CORE Track Session Credit Market Update: Is the Thaw Real?

Wednesday, March 23, 7:45 – 8:30 a.m.

Sponsored by William Blair & Company and BDO

Credit Market Update: Is the Thaw Real?Moderator: • Mark Cordes, Audax Group

Panel: • Juan E. Alva, Fifth Street Finance • Tom Klimmeck, Madison Capital Partners• Charles F. Riceman, Golub Capital• Brian Harrer, U.S. Bank

Sponsored by:

Private Equity Outlook

3

Deals and Capital Invested, 2005 - 2010

US Private Equity 2005 2006 2007 2008 2009 2010Capital Invested ($B) $ 173 $ 307 $ 596 $ 217 $ 61 $ 145

# of Deals 2061 2542 3011 2238 1375 1624

Source: PitchBook

Private Equity Outlook

4

Quarterly Deals and Capital Invested, 2007 – 2011 Q1

Source: PitchBook

Private Equity Outlook

5

PE Backed Companies by Vintage, 2000 - 2010

Year of Investment

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010PE-Owned Companies 108 98 138 256 474 678 974 1234 898 497 639

Source: PitchBook

Private Equity Outlook

6

PE Exits, 2000 - 2010

# of US PE Exits 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Corporate Acquisition 124 104 115 125 214 234 273 342 265 181 303IPO 49 23 25 27 67 72 74 78 15 30 59Secondary Transaction 22 15 31 61 100 128 165 191 110 45 141Total Count of closedate 195 142 171 213 381 434 512 611 390 256 503

Source: PitchBook

Private Equity Outlook

7

PE Backed Companies, 2004 - 2010

Source: PitchBook

Loan Market Update

8

Middle Market Loan Volume, 2004 - 2010

Source: Standard & Poor’s 4Q10 Review

Increased volume driven by: (i) economic recovery; (ii) tax driven M&A activity; and (iii) increased liquidity

Refinancings (32% share) and dividend recaps (20%) were largest use of proceeds

LBO’s in ‘10 represented 16% of volume vs. 49% in ‘07

Healthcare is largest industry segment at 12% share, up from 10% in ‘07

Computer/electronics, chemicals and food/beverage were biggest share gainers in ‘10 vs. ‘07

Services/leasing, utilities, printing/publishing, and oil/gas were biggest share losers in ‘10 vs. ‘07

Market Loan Volumes – New Issues

Market Loan Volumes – New Issues

Middle Market Sponsored VolumeMiddle Market Sponsored Volume

0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$25

$50

$75

$100

$125

$150

$175

$200

Sp

on

so

r %

of

To

tal

$ in

bil

lio

ns

Total Non-Sponsor Total Sponsor Sponsor % of Lev.

0%

10%

20%

30%

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50%

$0

$2

$4

$6

$8

$10

MM

% o

f Tot

al

$ in

bill

ions

MM Sponsor MM Sponsor % of Total Sponsor

Loan Market Update

9

Distribution of Loan Maturities, 2010 - 2017

Market Loan Volumes – New Issues

Market Loan Volumes – New Issues

Middle Market Sponsored VolumeMiddle Market Sponsored Volume

14

30

77

174

225

55

0311

56

125

223

00 3

21

71

181

109

33

1

38

13

65

$0B

$50B

$100B

$150B

$200B

$250B

2010 2011 2012 2013 2014 2015 2016 2017

12/31/2008 12/31/2009 12/17/2010

2010 2011 2012 2013 2014 2015 2016 2017 TotalAdditions

New Deals 1.4 1.1 0.4 5.7 20.3 29.0 80.4 22.7 161.0Facility Increases 0.0 0.0 0.0 0.4 0.7 0.3 0.6 0.0 2.0Amend/Extend 0.0 0.1 1.3 1.6 3.1 7.7 18.4 11.7 43.8

SubtractionsPaydowns 1.9 5.6 17.9 19.0 17.0 3.7 1.9 0.0 67.1Partial Paydowns 0.5 1.1 6.8 5.9 10.4 2.9 1.4 0.4 29.3HY Take-outs 0.1 0.9 6.6 16.5 15.3 2.2 0.2 0.8 42.7Defaults 0.2 0.2 0.6 3.8 3.3 0.7 0.0 0.0 8.9Amend/Extend 1.6 0.7 5.0 16.5 20.0 0.0 0.0 0.0 43.8

As of 12/31/09 3.3 10.5 56.3 124.8 223.4 37.5 13.0 0.0 468.8As of 12/17/10 0.4 3.2 21.1 70.9 181.4 64.8 108.8 33.3 483.9

• Significant progress was made in extending near-term loan maturities in 2010.

• In addition to nearly $50 billion of Amend-to-Extend (“A-to-E”) deals, issuers printed more than $114 billion of bond-for-loan takeouts, $43 billion of which repaid loans.

• Arrangers expect A-to-E activity to remain strong in 2011 as issuers look to address 2013 / 2014 loan maturities through IPO’s, M&A activity, cash flow or full refinancings.

Loan Maturity Additions and Subtractions, 2010 - 2017Loan Maturity Additions and Subtractions, 2010 - 2017

Loan Market Update

10

Middle Market Pricing, 2004 - 2010

Source: Standard & Poor's 4Q10 Review and Madison Capital*MM Sponsor pricing is primary issuance, tranche weighted, and includes upfront fees amortized over three years.

Source: Standard & Poor's 4Q10 Review, Fannie Mae, Bloomberg and Madison Capital

100

200

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Ba

sis

Po

ints

(L

+)

MM Sponsor AIS Avg AIS B+/B

Data notavailable

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

All

-in

Inte

rest

Rat

es

Institutional Loan Spreads (B+/B) LIBOR floor less 3M LIBOR 3M LIBOR

Primary Spreads for B+/B Credits Vs. New Issue MM Sponsor Deals

All-In Cash Coupon (B+/B credits)

Loan Market Update

11

Debt Multiples / Equity Contributions

Source: Standard & Poor’s 4Q10 Review

Average Leverage Multiples of LBO Loans

Deals < $50MM in EBITDA

LBO Purchase Multiples & Equity Contributions

Deal < $50MM in EBITDA

3.0x 3.0x3.4x

3.7x4.0x

3.2x

2.5x

3.2x3.4x

0.8x1.2x

1.3x 1.1x

1.6x

1.3x

0.7x

1.0x 0.7x

3.8x

4.2x

4.7x 4.7x

5.6x

4.5x

3.3x

4.2x 4.1x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

2003 2004 2005 2006 2007 2008 2009 2010 4Q10

Deb

t M

ult

iple

s

Junior Debt/EBITDA 1st Lien/EBITDA

7.0x 7.2x

8.5x8.1x

9.3x

8.3x

6.6x

8.3x8.0x

37.9%

39.7%

35.4%

34.1%

32.1%

40.2%

45.6%

44.8%

43.8%

25%

30%

35%

40%

45%

50%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

2003 2004 2005 2006 2007 2008 2009 2010 4Q10

Eq

uit

y C

on

trib

uti

on

%

Pu

rch

ase

Mu

ltip

les

Purchase Multiple % Equity

Loan Market Update

12

Institutional Loan Investors

Source: Standard & Poor’s 4Q10 Review

Investor Market Share for Highly Leveraged

Issuers < $50 million in EBITDA

Source: Standard & Poor's 4Q10 Review

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010

Sha

re o

f Mar

ket

U.S. Banks Foreign Banks Finance Cos. Inst. Investors

Health of the lending market improved significantly in 2010 Default rates at < 2%; recovery rates > 60%

Increasing liquidity into the mid-market is being driven by: Accelerating repayment rates Improved CLO balance sheets Improved commercial bank balance sheets Revitalization of structured products groups within

banks Growing hunger for yield

Optimism continues to build for both large market and mid-market CLO issuance; ~50% of CLO’s reach the end of their investment period by 2012 “Loan ratings” management remains key issue for mid-

market CLO managers

Loan mutual funds are biggest driver of new money into large, liquid market

Source: Intex, Wells Fargo Securities Source: Lipper FMI, S&P LCD Source: S&P LCD

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CLO Issuance

0

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60

70

2003

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2005

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2011(YTD

)

NA

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Prime-Fund NAV

-40

-20

0

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120

140

2003

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$ B

illi

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Change in Outstandings

Coming Up Next . . .• ACG Core Track (Elizabeth G)

• 8:45 - 9:30 a.m. Capital Markets Update: From Leverage to IPO

• 10:00 – 11:00 a.m. The Sell Side Process: Tactics for a Changing Game

• 11:15 a.m. – Noon Lower Middle Market Update

• 2:00 – 3:00 p.m. Strategies for Add-On Acquisitions

• Noon – 1:45 p.m. Lunch & Keynote with General Stanley McChrystal (Ret)Sponsored by Fifth Street Capital (Elizabeth Ballroom)