Joseph V. RizziJoseph V. RizziAmsterdam Institute of FinanceAmsterdam Institute of Finance
May, 2008May, 2008
1. Volume2. Issuers3. Private Equity4. CLO5. Banks6. Rating Agencies
2Amsterdam Institute of Finance May 2008
Volume
3Amsterdam Institute of Finance May 2008
Amsterdam Institute of Finance May 2008
4
€0B
€5B
€10B
€15B
€20B
€25B
€30B
€35B
€40B
€45B
€50B
1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08
FIRST QUARTER LBO LOAN VOLUME
Source: S&P
Amsterdam Institute of Finance May 2008
5
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.
1Q 07 2Q 07 3Q 07 4Q 07 1Q 08Buyouts
Volume € 31.49 € 41.30 € 10.63 € 11.07 € 7.33Deal Count 55 52 22 23 16Average Deal Size € 572.59 € 794.28 € 483.14 € 481.30 € 458.25Wtd. Avg. ProRata Spr. (bps) 209.42 201.90 209.48 239.26 227.91Wtd. Avg. Inst. Spr. (bps) 258.53 249.58 273.74 307.49 309.18
Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.3x 5.1x 5.0x 4.5x 4.3xLeverage thru 2nd Lien Debt 5.1x 5.8x 5.7x 5.3x 4.4xTotal Debt/EBITDA 5.9x 6.7x 7.0x 6.5x 6.0xEBITDA/Cash Interest 2.2x 2.4x 2.0x 1.9x 2.0x
RecapitalizationVolume € 7.67 € 10.96 € 2.77 € 4.30 € 0.00Deal Count 19 26 6 5 0Average Deal Size € 298.02 € 465.69 € 462.40 € 1,059.49 N/AWtd. Avg. ProRata Spr. (bps) 207.00 206.35 195.00 215.92 N/AWtd. Avg. Inst. Spr. (bps) 260.59 256.88 266.07 275.64 N/A
Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.6x 4.7x 5.6x 5.6x N/ALeverage thru 2nd Lien Debt 5.3x 5.1x 6.0x 6.2x N/ATotal Debt/EBITDA 6.0x 5.5x 6.6x 6.2x N/AEBITDA/Cash Interest 2.6x 2.6x 2.2x N/A N/A
RefinancingVolume € 4.85 € 5.91 € 0.83 € 0.82 € 0.33Deal Count 13 15 4 3 1Average Deal Size € 340.63 € 502.79 € 263.70 € 274.57 € 325.00Wtd. Avg. ProRata Spr. (bps) 192.73 193.11 225.00 N/A 250.00Wtd. Avg. Inst. Spr. (bps) 242.10 235.27 312.50 250.00 300.00
Average ProForma Credit Statistics:Leverage thru 1st Lien Debt 4.2x 4.9x N/A N/A N/ALeverage thru 2nd Lien Debt 4.9x 5.4x N/A N/A N/ATotal Debt/EBITDA 5.8x 5.9x N/A N/A N/AEBITDA/Cash Interest 3.2x 3.2x N/A N/A N/A
Amsterdam Institute of Finance May 2008
6
Cancelled U.S. Private Equity Deals
FIRM VALUE ANNOUNCED WITHDRAWN SPONSOR
HARMAN $ 8.2B 4/25/07 9/21/07 KKRAXCIOM $ 2.9B 5/16/07 10/01/07 Silver LakeAffiliated Computer $ 8.2B 3/20/07 10/01/07 CerbeusSLM $25.5B 4/16/07 12/13/07 JC FlowersUnited Rentals $ 4.0B 7/23/07 12/24/07 CerbeusPPH $ 1.7B 8/15/07 1/01/08 BlackstoneNIBC $ 4.4B 8/15/07 1/30/08 JC FlowersReddy Ice $ 1.1B 7/02/07 1/31/08 GSO Capital3 Com $ 2.2B 9/28/07 3/20/08 BainAlliconce Data $ 6.4B 5/17/07 4/18/08 Blackstone
Source: Fortune
IssuersIssuers
7Amsterdam Institute of Finance May 2008
Sponsor to Sponsor Club Transactions Dividend Recapitalizations Public to Private Spin offs Private Company Sales Middle Market
8Amsterdam Institute of Finance May 2008
Leveraged Buyouts: Type Diversification Trends
Based on Loan Volume Based on Deal Count
9Amsterdam Institute of Finance May 2008
0%
15%
30%
45%
60%
75%
90%
2002 2003 2004 2005 2006 2007 1Q080%
15%
30%
45%
60%
75%
90%
2002 2003 2004 2005 2006 2007 1Q08
Copyright © 2008 Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
P2P
Corporate
S25
Other
Corporate
S2S
Other
P2P
Private EquityPrivate Equity
10Amsterdam Institute of Finance May 2008
LBO Sponsor Diversification: 1Q08
11Amsterdam Institute of Finance May 2008
Sponsor ShareBridgepoint Capital 4.26%Charterhouse Equity Partners 3.19%CVC 3.19%EQT Partners 3.19%Permira 2.13%Kohlberg, Kravis & Roberts 2.13%Blackstone Group 2.13%Apax Partners 2.13%Allianz Capital 2.13%ABN AMRO 2.13%Candover Investments 2.13%LBO France Gestion 2.13%Macquarie 1.06%PAI Management 1.06%Cinven Ltd 1.06%Carlyle Group 1.06%Goldman Sachs 1.06%Texas Pacific Group 1.06%TA Associates 1.06%Dubai International Capital 1.06%Rank Group Ltd. 1.06%Madison Dearborn Partners 1.06%Eurazeo 1.06%Sagard Private Equity Partners 1.06%Electra Fleming 1.06%
25 Most Active Sponsors
Multiple Sponsors on Transaction
19.2%
Single Sponsor on Transaction
80.8%
Single vs. Multiple Sponsors
The analysis reflects sponsors related to buyouts (initial and secondary) only.Most Active Sponsors reflects activity based upon all sponsors named on a transaction. Share is based upon transaction count.
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.
Europe Senior LBO: 1Q08
Fund manager
Carried interest
partner
General
Partner
LP
A
LP
B
LP
C
US Investors
US Exempt
Investors
Non-US
Investors
FUND
Investment Investment InvestmentInvestment
Hold Co.
Hold Co.
Operating Entity
Bank
Bridge finance
Syndicate participants
Leverage finance
syndicate participants
Nominee
High Yield
Investors
Mezzanine
InvestorsFLL
SLL
CLO
Hedge funds
12Amsterdam Institute of Finance May 2008
Now In 5 yrs
EBITDA of Acquired Firm 125 188 (c)Sale value @ 8 x EBITDA 1,000 1,500
Financing Plan: Equity @ .20 200 Debt @ .80 800
Total Capital Raised 1,000
Fees 30 50
Net Sale Proceeds on Exit 1,450
Original Debt 800 Less: Debt pay down over 5 years 260Debt at end of 5 years -540 540Return of Original Equity -200Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710
Amsterdam Institute of Finance May 2008
13
(a) Share to CEO 2% points or $14.2 x 1 = $14.2Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 Total Management share $71.0
(b) Equals a 28.4% compound annual rate of return on investment.(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.
Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions TransactionHarvard Business School case 9-206-1 Rev 10/16/06
- $ millions -
Terra Firma Bridgepoint Permira Doughty Hanson
Amsterdam Institute of Finance May 2008
14
Breakdown of own accounts
PortfolioCompanies: Turnover
Details of profits/earnings
Employee numbers
Management named
Advent International and Montagu Private Equity did not provide any of the aboveSource: Private Equity News
Amsterdam Institute of Finance May 2008
15
Top 10 funds currently raising Industry benchmark medium IRR (%)
Vintage Years
0
5
10
15
20
25
30
1996 98 2000 02 04
11%
7%9%
12%
17%
28%
22%
30%
22%
12%
• Private Equity IPOs and financial aggressiveness
• Credit Correction
•CLO Shutdown
•Frozen syndications
•Writedowns
• Returns – Concentrated in larger more established firms
•Compare to Index: Just Leveraged equity?
•Investors – endowments vs. banks
•Capacity
• Large unused capacity
•Record fund raising continues
16Amsterdam Institute of Finance May 2008
• Increased Debt (lower taxes)
• Bargain Purchase
• Operating Improvements
• Improved Governance
• Bondholder Value transfer
17Amsterdam Institute of Finance May 2008
InvestorsInvestors
18Amsterdam Institute of Finance May 2008
• Banks (Relationship Driven)
• Typically invest in the pro-rata portion of bank facilities (Revolver and Term Loan A)
• Seek first priority claim on assets
• Preference for price stability over liquidity
• Institutional Investors (Yield Driven)
• Primarily looking for high coupon/yield. Embedded option and subordination translate to higher coupons
• Cross over investors (relative value between bank loans and high yield bonds)
• Hedge Funds (unknown impact)
19Amsterdam Institute of Finance May 2008
Amsterdam Institute of Finance May 2008
20
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.
0%
20%
40%
60%
80%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 LTME31/3/08
Europe US
Institutional Investors’ Share of the Institutional Investors’ Share of the Primary MarketPrimary Market
Source: S&P EUR US/Europe: 1Q08 www.lcdcomps.com
Total Return
US Index and Europe’s Euro Denominated Index are single currency indexes and contain only USD and EUR denominated facilities respectively. Their total returns consist of Interest Income Return plus Market Value Return.
Europe’s Multi Currency Index contains facilities denominated in EUR, GBP and USD. The Index calculates returns based upon non-Euro facilities converted into Euros at conversion rates at the time of calculation. As a result, the total return for the
Multi Currency Index consists of Interest Income, Market Value and Currency segments.
21Amsterdam Institute of Finance May 2008
9.78%
5.13% 5.06%
6.74%
2.02%
-5.74%
3.22%
5.44% 5.88% 6.36%
-8.56%
5.55% 5.76% 5.30%6.27%
1.12%
-7.60%
-0.57%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
2003 2004 2005 2006 2007 1Q08
US (S&P/LSTA Loan Index) Europe (S&P European Loan Index Multi Currency) Europe (S&P European Loan Index Euro Denominated)
Institutional Loan Investor Groups
22Amsterdam Institute of Finance May 2008
314
53
116 109
68 74 7886
225
307318
3318
7
99
22
170
254
132
0
50
100
150
200
250
300
350
1999 2000 2001 2002 2003 2004 2005 2006 2007 LTME31/3/08
European Manager Groups US Manager Groups
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.
23
Spread per Unit of Leverage (SPL)
23Amsterdam Institute of Finance May 2008
40 bps
50 bps
60 bps
70 bps
80 bps
90 bps
100 bps
110 bps
Europe U.S.
Based upon weighted average institutional spread versus average pro forma total debt leverage ratios.US leverage reflects ratios for Large Corporate Transaction (minimum EBITDA of $50M).
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. `
Amsterdam Institute of Finance May 2008
24
Jan 97-Jun 07 Jan 97-Feb081.00
0.50
0.00
S&P/LSTAIndex
M&L HIGHYIELD(H0A0)
10YR TREAS(GA10)
S&P 500(SPX)
MLHIGRADE
CORP (COCO)
Source: S&P
0.22
0.40
0.30
0.20
0.30
0.30
0.25
0.60
0.65
0.90
BanksBanks
25Amsterdam Institute of Finance May 2008
Deal Value No. of
($bn) Deals
JP Morgan 274.8 564
Bank of America 177.4 656
Citigroup 150.3 282
Credit Suisse 113.8 241
Deutsche Bank 104.5 172
Goldman Sachs 100.8 177
Lehman Brothers 73.1 146
Merrill Lynch 69.2 150
RBS 65.7 129
Wachovia 62.7 269
*Global syndicated since Jan 2007 to date.
Amsterdam Institute of Finance May 2008
26Source: Dealogic; Standard & Poor’s LCD
Deutsche Bank 96Citigroup 97Goldman Sachs 95Credit Suisse 94Merrill Lynch 97JP Morgan 95Morgan Stanley 91Lehman n.a.RBS 95Barclays 98UBS 96Credit Agricole 94HSBC 98BNP Paribas 92Societe Generale 96
** Including both funded and unfunded commitments. Exposures and writedowns are net of hedges. Figures as of Dec. 2007 except Goldman, Lehman and Morgan Stanley which are Nov 2007
Merrill Lynch 3,567 1,003 57 47 1,105 5,780
Amsterdam Institute of Finance May 2008
27
ABS Leveraged Residential Commercial CMBSEstimated
Company CDOs Loans Mortgages Real EstateTotal
Citigroup 1,108 2,620 2,954 129 ND 16,810
Bank of America 2,725 699 3,338 575 2,596 9,902
JP Morgan 120 1,472 2,880 176 2,959 7,605
Wachovia 213 507 1,570 641 1,451 4,382
Source: Company reports, CreditSights*CDO related losses does not include FG or other subprime. DCO exposure estimated for GS & LEH.1Q08 CDO mark est. at lower of Etrade case & Mark implied by change in ABX. ND: Not disclosed. NA: Not Available
Fixing the Broken Deal – Price and Structural FlexIncrease spread
Original issue discount
Eliminate PIK
Reduce debt
Add a subordinate tranche
More equity
Add covenants
Reduce Price
Seller Paper
MAC
28Amsterdam Institute of Finance May 2008
New Buyers of Discounted Bank Loans (adding insult to injury)
• Issuers: TDC @90-95% of par
• PE forms: Citi $12B @ 90%
Apollo
TPG
Blackstone
29Amsterdam Institute of Finance May 2008
Amsterdam Institute of Finance May 2008
30
CLO
CLOCLOEnhancement levels
Equity - minimize equity
Maximize AAA
Rating agencies
less multiple
asset default / recovery history
Example
History indicates5% default probability with 0% recovery
Multiples
AAA 6 30
AA 5 25
A 4 20
BBB 3 15
BB 2 10
B 1 5
E 0
31Amsterdam Institute of Finance May 2008
Amsterdam Institute of Finance May 2008
32
15 1813 12 15
27
56
108100
3
€0B
€50B
€100B
€150B
1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08
US Europe
To access the data points underlying the chart, double-click on the chart. Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.
How much demand is there absent CLOs? We know that € 34 bn of loan supply was issued to investors other than CLOs last year, non-traditional investors have been adding exposure, and cash has been accumulating.What if the calendar doesn’t clear? Absent deals committed to in the 1H’07, there really hasn’t been any supply. Banks may find room to fund solid credits looking forward, but shareholder-friendly deals seem unlikely (€ 140 bn last year).Bottom Line: The leveraged finance market is shrinking, but that does not mean broad market pricing is “rich” per se.
Amsterdam Institute of Finance May 2008
33
Supply Demand
“New” Investors
‘08 Paydowns:???
‘08 Coupons:€14.9 bn
‘08 Maturities:€28.7 bn
€
Forward Volume*€ 58 bn
Source: UBS, Bloomberg, S&P Note: As of April 17, 2008*This figures comes from S&P. Includes both pro-rata and institutional loans. We estimate €63bn in high-yield supply backlog. Coupon based on avg coupons on €130 bn of loans (S&P ELLI) and €74 bn of bonds (ML Eur HY index) over the remainder of the year. Maturities based on debt distribution schedules for all bonds and loans in Bloomberg less the amount of USD-denominated bonds and loans in Bloomberg. Assumed €/$1.5 for maturity conversion.
Amsterdam Institute of Finance May 2008
34
New Year Volume
1998 201999 392000 562001 692002 84 2003 1012004 1062005 1472006 2172007 301
Market size are estimates*CLO new issuance as of 12/31/07
Source: Credit Suisse, Moody’s, S&P, Fitch
Amsterdam Institute of Finance May 2008
35
2008 mantra – Survive and Advance Draining leverage Steep declines in volume CLO – Small Numbers Fund raising – institutional money: Little or no leverage Old pitch: high leverage/low beta New pitch: low leverage/high alpha Smaller, more conservative deals – High equity contributions Default rates trend higher Higher volatility continues
Areas of opportunity: Asset based lending Clubbish, off the run deals Rescue finance Middle market
Amsterdam Institute of Finance May 2008
36
Amsterdam Institute of Finance May 2008
37
DisclosureDisclosure
This information has been prepared solely for informational purposes
and is not intended to provide or should not be relied upon for
accounting, legal, tax, or investment advice. The factual
statements herein have been taken from sources believed to be
reliable, but such statements are made without any representation
as to accuracy or completeness. Opinions expressed are current
opinions as of the date appearing in this material only. These
materials are subject to change, completion, or amendment from
time to time without notice and CapGen Financial is not under any
obligation to keep you advise of such changes. All views expressed
in this presentation are those of the presenter, and not necessarily
those of CapGen Financial.
Top Related