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

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 3 Confidential & Trade Secret

Diversification benefits

European loans & high yield: Market development European high yield has become a mainstream credit allocation Europe: Size of European high yield market 1 Index value (€ billion) 350 European high yield market (ICE BAML HY ex-financials) 300 250 200 150 100 50 0 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 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. 5 Confidential & Trade Secret

European loans & high yield: Market development European loans are a less common allocation, but similar size Europe: Size of high yield and loan markets 1 Index value (€ billion) 600 European loan market (CS WELLI) European high yield market (ICE BAML HY ex-financials) 500 400 300 200 100 0 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 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. 6 Confidential & Trade Secret

European loans & high yield: Diversification benefits Low overlap between European loan & HY issuer pools European loan & high yield indices: Ticker overlap (indices at 30 September 2018) High yield Common Loan only only tickers tickers tickers 246 35 310 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. 7 Confidential & Trade Secret

European loans & high yield: Diversification benefits Uneven sector distribution between European loans & HY European loan & high yield indices: Sector distribution (common classification: CS), % index weight UTILITY 100 TRANSPORTATION 90 SERVICE RETAIL 80 METALS/MINERALS MEDIA/TELECOM 70 MANUFACTURING INFORMATION TECHNOLOGY 60 HOUSING HEALTHCARE 50 GAMING/LEISURE 40 FOREST PROD/CONTAINERS FOOD/TOBACCO 30 FOOD AND DRUG FINANCIAL 20 ENERGY CONSUMER NON-DURABLES 10 CONSUMER DURABLES CHEMICALS 0 HY Loans AEROSPACE 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. 8 Confidential & Trade Secret

European loans & high yield: Diversification benefits Default risks often cluster in a single sector European loan & high yield indices: Sector distribution (common methodology), % index weight UTILITY 100 3.1 TRANSPORTATION 11.9 90 SERVICE RETAIL 80 METALS/MINERALS MEDIA/TELECOM 70 MANUFACTURING INFORMATION TECHNOLOGY 60 HOUSING HEALTHCARE 50 GAMING/LEISURE 40 FOREST PROD/CONTAINERS FOOD/TOBACCO 30 FOOD AND DRUG FINANCIAL 20 ENERGY CONSUMER NON-DURABLES 10 CONSUMER DURABLES CHEMICALS 0 HY Loans AEROSPACE 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. 9 Confidential & Trade Secret

European loans & high yield: Diversification benefits Significant sector dispersion within 2018 high yield returns 2018 European high yield index returns by sector 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% -8% Automotive Basic Industry Capital Goods Consumer Goods Energy Healthcare Leisure Media Real Estate Retail Services Technology & Electronics Telecommunications Transportation Utility Source: ICE Bank of America Merrill Lynch (HPID). 10 Confidential & Trade Secret

European loans & high yield: Risk mitigation Security & seniority value across credit Global Average Corporate Debt Recovery Rates Illustrative LBO capital structure 1 Measured by Ultimate Recoveries (%) 2 1987-2017 100% First 80% lien 4.8x 60% Second lien & other debt 0.6x 40% Equity 47.80% 20% 0% Loans Sr. Secured Sr. Unsecured Subordinated Bonds Bonds Bonds 1. Source: S&P LCD, December 2018. 2. Source: Moody’s Corporate Default & Recovery Rates, February 2018. 11 Confidential & Trade Secret

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) Returns 10% S&P 500 8% 6% Stoxx 600 European HY European Loans Global Agg US HY US Loans 4% EUR Gvmt (1-10yrs) US IG EUR IG Emerging Market Debt US Treasuries (7-10yrs) 2% 3M US Libor Standard deviation 0% 0% 2% 4% 6% 8% 10% 12% 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 loans & high yield: Risk & return European loan index returns more tightly distributed Distribution of monthly index returns (EUR hedged), May 2014 - April 2019 (60 observations) 40 38 HPID (European HY) CS WELLI (European loans) 30 22 20 15 10 13 10 5 5 5 3 2 1 1 0 -5,-4 -4,-3 -3,-2 -2,-1 -1,-0 0,+1 +1,+2 +2,+3 +3,+4 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. 14 Confidential & Trade Secret

European loans & high yield: Risk & return Fundamental & technical drivers of return distribution Fundamental drivers Technical drivers • • Interest rates Investor base & fund flows • Floating vs fixed • UCITS eligibility • • Default & Recovery outcomes CLO creation • Secured vs unsecured • Sector distribution • Geography • Sponsorship • Private equity vs corporate vs family-owned 15 Confidential & Trade Secret

European loans & high yield: Risk & return A cross market perspective: provision of yield Yield versus rating by asset class 6% BAML Euro corp HY B 5% CS WELLI loan index 4% 3% BAML Euro corp HY BB 2% 5-year BTP (Italy) BAML Euro corp IG BBB 1% BAML Euro corp IG A 5-year Bonos (Spain) 0% 10-year Bund 5-year Bund AAA B -1% 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. 16 Confidential & Trade Secret

European loans & Private equity relationship PE-owned companies dominate European loan issuance European senior secured loan issuance: Sponsored (Private equity) vs non-sponsored Not Sponsored Sponsored 100% 90% 80% 70% 71% 71% 73% 76% 77% 60% 80% 84% 84% 85% 85% 85% 86% 87% 88% 89% 90% 91% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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. 17 Confidential & Trade Secret

European loans & Private equity relationship High overlap between European loan & PE investee pools Loans High yield Private equity Source: ICG 18 Confidential & Trade Secret

European loans & private equity relationship Strong flows into private equity funds Private equity dry powder: All buyout funds globally, USDbn 800 700 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Prequin, December 2018 19 Confidential & Trade Secret