clear as mud? the outlook for restructuring markets in 2015...source: aon political risk map 17 debt...

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Clear as mud?

The outlook for restructuring

markets in 2015 5 March 2015

1

Agenda

Debt Market Update Floris Hovingh

Economic Backdrop Henry Nicholson

Restructuring Implications Henry Nicholson

2

3

Economic Backdrop Henry Nicholson

UK GDP UK GDP is back above pre crisis levels and growing steadily

Real UK GDP since 2008 (index 2008 Q1 = 100)

Source: OECD

UK employment UK employment is at record high levels

UK workforce

Source: ONS

Cost of living

Year on year change in disposable income

Source: Asda Income Tracker (December 2014)

The cost of living squeeze is easing as disposable income rises

Inflation

CPI inflation

Source: ONS, OBR

Consumers are benefiting from positive economic trends…

Oil price Recent inflation decline helped by falling oil price…

Brent crude oil $/bbl

Source: Thomson Reuters

Commodity prices …and falling commodity prices

Gold spot price

Source: Bloomberg

Silver spot price Platinum spot price

Interest rate expectations The expected rise in interest rates keeps getting pushed out

Source: Bank of England, OBR

Market expectation for Bank Rate

Consumer debt

UK household gross debt to income

Source: ONS, OBR

Consumer debt has fallen but is forecast to grow rapidly

Government debt

Public sector deficit (excluding public sector banks) vs public sector net debt as % of GDP

Source: ONS

Deficit levels have fallen but government debt has not yet been tackled

Political background There is a very high likelihood that we will have another election without a clear winner

Source: Election Calculus (Prediction based on opinion polls from 08 Feb 15 to

27 Feb 15, sampling 10,871 people)

General election outcome predictions

Source: Paddy Power

European GDP trends Economic performance in Europe continues to be sluggish

Source: OECD

Eurozone (18 countries) annual GDP growth rate

European GDP to Debt Wide range of economic performance across the EU

Source: Eurostat

2013 GDP growth vs. debt as % of GDP

Global instability The areas outside of Europe’s borders are potentially unstable

Source: AON political risk map

17

Debt Market Update Floris Hovingh

Deloitte UK print A4 (21.00 cm x 29.70 cm)

Trends 2012:

- Macro economic

uncertainty

- Eurozone issues

- Sovereign debt issues

- Conservative debt market

- Banks are feeling the

pressure

Deloitte UK print A4 (21.00 cm x 29.70 cm)

Trends Today:

- Start of an upward trend

- Sovereign debt issues remain

- Eurozone issues still there

- Have the debt and equity

markets moved ahead of

itself?

- What about the

fundamentals?

On the

Back to 2001 & 2007?

Market cap $569B

Operating cash flow $13B

Factor 47x!

Deloitte UK print A4 (21.00 cm x 29.70 cm)

Overheated market:

Current drivers of debt markets

A new “Golden Age” of leveraged finance Key drivers

21 ©2015 Deloitte LLP. All rights reserved.

Reassessment

of the asset

class

Banks

Institutions Direct lending funds

HY desks

CLOs

Lack of

new deal

supply

Never had

it so good? Competition

Leverage

on leverage

Surplus

liquidity in US

Uptick in

new CLOs

1 2 3

Reassessment of the asset class Default rates have been moderate apart from market disruptions in 2002 and 2008

22 ©2015 Deloitte LLP. All rights reserved.

Source: S&P Capital IQ LCD

-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

11.00%

13.00%

15.00%

9/1

/200

0

2/1

/200

1

7/1

/200

1

12

/1/2

001

5/1

/200

2

10

/1/2

002

3/1

/200

3

8/1

/200

3

1/1

/200

4

6/1

/200

4

11

/1/2

004

4/1

/200

5

9/1

/200

5

2/1

/200

6

7/1

/200

6

12

/1/2

006

5/1

/200

7

10

/1/2

007

3/1

/200

8

8/1

/200

8

1/1

/200

9

6/1

/200

9

11

/1/2

009

4/1

/201

0

9/1

/201

0

2/1

/201

1

7/1

/201

1

12

/1/2

011

5/1

/201

2

10

/1/2

012

3/1

/201

3

8/1

/201

3

1/1

/201

4

6/1

/201

4

11

/1/2

014

Defa

ult r

ate

s

Loan default rates

Default Rates

1

Surplus liquidity…where does it come from? Central banks injecting cheap money in the circulation

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2

Monetary stimulus Scary relationship….

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2

M&A

$0B

$20B

$40B

$60B

$80B

$100B

3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14

Quarterly M&A leveraged loan volume

US Europe

Source: S&P Capital IQ LCD

Surge in Q3 US M&A activity not mirrored in Europe

Supply side constraints

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3 3

How long this is going to continue?

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

Share of deals with leverage of more than 6x

6-7x debt/EBITDA 7x or more debt/EBITDA

Effects of competitive tension in loan markets Debt structures evolving

27 ©2015 Deloitte LLP. All rights reserved.

Source: S&P Capital IQ LCD

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

2007 2008 2009 2010 2011 2012 2013 2014 Jan-15

Annual pro forma debt/EBITDA ratios

First lien/EBITDA Second lien/EBITDA Other debt/EBITDA

€0B

€2B

€4B

€6B

€8B

€10B

€12B

2006 2007 2008 -2009

2010 2011 2012 2013 YTD22/9/13

YTD22/9/14

Via loan market Via bond market

Dividends taken out via loan and HY bond markets

Effects of competitive tension in loan markets Debt structures evolving

28 ©2015 Deloitte LLP. All rights reserved.

Source: S&P Capital IQ LCD

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

€0B

€2B

€4B

€6B

€8B

€10B

€12B

€14B

€16B

€18B

€20B

2007 2008-2011 2012 2013 2014

Cov-lite loan volume

Cov-lite volume Share of institutional volume

0

2

4

6

8

10

12

14

16

18Number of institutional facilities flexed up/down (rolling 3 months)

Flex up Flex down

Signs of lender pushback

Flexed up facilities overtake flexed down in H2 2014

29 ©2015 Deloitte LLP. All rights reserved.

Source: S&P Capital IQ LCD

95.00

95.50

96.00

96.50

97.00

97.50

98.00

98.50

99.00

99.50

100.00

3-Oct-14 3-Nov-14 3-Dec-14 3-Jan-15

Loan flow average bid

Europe US

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%TLB YTM, B-rated: US vs Europe

Europe US

Yield Divergence

Yields increase but divergence emerges between US and Europe

30 ©2015 Deloitte LLP. All rights reserved.

Source: S&P Capital IQ LCD

Source: S&P Capital IQ LCD

Mid-market direct lending still going strong

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Evolution of the US leveraged debt market

Bank funding Non Bank funding

Banks vs. institutional investors

Share of primary loan market

32 ©2015 Deloitte LLP. All rights reserved.

Source: Preqin. Special Report: Private Debt, November 2014

60

83 88

94

137

69

23

41 45

60

77

37

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014 YTD

Year of Final Close

Annual private debt fundraising, 2009 - 2014 YTD

No. of Funds Closed Aggregate Capital Raised ($bn)

Source: S&P Capital IQ LCD

13 8

13

25 21

13 15

26 20

5

5

10

3 17

9 8

19

12

3

2

2

3

6

4 7

10

8

8

3

7

9

11

18

13

0

10

20

30

40

50

60

70

80

Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14

Number of deals completed

UK France Germany Other

2

3

How has the rise of private debt impacted the mid-market? Alternative lenders mainly competing on senior structures

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32.3%

46.1%

6.0%

11.4%

4.2%

40.0% 38.6%

0.5%

15.2%

5.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Senior Unitranche Second lien Mezz PIK/other

Deal structure overview

UK Euro

79% first lien

Source: Deloitte Alternative Lender Deal Tracker Source: Deloitte Alternative Lender Deal Tracker

34 ©2015 Deloitte LLP. All rights reserved.

Considerations for private debt funds

Ability to originate sufficient deals to deploy capital and scale up

How do you continue to meet returns of 8 - 10% for senior risk in a market where

there is yield compression?

Is the fund-bank collaboration sustainable?

How do you differentiate as a fund?

More secondary trading of underperforming credits

Structures in amend and extends to be priced “on market” in waivers

Different negotiations dynamics

More complex restructurings given the bespoke nature of structures

Predictions for future restructuring

in the mid-market

What structures are we seeing?

4.5x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Senior + mezz

EB

ITD

A (

x)

4x

1.5x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Senior & mezz

EB

ITD

A (

x)

6x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Unitranche

EB

ITD

A (

x)

1.5x

4.5x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Senior

EB

ITD

A (

x)

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Second lien – why and how? What is the best way of accessing it?

1. Senior only

Challenges?

• Stretch leverage?

• Traditional bank holds?

2. Senior + Mezzanine

Challenges?

• Stretch leverage?

• Traditional bank holds?

• Intercreditor?

• Deliverability?

• Covenants?

3. Unitranche

Sell down to

senior…leaving the

rest as 2nd lien

Challenges?

• Stretch leverage?

• Traditional bank holds?

• Intercreditor?

• Deliverability?

• Covenants?

• Acquisition facilities?

• Expensive?

4. 2nd lien

2nd

Lien

Challenges?

• Stretch leverage?

• Traditional bank holds?

• Intercreditor?

• Deliverability?

• Covenants?

• Acquisition facilities?

• Expensive?

• Cake…and eat it?

The Future?

Trends 2018?

- Supply and demand

rebalancing

- Increase in M&A activity

- Interest rate normalisation

- Shift away from bank lending

to a US Style funding model

- The big hangover?

- Alternative lenders leading

restructurings not banks

- Winners and losers

39

Restructuring Implications Henry Nicholson

Source: Deloitte UK & European restructuring market outlook 2015

Conclusions So what does this mean for UK restructuring markets?

Although Oil &

Gas and

Commodities

will continue to

face challenges

Similarly High

Yield structures

vulnerable to

shocks

Conclusions So what does this mean for European restructuring markets?

Unstable

borders

AQR and

Forbearance

Economic

Weakness

QE

“Specific

geographies”

Euro

stability

Q&A

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