clos in the heartland - mayer brown...fitch/mayer brown clos in the heartland middle market lending...

CLO i th H tl dCLOs in the Heartland

Opening Remarks

Mark Oline Managing DirectorGlobal Head of Business &

March 2014

Global Head of Business & Relationship Management

FITCH/MAYER BROWN FITCH/MAYER BROWN CLOCLOSS IN THE HEARTLANDIN THE HEARTLANDCLOCLOSS IN THE HEARTLANDIN THE HEARTLANDMIDDLE MARKET LENDING UPDATEMIDDLE MARKET LENDING UPDATEFran BeyersFran BeyersSenior Market AnalystThomson Reuters [email protected] 6646‐223‐7423

03/19/14 Fitch/Mayer Brown ‐ CLOs in the Heartland

BBIGGESTIGGESTTHEMESTHEMESFACINGFACINGMIDDLEMIDDLEMARKETMARKETLENDERSLENDERS

Supply 3Supply 3 Leveraged lending hit record levels in 2013, driven by 3Rs (refi, recap, repricing) M&A is picking up in 2014, but still not robust

Demand 8 Money flows into the leveraged loan mart from everywhere! Investor base is evolving: institutional interest rises, yields grind lower

Structures 13 Second liens take the lead, unitranche is gaining, mezz loses steam Leverage levels: How high will they go? Covenant lite: how low will it go?

Leveraged Lending Guidance 17 Banks lower their leverage tolerance Will non bank lenders pick up the slack?

3

Will non‐bank lenders pick up the slack?

2013 2013 WASWASAAYEARYEAROFOFRECORDSRECORDS: : DRIVENDRIVENBYBYTOOTOOMUCHMUCH

03/19/14 Fitch/Mayer Brown ‐ CLOs in the HeartlandLPC M

MONEYMONEYCHASINGCHASINGTOOTOOFEWFEWDEALSDEALS2013: A YEAR OF NEW RECORD HIGHS

MID

DLE

($ in billions) 2007 2012 2013 2014E*Gl b l l l 3980 4 3121 0 4029 8

E MARK

Global loan volume 3980.4 3121.0 4029.8U.S. Overall 1686.8 1575.7 2138.5Asia Pacific, excl. Japan 288.4 308.5 461.9

U.S IssuanceLeveraged loans 688.5 664.4 1135.2 1015.0L d R fi i 216 7 380 0 756 8 500 0

KET UP

Leveraged - Refinancings 216.7 380.0 756.8 500.0Leveraged - Institutional 425.8 335.2 625.4 565.0Leveraged - Pro Rata 262.7 329.2 509.8 450.0Leveraged - Sponsored 366.3 352.2 530.2Dividend Recapitalization 20.8 47.1 49.8Covenant-Lite 108.2 83.9 381.4HY B d 136 3 326 7 332 4 283 0

DATE

HY Bonds 136.3 326.7 332.4 283.0

Loan Retail Fund Flows -0.9 12.2 62.6

Investment Grade bonds 993.2 1011.0 1016.7Investment Grade - M&A loans 70.9 79.1 133.0 160.0

Middle Market loan volume 183.2 180.3 203.6Middle Market - Refinancings 75.7 102.1 129.9Middle Market - Non-sponsored 112.3 110.7 131.0Middle Market - Sponsored 71.0 69.6 72.5Middle Market - Dividend Recap 7.2 9.1 13.8 10.0Middle Market Covenant Lite 7 5 4 8 16 7

4

Middle Market - Covenant-Lite 7.5 4.8 16.7

*2014 forecast is generated from Thomson Reuters LPC’s Quarterly Lender Survey

NNEWEWMONEYMONEYDEALFLOWDEALFLOW ISISBUILDINGBUILDINGBUTBUTSTILLSTILLNOTNOT


BACKBACKTOTOPREPRE‐‐CRISISCRISIS LEVELSLEVELSLEVERAGED LOAN VOLUME MIDDLE MARKET SPONSORED LOAN VOLUME

MID

DLE

f

E MARK

200.0

250.0Refi New Money

18.0

21.0Refi New Money

KET UP150.0

n vo

lume ($B.)

12.0

15.0

volum

e ($B.)

DATE100.0

Leve

rage

d loa

6.0

9.0

MM spo

nsored v

0.0

50.0

0.0

3.0

M

5

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

Note: Data current as of 3/06/14, includes completed and in process dealsMiddle market defined as issuers having revenue and a total loan deal size of $500 million and below

LLARGEARGECORPORATECORPORATELBOLBOSSAREAREOUTPACINGOUTPACINGMIDDLEMIDDLE


MARKETMARKETBUYOUTSBUYOUTSSOSOFARFAR ININ1Q141Q14

70

LBO DEAL COUNT

MID

DLE

60

70Large Corporate Middle Market

E MARK

40

50

eal cou

nt

KET UP

20

30

LBO de D

ATE

0

10

4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 3 3 4

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

6

LLENDERSENDERSPREDICTPREDICTMIDDLEMIDDLEMARKETMARKETLBO LBO VOLUMEVOLUMEWILLWILL


INCREASEINCREASEMODERATELYMODERATELY ININ20142014WHAT DO YOU SEE AS THE KEY DRIVER OF

SPONSORED M&A DEALFLOW IN 2014? MIDDLE MARKET LBO ISSUANCE

MID

DLEE M

ARK25.0

30.0

)

MM LBO

2014 EstimateNarrowing of buyer‐seller disconnect KET U

P

15 0

20.0

O issu

ance ($

B.)

Pressure on sponsors to sell

DATE10.0

15.0

MM LBO

More visibility/certainty

Improving economic conditions

0.0

5.0

0 1 2 3 4 5 6 7 8 9 0 1 2 3 E0% 10% 20% 30% 40%

More visibility/certainty regarding regulatory change/operating

environment

7

2000

200

200

200

2004

200

2006

200

2008

2009

2010

201

201

201

2014

E

2014 forecast is generated from Thomson Reuters LPC’s Quarterly Lender Survey

0% 10% 20% 30% 40%% of respondents

WWILLILLMIDDLEMIDDLEMARKETMARKETLENDERSLENDERSHITHIT THEIRTHEIRBUDGETBUDGETTHISTHIS


YEARYEAR? ? DO YOU EXPECT TO HIT YOUR LENDING GOAL? WHY OR WHY NOT?

80%

MID

DLE

YES!

60%

70%

Banks

Non Banks

E MARK

YES! – Seeing (hoping for) better volume– More M&A discussions– Built out origination platform

Taking bigger hold sizes

40%

50%

60%

pond

ents

KET UP

– Taking bigger hold sizes– Strong technicals– More focused on lower middle market– Bigger product offering

20%

30%

40%

% of res

p DATE

NO! – Lack of M&A– Too much competition– High credit hurdles

%

10%

20% – Leveraged Lending Guidance– Structures are too weak– Covenant lite pushing down market– Pass rate is high

8

0%Yes No

g– Portfolio churn is a big issue

TTHEHELEVERAGEDLEVERAGEDLOANLOANASSETASSETCLASSCLASSHASHASSEENSEEN


UNPRECEDENTEDUNPRECEDENTEDDEMANDDEMAND ININTHETHELASTLASTYEARYEARSHARE OF U.S. INSTITUTIONAL LEVERAGED

LOAN MARKET OUTSTANDINGS**

MID

DLECLO ISSUANCE & LOAN MUTUAL FUND FLOWS E M

ARK

OtherLoan Funds (mutual funds & ETFs)CLOs*

120 0

140.0

160.0 CLO Issuance Retail Fund Flows

KET UP

37%%80.0

100.0

120.0

ions D

ATE

37%40%

40.0

60.0$ Billi

23%

*Based on LPC Collateral’s universe of 769 U.S. CLOs‐20.0

0.0

20.0

9

**Based on S&P/LSTA Leveraged Loan Index outstandings

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

MMIDDLEIDDLEMARKETMARKETCLOCLOSSUSEDUSEDASASAAFINANCINGFINANCINGVEHICLEVEHICLE; ;


2014 2014 VOLUMEVOLUMEEXPECTEDEXPECTEDTOTORESEMBLERESEMBLE20132013MM CLO ISSUANCE AAA SPREADS REMAIN HIGHER ON MM CLOS

MID

DLE

22.0A AAA d (BSL)

E MARK

16 0

18.0

20.0

B.)

MM CLO2014 Estimate

220

240

ies

Average AAA spread (BSL)Middle Market

KET UP12.0

14.0

16.0

O Issu

ance ($

B

180

200

A CLO liab

ilit

DATE

6.0

8.0

10.0

MM CLO

140

160

Spread on AAA

0.0

2.0

4.0

6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4

100

120

n‐11

r‐11

ul‐11

t‐11

n‐12

r‐12 l‐12

t‐12

n‐13

r‐13

ul‐13

t‐13

n‐14

S

10

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 Jan

Ap J u Oct

Jan

Ap Ju Oc t Jan

Ap J u Oc

Jan

CCLOSELOSETOTO$27 $27 BILLIONBILLION ININCUMULATIVECUMULATIVEEQUITYEQUITYCAPITALCAPITAL


RAISEDRAISEDBYBYBDCBDCSSSINCESINCE2000; BDC 2000; BDC ORIGINATIONSORIGINATIONSPEAKPEAKBDC CUMULATIVE EQUITY CAPITAL

RAISED (THROUGH 1/14/14)TRAILING 12 MONTH ORIGINATIONS

PEAK IN 2013

MID

DLE

25.0

30.0

E MARK

30 0

35.0

40.0

15.0

20.0

Billions

)KET U

P

20.0

25.0

30.0

Billions

)

10.0

($ B

DATE

10.0

15.0

($ B

0.0

5.0

000

001

002

003

004

005

006

007

008

009

010

011

012

013

014

0.0

5.0Q04

Q04

Q05

Q05

Q06

Q06

Q07

Q07

Q08

Q08

Q09

Q09

Q10

Q10

Q11

Q11

Q12

Q12

Q13

Q13

11

20 20 20 20 20 20 20 20 20 20 20 2 20 2 20 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1 3 1 Q 3Q 1 3

TTHEHECOMPETITIVECOMPETITIVE LANDSCAPELANDSCAPEFORFORMIDDLEMIDDLEMARKETMARKET


LENDINGLENDING ISISBECOMINGBECOMINGMOREMORECOMPLEXCOMPLEXANDANDDIVERSEDIVERSESOURCES AND TYPES OF AVAILABLE DEBT CAPITAL

MID

DLETraditional

k CLOFinance

CMezzanine

dInsurance CBDC

Hedge Funds / Credit Private Equity d

E MARK

Banks CLOsCompanies FundsCompaniesBDCsg

Opportunity Funds Funds

KET UPD

ATERevolver TermLoans

Last OutSenior

TrancheB

Second Lien Loans

Rate Only Sub Debt

Traditional Sub Debt

Preferred Stock

CommonEquity

Unitranche

Alt ti fi i g d t lik it h f iliti i g i g ti f iddl k t

Libor +150 ‐ 350

Libor +350 ‐ 500

Libor +400 ‐ 900

12 ‐ 15% 15 ‐ 17% 20 ‐ 25% 25% +

12

Alternative financing products, like unitranche facilities, comprise a growing portion of middle market leveraged financings today

AABUNDANTBUNDANTLIQUIDITYLIQUIDITYDRIVESDRIVESYIELDSYIELDSLOWERLOWERACROSSACROSS


THETHECAPITALCAPITALSTRUCTURESTRUCTUREYIELDS TIGHTEN IN LEVERAGED LAND DOWNWARD FLEXES DOMINATE IN MM

MID

DLE

15% 6,000

E MARK

%

13%

14%

15%LC 1st lien

LC 2nd lien

MM 1st lien

MM 2nd lien

4,000

,

M.)

Down Up

KET UP10%

11%

12%

ield

MM 2nd lien

0

2,000

ex volum

e ($M

DATE

7%

8%

9%Yi

‐2,000stitutiona

l fle

4%

5%

6%

0 1 1 1 1 2 2 2 2 3 3 3 3 4

‐6,000

‐4,000

MM in

13

2010

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

4Q02

4Q03

4Q04

4Q05

4Q06

4Q07

4Q08

4Q09

4Q10

4Q11

4Q12

4Q13


SSECONDECONDLIENSLIENSAREARE ININVOGUEVOGUE ININ20142014WHAT STRUCTURE WILL SPONSORS FAVOR? MM SECOND LIEN VOLUME

2014 Survey 2013 Survey

MID

DLE

4 0

1st / 2nd lien

2014 Survey 2013 Survey

E MARK

3.0

3.5

4.0

$B.)

Stretch senior

KET UP

2.0

2.5

3.0

en issu

ance ($

1st lien / mezz

DATE

1.0

1.5

MM sec

ond lie

0% 10% 20% 30% 40% 50% 60%

Unitranche

0.0

0.53 4 5 6 7 8 9 0 1 2 3 4

M

14

0% 10% 20% 30% 40% 50% 60%% of survey respondents

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

FFIRSTIRSTLIENLIEN / / SECONDSECONDLIENLIENSTRUCTURESTRUCTUREEXHIBITEDEXHIBITEDTHETHE


MOSTMOSTAGGRESSIVEAGGRESSIVE LEVERAGELEVERAGELEVELSLEVELS ININ201320132013 AVERAGE LEVERAGE BY FINANCING STRUCTURE FOR CLUB MM DEALS

MID

DLE

606 0x

E MARK50

60

5.0x

6.0x

Avg. 1st Lien Leverage Avg. Junior Leverage Average EBITDA

KET UP

30

40

3.0x

4.0x

EBITDA

o EB

ITDA

DATE20

30

2.0x

3.0x

Avg

. E

Deb

t to

0

10

0.0x

1.0x

15

All Senior Bifurcated Collateral First Lien / Mezz Unitranche First Lien / Second Lien

CCOVENANTOVENANT‐‐LITELITEVOLUMEVOLUMEREACHEDREACHEDNEWNEWHEIGHTSHEIGHTS ININ


2013; 2013; HOWHOWFARFARDOWNDOWNMARKETMARKETCANCANCOVYCOVY‐‐LITELITEGOGO??COVENANT‐LITE VOLUME

LARGE CORPORATE VS. MIDDLE MARKETMIDDLE MARKET COVENANT LITE

EXPECTATIONS FOR 2014

MID

DLE

16.0

18.0

350.0

400.0Large CorporateMiddle market

E MARK

Volume will grow but only at upper end of MM ($40‐

$50M+ EBITDA)

10.0

12.0

14.0

250.0

300.0

me ($B.)

me ($B.)

KET UP

Volume will grow and move down market (<$40M EBITDA)

0

6.0

8.0

100.0

150.0

200.0MM volum

LC volum

DATERemain the same

0.0

2.0

4.0

0.0

50.0

6 7 8 9 0 1 2 3 4 0% 10% 20% 30%40%50%60%

Volume will decline

16

2006

2007

2008

2009

2010

2011

2012

2013

2014 0% 10% 20% 30%40%50%60%

% of survey respondents

LLEVERAGEEVERAGEROSEROSEONONLBO LBO DEALSDEALS ININ20132013


AAREREWEWEHEADEDHEADEDBACKBACKTOTOPEAKPEAKLEVELSLEVELS ININ2014?2014?DEBT TO EBITDA FOR LBO DEALS IS LEVERAGE HEADING BACK TO PEAK LEVELS?

MID

DLE

I tit ti l MM

E MARK

6.5x

7.0x

7.5x

x)

Institutional MM Large Corporate

Yes for both markets

KET UP5.5x

6.0x

5

t to EB

ITDA (x

Yes for MM, No for LC

DATE4.5x

5.0x

vg. T

otal Deb

t

No for MM, Yes for LC

3.0x

3.5x

4.0xAv

0% 10% 20% 30% 40% 50%

No for either market

17

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

3 4 5% of respondents

BBANKANKBEHAVIORBEHAVIOR ISIS CHANGINGCHANGINGFOLLOWINGFOLLOWINGFINALIZEDFINALIZED


LEVERAGEDLEVERAGEDLENDINGLENDINGGUIDANCEGUIDANCEHOW MUCH WILL LLG IMPACT BANKS IN 2014? LEVERAGED LENDING GUIDANCE SUMMARY

MID

DLE

Deals treated as “leveraged” include:

No impact ‐ banks will continue to buy leveraged

loans

E MARK

Deals treated as leveraged include:– Proceeds used for buyouts,

dividends, etc. – Senior debt/EBITDA > 3x – Total debt/EBITDA > 4x

Modest impact ‐ banks will be more selective

KET UP

Total debt/EBITDA > 4x– Loans to vehicles that engage in

leveraged finance (CLOs, BDCs, etc.)– Fallen angels* (included only upon

modification or waiver)

Significant impact ‐ expect

be more selective DATE

– ABL* (incl. only if part of entire debt structure of a leveraged borrower)

Deals treated as “criticized” include:– If a company cannot show the ability

f d b

% % % 6 % 8 % %

Significant impact expect to see a noticeable drop off

in banks participation

to amortize 100% of its senior debt or 50% of its total debt within 5 to 7 years

– Issuers with leverage in excess of 6x debt/EBITDA after asset sales

18

0% 20% 40% 60% 80% 100%% of survey respondents

debt/EBITDA after asset sales

BBANKSANKSLOWERLOWERTHEIRTHEIR LEVERAGELEVERAGETOLERANCETOLERANCEFORFOR

03/19/14LPC M

Fitch/Mayer Brown ‐ CLOs in the Heartland

MIDDLEMIDDLEMARKETMARKETDEALSDEALSASASLLG LLG ISIS FRONTFRONTANDANDCENTERCENTER

MID

DLESPONSORED: SENIOR DEBT TO EBITDA SPONSORED: TOTAL DEBT TO EBITDA

4Q13 Survey 1Q14 Survey

E MARK60%

70%


40%

45%


KET UP40%

50%

espo

nden

ts

25%

30%

35%

pond

ents

DATE

20%

30%

% of b

ank re

10%

15%

20%

% of b

ank resp

0%

10%

< 3x 3x ‐ 3.5x 3.5 ‐ 4x > 4x0%

5%

10%

< 4x 4x ‐ 4.5x 4.5 ‐ 5x 5 ‐ 5.5x > 5.5x1st lien debt to EBITDA

19

Total debt to EBITDA

BBUTUT, , NONNON‐‐BANKBANKLENDERSLENDERSCONTINUECONTINUETOTOEXHIBITEXHIBIT


HIGHERHIGHERTOLERANCETOLERANCEFORFORLEVERAGELEVERAGESPONSORED: TOTAL DEBT TO EBITDA MM SPONSORED INSTITUTIONAL VOLUME

MID

DLE

80%20 0Institutional volume

E MARK60%

70%

ents


60%

70%

80%

16.0

18.0

20.0% of total sponsored

KET UP

40%

50%

n‐ba

nk re

spon

de

40%

50%

10.0

12.0

14.0

spo

nsored

uanc

e ($Bils

)

DATE 20%

30%

% of n

on

20%

30%

4.0

6.0

8.0 % of s

Issu

0%

10%

< 4x 4x ‐ 4 5x 4 5 ‐ 5x 5 ‐ 5 5x > 5 5x

0%

10%

0.0

2.0

4

Q01

Q01

Q02

Q03

Q04

Q04

Q05

Q06

Q07

Q07

Q08

Q09

Q10

Q10

Q11

Q12

1Q13

4Q13

20

< 4x 4x 4.5x 4.5 5x 5 5.5x > 5.5xTotal debt to EBITDA

1 4 3Q 2 1Q 4Q 3 2Q 1 4 3Q 2Q 1 4 3 2 1 4

WWHATHATWILLWILLBEBETHETHEBIGGESTBIGGESTCHALLENGECHALLENGE ININTHETHEMIDDLEMIDDLE


MARKETMARKETFORFORTHETHEREMAINDERREMAINDEROFOFTHETHEYEARYEAR??

L M&A t ti l

SURVEY RESPONSES AGGREGATED ACROSS COMMON THEMES

MID

DLE

Low M&A transaction volumes

Too much money chasing too few deals

Institutional investors continue to be hungry for assets and move down market

E MARK

Maintaining pricing integrity

Chasing volume and yield by going deeper and lower in the capital structure

High leverage multiples

KET UP

g g p

Adjusting to new regulatory issues

Leveraged lending guidance – banks getting more conservative

C ti g ith high h ld l l

DATE

Competing with high hold levels

Erosion of credit quality

Maintaining discipline on documentation, covenants

Growing assets

21

22NDNDANNUALANNUAL THOMSONTHOMSONREUTERSREUTERSLPCLPC

03/19/14 Fitch/Mayer Brown ‐ CLOs in the Heartland

MIDDLEMIDDLEMARKETMARKETLOANSLOANSCONFERENCECONFERENCE

22

Copyright © 2014 by Thomson Reuters LPC.

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State of Middle Market Lending and Middle Market CLOs

Derek MillerSenior Director

March 2014

CLOs in the Heartland

State of Middle Market Lending and Middle Market CLOs PanelistsPanelists

•Michael Hopson Head of U S Structured Finance Natixis•Michael Hopson, Head of U.S. Structured Finance, Natixis

•Josh Niedner, Managing Director, Madison Capital

K lli O’C ll Di t NXT C it l•Kelli O’Connell, Director, NXT Capital

25

R l t U d tRegulatory Update

March 19, 2014

Paul ForresterPartner+1 312 701 7366 [email protected]

Jan StewartPartner+1 312 701 [email protected]

Larry BerkovichPartner+1 704 444 3510

Sagi TamirPartner+1 212 506 25831 704 444 3510

[email protected] +1 212 506 [email protected]

l k l SVolcker Rule – Jan Stewart

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.


Volker Rule – Dodd-Frank Section 619

• Final Regulation approved December 10 2013 andFinal Regulation approved December 10, 2013 and effective April 1, 2014.

• Prohibitions on a “banking entity” under US Bank HoldingProhibitions on a banking entity under US Bank Holding Company Act from:

– Proprietary trading in securities, derivatives and other instruments

– Sponsoring, investing in and entering into transactions with covered fundscovered funds

28


Volcker Rule – Steps in Analyzing its Application

• Is the fund a covered fund?Is the fund a covered fund?

• Is the banking entity sponsoring or acquiring an ownership interest in the covered fund?ownership interest in the covered fund?

• Super 23A Provisions– Are the banking entity’s activities exempt?

– Does the prohibition on covered transactions under Super 23A apply?

– With respect to exempt activities, do they involve material conflicts of interest, high risk activities or risk to financial stability?y

29


Prohibition on Ownership of Covered Funds

• Hedge funds and private equity funds are intended to beHedge funds and private equity funds are intended to be defined as “Covered Funds”

• Covered Funds are those funds that would be subject toCovered Funds are those funds that would be subject to the Investment Company Act of 1940 but for the exemptions provided by Sections 3(c)(1) and 3(c)(7)

• Many ABS (including CLOs) rely on those same exemptions and are swept in as covered funds under the

d l b h i i di i h ABSproposed rule but there is no indications that ABS was targeted by Congress under the Volcker Rule

30


Savings for Loan Securitization

• There is an overriding savings provision in the Dodd‐Frank Act g g pmandating that nothing in the rule limit or restrict the sale or securitization of loans

L S iti ti E ti• Loan Securitization Exemption– Exclusion for securitization issuers of ABS that are backed solely by:

(i) loans, (ii) certain related contractual rights and other incidental ( ) f h d h h dassets, (iii) interest rate or foreign exchange derivatives that hedge

the permitted assets of the issuer and (iv) special units of beneficial interest and collateral certificates issued by a special purpose vehicle that itself meets the exclusion.vehicle that itself meets the exclusion.

– Permitted assets of an LSE issuer do not include (i) any security (other than cash equivalents or securities received in lieu of permitted loan assets), (ii) any other derivatives or (iii) any commodity forward contract.

31


Volcker: Avoiding Ownership Interests in Covered FundsFunds

• Ownership Interests DefinedOwnership Interests Defined – Any equity partnership interest or “similar interest,” voting or non‐

voting, including both general and limited partnership interests, ti d th d i tioptions and other derivatives.

– Debt security or other interest included if “exhibits substantially same characteristics” – voting, share in profits and losses, earn return based on performance of the fund.

– Many CLOs have senior debt tranches with right to replace defaulting collateral managers. Does this create an ownership interest?collateral managers. Does this create an ownership interest?

32


Proposed Volcker Rule’s “Super 23A” Provisions

• Covered Funds – including loan securitizations, are subject to “Super 23A” g , j pprovisions when sponsored or advised by banking entities or affiliates

• “Covered Transactions” between a sponsor or advisor and a covered fund are prohibitedare prohibited

• Exempt Activities not subject to Prohibition

– Fund activities conducted solely outside of the US

– Funds offered and organized in connection with bona fide fiduciary and advisory services to customers

– Organizing asset‐backed securitizationsOrganizing asset backed securitizations

– Market‐making and underwriting activities

33


Volcker Rule’s Advocacy for Modifications

• TruPS CDO Litigation and Interim RuleTruPS CDO Litigation and Interim Rule

• Congressional ActionLetters from members of Congress to fix Volcker ownership– Letters from members of Congress to fix Volcker ownership interest for CLOs

– H.R. 4167 to extend conformance period by two years to 2017p y y

• Industry Advocacy– In‐person meetings with regulatorsIn person meetings with regulators

– Trade associations (LSTA/SIFMA/SFIG) offer suggested fixes

34

US Ri k R t ti S i T iUS Risk Retention – Sagi Tamir


US Risk Retention – Dodd-Frank Section 941

• Dodd‐Frank created a new Section 15G of Exchange ActDodd Frank created a new Section 15G of Exchange Act

• Purposes:

• Align ABS “securitizers” incentives with investorsg

• Require ABS “securitizers” to have “skin in the game”

• Generally requires the entity that initiates or originates an ABS to retain a 5% economic interest in the credit risk of the securitized assets

• Applies to both registered and unregistered deals• Applies to both registered and unregistered deals

• Compliance Dates:

• RMBS: One year after final rules• RMBS: One year after final rules

• Everything else: Two years after final rules36


US Risk Retention – Implementing Rules

• Both the 2011 Initial Proposed Implementing Rules and 2013Both the 2011 Initial Proposed Implementing Rules and 2013 Re‐proposed Implementing Rules envision the CLO manager retaining 5% of the face value of the CLO notes

h h d h dd k d d k• The LSTA has argued that Dodd‐Frank required credit risk retention does not apply to managers of “Open Market CLOs”

• Dodd‐Frank requires retention by the “securitizer” – the entity that q y yinitiates or originates an ABS by selling or transferring assets to the Issuer

• In “Open Market CLOs” there is no single seller or transferor

i i i k t ti CLO l i k ti• imposing risk retention on CLO managers equals risk assumption

• Risk retention is economically unfeasible for many CLO managers

• Notwithstanding the 2013 Re‐proposed Implementing Rules doNotwithstanding, the 2013 Re proposed Implementing Rules do not exempt CLOs or CLO managers

37


US Risk Retention – Re-proposed Rules

• Under the Re‐proposed Implementing Rules, “Open MarketUnder the Re proposed Implementing Rules, Open Market CLOs” would be subject to risk retention in one of two ways:

• The Manager Option – the CLO manager would retain 5% of the f l f th CLO tface value of the CLO notes

• The Arranger Option – the CLO manager would be exempt from risk retention if it limits the assets in the portfolio to tranches of syndicated loans where the lead arranger agrees to hold 5% of the entire notional tranche amount

• Under both options, hedging or selling the exposure isUnder both options, hedging or selling the exposure is prohibited for the life of the CLO / loan

• LSTA has argued that the Arranger Option is an illusory – no lead arranger would agree to retain 5% of an institutional term loan without the abilitywould agree to retain 5% of an institutional term loan without the ability to hedge or sell for the life of the loan

38


US Risk Retention – LSTA’s “Open Market” CLO ProposalsProposals

• In response to the Re‐proposed Implementing Rules, the LSTAIn response to the Re proposed Implementing Rules, the LSTA has proposed:

• Developing a category of high quality leveraged loans that would not attract risk retention (similar to qualified residential mortgages)attract risk retention (similar to qualified residential mortgages)

• Allowing third party equity investors to act as sponsors so long as they have a role in developing the asset selection criteria for the CLO

• The LSTA’s “Qualified CLO” Proposal

• CLOs that satisfy certain restrictions / protections intended to ensure strong collateral, alignment of incentives and investors protectionstrong collateral, alignment of incentives and investors protection

• CLO manager would only have to retain 5% of the equity (as opposed to 5% of the notional amount of the CLO)

39


US Risk Retention – LSTA’s “Open Market” CLO Proposals (Cont )Proposals (Cont.)

• The LSTA’s “Qualified CLO” QualificationsThe LSTA s Qualified CLO Qualifications

• Asset Quality – at least 90% cash and senior secured loans to companies; loans must be held by three or more unaffiliated investors; no more than 60% cov light60% cov light

• Portfolio Composition – no loan can be higher than 3.5% of the portfolio and no more than 15% concentration in any one industry

• Structural Features – CLO equity must be at least 8% and structure must include IC and OC tests

• Alignment of Interests – must be an “Open Market CLO,” equity can remove manager for cause, majority of manager’s fee subordinated to rated notes, manager must retain 5% of the equity, limited discretionary trading, U.S investors must be Qualified Investors

40


US Risk Retention – LSTA’s “Open Market” CLO Proposals (Cont )Proposals (Cont.)

• The LSTA’s “Qualified CLO” Qualifications (Cont.)The LSTA s Qualified CLO Qualifications (Cont.)

• Transparency and Disclosure – manager must provide monthly reports that provide significant information on the underlying assets and the portfolio, OC and IC tests status and all purchases, repayments and salesportfolio, OC and IC tests status and all purchases, repayments and sales

• Regulatory Oversight – CLO manager must be a registered investment advisor

• Bottom line – U.S. CLOs will likely have to be compliant with some form of risk retention

41


US Risk Retention Rules – Timing

• U S risk retention was supposed to have been finalized byU.S. risk retention was supposed to have been finalized by April, 2011, but disagreement among regulators delayed finalization

• Implementing rules were re‐proposed in August 2013

• After they are finalized, there likely will be a two‐year y , y yimplementation period

• Thus, in a worst‐case scenario, CLOs can be likely issued ythrough early 2016 without having to fully comply

42

EU Ri k R t ti L B k i hEU Risk Retention – Larry Berkovich


CRR—Article 122a no longer applies

• The Article 122a securitization risk retention provisions no longer apply as of January 1, 2014. They are replaced by the Capital Requirements Regulation (CRR).

O D b 17 2013 f ll i th l i f lt ti i d th E• On December 17, 2013, following the closing of a consultation period, the European Banking Authority (EBA) published final draft regulatory technical standards (RTS) for CRR.

• The European Commission has to adopt amend or reject the draft RTS (Expected• The European Commission has to adopt, amend or reject the draft RTS. (Expected outcome is that the draft RTS will be adopted in its current form.)

• Concerns raised by market participants notwithstanding, the draft RTS does not provide for full grandfathering for transactions completed prior to currentprovide for full grandfathering for transactions completed prior to current guidance.

• In deciding whether additional risk penalties will be imposed, compliance with Rule 122a will be considered122a will be considered.

44


CRR—Retention Requirement

• Retention Provider needs to retain an economic interestRetention Provider needs to retain an economic interest of a least 5% of the outstanding balance of the CLO collateral.

• Retention requirements may be satisfied by holding (i) 5% of each underlying loan; (ii) the first‐loss tranche (equity) or (iii) pro rata portion of all tranches.

• RTS does not contain Rule 122a’s provision permitting the i i b lid d b iretention requirement to be met on a consolidated basis.

• Entities that are not credit institutions are unable to meet th t ti i t f d d b ithe retention requirement on an unfunded basis.

45


CRR—Who may act as Retainer?

• Retention providers must meet the definition of sponsorRetention providers must meet the definition of sponsor, originator or original lender.

• Original lenders under underlying loans have little interestOriginal lenders under underlying loans have little interest in committing to retain 5%.

• U.S. collateral managers generally do not fall within the g g ydefinition of sponsor.

• Definition of sponsor is generally limited to entities that p g yare subject to the requirements of the EU Markets in Financial Instruments Directive (MiFID).

46


CRR—Retention by Originators

• CLOs managed by US‐based managers generally rely onCLOs managed by US based managers generally rely on clause (b) of the definition of Originator.

• ‘Originator' means an entity which: (a) itself or throughOriginator means an entity which: (a) itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposure being securitised; or (b) purchases a third party's exposures for its own accountpurchases a third party s exposures for its own account and then securitises them [emphasis added].

47



• CLOs designates an entity (e g a loan fund that is alsoCLOs designates an entity (e.g. a loan fund that is also managed by the collateral manager) to acquire loans and sell them to the CLO issuer.

• The Originator could satisfy the retention requirement by (i) retaining 5% of all loans that it sells or (ii) by retaining CLO tranches.

• Originator must have a beneficial interest in the loans it ll h CLO [S d l i f h l fsells to the CLO. [Some deals permit for the settlement of

loans directly with the CLO issuer.]

48



• Originator must be an operating companyOriginator must be an operating company.

• Can’t be a mere “flow‐through .”

A t i l ti f th t t l f th O i i t• A material portion of the net asset value of the Originator must include investments and other assets that are not related to the CLO that the Originator is supporting.g pp g

• Multiple originators are permitted.

49



• RTS also provides that the retention requirement may beRTS also provides that the retention requirement may be satisfied by a single Originator if it also “established and is managing the program or securitisation scheme.”

• The collateral manager may now be able to act as a retainer as long as it acquires one or more loans for its own account, and then sells the loans to the CLO.

50

FATCA d th TFATCA and other Tax


FATCA and Cayman CLOs – Overview

• Foreign Account Tax Compliance Act (FATCA) is the law

– Signed by President Obama on March 18, 2010– Proposed Regulations issued on February 8, 2012 (published on February 15, 2012)– Final Regulations issued on January 17, 2013 (officially published January 28, 2013)

Corrections/Amendments issued in September 2013 and February 2014– Corrections/Amendments issued in September 2013 and February 2014– Bilateral Intergovernmental Agreements (“IGAs”) can modify outcomes under the Final

Regulations• New withholding tax and information reporting system for payments made to “foreign financial institutions” (FFIs) including CLOsinstitutions (FFIs), including CLOs

• Similar system of withholding tax and information reporting for payments made to “non‐financial foreign entities” (NFFEs)

• Designed to reduce the incidence of improper tax avoidance by US investors through the use of offshore accounts and non US investmentsoffshore accounts and non‐US investments

– FATCA targets financial institutions serving US investors rather than the US investor itself– Goal: increased information reporting and transparency– Enforcement mechanism: 30% withholding tax imposed on US payments (including payments

by FFIs that are re sourced as US payments) to certain non compliant non US personsby FFIs that are re‐sourced as US payments) to certain non‐compliant non‐US persons

52


Withholding on Payments made to CLOs

• Any “withholdable payment” made to a non‐US entity is potentially subjectAny withholdable payment made to a non US entity is potentially subject to FATCA

– Withholdable payment means (i) any payment of US source FDAP income (i e interest dividends rents premiums annuities etc ) andincome (i.e., interest, dividends, rents, premiums, annuities, etc.) and (ii) any gross proceeds from the sale or other disposition (occurring after 12/31/16) of any property of a type which can produce interest or dividends that are US source FDAP incomeor dividends that are US source FDAP income

– However, no such withholding will apply if the FFI recipient is a “participating FFI” or otherwise deemed compliant

• A participating FFI is an FFI that enters into an agreement with the IRS (FFI Agreement) to report on their account holders and to withhold on payments, if necessary

53


Withholding on Payments made to CLOs (cont.)

• Payments made with respect to preexisting obligations (i e• Payments made with respect to preexisting obligations (i.e., those existing as of 7/1/14 that are not equity for U.S. federal tax income tax purposes) may be grandfathered and exempt f l “ i ll difi d” f / /from FATCA unless “materially modified” after 7/1/14

• As such, unless a Cayman CLO can qualify as (a) an LLDIE or (b) a compliant entity under the US Cayman IGA it will need toa compliant entity under the US‐Cayman IGA, it will need to become a participating FFI and undertake reporting/withholding obligations with regard to its investors in order to be exempted from withholding on payments made to it (although payments made be grandfathered)

54


Special Rule for Legacy Securitization Vehicles (LLDIEs)(LLDIEs)

• Certain legacy (e.g., pre‐FATCA) securitization vehicles (e.g., CLOs)Certain legacy (e.g., pre FATCA) securitization vehicles (e.g., CLOs) cannot comply with the registration and due diligence requirements of FATCA pursuant to their terms

h di b i d i h hi l– e.g., the trustee or directors may not be permitted to register the vehicle as a participating FFI or comply with the due diligence requirements

• The regulations permit these securitization vehicles to qualify as “certified deemed‐compliant” FFIs

– If available, this relief continues for the life of the vehicle (absent change in circumstances))

– Vehicles do not need to register with the IRS

– Recent changes expand/ease some of the requirements, but significant t i t i t h th th i t ill b f th difi duncertainty remains as to whether the requirements will be further modified

and how such concept/term will be picked up in the US‐Cayman IGA55


Special Rule for Legacy Securitization Vehicles (LLDIEs) (cont )(LLDIEs) (cont.)

• Six‐pronged test:Six pronged test:

– FFI is an “investment entity” that issued one or more classes of debt/equity interest to investors pursuant to a trust indenture or similar agreement and all of such interests were issued on or before January 1 2017of such interests were issued on or before January 1, 2017

– FFI was in existence as of January 17, 2013, and has entered into a trust indenture or similar agreement that requires the FFI to pay to investors holding substantially all of the interests in the FFI, no later than a set date orholding substantially all of the interests in the FFI, no later than a set date or period following the maturity of the last asset held by the FFI, all amounts that such investors are entitled to receive from the FFI

– FFI was formed and operated for the purpose of purchasing or acquiringFFI was formed and operated for the purpose of purchasing or acquiring specific types of debt instruments or interests therein and holding those assets subject to reinvestment only under prescribed circumstances to maturity

56


Special Rule for Legacy Securitization Vehicles (LLDIEs) (cont )(LLDIEs) (cont.)

• Six‐pronged test (cont.):

– Substantially all of the assets of the FFI consist of debt instruments or interests therein

– All payments made to the investors of the FFI (other than holders of a de minimis interest) are either cleared through a clearing organization or custodial institution that is a participating FFI, reporting Model 1 FFI or U S financial institution or made through a transfer agent thatFFI, or U.S. financial institution or made through a transfer agent that is a participating FFI, reporting Model 1 FFI, or U.S. financial institution

– The FFI's trustee or fiduciary is not authorized through a fiduciary duty or otherwise to fulfill the obligations of a participating FFI and no other person has the authority to fulfill the obligations of a

ti i ti FFI b h lf f th FFIparticipating FFI on behalf of the FFI

57

CLOs in the HeartlandAlternative Regime: Intergovernmental Agreements (IGAs)

• As of March 14, 2014, US has signed agreements with 24 countries

• Special rule for legacy securitization vehicles not contained in Model agreements (e.g., not contained in US‐Cayman IGA)IGA)

• Must review applicable agreement (including partner jurisdiction law implementing the agreement) to determinejurisdiction law implementing the agreement) to determine whether the legacy securitization vehicle rule applies

58

CLOs in the HeartlandAlternative Regime: Intergovernmental Agreements (IGAs) (cont.)

• US‐Cayman IGA was signed on 11/29/2013y g / /

• LLDIE rule not contained in US‐Cayman IGA

• Uncertainty of registration requirements since LLDIE definitionUncertainty of registration requirements since LLDIE definition not included

• Timing of Cayman Legislation to implement the IGA:

– May/June 2014 – amend primary legislation

– July/August 2014 – adopt regulations and guidance notesJuly/August 2014 adopt regulations and guidance notes

• These rules are extremely complex and continue to evolve –CLOs, managers and sponsors should consult tax advisors

59


Circular 230 Disclaimer

h h d h hThe authors intend that no person may use this presentation, and it may not be used, to avoid tax penalties that may be imposed by U S law Thispenalties that may be imposed by U.S. law. This presentation does not render tax advice, which can be given only after considering all relevant facts about a g y gspecific transaction. Consult a professional tax advisor for tax advice.

60

N “P bli l T d d” R l f D bt New “Publicly-Traded” Rules for Debt Modifications


In General

• Treatment of a debt instrument as publicly traded will generally affect the U.S. federal tax consequences to issuers and holders of a modification of a debt instrumentissuers and holders of a modification of a debt instrument that results in a “deemed exchange,” including:

– Cancellation of debt income (“COD”) of the issuerCancellation of debt income ( COD ) of the issuer

– Gain or loss to the holder

– Original issue discount (“OID”) treatment of the “new” debtOriginal issue discount ( OID ) treatment of the new debt

62


Consequences of a Modification of a Debt Instrument that Results in a “Deemed Exchange”that Results in a Deemed Exchange

• Certain “significant modifications” of a debt instrument will result in aCertain significant modifications of a debt instrument will result in a deemed exchange of the unmodified debt instrument (the old debt) for the modified debt instrument (the new debt)

The form of the modification is generally irrelevant and could occur– The form of the modification is generally irrelevant and could occur, for example, through a debt‐for‐debt exchange by the issuer or an amendment to a loan agreement

• The old debt will be treated as redeemed for an amount equal to the “issue price” of the new debt

• The new debt will be treated as a newly issued debt instrument with a new yissue price

63


Consequences of a Modification of a Debt Instrument that Results in a “Deemed Exchange” (Cont )that Results in a Deemed Exchange (Cont.)

• Consequences to Issuerd f ld d b– Redemption of old debt• If the issue price of the new debt is less than the “adjusted issue price” of the old debt (which in most circumstances will be the principal amount of the old debt) the issuer will generally have COD incomethe old debt), the issuer will generally have COD income

• If the issue price of the new debt is greater than the adjusted issue price of the old debt, the issuer will generally have deductible premium (which may not be immediately deductible)may not be immediately deductible)

– Issuance of new debt• If the issue price of the new debt is less than the “stated redemption price

i ” ( hi h i i ill b h i i l fat maturity” (which in most circumstances will be the principal amount of the new debt) by more than a de minimis amount, the new debt will have OID, which will generally be deductible by the issuer

If h i i f h d b i h h SRPM f h• If the issue price of the new debt is greater than the SRPM of the new debt, the premium will reduce interest deductions

64



• Consequences to Holder

– Redemption of old debt

• The holder will generally have gain or loss equal to the different between the issue price of the new debt and the holder’s basis in the debtthe issue price of the new debt and the holder s basis in the debt instrument, which will usually be a capital gain or loss

– Issuance of new debt

• If the issue price of the new debt is less than the “stated redemption price at maturity” (which in most circumstances will be the principal amount of the new debt) by more than a de minimis amount, the new debt will have OID, which will generally be includible as income by the holder over theOID, which will generally be includible as income by the holder over the term of the new debt

• If the issue price of the new debt is greater than the stated redemption price of the new debt, the premium will be deductible over the term ofprice of the new debt, the premium will be deductible over the term of the instrument, if the holder elects

65



• If the issue price of the new debt is less than the SRPM:

– The issuer will have an immediate COD income inclusion that will generally be offset by OID deductions but only over the term of the new debt

A i iti l h ld ill ll h it l l d ill– An initial holder will generally have a capital loss and will have OID inclusions over the term of the new debt that are ordinary

66


Modification Resulting in Deemed Exchanges

• A deemed exchange will occur upon a “modification” that is a “significant modification”modification

– Any change to a right or obligation of the issuer or holder will result in a “modification,” unless, in most circumstances, it is pursuant to the terms of the debt instrument (e g a scheduled increase in the interest rate)the debt instrument (e.g., a scheduled increase in the interest rate)

– A modification will be “significant” if it falls within one of 5 enumerated categories below or, if not addressed in a category, is “economically significant”significant

• Certain changes in yield (generally, by more than 20bps)• Certain changes in timing of payments (generally, more than 50% of term)• Certain changes in obligor or security• Change in nature of debt instrument (i.e., new instrument is not debt)• Certain changes in accounting or financial covenants (generally, of non‐“customary” covenants)

67


Determination of Issue Price of New Debt

• The issue price of the new debt will depend upon the status of the debt p p pinstrument (old or new) as “publicly traded”

– If the debt instrument is not publicly traded, in most circumstances the issue price of the new debt will equal its principal amountthe issue price of the new debt will equal its principal amount

• The typical consequence of this is that an Issuer has neither COD income nor redemption premium, an initial holder generally

l d h d b d hrecognizes no gain or loss, and the new debt does not have OID

– If the debt instrument is publicly traded, the issue price will equal the fair market value as determined under the Regs.

• This will result in the consequences described above

68


Determination of Publicly Traded Status and Fair Market ValueMarket Value

• Under the new tax regulations, a debt instrument will beUnder the new tax regulations, a debt instrument will be publicly traded if, within 15 days before or after the deemed exchange there exists:

– A sales price

– One or more firm quotes

– One or more indicative quotes

• Exception—A debt instrument will not be treated as publicly traded if the principal amount for the issue (generally the class) is $100MM or less at the time of determination

69


Determination of Publicly Traded Status and Fair Market Value (Cont )Market Value (Cont.)

• Sales Price

– A price for an executed purchase within the 31‐day period is “reasonably available” within a “reasonable period of time”

“R bl il bl ” if i i di il bl– “Reasonably available,” if it appears in a medium available to:

• Issuers of debt,

• Persons that regularly purchase or sell debt, orPersons that regularly purchase or sell debt, or

• Brokers

– A “reasonable period of time” is not defined but it is clear that it extends beyond 15 days after the deemed exchange

• Presumably, it does not extend beyond the 90‐day period in which the issuer is required to make information available to holders, as described below

70



Fi Q t• Firm Quotes

– A price quote is available from a broker, dealer, or pricing service (including a subscription service or service of limited circulation)

• The price quote must be substantially the same as the price for which recipients could purchase or sell the property

• The party requesting the quote is irrelevantThe party requesting the quote is irrelevant

• The identity of the quote provider must be reasonably ascertainable

• The quote must be:

– Designated as a firm quote by the provider, or

– The price at which market participants typically buy or sell (even if the provider is not legally obligated to buy or sell at the price)the provider is not legally obligated to buy or sell at the price)

71



• Indicative quotes– Any price quote available from at least on broker, dealer, or y p q , ,pricing agent that is not a “firm quote”

– Obviously, extremely broad

72



• Fair Market Value DeterminationFair Market Value Determination– The fair market value is presumed to be the sales price or quoted price

– If two or more sales prices, quoted prices, or sales and quoted prices exist, a reasonable method consistently applied is acceptableacceptable

– For indicative quotes, the presumption of fair market value may be rebutted if it is established that:

• The indicative quote materially misrepresents the fair market value, and

• The method chosen more accurately reflects the value

• (No volume discount may be applied)

73



• Anti‐abuse rulesAnti abuse rules– Any temporary restriction on trading a purpose of which is to avoid these rules will cause the debt instrument to be treated as publicly traded, regardless of whether it is imposed by the issuer

• Note that a such a temporary restriction is not simply disregarded butNote that a such a temporary restriction is not simply disregarded but automatically results in publicly traded status

– A sales price or quotation a principal purpose of which is to bli l t d d t t ill b di d dcause publicly traded status will be disregarded

74



• Issuer responsibility to determine and reportIssuer responsibility to determine and report

– The issuer is required to determine publicly traded status and fair market value

h “ bl l ”• The issuer must use “reasonable diligence” to determine:

– Whether and how many sales have occurred,– The sales price,– The existence of firm or indicative quotes, and– Any other relevant information

– If the issuer determines that the debt is publicly traded it must:If the issuer determines that the debt is publicly traded, it must:

• Make a determination regarding the fair market value, and

• Make the information available to holder in a “commercially reasonable” fashion, including electronic publication, within 90 days

75



•Holder Responsibilities– The holder is required to report in the manner q pdisclosed by the issuer, unless it explicitly discloses its contrary position on a timing filed tax return for the year

– If the issuer does not provide the fair market value, the holder must determine the fair market value

76


Thank you

Jan Stewart, PartnerChicago+1 312 701 8859 [email protected]

Larry Berkovich, PartnerCharlotte+1 704 444 3510 [email protected] Berkovich's Biography

Paul Forrester, PartnerChicago+1 312 701 [email protected] Forrester's Biography

Sagi Tamir, PartnerNew York+1 212 506 2583 [email protected] Tamir's BiographyJan Stewart's Biography

77


CLOs 3.0

Kevin KendraManaging Director

March 2014


CLOs 3.0 Panelists

•Michael Loehrke, Co‐Head, Sr. Portfolio Manager, Golub CapitalMichael Loehrke, Co Head, Sr. Portfolio Manager, Golub Capital

•Levoyd E. Robinson, Managing Principal, Chicago Fundamental Investment Partners

•Allan Schmitt, Vice President, Wells Fargo Securities

79


Leveraged Loan Issuance Mostly Refinancing

1,200.0

1,400.0

1,600.0 HY bonds Leveraged loans Lev. loans refi Lev. loans new money

800.0

1,000.0

,

nce ($Bils.)

200 0

400.0

600.0

Issu

a

0.0

200.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

reca

st20

14 ForSource: Thompson Reuters LPC

80


CLOs and Retail Funds Driving Demand

240

280

CLO issuance Loan fund flows 300

350

Bils

.)

CLO 1.0

CLO 2.0

120

160

200

($Bils.)

150

200

250

cipa

l Balan

ce ($

40

80

120

50

100

150

Agg

rega

te Princ

0

4

Jan '11

Mar '11

May '11

Jul '11

Sep '11

Nov '11

Jan '12

Mar '12

May '12

Jul '12

Sep '12

Nov '12

Jan '13

Mar '13

May '13

Jul '13

Sept …

Nov '13

Jan '14

0

5

Jul‐1

2Aug‐12

Sep‐12

Oct‐12

Nov‐12

Dec‐12

Jan‐13

Feb‐13

Mar‐13

Apr‐13

May‐13

Jun‐13

Jul‐1

3Aug‐13

Sep‐13

Oct‐13

Nov‐13

Dec‐13

Jan‐14

Feb‐14

CLO A

Source: Thompson Reuters LPC

81


Strong Demand Impacts Primary Market Yields

10.0%

8 0%

9.0%

10.0%

d

Large Corp. Middle Market

6 0%

7.0%

8.0%

Ave

rage yield

%

5.0%

6.0%A

4.0%

1Q10

Apr‐10

May‐10

Jun‐10

Jul‐1

0Aug‐10

Sep‐10

Oct‐10

Nov‐10

Dec‐10

Jan‐11

Feb‐11

Mar‐11

Apr‐11

May‐11

Jun‐11

Jul‐1

1Aug‐11

Sep‐11

Oct‐11

Nov‐11

Dec‐11

Jan‐12

Feb‐12

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2Aug‐12

Sep‐12

Oct‐12

Nov‐12

Dec‐12

Jan‐13

Feb‐13

Mar‐13

Apr‐13

May‐13

Jun‐13

Jul‐1

3Aug‐13

Sep‐13

Oct‐13

Nov‐13

Dec‐13

Jan‐14

Feb‐14


82


Limited Differentiation in Secondary Market Bids

105.0l

95.0

100.0

5

par)

Cov‐lite2nd Lien TLMulti‐quote Inst. TLs

85 0

90.0

95.0

vg. B

id (%

of p

75 0

80.0

85.0

Av

75.0

1/12

/11

2/12

/11

3/12

/11

4/12

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Closing Remarks

Kevin DuignanManaging Director Global Head of Structured Finance and

March 2014

Global Head of Structured Finance and Covered Bonds

clos in the heartland - mayer brown...fitch/mayer brown clos in the heartland middle market lending...

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