Institutional investors in Europes deleveraging credit landscape - - PowerPoint PPT Presentation

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Intermediate Capital Group plc

Institutional investors in Europe’s deleveraging credit landscape

The role of private debt in financing Europe’s future growth

Rolf Nuijens, Intermediate Capital Group plc 27 February 2014

Specialist Lender of the Year 2013 Debt Firm of the Year 2013 Alternative Debt Provider

• f the Year

2013 Lender of the Year – EMEA 2013 CLO Manager of the Year – EMEA 2013 Fundraising of the Year – EMEA 2013

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Intermediate Capital Group plc 2

• Macro lending

Macro lending en environment vironment

• Dif

Different f erent forms s of

• f credit and t

credit and their place heir place in the capital in the capital str structure ucture

• What does it tak

does it take to e to execute? ecute?

Topics

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Intermediate Capital Group plc

Macro lending environment

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Intermediate Capital Group plc 4

Macro lending environment

Private sector lending in the Netherlands

• Growth in lending in the Netherlands has fallen sharply since 2009
• Annual European bank lending to the private sector has fallen by over 2% year on year for the last two years¹
• Comparing lending patterns across geographies suggests that this theme is set to persist across the core and

periphery countries of the Eurozone

• The declining role of bank lending signals a major shift in the European debt landscape

Growth in bank lending Growth in bank lending in the Nether in the Netherlands lands Growth in bank lending Growth in bank lending to fir to firms s inter internationall ionally

% % %

Source: Dutch National Bank, ECB Please note: 1) Foreign data calculated on a quarterly rolling basis and is adjusted for securitisations and data series breaks. 2) GIIPS = Greece, Ireland, Italy, Portugal and Spain Source: Dutch National Bank Please note: 1) Data calculated on a monthly rolling basis and is adjusted for securitisations and data series breaks. Note: 1. Source, Thomson Datastream

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Intermediate Capital Group plc 5

Macro lending environment

Europe vs. US

Bank balance Bank balance sheet a sheet assets as percentage ssets as percentage

• f
• f GDP

GDP

366% 78% 0% 100% 200% 300% 400% EU US 81% 19% 0% 20% 40% 60% 80% 100% EU US

Source: LSE, IMF and UN 2012, McKinsey Global Institute and Group of Thirty (2013)

Bank lending Bank lending as percentage as percentage of

• f e

exter ternal long ter nal long term financing financing Dependence Dependence of

• f Europe on banks

Europe on banks rela relativ tive to the US to the US

• In contrast to the US, Europe remains primarily a banking market
• In general, non-bank financing in the US is provided by the public bond markets, non-bank loans and private

placements supported by a very deep institutional investor base

• The European institutional market is still expanding

Source: LSE, IMF and UN 2012, McKinsey Global Institute and Group of Thirty (2013)

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Intermediate Capital Group plc 6

Macro lending environment

Europe vs. US

Sources of Sources of non financial non financial cor corpora porate financing e financing

4.640 1.641 978 5.415 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Euro Area (EURbn) US (USDbn) Bank loans (excl. mortgages) Outstanding corporate bonds

• Historically, the only significant non-bank lenders in the European private debt market have been CLOs, some

credit funds and the independent mezzanine funds

• As these traditional lenders exit the market, we are seeing a new breed of non-bank lenders coming to the fore

across each of the loan, high yield and direct lending markets

• The European market will continue to shift towards the US model as institutions continue to enter the market

and provide alternative sources of credit

Source: Societe Generale cross asset research: “In the Mood For Loans”, April 2013)

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Intermediate Capital Group plc 7

Macro lending environment

Scarcity of capital for new loans

0% 50% 100% 150% 200% 250% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bank balance Bank balance sheets as a sheets as a propor proportion tion of

• f GDP¹

GDP¹

Sources: S&P LCD, ECB Note: 1. Europe

• Bank balance sheets over expanded but now must de-

gear – Basel III – Domestic regulations – ECB financial stability review

• Bank appetite for non-investment grade loans down

– Hold sizes materially reduced – Retrenched to domestic markets

• Flight to quality

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Intermediate Capital Group plc 8

20 40 60 80 100 120 140 160 180 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 €billion European Banks Non-European Banks Institutional Investors Securities Firms NA¹

Macro lending environment

The increasing role of institutional investors

Source: S&P LCD Note: 1. Given the lack of primary issuance, LCD did not track enough observations to compile a meaningful sample for 2009

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Intermediate Capital Group plc

Different forms of credit and their place in the capital structure

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Intermediate Capital Group plc 10

Different forms of credit

Senior secured loans overview

• Senior secured loans and high yield bonds are a

defensive route to access yield in a low-growth environment

– Loans have security and step-in rights limit

downside risk

– Equity cushion and covenants support loans and

high yield

– UK legal regime supportive of high recovery rates

• Gross yields of 5-7% currently in loans

Attractiv Attractive risk/reward e risk/reward

• Loans are senior in the LBO capital structure
• Typically c. 50% embedded subordination
• Security, documentation and ranking in capital

structure result in higher recovery rates in case of default

FUNDING STR FUNDING STRUCTURE UCTURE

Subordinate Subordinated Debt Debt : : c.15-20% c.15-20%

Equity: Equity: c.30-50% 30-50%

Grea Greater ter risk risk

Senior Debt Senior Debt (senior (senior loans, etc.): loans, etc.): c.45-55% c.45-55%

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Intermediate Capital Group plc 11

Different forms of credit

Risk/return profile

Indica Indicativ tive risk/retur risk/return profiles profiles

• Credit strategies can be tailored to fit a broad range of risk return profiles

Return Return Distressed Debt (15%-18%) More R More Risk sk

20% 10% 0%

CLO Debt (15%-20%) Corporate Mezzanine (14%-17%) High Yield Bonds (8%-10%) Real Estate Senior Debt (3%-4%) Syndicated Loans (4%-12%) Infrastructure Senior Debt (2%-4%) Real Estate Mezzanine (10%-12%) Direct Lending Direct Lending Funds Funds (6%-12%) (6%-12%)

Source: ICG

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Intermediate Capital Group plc 12

Different forms of credit

Structural characteristics of asset classes

Attribute Attribute

Liquid loans Liquid loans Directly originated Directly originated senior loans senior loans Mezzanine Mezzanine Senior secured Senior secured high high yield bonds yield bonds Investment Grade Investment Grade Corporate Bonds Corporate Bonds

Issuers Issuers

Across full capitalisation range Across full capitalisation range Mid-market companies Mid to large cap companies Large cap companies

Ranking/ Ranking/ security security

First ranking First ranking Ranks below senior debt. Can be secured or unsecured depending on whether junior or senior mezzanine. Variable, often lower than loans Generally subordinated and unsecured

Covenants Covenants

Strong Very strong Very strong Less strong None

Information / Information / Due Due Diligence Diligence

Monthly management accounts Full Due Diligence Monthly management accounts Full Due Diligence Monthly management accounts and board packs where board representation present. Full Due Diligence Public info only Very limited Due Diligence Public info only No Due Diligence

Term Term

5 – 7 years 5 – 7 years 7 - 8 years 5 - 7 years 3 – 30 years

Coupons Coupons

Floating based on base rate plus a spread Floating based on base rate plus a spread Floating based on base rate plus a spread and a PIK

• margin. Can be structured with

the addition of warrants. Predominantly fixed coupon Fixed coupon

Current Current yields yields

EURIBOR + 350- 550bps EURIBOR + 500-600bps EURIBOR + 1050-1200bps 4%-9% 1%-4%

Arrangement Arrangement fees fees

Low or none

• c. 400 bps

400 bps None None

Source: ICG

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Intermediate Capital Group plc

How to execute

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Intermediate Capital Group plc 14

50,0 60,0 70,0 80,0 90,0 100,0 110,0 2005 2006 2007 2008 2009 2010 2011

How to execute

Invest via sound structures

Vola latility in European senior tility in European senior de debt bt prices¹ prices¹

• Fixed Income investors should avoid getting caught in market hysteria which surrounds periods of market

volatility

• Investing in loans is therefore best done via sound structures

Mar Market et vola latility in European tility in European Le Leveraged Loans raged Loans

Source: Credit Suisse Note: 1. Credit Suisse European Leveraged Loans Index (“ELLI”) single B Loan prices have been used to represent European senior debt prices

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Intermediate Capital Group plc 15

How to execute

Proceed with caution

• Take advantage of local knowledge
• Ensure credit discipline
• Administration
• Workout/ recovery – getting money back
• Contact with advisors
• Regulation
• Banks - proceed with caution

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Intermediate Capital Group plc

Case studies

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Intermediate Capital Group plc 17

Transaction description ansaction description In Investment ra stment rationale tionale

• VTD is the leading dental care services provider in Spain and Italy

with

• VTD provides private dental treatments through a network of 436

clinics (363 in Spain & 73 in Italy) located at street level, of which 36% are owned and 64% franchised

• ICG provided a Private Senior Loan (“PSL”) to refinance existing

debt and fund international expansion

• VTD operates in large markets with attractive characteristics:

100% private, large availability of dentists, ageing population, high awareness of preventive dental treatment benefits, existing legal framework friendly to dental network operators, and well developed banking systems to make consumer credit available

• Undisputable leader in Spain and Italy (~3x larger than its

closest competitor) with scope for additional consolidation

• Proven, scalable and sustainable business model
• Battle tested business with good financial track record
• Strong downside protection built through legal documentation,

including mechanisms to control cash by limiting growth capex

• Attractive risk-reward profile: sole senior secured lender, rich

pricing & low leverage

ICG’ ICG’s v s value added lue added

• After having stabilized the company in a difficult environment,

VTD was in a position to regain growth and accelerate expansion in Italy and Poland

• Management was looking to refinance its existing senior debt, as

well as acquire growth capital

• Company initially approached 3 other financing institutions. ICG

became the preferred choice on the back of: (i) our ability to commit quickly, (ii) our reliability (>€1bn invested in Spain), and (iii) a strong local team able to interact with the owner in Spanish

Source: ICG

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Intermediate Capital Group plc 18

Transaction description ansaction description In Investment ra stment rationale tionale

• Inenco is a UK headquartered energy procurement and risk

management service provider

• The Company manages the procurement of c.£3.3 billion of

energy spend

• Diverse customer base includes; more than 800 corporates, 8,000

SMEs and 150 public sector clients across 67,000 sites in the UK

• UK market leader
• High visibility on future earnings as a result of low customer

churn

• SME market in the early phases of development with high growth

potential

• High cash flow conversion due to minimal capital expenditure
• Attractive position in the capital structure
• Immediate priorities:

– Fine tune the platform before investing for growth – Pick the low hanging fruit

• Key growth levers in the longer term:
• Drive SME penetration faster by investing in resource

– M&A – International

• Company expects to grow significantly in coming years –
• pening up various exit options

ICG’ ICG’s v s value added lue added

• ICG provided all the acquisition debt and co-invested in the

equity to support the LBO

• Our speed of execution provided an edge in a competitive

auction process

• Our debt structure and our ability to provide follow-on capital

provides the company with flexibility to grow through investment in its sales force and strategic M&A

Source: ICG

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Intermediate Capital Group plc 19

Concluding remarks

• The current macro environment favours a larger role of private debt
• It is of increasing importance to understand the different instruments and asset classes in order

to best fit with liabilities

• Liquid vs Closed-end funds
• Sound advice and expertise is necessary, either build up internal expertise or seek outside help
• The key to success is in manager selection:

– Track record – Infrastructure – Europe versus the US – US managers cannot apply the same principals in Europe

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Intermediate Capital Group plc

Appendix

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Intermediate Capital Group plc 21 2013 2013

Singapore and Tokyo office

2007 2007

New York

• ffice

2001 2001

Hong Kong

• ffice

1989 1989

ICG founded

2007 2007

ICG European Loan Fund

1994 1994

Listed on London Stock Exchange

2004 2004

Stockholm and Madrid offices

2008 2008

Amsterdam

• ffice

2005 2005

Frankfurt office

Fir Firm milestones milestones

1999 1999

Eurocredit CDO I (the first European institutional loan fund and high yield bond fund)

2009 2009

ICG European High Yield Bond Fund

Fund management histor Fund management history

1995 1995

Paris office

2006 2006

First segregated mandate (EIF I) European Mezzanine Fund IV

2010 2010

Eos I

2000 2000

Mezzanine Fund II

2003 2003

Mezzanine Fund III

2008 2008

Minority Partners 2008 Recovery Fund 2008 ICAP Fund II 2008

2011 2011

Mezzanine Fund V

2012 2012

Total Credit Senior Debt Partners I Australia Senior Loan Longbow III ABS Fund

2006 2006

Sydney office

2013 2013

US Fund

25 25 year ears of s of credit in credit investing sting €12.1 billion¹ €12.1 billion¹ assets under management assets under management

2010 2010

51% acquisition

• f Longbow

2005 2005

ICAP Fund 2005

1998 1998

Mezzanine Fund I

Note: 1. Data as at September 2013

Appendix

ICG key milestones

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Intermediate Capital Group plc 22

Appendix

ICG capabilities - Investing across asset classes

ICG strate gies

Senior loans High yield Mezzanine

Asset class

Credit Strategies Liquid strategies

European Senior Loan Fund European HY Bond Fund European CLO Debt Fund Multi-Strategy Credit Fund CLOs Separate Loan mandates UK Real Estate Senior Debt Fund European Mezzanine funds Asian Mezzanine funds Australian Senior Loan Fund North American Mezzanine funds European Direct Lending Fund UK Real Estate Mezzanine funds

Illiquid strategies Private Debt

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Intermediate Capital Group plc 23

Appendix

ICG credentials

EUROWEEK Most Impressive Mezzanine Provider of the Year – Asia 2009 EUROWEEK Mezzanine Provider of the Year - Europe 2009

European Mezzanine House of the Year 2009 Alternative Debt Provider 2009 High Yield Investors 2009 ACQ Global Award 2010 Mezzanine House Benelux High Yield Investors 2010 Mezzanine Firm

• f the year

2010 European Mezzanine House of the year 2010

EUROWEEK Most Impressive Subordinate Debt Provider of the Year - Asia 2009

Mezzanine Provider of the Year European Mezzanine House of the Year 2008 Specialist Lender of the Year 2013 Debt Firm of the Year 2013 Alternative Debt Provider

• f the Year

2013 Lender of the Year – EMEA 2013s CLO Manager of the Year – EMEA 2013 Fundraising of the Year – EMEA 2013

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Intermediate Capital Group plc 24

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