FEI LOUISVILLE CAPITAL MARKETS UPDATE November 13, 2018
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W ELCOME ! Section I Economic Conditions Section II Investment Grade Debt Market Section III High Yield Market Section IV Middle Market M&A Section V Leveraged Finance Markets Section VI Observations from Prudential Capital Group Portfolio Confidential – Do Not Distribute | 3
SECTION I – ECONOMIC CONDITIONS
U.S. Economy is Strong GDP Growth 1 Inflation Rate 2 5.00% 3.0% 4.00% 2.5% 3.00% 2.0% 2.00% 1.00% 1.5% 0.00% 1.0% -1.00% 0.5% -2.00% -3.00% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1. Source: U.S. Bureau of Economic Analysis 11/8/2018 2. Source: U.S. Bureau of Labor Statistics 11/8/2018 Confidential – Do Not Distribute | 5
10.0% 12.0% Full Employment and Wages Slight Acceleration 0.0% 2.0% 4.0% 6.0% 8.0% 2. Source: Federal Reserve Bank of Atlanta 11/8/2018 1. Source: U.S. Bureau of Labor Statistics 11/8/2018 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 Unemployment 1 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0.5 1.5 2.5 3.5 4.5 0 1 2 3 4 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 1/1/2013 5/1/2013 9/1/2013 Wage Growth 2 1/1/2014 5/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016 1/1/2017 Confidential – Do Not Distribute | 6 5/1/2017 9/1/2017 1/1/2018 5/1/2018 9/1/2018
Fed Continues to Take Liquidity Out of System Fed Funds Target Rate vs. 3-Month LIBOR Fed Balance Sheet Holdings ($MMs) 3.00% 5000000 4500000 2.50% 4000000 3500000 2.00% 3000000 1.50% 2500000 2000000 1.00% 1500000 0.50% 1000000 500000 0.00% 0 2007-10-01 2008-03-01 2008-08-01 2009-01-01 2009-06-01 2009-11-01 2010-04-01 2010-09-01 2011-02-01 2011-07-01 2011-12-01 2012-05-01 2012-10-01 2013-03-01 2013-08-01 2014-01-01 2014-06-01 2014-11-01 2015-04-01 2015-09-01 2016-02-01 2016-07-01 2016-12-01 2017-05-01 2017-10-01 2018-03-01 2018-08-01 Fed Funds Target Rate 3-Month LIBOR Source: Federal Reserve Bank of St. Louis 11/8/2018 Confidential – Do Not Distribute | 7
Market Expects More Tightening 3 Month LIBOR Forward Curve 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Today 3 Month 6 Month 1 Year 2 Year Source: Intercontinental Exchange 11/8/2018 Confidential – Do Not Distribute | 8
Long-Term Interest Rates at Historical Lows 10-Year U.S. Treasury Yields 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source: Federal Reserve Bank of St. Louis 11/8/2018 Confidential – Do Not Distribute | 9
Yield Curve is Flattening U.S. Treasury Yield Curve 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 11/6/2018 11/6/2017 11/6/2014 Source: Federal Reserve Bank of St. Louis 11/8/2018 Confidential – Do Not Distribute | 10
SECTION II – INVESTMENT GRADE DEBT MARKET
Investment Grade Public Issuance is Strong Investment Grade Public Issuances ($billions) 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Securities Industry and Financial Markets Association (SIFMA) 11/8/2018 Confidential – Do Not Distribute | 12
Credit Spreads Remain Low Investment Grade Public Spreads and Yields 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total IG 10-yr Yield 10-yr Treasury Yield Total IG 10-yr Spread Source: Barclays U.S. Credit Index 10/20/2018 Confidential – Do Not Distribute | 13
SECTION III – HIGH YIELD MARKET
High Yield Public Recovering from Slump in Energy Issuance High Yield Public Issuances ($billions) 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Securities Industry and Financial Markets Association (SIFMA) 11/8/2018 Confidential – Do Not Distribute | 15
High Yield Market Spreads and Yields Still Near Lows Investment Grade Public Spreads and Yields 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total BIG 10-yr Yield 10-yr Treasury Yield Total BIG 10-yr Spread Source: Barclays U.S. Credit Index 10/20/2018 Confidential – Do Not Distribute | 16
SECTION IV – MIDDLE MARKET M&A
Record Private Equity Fundraising ▪ Private equity activity remains strong with $260 billion of capital raised in 2017 ▪ Record $575 billion of private equity dry powder leads to high demand for LBO and M&A activity US & Europe Private Equity Fundraising 1 $300.0 $259.6 $250.0 $213.1 Capital Raised in Billions $200.0 $150.0 $100.0 $87.9 $50.0 $0.0 2000 2008 2017 1. Preqin 11/8/2018 Confidential – Do Not Distribute | 18
Middle Market Purchase Prices Remains Strong Middle Market LBO Purchase Price and Debt Multiples 1 11.6x 12.0x 10.7x 10.4x 10.2x 11.0x 9.6x 9.3x 10.0x 8.8x 8.4x 8.3x 9.0x 8.2x 8.1x 7.9x 8.0x 6.6x 7.0x 5.8x 5.5x 5.7x 6.0x 5.3x 5.3x 5.1x 4.7x 4.6x 5.0x 4.5x 4.5x 4.3x 4.3x 4.0x 3.3x 3.0x 5.7x 5.4x 5.4x 5.1x 5.1x 4.5x 4.7x 4.1x 2.0x 3.8x 3.6x 3.8x 3.3x 2.6x 1.0x 0.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LTM Senior Debt/EBITDA Sub Debt/EBITDA Total PP 1. S&P LCD’s LBO 2Q18 Review. Data is for the middle market (issuers with EBITDA $50 MM or less). 11/8/2018 Confidential – Do Not Distribute | 19
SECTION V – LEVERAGED FINANCE MARKETS
The Rise of Direct Lending ▪ Banks have pulled back lending significantly post financial crisis driven by regulatory and structural changes ▪ Similar trends have occurred in Europe, which has undergone an accelerated shift from bank to non-bank lending ▪ Direct lending now constitutes >50% of total private credit fundraising Capital Provider Mix in US Middle Market LBO Market 1 US and Europe Private Debt Fundraising 2 Note: Non-Bank investors includes CLOs, loan participation mutual funds, hedge funds, high-yield bond funds, pension funds, insurance companies, direct lending funds, mezzanine funds and other proprietary investors. Confidential – Do Not Distribute | 21 1. S&P LCD 4Q17 LBO Review. 11/8/2018 2. Preqin. 11/8/2018
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