European senior secured loans: A portfolio context Harry Sugiarto, - - PowerPoint PPT Presentation

European senior secured loans: A portfolio context

Harry Sugiarto, CFA – Managing Director, ICG

June 2019

Biography

• 16 years in credit investing
• Multi-credit portfolio manager
• CFA charterholder

3 Confidential & Trade Secret

European senior secured loans: A portfolio context

• Comparing European high yield to loans: The value of diversification
• Diversification by name
• Diversification by sector
• The long-term risk & return profile of European senior secured loans
• A cross-asset class perspective
• Comparing private equity to senior secured loans: First loss vs Last loss
• Evaluating risks in European senior secured loans today
• Putting cov-lite in perspective

Diversification benefits

European high yield has become a mainstream credit allocation

Europe: Size of European high yield market1

Index value (€ billion)

Note:

• 1. Source: ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Market development

50 100 150 200 250 300 350 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 European high yield market (ICE BAML HY ex-financials)

European loans are a less common allocation, but similar size

Europe: Size of high yield and loan markets1

Index value (€ billion)

Note:

• 1. Source: Credit Suisse, Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and

definition of the indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Market development

100 200 300 400 500 600 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 European loan market (CS WELLI) European high yield market (ICE BAML HY ex-financials)

Low overlap between European loan & HY issuer pools

European loan & high yield indices: Ticker overlap (indices at 30 September 2018)

Note:

• 1. Source: Credit Suisse, ICE Bank of America Merrill Lynch. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and definition of the

indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Diversification benefits

35 246 310

High yield

• nly tickers

Loan only tickers Common tickers

Uneven sector distribution between European loans & HY

European loan & high yield indices: Sector distribution (common classification: CS), % index weight

Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data at 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Diversification benefits

10 20 30 40 50 60 70 80 90 100

HY Loans

UTILITY TRANSPORTATION SERVICE RETAIL METALS/MINERALS MEDIA/TELECOM MANUFACTURING INFORMATION TECHNOLOGY HOUSING HEALTHCARE GAMING/LEISURE FOREST PROD/CONTAINERS FOOD/TOBACCO FOOD AND DRUG FINANCIAL ENERGY CONSUMER NON-DURABLES CONSUMER DURABLES CHEMICALS AEROSPACE

European loan & high yield indices: Sector distribution (common methodology), % index weight

Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Diversification benefits

11.9 3.1

10 20 30 40 50 60 70 80 90 100

HY Loans

UTILITY TRANSPORTATION SERVICE RETAIL METALS/MINERALS MEDIA/TELECOM MANUFACTURING INFORMATION TECHNOLOGY HOUSING HEALTHCARE GAMING/LEISURE FOREST PROD/CONTAINERS FOOD/TOBACCO FOOD AND DRUG FINANCIAL ENERGY CONSUMER NON-DURABLES CONSUMER DURABLES CHEMICALS AEROSPACE

Default risks often cluster in a single sector

2018 European high yield index returns by sector

Source: ICE Bank of America Merrill Lynch (HPID).

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European loans & high yield: Diversification benefits

Significant sector dispersion within 2018 high yield returns

• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% Automotive Basic Industry Capital Goods Consumer Goods Energy Healthcare Leisure Media Real Estate Retail Services Technology & Electronics Telecommunications Transportation Utility

Security & seniority value across credit

• 1. Source: S&P LCD, December 2018.
• 2. Source: Moody’s Corporate Default & Recovery Rates, February 2018.

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European loans & high yield: Risk mitigation

Global Average Corporate Debt Recovery Rates Measured by Ultimate Recoveries (%)2

0% 20% 40% 60% 80% 100% Loans

• Sr. Secured

Bonds

• Sr. Unsecured

Bonds Subordinated Bonds 1987-2017

Illustrative LBO capital structure 1

Equity 47.80% First lien 4.8x Second lien & other debt 0.6x

Long-term risk & return profile

European loans & high yield: Risk & return

A cross-asset perspective: Standalone efficiency

Returns versus volatility across asset classes (5 years, USD Hedged)

Source: European Loans – CS WELLI. European HY - ICE BAML HEAG. EUR Gvmt – Euro 1-10yr index, E5AS. EUR IG – Euro investment grade non-financials index, EN00. US Loans – CS LLI. US HY – ICE BAML HCNF. US IG – US Investment grade non-financials, CF0X. US Treasuries – 7-10yr index, G0Q0. 3M US Libor – US0003M. Emerging Market Debt – EM Euro Corporate index, EMEB. Stoxx 600 – SXXHUN. S&P 500 – SPXT. Global Aggregate – Bloomberg Barclays Global Aggregate – LEGATRUH. See index disclaimer in at the end of the presentation. Data as at 31 May 2019.

13 Confidential & Trade Secret European HY US HY European Loans US Loans US Treasuries (7-10yrs) Stoxx 600 S&P 500 Global Agg EUR IG US IG EUR Gvmt (1-10yrs) Emerging Market Debt 3M US Libor

0% 2% 4% 6% 8% 10% 0% 2% 4% 6% 8% 10% 12%

Returns Standard deviation

European loan index returns more tightly distributed

• 1. Source: Credit Suisse, ICE Bank of America Merrill Lynch. Data to 30 April 2019. Index does not include all issuers in the market. CS WELLI is the Credit Suisse Western European Leveraged Loan Index. Further detail

and definition of the indices are provided in the index disclaimer in the Notes section.

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European loans & high yield: Risk & return

3 5 13 22 10 5 2 1 15 38 5 1 10 20 30 40

• 5,-4
• 4,-3
• 3,-2
• 2,-1
• 1,-0

0,+1 +1,+2 +2,+3 +3,+4 HPID (European HY) CS WELLI (European loans)

Distribution of monthly index returns (EUR hedged), May 2014 - April 2019 (60 observations)

Fundamental & technical drivers of return distribution

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European loans & high yield: Risk & return

Fundamental drivers

• Interest rates
• Floating vs fixed
• Default & Recovery outcomes
• Secured vs unsecured
• Sector distribution
• Geography
• Sponsorship
• Private equity vs corporate vs family-owned

Technical drivers

• Investor base & fund flows
• UCITS eligibility
• CLO creation

European loans & high yield: Risk & return

A cross market perspective: provision of yield

Yield versus rating by asset class

B AAA

Source: ICE BAML, Credit Suisse, Bloomberg, S&P ratings, 31 March 2019. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

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5-year Bund 10-year Bund 5-year BTP (Italy) 5-year Bonos (Spain) BAML Euro corp IG A BAML Euro corp IG BBB BAML Euro corp HY BB CS WELLI loan index BAML Euro corp HY B

• 1%

0% 1% 2% 3% 4% 5% 6%

European loans & Private equity relationship

PE-owned companies dominate European loan issuance

European senior secured loan issuance: Sponsored (Private equity) vs non-sponsored

Notes

• 1. Further detail and definition of the indices are provided in the index disclaimer in the Notes section.

Source: S&P ratings, 31 March 2019.

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90% 91% 88% 84% 80% 85% 86% 84% 87% 89% 85% 85% 76% 71% 71% 73% 77% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Not Sponsored Sponsored

High overlap between European loan & PE investee pools

Source: ICG

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European loans & Private equity relationship

High yield Loans Private equity

Strong flows into private equity funds

Private equity dry powder: All buyout funds globally, USDbn

Source: Prequin, December 2018

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European loans & private equity relationship

100 200 300 400 500 600 700 800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Is it consistent to be positive on PE & negative on loans?

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European loans & private equity relationship

Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity Senior secured loan Equity

0-50% Enterprise value Target return 4-6% “Last loss” 50-100% Enterprise value Target return 15+% “First loss”

Source: ICG

Putting cov-lite in perspective

This metric gets a lot of focus today

Cov-lite % of institutional loan issuance in Europe

Source: S&P LCD, December 2018

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Putting cov-lite in perspective

7% 0% 9% 21% 36% 51% 62% 76% 87% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008-2011 2012 2013 2014 2015 2016 2017 2018

Only one of many important metrics in credit

Example risk factors when making a credit call

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Putting cov-lite in perspective

Source: ICG

Loan-to-value significantly lower now than pre-crisis

Equity as a percentage of total sources in European LBOs

Source: S&P LCD, December 2018

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Putting cov-lite in perspective

32.7% 32.9% 32.5% 42.1% 45.4% 46.9% 44.2% 47.7% 42.4% 41.2% 41.7% 48.6% 44.2% 47.8% 20% 25% 30% 35% 40% 45% 50% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Putting cov-lite in perspective

Will recovery rates improve or deteriorate versus history?

Comparison of new issue loan metrics: 2007 & 2018

Source: Moody’s, S&P LCD, Prequin. 31 March 2019.* Recovery % is 1987-2017 Moody’s global average

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2007 2018 Cov-lite % 7% 87% Proforma Leverage (xEBITDA), primary 6.0x 5.4x Proforma EBITDA / Int. cover, primary 2.5x 4.2x Equity, % of EV, primary 32.5% 47.8% Global PE buyout dry powder $438bn $694bn New issue TLB/C loan spread 265 376 Recovery % 80* ?

Index Disclaimer: HEAG: Bank of America Merrill Lynch BB-B Euro high yield non-financial fixed & floating rate constrained index. CS WELLI: Credit Suisse western leveraged loan index all denominations. CS LLI: Credit Suisse US leveraged loan index. S&P ELLI: Standard & Poor’s European leveraged loans index. HEAD: BAML Euro non-financial high yield constrained index. HCNF: BAML US non-financial constrained. H0EN: BAML US HY energy index. HE20: BAML single-B Euro HY index. EN00: BAML Euro non-financial index (IG corporate). CF0X: BAML US non-financial index (IG corporate). EG04: BAML 7-10 year Euro government index. G9O2: BAML 10+ year US Treasury index. Barclays Global Agg: Barclays Global Aggregate US investment grade bond index. SPXT: S&P500 total return index. SXXGR: Stoxx 600 gross return index. The returns for the indices are being provided for comparison purposes only and the comparisons do not mean that there necessarily will be a correlation between the returns of the fund, on the one hand, and the indices, on the other hand. The indices have not been selected to represent an appropriate benchmark against which to compare the fund’s performance; but, rather, is disclosed to allow for comparison

• f the fund’s performance to that of these well-known and widely recognized indices. The returns of the fund may differ from the indices in that, among other reasons, the fund is actively managed and may

use leverage. The indices are not available for direct investment, are unmanaged and are not subject to fees and expenses, including transaction costs, typically associated with the management of loan

• accounts. In addition, the fund’s holdings will likely differ significantly from the securities that comprise the indices and the differences may be material. Past results are not necessarily indicative of future

results and no representation is made that results similar to those shown can be achieved. Benchmarks used in these materials are broad-based indices which are used for comparative purposes only and have been selected as they are well known and easily recognizable by investors. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from this transaction. For example, investments made by the Issuer may differ significantly in terms of security holdings, industry weightings and asset allocation from those of the benchmark. Accordingly, investment results and the volatility of the strategy in respect of this transaction may differ from those of the benchmark. Also, the indices noted in this presentation are unmanaged, are not available for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the Issuer may incur. In addition, the performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. No party involved in or related to compiling, computing or creating the index data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of

• riginality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data.

Notes

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This document is being provided to you by the subsidiaries or affiliates of Intermediate Capital Group Plc (“ICG”, and together with their respective directors, officers, employees, partners, members, shareholders, advisers and agents, as the context requires, “the ICG Parties”) on a strictly confidential basis and no part may be reproduced or redistributed in any form, by any means without the prior express written consent of ICG. This document is intended only for information purposes and convenient reference and does not create any legally binding obligation on any of the ICG Parties. The ICG Parties expressly disclaim any liability for the use, misuse,

• r distribution of this information to unauthorised recipients.

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• ther such similar documents for additional information. A private offering of interests in an ICG Fund may only be made pursuant to the final confidential private

placement memorandum for the fund and any supplements (or any other such similar documents) thereto (the “Memorandum”) and the fund’s governing and subscription documents (together, the “Offering Documents”), which may be furnished to qualified investors on a confidential basis at their request for their consideration in connection with such offering. The information contained herein will be superseded by and is qualified in its entirety by reference to the Offering Documents, which contains additional information about the investment objective, terms and conditions of an investment in the fund and also contains tax information and risk and conflict of interest disclosures that are important to any investment decision regarding the fund. No person has been authorized to give any information or make any representations other than as contained in the Memorandum and, if given or made, any such information or representation must not be relied upon as having been authorized by the fund or any of the ICG Parties. A prospective investor should not invest in any fund interests unless satisfied that it (alone or together with its investment representative) has asked for and received all information that would enable the investor (or both of them) to evaluate the merits and risks of the proposed investment. Although certain information has been obtained from, and is based upon sources that we consider reliable, none of the ICG Parties guarantee its accuracy, and it may be incomplete or condensed. All opinions, projections and estimates constitute the judgement of the ICG Parties, as of the date of the document and are subject to change without notice. The ICG Parties make no representation or warranty, express or implied as to the fairness, correctness, accuracy or completeness of this

• document. The ICG Parties accept no responsibility for any loss arising for any action taken or not taken by anyone using the information contained herein. This

document is not to be relied upon in substitution for the exercise of independent judgment. ICG may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information contained herein. This document reflects the different assumptions, views and analytical methods of the analysts who prepared them and ICG is under no obligation to ensure that such communications are brought to the attention of any recipient

• f this document. Past performance should not be taken as an indication or guarantee regarding future performance, and no representation or warranty, express or

implied is made regarding future performance. Moreover, certain information contained herein constitute “forward-looking statements,” which may be identified by the use of forward-looking terminology such as “may,” “will”, “should,” “expect,” “anticipate,” “target,” “project,” “forecast,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Any forward-looking statements or results in this presentation are based upon current assumptions, may be simplified and may depend on events outside ICG’s control. Due to various risks and uncertainties actual events or results or the actual performance of the fund may differ materially from those reflected or contemplated in such forward-looking statements. Statements herein are made as of the date hereof unless stated otherwise herein.

Disclaimer

Confidential & Trade Secret 27

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Disclaimer

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