1_ business finance
TRANSCRIPT
Business Finance: Lending and Job Creation in the 21st Century
Fall 2010
Industrial and commercial loans by all depository institutions declined in 2009
-120
-80
-40
0
40
80
120
2007 Q1
2007 Q2
2007 Q3
2007 Q4
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
Quarterly change, US$ billions
Source: FDIC. 2
Bank lending continues to decline, while businesses and individuals draw upon existing credit lines
4.0
5.0
6.0
7.0
8.0
9.0
2003 Q1
2003 Q3
2004 Q1
2004 Q3
2005 Q1
2005 Q3
2006 Q1
2006 Q3
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
US$ trillions
Net loans and leases
Unused commitments
Sources: FDIC, Milken Institute.
3
Companies raised $3 trillion worldwide in 2009 via corporate bond issuance
4
Source: Dealogic.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
US$ billions
2009: $3 trillion
U.S. companies raised $883 billion from corporate bond issuance in 2009
5
Source: Dealogic.
0
100
200
300
400
500
600
700
800
900
1,000
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Th
ou
san
ds
US$ billions 2009: $883 billion
Companies worldwide raised $809 billion on equity markets in 2009
6
Source: Dealogic.
0
100
200
300
400
500
600
700
800
900
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US$ billions
IPO
Follow-on offering
Loan issuance in the United States Quarterly, Q1 2004 to Q1 2010
7
Source: Dealogic.
0
100
200
300
400
500
600
700
800
900
2004 2005 2006 2007 2008 2009 2010
Investment grade
Leveraged
Highly leveraged
US$ billions
$625 billion high yield bonds and $1.9 trillionleveraged loans are scheduled to mature by 2015
8
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015 >2015
US$ billions
Leveraged loans
High yield bonds
Source: Dealogic.
Leveraged loans scheduled to mature between now and 2015
9
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015 >2015
US$ billions
Others
Term loan
Revolving credit
Source: Dealogic.
Medium term note (MTN)
Traditional vs. shadow banking system
10
Traditional banks
Investors
•Money market funds
Shadow banking system
- Bank conduits
- Special investment vehicles (SIVs) and limited purpose finance companies (LPFCs)
- Securitizations (ABS, RMBS, CMBS, auto loans)
- CLOs, CBOs and CDOs
- Special credit managers
•Securities lenders
•Investment managers
•Under-exposed banks
•Pension companies and insurance companies
Commercial paper (CP)
CP, MTN and capital
Capital
Capital, Debt
CD, CP, bank equity
Borrowers
-Corporate borrowers
- Individual borrowers
Loans
Cash Products
Source: Gary Gorton (2010).
Despite market value Haircuts, CLO event of default levels at their trough maintained 15%+ cushion levels
Sources: Moody’s, S&P/LSTA, Wells Fargo.
90
95
100
105
110
115
120
125
130
135
Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09
(%)
2003 CLOs - Senior O/C ratio 2004 CLOs - Senior O/C ratio 2005 CLOs - Senior O/C ratio2006 CLOs - Senior O/C ratio 2007 CLOs - Senior O/C ratio 2003 CLOs - EOD O/C trigger2004 CLOs - EOD O/C trigger 2005 CLOs - EOD O/C trigger 2006 CLOs - EOD O/C trigger2007 CLOs - EOD O/C trigger
U.S. Corporate CLO EOD Index
11
12
Securitization contributed to economic growth by providing cheap financing and stimulating consumption
Economic growth
Securitization
ConsumptionCheap
financing
13
Total private credit market debt/US GDP 1916 to 2009
Sources: Federal Reserve, Historical Statistics of the United States, Bureau of Labor Statistics, Milken Institute.
0
50
100
150
200
250
300
350
1920 1930 1940 1950 1960 1970 1980 1990 2000
Percent
Great Depression
Today
14
Leveraged loan and high yield spread Q1 1998 to Q4 2009
0
400
800
1,200
1,600
2,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Basis points
Average straight spread of B+/B institutional loans to LIBOR
Average high yield spread to Treasuries
No risk premium
Source: S&P/LSTA, Merrill Lynch
15
Subprime: Defaults & losses lead to uncertainty & loss
of confidence
SIVs & Conduits:Loss of confidence results in disappearance of short term funding/ABCP market forcing
some SIVs holding LT portfolios into default and liquidations
Banks:Illiquidity and disappearance of lenders
leads to overhang of loans on bank books causing markdowns and secondary price
decline
CLOs:Bank warehousing
lines frozen, AAA lender disappears, closes ABS
market
Hedge funds:Marked-to-market losses,
conditions to equity withdrawals and liquidations
Leveraged loan market:Minimal capital available to
loan market from Hedge Funds, CLOs, Banks
LiquidityCrisis
LiquidityCrisis
A liquidity crisis
U.S. leveraged loans outstanding 2000 to 2009
16
Sources: Credit Suisse.
0
200
400
600
800
1000
1200
1400
1600
1800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US$ billions
Non-syndicated loans
Syndicated loans
17
Active institutional loan investor groups 1996 to 2009
Sources: Credit Suisse Leveraged Loan Index, S&P LCD Quarterly Leveraging Lending Review.
22 2948 54
4264
7698
116
168
218
261
85102
0
50
100
150
200
250
300
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Numberof investor groups that made 10 or more primary commitments each year
18
Syndicated bank loan and high yield bonds maturing in the next five years
$21 $58$95
$215$294
$22$68
$61
$93
$108
0
50
100
150
200
250
300
350
400
450
2010 2011 2012 2013 2014
US$ billions
$43
$126$156
$308
$403
Sources: Credit Suisse Leveraged Loan Index, Merrill Lynch High Yield Master II Index, S&P LCD Quarterly Leveraging Lending Review.
Middle-market loans maturing in the next five years
19
Sources: Thomson Reuters LPC.
71 82109
65
25
817
31
38
26
0
20
40
60
80
100
120
140
160
2010 2011 2012 2013 2014
US$ billions
Sponsored Non-sponsored
99
140
103
52
20
Differentiating CLO’s versus Mortgage CDO’s
CLOs – The Good Mortgage CDOs – The Bad
High quality product No AAA CLO has lost principal
value More suitable leverage Ability to access underlying
collateral
Contributor to lower cost of bank debt CLOs are a “non-bank” bank Provides meaningful benefit to the
U.S. economy
Low quality product Ratings agency did not understand
the correlation risks Imprudent leverage Impossible to access underlying
collateral leading to decreased ability to fix systemic problems associated with the product
Destroyed balance sheets of banks
21
Corporate loan default rates peaked in 2009 at less than half the current mortgage delinquency rate
Sources: Moody’s, Bloomberg. Note: (1) Moody’s trailing twelve month default rate by Issuer; (2) Bloomberg Mortgage Delinquency Rate – includes All Mortgages 90+ Days. Delinquent including REO and Foreclosure as a percentage of loans that provided delinquency figures for the month from Bloomberg’s non-agency database encompassing over 12 million loans.
3/31/10: 10.26%
3/31/10: 25.68%
0%
5%
10%
15%
20%
25%
30%
2005 2006 2007 2008 2009 2010
Percent
Mortgage delinquency rate (2)
Loans default rate (by issuer) (1)
22
CLO’s if properly structured should help reduce the cost of credit to small, medium and large companies
0
10
20
30
40
50
60
70
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q1 2010
Percent of newly issued institutional loans purchased by CLO's
Source: S&P LCD Quarterly Leveraged Lending Review.
23
CLO outstanding reinvestment period
Source: S&P LCD Quarterly Leveraged Lending Review.
-300
-200
-100
0
100
200
300
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Cumulative CLO outstandings in reinvestment period
Cumulative decrease in demand as reinvestment period ends
US$ billions
24
U.S. middle-market loan issuance 2001 to 2009
0
20
40
60
80
100
120
140
160
180
200
2001 2003 2005 2007 2009
Total issuance, US$ billions
0
20
40
60
80
100
120
140
160
2001 2003 2005 2007 2009
Large
Traditional
Large and traditional loan issuance, US$ billions
Source: Thomson Reuters LPC.
25
Importance of BDCs to the middle market
Sources: Thomson Reuters LPC, Stifel Nicolaus Research.
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
10
20
30
40
50
60
2006 2007 2008 2009
Traditional middle-market loan issuance (left axis)
BDC originations (left axis)
BDC originations as % of middle-market volume (right axis)
Loan volume, US$ billions Percent
26
Prognosis for BDCs—Outlook improving
0
5
10
15
20
25
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008 2009 2010 YTD
Equity issuance (left axis)
Number of deals (right axis)
US$ billions
0
4
8
12
16
20
2002 2003 2004 2005 2006 2007 2008 2009
Market capitalization for BDC industry, US$ billions
Sources: Lazard and ECM Analytics as of 3/12/10; SEC filings.
27
Cost of capital for BDCs is normalizing
0
5
10
15
20
25
30
35
40
45
3/30/2005 3/30/2006 3/30/2007 3/30/2008 3/30/2009 3/30/2010
Yield to maturity, percent
BDC dividend yields
Bank of America/Merrill Lynch U.S. high yield B-BB index
Sources: Bank of America/Merrill Lynch, JMP Securities Research
28
Bank failures reached 140 in 2009 Annual: 1934 — 2009
Source: FDIC.*through March 19, 2010
29
Number of “problem institutions” reached 702 in 2009, exceeding $400 billion in assets Annual: 2001 — 2009
Source: FDIC.
FAS 157—Unintended consequences
• FAS 157 was enacted in 2006 (for adoption after November 15, 2007) to address uniformity in accounting standards for fair value measurements
• While BDCs were created to supplement a bank function, they were not granted the same accounting standards for loans ascribed to banks
• While BDCs have always been required to fair value their assets, FAS 157 and subsequent regulatory guidance changed fair value measurement for assets but did not permit them to fair value their existing liabilities in a similar manner
• Unintended consequence: During the credit crisis, the FAS 157 process forced money-good assets to be marked down, skewing statutory leverage ratios and thus diminishing the ability of BDCs to extend capital during a critical period
30Source: Jim Zelter.
FAS 157—Impact on BDC model
An erosion in mark to market asset prices significantly curtails lending activity of BDCs at a critical juncture
Sources: Jim Zelter, Apollo Analysis.
Par Portfolio Down 30%
Portfolio Value $1,500 $1,050
Debt $500 $500
NAV $1,000 $550
Leverage 0.50x 0.91x
Incremental Capacity $500 $50
(US$ millions)
31