richard byrne -...
TRANSCRIPT
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#MIGlobal #MIGlobal
Richard Byrne
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#MIGlobal
69%
17% 12%
31%
83% 88%
0%
20%
40%
60%
80%
100%
2002 2013 1H 2014
Banks (U.S. and non-U.S.) Non-banks
Traditional Lenders Exiting Middle Market Space
Traditional lenders continue to shift focus away from the middle-market leveraged loan market
Over the past decade, the share of primary middle market loans issued by banks has fallen significantly
We believe a combination of regulatory and structural changes has led to banks leaving middle market lending, resulting in a significant funding gap
Increasing need for capital
Significant number of middle market loan maturities continue to come due
Source: S&P LCD, SDC, Reuters.
Note: Middle market defined as issuers with EBITDA of $50 million or less. Data reflects share of non-bank investors in middle market leveraged loans. Views
expressed are those of BSP.
Primary Middle-Market Leveraged Loan Market* Middle Market Loan Maturities*
$0bn
$20bn
$40bn
$60bn
$80bn
$100bn
$120bn
$140bn
2015 2016 2017 2018 2019
Non-Sponsored Sponsored
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#MIGlobal
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD
Lower Rated New Issuance Defaulted Debt
Lower Rated Issuance Leads to Increased Defaults
Note: Views expressed are those of BSP. Opinions, estimates, forecasts and statements of financial market trends above are based on current market conditions and
are subject to change without notice. While the information provided here is believed to be reliable it should not be assumed to be accurate or complete. The views and
strategies described may not be suitable for all investors.
Source: JPM as of October 1, 2014. Lower-rated new-issues include: Split B, CCC, and Not Rated securities.
Increased
Lower Rated
New
Issuance…
…Leads to
Increased
Defaults
High-yield new issuance. $ in billions
Lower Rated New HY Issuance and Defaulted Debt
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#MIGlobal
0
50
100
150
200
250
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
($ in billions)
Destruction of CRE Lending Capacity Three of the top four lenders in 2007 no longer exist or have exited the US CMBS lending business
Approximately 44% of 2007 market capacity has been destroyed, which could rise to a 50% reduction in market capacity assuming
the exit of some additional, significant European banks
2007 Top 15 Lenders
= Finance companies Strikethrough
CMBS Issuance (Excluding Agency CMBS)
= High risk of exiting business in next 24 months
Red Text
= No longer exist or exited CMBS lending
Source: Commercial Mortgage Alert, Bank of America Merrill Lynch Global Research.
Notes: Views expressed are those of BSP.
2013
RankLender
2013 Total
($in mm)
% of
Total
1 JP Morgan 10,470 13%
2 Deutsche Bank 10,127 13%
3 Goldman Sachs 7,060 9%
4 Morgan Stanley 6,214 8%
5 Wells Fargo 5,829 7%
6 Cantor CRE 5,265 7%
7 Bank of America 5,212 7%
8 RBS 4,814 6%
9 Citigroup 4,770 6%
10 UBS 2,835 4%
11 Barclays 2,795 4%
12 Ladder Capital 2,229 3%
13 Starwood Mortgage 1,513 2%
14 Jefferies LoanCore 1,444 2%
15 Liberty Island 831 1%
2013 Top 15 Lenders
2015-2017
Projected to be
~2x 2012-2014
2014 Top 15 Lenders 2007
RankLender
2007 Total
($ in mm)
% of
Total
1 Wachovia 24,175 10.8%
2 Bank of America 15,624 7.0%
3 Lehman Brothers 14,794 6.6%
4 Credit Suisse 14,730 6.6%
5 Morgan Stanley 13,785 6.2%
6 J.P. Morgan 11,948 5.3%
7 UBS 9,699 4.3%
8 Deutsche Bank 9,593 4.3%
9 Bear Stearns 9,563 4.3%
10 RBS Greenwich 9,175 4.1%
11 Merrill Lynch 8,642 3.9%
12 Goldman Sachs 8,470 3.8%
13 Citigroup 6,917 3.1%
14 LaSalle Bank 6,811 3.0%
15 Countrywide 6,701 3.0%
2 0 14
Ra nkLe nde r
2 0 14
Tota l ($ in
mm)
% of
Tota l
1 Deutsche Bank 13,719 16%
2 JP Morgan 11,176 13%
3 Wells Fargo 5,998 7%
4 Cantor CRE 5,762 7%
5 Bank of America 5,504 6%
6 Morgan Stanley 5,331 6%
7 Citigroup 5,087 6%
8 Goldman Sachs 4,811 6%
9 Ladder Capital 3,493 4%
10 Barclays 3,106 4%
11 UBS 2,959 3%
12 Credit Suisse 2,328 3%
13 RBS 2,237 3%
14 Starwood Mortgage 1,618 2%
15 Rialto Mortgage 1,494 2%
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#MIGlobal
High Leverage Levels & Low Quality Issuance Distressed Opportunities:
Median New Issue Loan Leverage CCC-rated Bonds and Loan Issuance
(% of Market Size)
4.0x 4.1x 4.3x 4.3x
4.4x
4.9x
3.7x
4.1x 3.9x
4.4x 4.6x
4.7x 4.9x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
5.0x
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD
2014*
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1998 2000 2002 2004 2006 2008 2010 2012 2014
CCC Bonds + Loans (Issuance % of Market Size)
Source: CCC Bonds and Loans as a % of Market Size from Deutsche Bank Credit Strategy Chartbook as of October 31, 2014. Median New Issue Loan
Leverage from Pitchbook Q3 2014 * Through 9/30/2014
Note: Please see disclaimer on the last page of this presentation for more information. Views expressed are those of BSP. Opinions, estimates, forecasts and
statements of financial market trends above are based on current market conditions and are subject to change without notice. While the information provided
here is believed to be reliable it should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.
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#MIGlobal
Dealer Inventory & HY Turnover Have Fallen Significantly Distressed Opportunities
Primary Dealer Corporate Bond Inventory vs.
High Yield & Leveraged Loan Outstanding HY Debt Outstanding vs. 12 Month Turnover (Trace)
Source: Dealer Inventory is Goldman Sachs “The state of play in the leveraged finance market: Ok for now” from 10/8/2014. HY & LL Outstanding is LCD. 12-
Month Turnover is Barclays Research, "Liquidity in the Small Stuff," US Credit Alpha, 12 Sept. 2014. 2014 volume is straight-line annualized.
Note: Please see disclaimer on the last page of this presentation for more information. Views expressed are those of BSP. Opinions, estimates, forecasts and
statements of financial market trends above are base don current market conditions and are subject to change without notice. While the information provided
here is believed to be reliable it should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.
.
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2001 2003 2005 2007 2009 2011 2013
Corporate Bond Dealer Inventory
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
0
200
400
600
800
1,000
1,200
2005 2007 2009 2011 2013
HY Debt Turnover (%)
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#MIGlobal #MIGlobal
David Warren
Source: .
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#MIGlobal
US CMBS Maturity “Wall”
Source: Credit Suisse, Trepp. Includes legacy CMBS conduit maturities.
Drop in maturities due to liquidations, prepayments, defeasance, and amortization.
80
120 122
321
45
104 113
262
-
50
100
150
200
250
300
350
2015 2016 2017 Total
Expected CMBS maturities, April 2014 Balance Remaining, April 2015
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#MIGlobal
Recent US CMBS Issuance
Source: Barclays Capital, Commercial Mortgage Alert.
Includes conduit, single borrower, and floating rate fusion (excludes agency CMBS).
44
79
89
114
-
20
40
60
80
100
120
140
2012 2013 2014 YTD 4/24/15,annualized
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#MIGlobal #MIGlobal
Thomas Finke
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#MIGlobal
Covenant Lite Loans Become Majority of Market Share
Source: S&P/LCD as of March 31, 2015.
Oct-1 2 Jan-1 3 Apr-1 3 Jul-1 3 Oct-1 3 Jan-1 4 Apr-1 4 Jul-1 4 Oct-1 4 Jan-1 5 Apr-1 5
25%
30%
35%
40%
45%
50%
55%
60%
COVENANT LITE SHARE OF OUTSTANDINGS
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European Banks Retreat, High Yield Bond Market Emerges
Source: FactSet as of March 31, 2015.
2005 2006 2007 2008 2009 201 0 201 1 201 2 201 3 201 4
€3.2T
€3.4T
€3.6T
€3.8T
€4.0T
€4.2T
€4.4T
€4.6T
€4.8T
€5.0T
€50B
€100B
€150B
€200B
€250B
€300B
€350B
EUROPEAN CORPORATE BORROWING
Bank Lending to Non-Financial Corporations - Euro Zone (Left)BofA Merrill Ly nch European Currency High Yield - Constrained / Non-Financials - Market Value (Right)
-€570B
+€275B
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#MIGlobal
High Yield Corporate Spreads
Source: Factset, Credit Suisse, Bank of America Merrill Lynch and Babson Capital as of April 17 , 2015. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. It is not possible to invest directly in
an Index.
Apr May Jun Jul Aug Sep Oct Dec Jan Feb Mar Apr
300bps
350bps
400bps
450bps
500bps
550bps
392
466
492
503
West Euro Lev Loan Index DM3 Spread CS Lev Loan Index DM3 SpreadBAML European Currency High Yield OAS BAML U.S. High Yield Master OAS
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Increased Institutional Interest
Note: For illustrative purposes only. Return ranges are gross and based on Babson’s market
observations as of March 31, 2015.
2-4% 3-5% 5-7% 12-15% 15%+ 10-13% 7-10%
Traditional Commercial Bank Strategies Traditional Institutional Strategies
Broadening Institutional Investor Interest
Traditional middle market leveraged finance is becoming increasingly institutionalized
Increasing Risk / Return Spectrum
Traditional
commercial
bank loans
Performing
asset based
loans
Middle market
1st lien loans
Mezzanine,
subordinated
debt
Middle market
private equity
Middle market
unitranche
loans
Middle market
2nd lien loans
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#MIGlobal
Global Private Credit Return Profile
1. S&P LCD 1Q15 U.S. Middle Market Review. Represents all-in institutional spreads of LBOs. Middle market
defined as issuers with less than $50 million in EBITDA
U.S. middle market loan historically offer a return premium to broadly syndicated loans
495
558
200
250
300
350
400
450
500
550
600
650
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q15
U.S. Large Market U.S. Middle Market
U.S. Middle Market vs. Large Corporate Loan Spreads (bps)
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#MIGlobal #MIGlobal
Steven Tananbaum
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#MIGlobal
Markets are Late Mid-Cycle
0
1
2
3
4
5
6
Leverage Ratios
Source: Source: Leveraged ratios from S&P LCD using 1st lien and junior debt over EBITDA. Leveraged
Loan acquisition finance and CCC & below volume from JP Morgan Credit Strategy research. As of 3/31/2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
Acquisition Finance Debt to EBITDA
% of total issuance
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#MIGlobal
CCC Expected to Underperform
Default Rate Increase
Prior Year Default Rate
CCC Index Return
HY Index Return
CCC Index Underperformance
1989 +2.2% 3.6% -18.4% +0.4% -18.7%
1998 +1.2% 2.2% -6.3% +3.0% -9.3%
1999 +2.4% 3.3% +1.5% +2.5% -1.0%
2008 +3.5% 1.0% -38.3% -26.4% -11.9%
2015 Going Higher
2.1% +1.6% +2.4% -0.8%
Source: Moody’s Speculative default rates; Merrill Lynch HY Index Returns since 1998. Previously Credit
Suisse HY Index Returns. As of 3/30/2015
Over the past 30 years, when default rates rise by at least 1% during periods of low default, the CCC
Index has significantly underperformed the overall HY Index by -10% on average
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#MIGlobal
Performance Across Credit Quality
2015 Return
Difference to ML HY
Index
2014 Return
Difference to ML HY
Index
2013 Return
Difference to ML HY
Index
ML HY Index 2.55% - 2.50% - 7.42% -
BB 2.67% +12 bps 5.34% +284 bps 5.19% -223 bps
B 2.71% +17 bps 1.32% -118 bps 7.47% +6 bps
CCC / Lower 1.78% -77 bps -2.57% -507 bps 12.96% +554 bps
Source: Merrill Lynch HY Index Returns. As of 3/31/2015
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#MIGlobal
Average: 20.7%
Period of Above Average
Defaults Rates
Average: 15.4%
Period of Above Average
Defaults Rates
Growing Distressed Universe When annual default rates reach the 5% area, Distressed Debt (i.e. Debt with Spreads greater then
1000bps) is typically 18% of the index or a market size of $250 billion today
1%
8% 6%
25%
17%
24%
5% 3% 3% 1%
6%
63%
10%
4%
14%
6% 2%
7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percentage of Merrill Lynch HY Index with Spreads Greater than 1000bps
Source: Merrill Lynch High Yield Index; Moody’s Global Speculative Grade Default Rates.
As of 12/31/2014
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#MIGlobal
Energy and Commodities Sector Expansion
9% 10% 13%
15% 19% 19%
0%
5%
10%
15%
20%
2004 2006 2008 2010 2012 2015
Energy and Commodities % of HY Bond Index
Source: Energy, Commodity and TMT sector weightings based on Credit Suisse HY Bond Index as of
March 31, 2015
11% 13% 18%
24% 32%
38%
0%
10%
20%
30%
40%
1989 1991 1993 1995 1997 1999
Energy and Commodities % of HY Bond Index
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#MIGlobal
Technology Expansion with CCC Issuance Technology sector has grown over the past 3 years with increased issuance of CCC bonds with leverage
ratios increasing over the last 5 years
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2012 2013 2014
Technology as % of CCC Issuance
Source: S&P LCD; Leverage ratio base don JP Morgan research
3
4
5
6
7
8
2011 2012 2013 2014
Leverage Ratio of LBO Technology
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#MIGlobal
Structured Finance Issuance Vs Corporate Issuance
Source: SIFMA for Structured Finance issuance; SP LCD, Barclays Research for Corporate issuance
2.1 2.2
2.1
0.5 0.6
1.2
1.8 1.9
2.6 2.6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2006 2007 2013 2014
Structured Finance Issuance Corporate Bond and Loan IssuanceUS & Europe Issuance in $ Trillions
Ratio of Structured Finance to Corporate Issuance
1.8 1.3 1.1 0.2 0.2
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#MIGlobal #MIGlobal
Michael Hintze
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Credit Market Cycle: Opportunity Returning
Source: CQS and Bloomberg, as at 7January 2015.
Market Evolution Since 2011
High Volatility / High Spread
Low Volatility / High Spread Low Volatility / Low Spread
High Volatility / Low Spread
Spread Spread
Volatility
H1 2011
Q4 2011
Q4 2012/ Q1 2013 Q2 2014
Q3 2014
Current
2015/16? 2015/16?
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#MIGlobal
Euro Non-Financial Issuance Up Significantly
Source: Citi Research, Dealogic, as at 17 April 2015.
Year-to-date € IG issuance, €bn
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#MIGlobal
European Dispersion is Back: Uncoupling in Credit…
Source: Bloomberg, as at 17 April 2015.
One Market, Two Outcomes: Wider High Yield Spreads
but Tighter High Grade Spreads
80
90
100
110
120
130
140
150
200
250
300
350
400
450
500
October2013
January2014
April2014
July2014
October2014
January2015
April2015
bp
s
bp
s
High Yield High Grade (RHS)
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#MIGlobal
Decompression in High Yield Creates Opportunity
Source: J.P. Morgan, Markit Group, ‘European High Yield Weekly Analytics’, 31 March 2015.
For illustrative purposes.
European High Yield Total Returns
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#MIGlobal
Xover Dispersion Provides Opportunity
Source: CQS, Bloomberg as at 20 April 2015. For illustrative purposes.
Excludes index constituents with spreads greater than 800 bps.
Index Constituents (LHS) iTRAXX Xover 5 year Series 21 (RHS)
50
150
250
350
450
550
650
0
100
200
300
400
500
600
700
800
January2013
June2013
October2013
March2014
July2014
December2014
April2015
bp
s
bp
s
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#MIGlobal
European Senior Secured Loans:
Paid to Move up in the Capital Structure
Source: 1Bloomberg, BoAML Euro High Yield Constrained Index (HEC0) as at 28 February 2015.
Institutional Tranches refer to loans which are syndicated to institutional / non-bank investors.
For illustrative purposes only. It is not possible to invest directly in an index. 2S&P LCD European Leveraged Lending Review, as at 28 February 2015.
BoAML Euro High Yield Constrained Index (HEC0)1 vs.
Institutional Tranches of Europe Primary Senior Secured Loans2
200
400
600
800
1000
December2011
June2012
December2012
July2013
January2014
August2014
February2015
bp
s
BoAML Europe High Yield Constrained IndexEuropean Primary Senior Secured Loan Spread over Euribor
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#MIGlobal
Primary Dealer Inventories of Corporate Bonds Have Dropped
as Bond Market Volume Has Risen
Source: FRB, Haver Analytics, DB Global Markets Research, as at April 2015.
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#MIGlobal
Saudi Arabia as the Swing Producer
Source: Bloomberg, 28 December 2014.
1998-99 2001-02 2006-07 2008-09 2013-14
Oil Price (55.8%) (39.7%) (23.6%) (67.9%) (50.8%)
Saudi Output (70.4%) (88.7%) (40.5%) (67.3%) (11.7%)
OPEC Output (42.5%) (64.7%) (19.1%) (44.5%) (6.3%)
(% decline in the price of oil and output)
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#MIGlobal
Marginal Cost Curve for Global Oil
Source: Morgan Stanley Research, ‘Crude Oil: 2015 Outlook’, 5 December 2014.
Prices Likely to Remain Low
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#MIGlobal
Is this the End of OPEC?
Saudi Arabia no longer a Swing Producer
Source: IMF Working Paper, ‘Economic Growth and Government Spending
in Saudi Arabia: an Empirical Investigation’, January 2014.
Rising defence and education expenditures in 2013 led to fixed surplus declining to
5.8% and fiscal break even price of oil rose to $89/bbl vs $78/bbl in 2012
Saudi Arabia: Government Expenditures: by Sector 1970-20101
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#MIGlobal
TARGET2 Balances
Source: http://www.eurocrisismonitor.com/, as at 14 April 2015
Individual euro area NCB's, International Financial Statistics (IFS).
€m
-450
-250
-50
150
350
550
750
January2007
August2008
March2010
November2011
June2013
February2015
Belgium Germany Estonia Ireland Greece Spain
France Italy Cyprus Luxembourg Malta Netherlands
Austria Portugal Slovenia Slovakia Finland Latvia
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#MIGlobal
TARGET2 Balances
Source: http://www.eurocrisismonitor.com/, as at 14 April 2015
Individual euro area NCB's, International Financial Statistics (IFS).
€m
-450
-250
-50
150
350
550
750
January2007
August2008
March2010
November2011
June2013
February2015
Germany Greece Spain Italy Luxembourg Netherlands
€513,365
€103,421
€8,010
(€91,157)
(€164,566)
(€192,417)
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#MIGlobal
Spike in Claims Indicates Stress in Greece and Cyprus
Source: European Central Bank, Statistical Data Warehouse, 21 April 2015
Claims on Euro Area Credit Institutions Including Emergency Liquidity
Assistance (ELA)
0
50
100
150
200
250
300
19
98
-W5
3
20
00
-W1
8
20
01
-W3
6
20
03
-W0
2
20
04
-W2
0
20
05
-W3
7
20
07
-W0
3
20
08
-W2
1
20
09
-W3
9
20
11
-W0
4
20
12
-W2
2
20
13
-W4
0
20
15
-W0
6
€ b
n
1998 2000 2001 2003 2004 2005 2007 2008 2009 2011 2012 2013 2015
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#MIGlobal #MIGlobal
Mike Milken
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Source: Bloomberg and International Monetary Fund. Note: Includes cash and near cash items.
Increase in Corporate Cash Balances Cash holdings of publicly listed companies, percent of GDP
17
6 7 8 6
4
13
9 6
1 3
7 3 4
42
37
30
21
16 15 13 12
10 9
7 7 6 5
0
5
10
15
20
25
30
35
40
45
Japan$2030
China$3686
U.K. $847 France$612
Korea$205
Spain$208
Canada$227
U.S. $2102 Brazil$229
Russia$181
India$137
Germany$255
Italy $126 Mexico$61
Q4 2005 Q4 2014Percent of GDP
US$ billions
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Corporate cash balances
15
61
23 15
22 7
25
8 8
155
138
90
65 52
45 33
14 14
0
20
40
60
80
100
120
140
160
180
Apple +909% GE +126% Microsoft +285%Google +323% Cisco +134% Oracle +537% Pfizer +31% Chevron +79% Merck +74%
US$ billions
Source: Bloomberg. Note: Cash and marketable securities.
Percent change
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Japanese Companies’ Cash Stockpiles
0.1
1.7
0.8 1.0 1.0
0.4
0.1
2.4 2.3
1.6
1.2
0.6 0.4 0.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Toyota Softbank Honda Motor Mitsubishi Mitsui Rakuten Sony
2007 2014US$ trillions
Source: Bloomberg 1/27/15.
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S&P 500 leverage has fallen
0
1
2
3
4
5
6
2001 2003 2005 2007 2009 2011 2013 2015
Net debt-to-EBITDA
Source: Bloomberg.
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U.S. corporate profits
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000 2002 2004 2006 2008 2010 2012 2014
US$ trillions
Source: BEA, Bloomberg. Note: U.S. corporate profits without IVA and CCA profits before tax, seasonally.
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S&P 500 value
7
8
9
10
11
12
2007 2008 2009 2010 2011 2012 2013 2014 2015
Enterprise value to T12M EBITDA
Sources: Bloomberg.
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Sources: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises, Carmen M.
Reinhart / Milken Institute
• 1828
• 1898
• 1902
• 1914
• 1931
• 1937
• 1961
• 1964
• 1983
• 1986
• 1990
• 1832
• 1868
• 1911
• 1914
• 1931
• 1982
• 1999
• 2008
•1876
•1915
•1931
•1940
•1959
•1965
•1978
•1982
•2000
• 1826
• 1848
• 1860
• 1865
• 1892
• 1898
• 1983
• 1990
• 1995
• 1998
• 2004
Brazil Ecuador
• 1839
• 1885
• 1917
• 1918
• 1947
• 1957
• 1991
• 1998
Russia
•1826
•1843
•1852
•1893
•1932
•2011
Greece Turkey Venezuela
• 1982
• 1986
• 1992
• 2001
• 2004
Nigeria
Sovereign Debt Defaults
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Systemically important banks tier 1 capital ratio
0 2 4 6 8 10 12 14 16 18
Deutsche Bank
Barclays
HSBC
BNP Paribas
Royal Bank of Scotland
Goldman Sachs
Wells Fargo
Bank of America
Citigroup
JP Morgan Chase
Percent
Source: Bloomberg (4/5/2015)
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Systemically important banks leverage
0 2 4 6 8 10 12
Wells Fargo
Bank of America
Citigroup
JPMorgan Chase
Goldman Sachs
HSBC
BNP Paribas
Credit Suisse
Societe Generale
Deutsche Bank
Common equity/total assets, percent
Source: Thomson Reuters.
Notes: BBVA and Barclays from Q3 2014, all else from Q4 2014.
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Concentration of Three Largest Banks Total assets of top 3 banks, percent of home country’s GDP
0%
50%
100%
150%
200%
250%
300%
France United States
Crédit Agricole
Société Générale
263% of GDP ($6.5 T)
50% of GDP ($9.1T)
J.P. Morgan Bank of America
Citigroup BNP Paribas
Note: Data for Q4 2014. U.S. ratio reflects IFRS accounting treatment for derivatives; under GAAP, the ratio is 36%. Sources: Bankscope, SNL.
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Total bank assets relative to GDP Q4 2014
552% 524%
373%
293% 283% 261% 249%
222%
Ireland Cyprus France Spain Portugal Germany Italy Germany
Percent of GDP
Source: Thomson Reuters.
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Assets of the 4 biggest banks Q4 2014
340% 304%
239% 220%
162% 151% 123% 113% 99%
60%
Percent of GDP
Sources: BankScope, Milken Institute.
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Assets of the 4 Biggest Banks Q4 2014
340% 304%
239% 220%
162% 151% 123% 113% 99%
60%
Percent of GDP
Sources: BankScope, Milken Institute.
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Unit labor costs in Europe Q4 2014
116 114
112
106 103
98
Italy France Germany Ireland Greece Portugal
85
90
95
100
105
110
115
120
Source: OECD.
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Source: OECD
Euro area unit labor costs
90
100
110
120
130
140
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
France Germany Greece Ireland ItalyIndex (2000 = 100)
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Job Creation Since 1970
Source: OECD.
90
110
130
150
170
190
210
1970 1975 1980 1985 1990 1995 2000 2005 2010
United States
Western Europe
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Europe 26% Japan 9%
U.S. 59% Other 6%
US + Japan = 68%
Market Capitalization: 1950
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Unit Labor Costs in Europe
100
105
110
115
120
125
GREECE PORTUGAL ITALY IRELAND SPAIN GERMANY
Index (2005 = 100)
Source: European Central Bank, Q4 2011
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Central Bank Assets
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
BoE BoJ Fed ECBUS$ trillions
Source: Datastream.
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Source: Bloomberg.
Central bank target interest rates
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014 2015
BoE Fed ECB BoJPercent
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US 10-year Treasury yields
0
2
4
6
8
10
12
14
16
18
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Ten-year Treasury yield, percent
Average: 6.57 percent
Source: Bloomberg.
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AAA corporate bond spreads
0
0.5
1
1.5
2
2.5
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US Euro UKPercent over government bonds
Source: Thomson Reuters. Eurozone benchmark yields are compared with German government yields.
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BBB corporate bond spreads
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US Europe UKPercent over government bonds
Source: Thomson Reuters. Notes: 5 year benchmark indices used. Eurozone benchmark yields are compared with German government yields.
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Public pension assumptions vs. corporate bond yields
0 1 2 3 4 5 6 7 8 9
AAA
AA
A
BBB
Median assumption
Source: Thomson Reuters, Bloomberg, NASRA. Note: 5 year corporate benchmark indices used.
Percent
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Median public pension annualized returns
0
2
4
6
8
10
12
14
16
18
1 yr 3 yr 5 yr 10 yr 20 yr 25 yr
Percent
Median assumption: 7.75%
Source: NASRA.
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Average expected return assumptions
0%
2%
4%
6%
8%
10%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: Goldman Sachs., Milliman.
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Government bond returns in 2015
-35 -30 -25 -20 -15 -10 -5 0 5
Greece
Spain
Italy
Germany
France
Ireland
UK
Australia
Mexico
Japan
US
Total returns in US$, YTD, percent
Source: Thomson Reuters.
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Seven-year asset class real return forecasts As of December 2014
5.4
3.8 2.9
1.3 1.2 0.4 0
-0.3 -0.6 -1.8
-2.9 -3.4
-6
-4
-2
0
2
4
6
Timber Emergingequity
Emergingdebt
Int'l largecap
equity
Int'lsmall cap
equity
U.S. highqualityequity
Inflationlinkedbonds
Cash U.S.bonds
U.S. largecap
equity
U.S. smallcap
equity
Int'lhedgedbonds
Percent
Source: GMO.
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Long-term U.S. Treasury yields have dropped Treasury yield curves
0
1
2
3
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y
Percent
1/1/15
4/8/15
Source: Bloomberg.
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Oil prices
0
20
40
60
80
100
120
140
2013 2014 2015
Price of crude oil per barrel, US$
WTI
Brent
Source: Thomson Reuters.
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Markets pricing in sovereign yields in a year 10-year sovereign bonds
0
0.5
1
1.5
2
2.5
3
3.5
2012 2013 2014 2015
U.K.
1 year forward rates, percent
Eurozone
U.S.
Source: Bloomberg.
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Total U.S. credit market debt
0
10
20
30
40
50
60
70
'50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14
US$ trillions
Total credit market debt outstanding
GDP
Debt/GDP (1950-1980): 1.5
Source: Federal Reserve, BEA. Note: Total credit market debt includes that owed by domestic nonfinancial, the financial sectors, and the rest of the world.
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U.S. high yield corporate bond yield
0
2
4
6
8
10
12
2010 2011 2012 2013 2014 2015
Yield to worst, percent
Source: Bloomberg. Note: Yield to Worst. BofA ML U.S. HY Master II.
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U.S. high yield corporate bond yield
0
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013 2014 2015
Option-adjusted spread, percent
Source: Bloomberg. Note: Bank of America Merrill Lynch U.S. HY Master II. OAS.
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Interbank lending rates
0
1
2
3
4
5
6
7
8
9
10
2001 2003 2005 2007 2009 2011 2013 2015
Percent
China UK
US
Japan
EU
Sources: Datastream.
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Euro area loans
-20
-10
0
10
20
30
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Rolling 12 month percent change
Source: Thomson Reuters.
To households
To financial intermediaries
To non-financial corporations
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European bank deposits
300
800
1,300
1,800
50
100
150
200
250
2000 2003 2006 2009 2012 2015
Euros billions
Italy
Ireland
Greece
Portugal
Spain
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Greece vs. Euro area government bond yields
0
2
4
6
8
10
12
14
2013 2014 2015
Greece
Portugal
Italy
Spain
Ireland
France
Germany
10 year government bonds, percent
Source: Thomson Reuters.
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Euro area unemployment rates
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Percent Greece
Spain
Ireland
Portugal
Italy
Germany
Source: Thomson Reuters.
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Greece primary budget balance
-12
-10
-8
-6
-4
-2
0
2
4
6
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Percent of GDP OECD forecast for 2015
Source: Thomson Reuters.
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U.S. loan amendments
0%
25%
50%
75%
100%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Amended
Unchanged
Percent of total loan terms
Source: Bloomberg.
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Global corporate leverage
0123456789
10
Emerging Asia DevelopedAsia
Latin America Middle Eastand Africa
EasternEurope
North America WesternEurope
IG HYAverage corporate debt/EBITDA ratio
Source: Bloomberg.
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U.S. corporate profitability
0 5 10 15 20 25 30 35 40 45 50
Financials
Oil & Gas
Health Care
Industrials
Consumer Services
Basic Materials
Technology
Consumer Goods
Utilities
Telecom
HY
IG
2010-2015 revenue growth, percent
163%
Source: Bloomberg.
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U.S. corporate ratings changes
0%
25%
50%
75%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Upgrades
Downgrades
Percent of total changes
Source: Bloomberg.
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U.S. corporate ratings changes
0
1
2
3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Up/Down Ratio
Source: Bloomberg.
Note: Ratio means credit rating upgrades divided by credit rating downgrades.
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U.S. energy sector credit term structure
0
50
100
150
200
250
1 Yr 2Yr 3Yr 4Yr 5Yr 7Yr 10Yr
Bps
0
500
1,000
1,500
2,000
1 Yr 2Yr 3Yr 4Yr 5Yr 7Yr 10Yr
Bps
Source: Bloomberg.
Note: As of 4/22/15.
Investment grade High yield
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European peripheral sovereign default risks have fallen
Sovereign 5-year credit default swap rates
40
140
240
340
440
540
640
Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15
Index, 100=4/18/13
Portugal
Italy
Ireland Spain
Source: Bloomberg.
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Nonbank direct loans to European companies increase
0
10
20
30
40
50
60
70
80
2012 2013 2014
Deal count
Source: Deloitte.
Note: Deal location as of Q4 2014.
France 25%
U.K. 43%
Germany 13%
Rest of Europe
19%
Deal location
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Most European alternative lending is LBO-related
0
10
20
30
40
50
LBO Dividend recap Refinancing Bolt-on M&A Growth capital
U.K. Euro
Deal purpose, percent
Source: Deloitte.
Note: As of Q4 2014.
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Unitranche is a popular structure for European direct lending
0
10
20
30
40
50
Senior Unitranche Second lien Mezzanine PIK/other
U.K.
Euro
First lien
Deal structure, percent
Source: Deloitte.
Note: “PIK” refers to payment in kind lending. As of Q4 2014.
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Banks vs. non-bank banks G-20 countries
0
400
800
1,200
Total assets, percent of GDP
Banks
Non-bank banks
Source: Financial Stability Board.
Note: As of Q4 2014.
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Assets of non-bank financial intermediaries G-20 member countries
0
10
20
30
40
50
60
70
80
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
US$ trillions
Source: Global Shadow Banking Monitoring Report 2013, Financial Stability Board.
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Emerging market corporate bonds By credit rating
0
100
200
300
400
500
600
700
2000 2002 2004 2006 2008 2010 2012 2014
BBB+ to AAA
CCC+ to BBB
Below CCC+
US$ billions
Source: Bloomberg.
Note: S&P ratings.
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Emerging market corporates raise international debt
0
100
200
300
400
500
600
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Europe Latin America & Caribbean Asia & Pacific Africa & Middle East
Outstanding, US$ billions
Source: BIS.
Note: Non-financial corporate international debt securities outstanding. By
residence of issuer.
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China’s debt
-10
0
10
20
30
40
50
60
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
RMB trillions Non-bank debt
Bank loans
Source: Datastream.
Note: “Non-bank debt” refers to entrusted loans, trust loans, bank acceptance, and corporate bond
financing.
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U.S. vs. European leveraged loan performance
55
65
75
85
95
105
2006 2007 2008 2009 2010 2011 2012 2013 2014
Index, 100=1/1/07
Europe
U.S.
Source: S&P, Bloomberg.
Notes: S&P/LSTA U.S. Leveraged Loan Index, S&P European Leveraged Loan Index.
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Commercial bank treasury holdings
0
0.5
1
1.5
2
2.5
0
5
10
15
20
25
30
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Treasury holdings (R)
Treasury holdings, percent of total credit (L)
US$ trillions Percent
Sources: Federal Reserve.
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Fed treasury holdings
0
1
2
3
0
20
40
60
80
100
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Percent
Treasury holdings, percent of total assets (L)
Treasury holdings (R)
US$ trillions
Sources: Federal Reserve.
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Investors buying corporate bonds as dealers retreat
0
200
400
600
800
1000
1200
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Corporate bonds, US$ billions
Dealer inventory
Including ETFs
Mutual fund assets
Sources: Citi, ICI, NY Fed, Bloomberg, Haver Analytics, U.S. Department of the Treasury.
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U.S. corporate debt markets
0.0
0.5
1.0
1.5
2.0
1996 2002 2008 2014
US$ trillions
0
2
4
6
8
10
1996 2002 2008 2014
Source: SIFMA.
Issuance Outstanding
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U.S. corporate debt outstanding
0
1
2
3
4
5
6
2004 2006 2008 2010 2012 2014
US$ trillions
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2004 2006 2008 2010 2012 2014
Source: MarketAxess.
Investment grade High yield
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U.S. corporate bond trading volume
8
9
10
11
12
13
14
15
16
2006 2008 2010 2012 2014
US$ billions
4
5
6
7
8
9
10
11
12
2006 2008 2010 2012 2014
Source: SIFMA.
Note: Publicly traded and 144A, excludes issues with maturities of one year or less and convertible bonds. 3 month rolling averages used.
Investment grade High yield
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U.S. corporate bond turnover has fallen
70
80
90
100
110
120
130
2005 2008 2011 2014
12 month rolling turnover, percent
2008 low
Source: MarketAxess, FINRA TRACE.
Note: Investment grade bond turnover shown. Turnover is the total amount traded as a percent of the
amount outstanding for the bonds traded.
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U.S. corporate bond trade sizes
1,300
1,500
1,700
1,900
2010 2011 2012 2013 2014
Average trade size, US$ millions
350
450
550
2010 2011 2012 2013 2014
Source: Market Axess.
Note: 3 month rolling average used.
Institutional trades (100K+) Total trades
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U.S. corporate bond average maturity
7
8
9
10
11
12
13
14
15
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Years
Source: SIFMA.
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Dealer corporate bond holdings decline
70
80
90
100
110
120
2007 2014
-21%
US$ billions
0
50
100
150
200
250
2002 2005 2008 2011 2014
US$ billions
Source: TABB, MarketAxess.
Notes: Balance sheet capacity estimated.
Large dealer capacity Dealer inventory
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U.S. corporate bond average dealer mark-up
-5
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013 2014
bps
Bid
Offer
Source: MarketAxess.
Note: Data is for investment grade bonds. The dealer mark up on the bid side plus the offer side is equal
to the total bid-ask spread.
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Dow Industrials: 1973-77 and 2008-14
5000
7000
9000
11000
13000
15000
17000
500
600
700
800
900
1000
1100
578 on Dec. 6, 1974
6,547 on March 9, 2009
DJIA, 1973-1979 DJIA, 2008-2014
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Sources: S&P LCD, JPMorgan, Wells Fargo. 11/11/14)
Investor Base for Non-investment Grade Loans
0%
20%
40%
60%
80%
100%
Banks CLOs Hedge, distressed and… Prime rates funds, financial…
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Covenant-lite loans in the U.S.
0
20
40
60
80
100
120
140
160
180
2010 2011 2012 2013 2014
US$ billions
Covenant-lite
Other leveraged loans
Source: Bloomberg.
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European Credit is a Bank Market Bonds and loans as a share of total corporate debt, 2014
0%
20%
40%
60%
80%
100%
Spain Ireland Germany Italy Portugal France UK
Loans Bonds
Sources: BIS, ECB.
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U.S. vs. Europe high yield debt markets
56 39
7 41
61 66 89
128 147 136
43
148
264
224
329 336
0
50
100
150
200
250
300
350
400
2006 2007 2008 2009 2010 2011 2012 2013
Europe U.S.
Issuance, US$ billions
Source: SIFMA.
Note: Data as of Q3 2013. Europe includes Western and Eastern Europe.
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U.S. CLO market
0
20
40
60
80
100
120
140
0
10
20
30
40
50
60
70
H1 2010 H1 2011 H1 2012 H1 2013 H1 2014
US$ billions
Deal count (R)
Deal count
Deal value (L)
Source: Appleby.
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U.S. leveraged loan volume
0
100
200
300
400
500
600
700
2007 2008 2009 2010 2011 2012 2013 2014
US$ billions
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014
Source: S&P LCD.
Large corporates Middle market
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Middle market vs GDP
0 2 4 6 8 10 12 14 16
United States
China
Japan
US Middle Market
Germany
US$ trillions
Source: S&P LCD.
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LBO leverage multiples
6.2x
4.9x
4.0x
4.7x
5.2x 5.3x 5.4x 5.8x
5.6x
4.5x
3.3x
4.2x 4.3x 4.5x
4.8x
5.3x
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014
Leverage multiples
Large corporate Middle market
Source: S&P LCD.
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Leveraged loans multiples
4.9x
3.7x
4.1x
3.9x
4.4x
4.6x 4.7x
4.9x 4.8x
4.3x
3.4x
3.7x
4.2x 4.3x
4.8x
5.0x
3
4
5
2007 2008 2009 2010 2011 2012 2013 2014
Leverage multiples
Source: S&P LCD.
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International Games Technology Similar Bonds
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2/20 2/27 3/6 3/13 3/20 3/27 4/3 4/10 4/17 4/24
Yield to Maturity, percent
USD
EUR
Source: OECD.
Note: USD security matures 2025, EUR matures 2023.
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High-yield benchmark bonds
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
2010 2011 2012 2013 2014 2015
Coupon, percent
EUR
USD
Source: Bloomberg. Notes: The USD and EUR High Yield Corporate Bond Indices are rules-based, market-value weighted indices engineered to measure USD and EUR denominated high yield, fixed-rate securities publicly issued in the U.S. and Euro bond markets. To be included in the index a security must have a minimum par amount of 200-250MM.