Refinancing Activity Pushes out the Maturity Wall Record capital - - PowerPoint PPT Presentation

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Refinancing Activity Pushes out the Maturity Wall Record capital - - PowerPoint PPT Presentation

Nov 03, 2023 112 likes •193 views

Investing in a Low Rates for Longer Environment Refinancing Activity Pushes out the Maturity Wall Record capital market conditions improved corporate liquidity and minimized the immediate need to access capital 67% of new issuance over

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SLIDE 1

Investing in a “Low Rates for Longer” Environment

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SLIDE 2

2

Refinancing Activity Pushes out the Maturity Wall

  • Record capital market conditions improved corporate liquidity and minimized the immediate need to access capital
  • 67% of new issuance over the last three years was used to refinance existing debt
  • The healthy new issue market should remain strong and continue to fuel refinancing
  • High yield debt due in 2013 is $48 billion
  • Both high yield bonds and bank loans set to mature through 2014 were reduced by $587 billion since the beginning of 2009

35 48 78 140 141 160 168 109 294 12 46 149 66 143 130 98 3

50 100 150 200 250 300 350 2012 2013 2014 2015 2016 2017 2018 2019 2020 or later $ billions

High Yield Bond and Institutional Loan Maturities

HY Bonds

  • Inst. Leveraged Loans
  • 151
  • 234
  • 202

16 168 222 241 104 218

  • 300
  • 200
  • 100

100 200 300 2012 2013 2014 2015 2016 2017 2018 2019 2020 or later $ billions

Change in Combined High Yield Bond and Loan Maturity Schedules Since December 2008

Source: JP Morgan Notes: Change is measured between December 2008 and November 2011

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SLIDE 3

3

High Yield Correlation Analysis

Source: Credit Suisse

January 1992- December 2012 US Govt 5-7 Years US Govt 10+ Years ML Mortgage Russell 2000 U.S. Intermediate Term Government U.S. Long Term Government 0.88 Merrill Lynch Mortgage 0.84 0.73 Merrill Lynch ABS 0.59 0.45 0.65 Merrill Lynch Corporate 0.64 0.63 0.70 Barclays US Agg Bd USD 0.90 0.85 0.91 Barclays AAA Corp 0.81 0.83 0.74 S&P 500

  • 0.16
  • 0.17

0.02 Russell 2000

  • 0.26
  • 0.24
  • 0.10

JPM Emerging Markets 0.23 0.23 0.40 0.46 MSCI EAFE

  • 0.18
  • 0.19
  • 0.01

0.71 Gold 0.16 0.07 0.19 0.10 US Inflation

  • 0.17
  • 0.23
  • 0.14

0.02 FTSE NAREIT All REITs

  • 0.06
  • 0.07

0.04 0.66 Credit Suisse High Yield Index

  • 0.15
  • 0.13

0.08 0.63 Credit Suisse Leveraged Loan Index

  • 0.32
  • 0.31
  • 0.13

0.43

20-Year Correlation of Asset Classes

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SLIDE 4

4

Aggregate

  • Int. Aggregate

Corp/Gov

  • Int. Corp/Gov

Opportunistic Defensive BB Short Duration ML US ML US ML US ML US ML US HY ML US HY ML US HY ML US HY Yield Change Broad Market Dmstc Mstr 7-10yrs Corp/Gov Mstr Corp/Gov 7-10yrs Master II Cons BB-B ND BB Sr CPC BB-B CP 1-3yrs (bps) US00 D4A0 B0A0 B4A0 HUC0 H4ND J0AC J1A4

  • 150

9.01 13.18 10.69 13.18 12.30 11.53 11.27 5.58

  • 100

6.52 9.55 7.65 9.55 10.22 9.36 9.00 4.82

  • 50

4.04 5.92 4.62 5.92 8.15 7.19 6.73 4.07

  • 25

2.79 4.11 3.10 4.11 7.11 6.11 5.60 3.69 1.55 2.29 1.58 2.29 6.07 5.02 4.46 3.31 25 0.31 0.48 0.06 0.48 5.03 3.94 3.33 2.93 50

  • 0.94
  • 1.34
  • 1.46
  • 1.34

4.00 2.85 2.19 2.56 100

  • 3.42
  • 4.97
  • 4.49
  • 4.97

1.92 0.68

  • 0.08

1.80 150

  • 5.91
  • 8.60
  • 7.53
  • 8.60
  • 0.15
  • 1.49
  • 2.35

1.05 200

  • 8.39
  • 12.23
  • 10.56
  • 12.23
  • 2.23
  • 3.66
  • 4.62

0.29 250

  • 10.88
  • 15.86
  • 13.60
  • 15.86
  • 4.31
  • 5.83
  • 6.89
  • 0.47

300

  • 13.36
  • 19.49
  • 16.63
  • 19.49
  • 6.38
  • 8.00
  • 9.16
  • 1.22

350

  • 15.85
  • 23.12
  • 19.67
  • 23.12
  • 8.46
  • 10.17
  • 11.43
  • 1.98

400

  • 18.33
  • 26.75
  • 22.70
  • 26.75
  • 10.53
  • 12.34
  • 13.70
  • 2.73

450

  • 20.82
  • 30.38
  • 25.74
  • 30.38
  • 12.61
  • 14.51
  • 15.97
  • 3.49

500

  • 23.30
  • 34.01
  • 28.77
  • 34.01
  • 14.68
  • 16.68
  • 18.24
  • 4.24

Duration 4.970 7.260 6.070 7.260 4.150 4.340 4.540 1.510 12 Month Holding Period - Annualized Returns a/o 12/31/2012

High Yield and Interest Rate Sensitivity

For each index the current yield to worst as of 12/31/2012 was used as the base case annualized return. The annualized return sensitivity to a uniform increase or decrease in the yield curve was calculated by taking the index’s modified duration to worst as of 12/31/2012multiplied by the percentage point change in the yield curve (basis point change divided by 100) and then appropriately adding or subtracting this implied percentage change in the value of the index (due to the shift in the yield curve) to the base case annualized return. This is a rough approximation of the annual return sensitivity to parallel shifts in the yield curve.

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SLIDE 5

5

Institutional Leveraged Loans Versus High Yield Bonds

Price vs. Yields

  • Avg. Price
  • Avg. Coupon
  • Avg. Maturity

Yield to Maturity Current Yield Leveraged Loans $100 5.2% 4.8 years 5.3% 5.2% High Yield Bonds $104 7.8% 6.5 years 6.7% 7.5% Senior & Secure First Lien 95% Second Lien 4% Other 1% Covenant-lite 27%

Leveraged Loans: CS Inst LL Index High Yield Bonds: BofA MLHY Master II Constrained Index

Leveraged Loans Versus Bonds Pros Cons

Floating coupon offers protection against rising rates Lower coupon and lower total return potential Higher quality Longer settlement Stronger covenants Not call protected Provides diversification of credits versus bond index More concentrated set of underwriters and larger trade lot sizes High Quality Bias Double-B & Higher Single-B Triple-C & Lower Non-Rated Leveraged Loans 54% 38% 2% 6% High Yield 41% 42% 17% 0%

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SLIDE 6

6 Step 4: Verify attractiveness

  • f relative value

Step 3: Notch PRR up/down for qualitative factors

  • r bond specific

characteristics Step 2: Notch PRR up/down for underlying asset value Step 1: Map quantitative forward metrics to the appropriate PRR

PRR – PENN Risk Rating

Recovery BB/> B CCC/< Notch the PRR 80 cents 50 cents 20 cents Agency Rating Mkt. value PRR PENN Expectation Attractive? CCC+/ Split- Rated B BB Spread Tightening Yes BB B CCC+/ Split- Rated Spread Widening No Forward Metrics BB/> B CCC/< Probability of Default 0-10% 10-25% >25% Net Leverage <3x 3-5x >6x Interest Coverage >3x 2-3x <2x Recurring FCF/Debt >10% 5% 0% Requires conviction in liquidity sources and management execution Qualitative Factors and Bond Specific Characteristics

  • Strength of covenants
  • Maturity schedule
  • Company liquidity
  • Bond liquidity
  • Event risk
  • Cyclicality
  • Corporate structure
  • Equity cushion/sponsor

Value Added: PENN’s forward looking process identifies misrated and mispriced securities Challenge: Rating agencies are unreliable

  • Backward-looking
  • Reactive, not proactive
  • Infrequent updates

Opportunity: Inaccurate ratings can lead to mispriced securities PENN Solution: PENN’s proprietary credit rating process

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SLIDE 7

7

Liquidity Advantage

 Larger asset managers often ignore below average size issues 

Approximately 65% of all high yield issues are $500 million or less in size*

Two of the largest high yield ETFs (HYG and JNK) exclude issues below $600 and $400 million, respectively

 PENN’s strict capacity constraints enable: 

Freer movement into and out of positions

Participation in the entire high yield universe

Example: 1% Position on a $500 Million Issue

Manager 1 Manager 2 High Yield Manager Assets ($ billions) $20 $5 Issue Size ($ millions) $500 $500 Position Size 1% 1% Amount of Issue Owned ($ millions) $200 $50 Percentage of Issuance Owned 40% 10% Liquidity Risk Relative Liquidity Advantage

*(Source: BofA Merrill Lynch)