CAPITAL MARKETS UPDATE November 13, 2018 Important Disclosures The - - PowerPoint PPT Presentation

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CAPITAL MARKETS UPDATE November 13, 2018 Important Disclosures The - - PowerPoint PPT Presentation

FEI LOUISVILLE CAPITAL MARKETS UPDATE November 13, 2018 Important Disclosures The information contained herein is provided by Prudential Capital Group (PCG) . This document may contain confidential information and the recipient hereof


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FEI LOUISVILLE CAPITAL MARKETS UPDATE

November 13, 2018

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Important Disclosures

The information contained herein is provided by Prudential Capital Group (“PCG”). This document may contain confidential information and the recipient hereof agrees to maintain the confidentiality of such information. Distribution of this information to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of its contents, without the prior consent of PCG, is prohibited. Certain information in this document has been obtained from sources that PCG believes to be reliable as of the date presented; however, PCG cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. PCG has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to its completeness or accuracy. Any information presented regarding the affiliates of PCG is presented purely to facilitate an organizational overview and is not a solicitation on behalf of any affiliate. These materials are not intended as an

  • ffer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. These materials do not

constitute investment advice and should not be used as the basis for any investment decision. These materials do not take into account individual client circumstances, objectives or needs. No determination has been made regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. The information contained herein is provided on the basis and subject to the explanations, caveats and warnings set out in this notice and elsewhere herein. Any discussion of risk management is intended to describe PCG’s efforts to monitor and manage risk but does not imply low risk. These materials do not purport to provide any legal, tax or accounting advice. These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Prudential and the Rock logo are registered service marks of Prudential Financial, Inc. and its related entities.

Confidential – Do Not Distribute | 2

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WELCOME!

Section I Section II Section III Section IV Section V Section VI Economic Conditions Investment Grade Debt Market High Yield Market Middle Market M&A Leveraged Finance Markets Observations from Prudential Capital Group Portfolio

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SECTION I – ECONOMIC CONDITIONS

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U.S. Economy is Strong

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  • 1. Source: U.S. Bureau of Economic Analysis 11/8/2018
  • 2. Source: U.S. Bureau of Labor Statistics 11/8/2018

GDP Growth1 Inflation Rate2

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

  • 3.00%
  • 2.00%
  • 1.00%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Full Employment and Wages Slight Acceleration

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  • 1. Source: U.S. Bureau of Labor Statistics 11/8/2018
  • 2. Source: Federal Reserve Bank of Atlanta 11/8/2018

Unemployment1 Wage Growth2

0.5 1 1.5 2 2.5 3 3.5 4 4.5 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 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 5/1/2017 9/1/2017 1/1/2018 5/1/2018 9/1/2018 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

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Fed Continues to Take Liquidity Out of System

Source: Federal Reserve Bank of St. Louis 11/8/2018

Fed Funds Target Rate vs. 3-Month LIBOR Fed Balance Sheet Holdings ($MMs)

500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000 4500000 5000000 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 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Fed Funds Target Rate 3-Month LIBOR

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Market Expects More Tightening

Source: Intercontinental Exchange 11/8/2018

3 Month LIBOR Forward Curve

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% Today 3 Month 6 Month 1 Year 2 Year

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Long-Term Interest Rates at Historical Lows

Source: Federal Reserve Bank of St. Louis 11/8/2018

10-Year U.S. Treasury Yields

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%

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Yield Curve is Flattening

Source: Federal Reserve Bank of St. Louis 11/8/2018

U.S. Treasury Yield Curve

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 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

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SECTION II – INVESTMENT GRADE DEBT MARKET

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Investment Grade Public Issuance is Strong

Source: Securities Industry and Financial Markets Association (SIFMA) 11/8/2018

Investment Grade Public Issuances ($billions)

0.0 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 1,600.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Credit Spreads Remain Low

Investment Grade Public Spreads and Yields

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% 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

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SECTION III – HIGH YIELD MARKET

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High Yield Public Recovering from Slump in Energy Issuance

Source: Securities Industry and Financial Markets Association (SIFMA) 11/8/2018

High Yield Public Issuances ($billions)

0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 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

High Yield Market Spreads and Yields Still Near Lows

Source: Barclays U.S. Credit Index 10/20/2018

Investment Grade Public Spreads and Yields

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SECTION IV – MIDDLE MARKET M&A

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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 Fundraising1

$87.9 $213.1 $259.6 $0.0 $50.0 $100.0 $150.0 $200.0 $250.0 $300.0 2000 2008 2017

Capital Raised in Billions

  • 1. Preqin 11/8/2018

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Middle Market Purchase Prices Remains Strong

Middle Market LBO Purchase Price and Debt Multiples1

4.1x 5.4x 3.6x 2.6x 3.3x 3.8x 3.8x 4.5x 5.1x 5.1x 4.7x 5.4x 5.7x 4.7x 5.8x 4.5x 3.3x 4.3x 4.3x 4.5x 4.6x 5.3x 5.3x 5.1x 5.5x 5.7x 8.1x 9.3x 8.3x 6.6x 8.4x 8.2x 7.9x 8.8x 9.6x 10.7x 10.2x 11.6x 10.4x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x 12.0x 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

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SECTION V – LEVERAGED FINANCE MARKETS

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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 Market1 US and Europe Private Debt Fundraising2

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.

  • 1. S&P LCD 4Q17 LBO Review. 11/8/2018
  • 2. Preqin. 11/8/2018

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Substantial Investor Appetite

  • 1. Loss rate est. using broadly syndicated loans’ 17-year avg. annual default rate of 3.0% (obtained from S&P LCD) and long-term recovery rate (1989-2016) of 70%. (3.0% x (1-74%)) = 0.9%. 11/8/2018
  • 2. Loss rate est. using high yield bonds; 2000-15 avg. annual default rate of 4.0% (obtained from NYU Salomon Center) and long-term recovery rate (1989-2016) of 30%. (4.0%x(1-30%))=2.58%. 11/8/2018
  • 3. Estimated using middle-market loans’ 17 year avg. annual default rate of 2.4% (obtained from S&P LCD) and long-term recovery rate (1989-2016) of 75%. (2.4% x (1-75%)) = 0.6%. 11/8/2018
  • 4. Estimated using average Caa-C default and loss rates from Moody’s Default Study 2017. 11/8/2018

Syndicated Leveraged Loans 1 High Yield Bonds 2 Middle-Market Direct Lending 3 Mezzanine 4 Coupon 300-400 bps over LIBOR (Floating Rate)

400-700 bps over Treasuries (Fixed Rate) 450-700 bps over LIBOR (Floating Rate) 11-15% (Fixed Rate) OID 50 - 100 bps Infrequent 100 - 300 bps 200 – 300 bps Covenants Covenant-lite Incurrence Maintenance Maintenance Due Diligence Through intermediary / bank (less than 2 weeks) Through intermediary / bank (less than 1 week) Direct and extensive (3-6 weeks) Direct and extensive (3-6 weeks) Default Rate 3.0% 4.0% 3.4% 10.5% Loss Rate 0.9% 2.8% 0.6% 8.1% Liquidity Medium to high High Limited or none Limited or none Mark to Market Medium to high High Low to none Low to none

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Leverage Multiples Back to Pre-Recession Levels

Middle Market LBO Debt Multiples1

  • 1. S&P LCD’s LBO 2Q18 Review. Data is for the middle market (issuers with EBITDA $50 MM or less). 11/8/2018

4.70x 5.80x 4.50x 3.30x 4.30x 4.30x 4.50x 4.60x 5.30x 5.30x 5.10x 5.50x 5.70x 4.10x 5.40x 3.60x 2.60x 3.30x 3.80x 3.80x 4.50x 5.10x 5.10x 4.70x 5.40x 5.70x 0.00x 1.00x 2.00x 3.00x 4.00x 5.00x 6.00x 7.00x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 LTM Sub Debt/EBITDA Senior Debt/EBITDA

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▪ An increasing number of lenders in the broader market are comfortable providing covenant lite loans ▪ Covenant lite loans are particularly relevant to companies with more than $40 - $50 million in EBITDA

Covenant Lite Loans – Another Sign of a Peak?

2 24 97 3 3 8 57 98 262 237 178 245 375 223 $0B $50B $100B $150B $200B $250B $300B $350B $400B

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18

1% 0% 2% 8% 29% 4% 9% 5% 26% 33% 57% 63% 69% 73% 75% 81% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20171H18

Number of Deals Completed on a Covenant Lite Basis1 Percentage of Deals Completed on a Covenant Lite Basis1

  • 1. Source: S&P Global Market Intelligence includes all U.S. leveraged loan volume. 11/8/2018

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SECTION V – OBSERVATIONS FROM PRUDENTIAL CAPITAL GROUP PORTFOLIO

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Prudential Capital Group Portfolio – Investment Grade (Medians)

Source: Prudential Capital Group Internal (as of 9/30/2018)

2013 2014 2015 2016 2017

Revenue ($millions) 1,229 1,119 1,286 1,236 1,374 Growth

  • 2.4%

7.26%

  • 3.95%

11.21% EBITDA ($millions) 209 228 244 235 261 EBITDA Margin 17% 19% 19% 19% 19% # of Companies 218 255 277 306 323

▪ Growth is hard to come by ▪ EBITDA margins remain healthy

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Prudential Capital Group Portfolio – Investment Grade (Medians)

Source: Prudential Capital Group Internal (as of 9/30/2018)

2013 2014 2015 2016 2017

Net Debt / EBITDA 1.8x 1.8x 1.8x 2.0x 1.8x Total Debt / EBITDA 2.1x 2.3x 2.2x 2.4x 2.2x EBITDA / Interest 10.6x 11.1x 10.4x 10.0x 11.1x # of Companies 218 255 277 306 323

▪ Leverage has not changed ▪ Interest coverage strong

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Summary ▪ Economic conditions are strong ▪ Interest rates are low but moving steadily up ▪ Plenty of money everywhere

  • Investment grade debt
  • High yield
  • Leveraged finance

▪ Valuation multiples remain at cyclical high ▪ Investment grade credit conditions are strong/stable

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