Other


2

Highly Leveraged Loans


4.9 4 7

7 3.8 3.94.2 4.3 4.4

3.8 4.0 3.94.3 4.5 4.7 4.5

3.47x

0.50x

002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

4Q13

Sr Debt/EBITDA Sub Debt/EBITDA

0

Average Cash Flow MultipleLoansLoans

6.0x

4 0

2 5 2 4

2.9 2.9

4.0x

1.31.7

1.5

2.52.3

2.4 2.42.1 2.0 2.0

2.3

2.0x

0.0x

1987

1988

1989

1990

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

EBITDA-Capex/Cash Int


2

es of Highly Leveraged


3.9 3.9 4.0 3 94.1

3 9 3 84.1 4.2

3.5

3.9 3.9

3.5

3.0 2.9

3.83.9 3.9 3.8

2.84x

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

134Q

13

terest EBITDA/Cash Interest

1

Outlook

2014 expectations remain a function

The hunt for yield will continue

A coupon-clipping year at bestreturn than bonds

Fundamental risk appears to be Fundamental risk appears to be

Under consensus economic assmoderately

Relative volatility and correlatloans vs. other income asset cla

But we must consider:

Direction and magnitude of inve

Uncertainty of taper and the imp

U.S. political dysfunction, while


2

n of rate policy and economic growth

; loans more likely to earn a coupon

manageablemanageable

sumptions, default rates will rise, but

tion advantages should again fall toasses

estment flows; impact on spreads

pact on long rates

apparently lessened, is not dead

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DisclosureThi i f ti i i t dThis information is proprietary and cCertain information may be receivedManagement (“ING U.S. IM”) consid

t th t h i f ti irepresent that such information istatements contained herein may conother “forward-looking statements” w

b d l lare based primarily upon applyingassumptions to certain historical finanor events may differ materially froopinions, projections, forecasts and fherein are valid only as of the datechange. Nothing contained herein shbuy any security or (ii) a recommendain, purchasing or selling any security.to update any forward-looking informa

Past performance is no guarantee of fu

©2014 ING Investment Distributor, LL


2

t b d d di t ib t dcannot be reproduced or distributed.d from sources ING U.S. Investmentders reliable; ING U.S. IM does not

t l t C t is accurate or complete. Certainnstitute “projections,” “forecasts” and

which do not reflect actual results andl h h l fretroactively a hypothetical set of

cial data. Actual results, performancem those in such statements. Anyforward-looking statements presentedof this document and are subject to

hould be construed as (i) an offer toation as to the advisability of investing. ING U.S. IM assumes no obligationation.

uture results.

LC, 230 Park Ave, New York, NY 10169

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Senior Loan Market Update - LarrainVial

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