BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2011

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  • 1. The 5th Annual Current State of the Capital Markets Breakfast Forum September 8, 2011
  • 2. www.boyarmiller.com Equity and the Public Markets Andrew D. Kanaly – Kanaly Trust Chairman & CEO
  • 3. Copyright 2009 Kanaly Trust. All rights reserved. Market Performance Index Performance as of August 31, 2011 EQUITIES 3 Month YTD 12 Months S&P 500 (8.9) (1.8) 18.5 DJIA (7.0) 2.1 19.0 Nasdaq (8.8) (2.2) 23.3 Russell 2000 (14.0) (6.5) 22.2 MSCI EAFE (11.6) (5.7) 10.5 MSCI Emerging Mkts (10.6) (8.3) 9.4 FIXED INCOME BarCap US Treasury Interm 3.1 5.5 3.9 BarCap Inv. Grade Credit 1.7 5.8 4.9 ML US High Yield (2.9) 2.7 7.9 BarCap 1-10yr Muni 2.2 5.1 3.0 ALTERNATIVES HFRI Global Hedge Fund (5.1) (5.6) (0.9) DJ Wilshire REIT (7.0) 6.8 19.8 DJ UBS Commodity (1.3) 1.3 25.8 Gold 18.9 28.5 46.4 Crude Oil (13.5) (2.8) 23.5
  • 4. Copyright 2009 Kanaly Trust. All rights reserved.
  • 5. Copyright 2009 Kanaly Trust. All rights reserved.
  • 6. Copyright 2009 Kanaly Trust. All rights reserved. Credit Market Stress Is Building
  • 7. Copyright 2009 Kanaly Trust. All rights reserved. European Sovereign Debt Crisis
  • 8. Copyright 2009 Kanaly Trust. All rights reserved. U.S. Manufacturing in a Soft Patch
  • 9. Copyright 2009 Kanaly Trust. All rights reserved. New Jobless Claims Need to Move Below 400K
  • 10. Copyright 2009 Kanaly Trust. All rights reserved. Employment Recovery Far From Normal (E0028D) MonthlyData6/30/2007- 6/30/2012 *Dates of expansions designated by the National Bureau of Economic Research. Expansion starting dates used: November 1970, March 1975, July 1980, November 1982, March 1991, and November 2001. Recession ended in June 2009. Current Expansion ( ) Average of Last Six Post World War II Expansions* ( ) 58.2 58.3 58.4 58.5 58.6 58.7 58.8 58.9 59.0 59.1 59.2 59.3 59.4 59.5 59.6 59.7 59.8 59.9 60.0 60.1 60.2 60.3 60.4 60.5 60.6 60.7 60.8 60.9 61.0 61.1 61.2 61.3 61.4 61.5 61.6 61.7 61.8 61.9 62.0 62.1 62.2 62.3 62.4 62.5 62.6 62.7 62.8 62.9 63.0 58.2 58.3 58.4 58.5 58.6 58.7 58.8 58.9 59.0 59.1 59.2 59.3 59.4 59.5 59.6 59.7 59.8 59.9 60.0 60.1 60.2 60.3 60.4 60.5 60.6 60.7 60.8 60.9 61.0 61.1 61.2 61.3 61.4 61.5 61.6 61.7 61.8 61.9 62.0 62.1 62.2 62.3 62.4 62.5 62.6 62.7 62.8 62.9 63.0 S D 2008 M J S D 2009 M J S D 2010 M J S D 2011 M J S D 2012 M J Employment-Population Ratio vs Average of Last Six Expansions Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. .www.ndr.com/vendorinfo/. For data vendor disclaimers refer towww.ndr.com/copyright.htmlSee NDR Disclaimer at 
  • 11. Copyright 2009 Kanaly Trust. All rights reserved. Household Balance Sheets Much Improved
  • 12. Copyright 2009 Kanaly Trust. All rights reserved. S&P 500
  • 13. Copyright 2009 Kanaly Trust. All rights reserved. Commodities
  • 14. Copyright 2009 Kanaly Trust. All rights reserved. Too Much Debt is the Long-term Problem
  • 15. Copyright 2009 Kanaly Trust. All rights reserved. Balancing the Budget Requires Substantial Reform Source: Office of Management and Budget, Fiscal 2011 Requested Budget
  • 16. Copyright 2009 Kanaly Trust. All rights reserved. Lack of Credit Prevents Robust Recovery • Credit is the lifeblood of economic growth • The largest banks have reduced lending by over 25%
  • 17. Copyright 2009 Kanaly Trust. All rights reserved. Investment Strategy Portfolios should be geared more toward capital preservation to manage significant downside risks: • Pursue ultra-diversification, utilizing traditional asset classes as well as alternative investment strategies (stocks & bonds are not the only choices) • Actively manage the asset mix, and look for opportunities to hedge • Equity exposure should focus on high quality global businesses trading at attractive valuations (bias to large caps, emerging markets) • Be highly selective with fixed income: avoid high yield debt, and invest in only the most creditworthy municipal issuers • Add to inflation protection when it is cheap
  • 18. Copyright 2009 Kanaly Trust. All rights reserved. Current Allocations Traditional 30% Equity 60% Equity 30% Fixed ASSET CLASS 40% Fixed 40% Alts Large Cap Equity 30.00% 8.50% Small Cap Equity 15.00% 6.25% Micro Cap Equity 3.25% International Equity 10.00% 8.00% Emerging Markets 5.00% 4.00% Fixed Income 40.00% 30.00% Liquid Alternatives 11.00% Hedged Equity 6.00% Commodities 5.00% MLPs 5.00% REITs 3.00% Managed Futures 10.00% Expected Return 7.60% 8.60% Standard Deviation 10.74% 8.16% Sharpe Ratio 0.34% 0.56%
  • 19. Copyright 2009 Kanaly Trust. All rights reserved. Kanaly Trust Investment Performance – as of 8/31/2011 2011 YEAR TO DATE ASSET CLASS PERFORMANCE August 2011 Equity Only -6.2% -3.5% Fixed Income - Taxable -1.0% 1.5% ALTs - No MLPs -1.2% 1.8% ALTs - With MLPs -1.1% 2.0% Growth & Income Portfolio - Taxable (1) -2.8% -0.5% Growth & Income Portfolio - Tax Free (1) -2.5% -0.1% Income Portfolio (2) -0.4% 6.0% S&P 500 Index -5.4% -1.8% Barclays US Aggregate Bond Index 1.5% 5.9% BarCap 1-10Yr Muni Index 1.3% 5.1% S&P 500 (60%) / Intermediate Taxable (40%) -2.7% 1.3% S&P 500 (60%) / Intermediate Tax Free (40%) -2.7% 1.0% * Footnotes The asset allocation models above represent an approximation of how the portfolios perform; actual results may differ from the models. Returns are shown before fees and are not AIMR/GIPS compliant. The return information provided above represents past performance and is not necessarily indicative of future results. Further, specific client portfolio(s) investment returns and results may vary from figures noted above based on account-specific circumstances. (1) The current allocation of the Growth & Income portfolio is 35% Equity, 25% Fixed Income, 33% Alternatives, and 7% Cash. (2) The current allocation of the Income Portfolio is 80% Fixed Income and 20% Dividend Paying Equities.
  • 20. Copyright 2009 Kanaly Trust. All rights reserved. 20 Equity and the Public MarketsSeptember 8, 2011
  • 21. www.boyarmiller.com Private Equity and Mergers & Acquisitions David W. Sargent – Duff & Phelps Securities Managing Director
  • 22. M&A1.
  • 23. M&A -- Activity Drivers 23 Cost of Debt Capital Access to Debt Capital Private Equity Environment Strategic Buyers Purchasing Power Taxes 2008 2009 20112010 Economic Outlook
  • 24. M&A -- Overall U.S. M&A Activity 24 Source: William Blair & Company U.S. Overall M&A Transactions and Deal Value $1,609 $871 $567 $687 $992 $1,298 $1,645 $1,754 $1,086 $881 $1,085 $430 $689 $523 $689 $0 $500 $1,000 $1,500 $2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09 YTD 6/30/11 YTD 6/30/10 YTD 6/30/11 YTD Undisclosed Middle Market > $750M Deal Value #ofTransactions DealValue($inbillions) 60.2% Increase In Deal Value 31.7% Increase In Deal Value 1 Year Period2 Year Period
  • 25. $462 $279 $258 $291 $352 $364 $419 $465 $356 $235 $364 $101 $198 $163 $198 0 100 200 300 400 500 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09 YTD 6/30/11 YTD 6/30/10 YTD 6/30/11 YTD DealValue($inbillions) #ofTranscations < $50 $50-250M $250-750M Deal Value M&A -- Middle‐Market M&A Activity 25  Recovery in the financing markets resulted in a general upturn in M&A activity in 2010, following 2 years of decline.  Deal value year-to-date is up 21.5% driven primarily by an increase in larger-sized transactions, offsetting a 17.9% decline in the total number of transactions.  The tone in recent months has been more cautious owing to a uncertain economic recovery. Source: William Blair & Company U.S. Middle-Market M&A Transactions and Deal Value 96.0% Increase in Deal Value 21.5% Increase In Deal Value 2 Year Period 1 Year Period
  • 26. M&A -- Transactions by Industry Sector 26  The distribution of transactions by industry has remained largely unchanged. M&A Transactions by Industry Sector Source: William Blair & Company 2007 2009 YTD 2011 Other 20% Electronics 17% Construction 4% Consumer 4% Energy 7% Finance 7% Healthcare 9% Industrials 6% Services 15% Real Estate 5% Retail 2% Telecomm 4% Other 18% Electronics 21% Construction 2% Consumer 3% Energy 9% Finance 6% Healthcare 11% Industrials 6% Services 13% Real Estate 6% Retail 2% Telecomm 3% Other 17% Electronics 23% Telecomm 4% Retail 2% Real Estate 4% Services 11% Industrials 5% Healthcare 13% Finance 8% Energy 8% Consumer 2% Construction 3%
  • 27. 961 825 685 1,054 1,115 $142 $116 $83 $165 $152 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2007 2008 2009 2010 2011 DealValue($inbillions) #ofDeals # of Deals Transaction Value M&A -- Activity in the Energy Sector 27 Energy Sector Activity as a % of Total M&A Transactions Source: Capital IQ  The energy sector has shown a significant uptick in activity, almost doubling in number of transactions from 2009 through June 2011.  Deal value in energy-related deals represented more than 20% of total M&A deal value in 2010, making energy the most active industry sector. 6.5% of Total M&A Transactions 7.2% of Total M&A Transactions Peak – 21.8% of Total M&A Deal Value
  • 28. M&A -- Purchase Price Multiples by Sources 28 Source: S&P LCD Purchase Price Multiples for Middle-Market LBOs  Competition and pre-financial crisis leverage multiples are driving the increase in purchase price multiples.  Private equity sponsors continue to “over equitize” middle‐market LBO transactions, contributing an average of 42% equity year-to-date in 2011 compared to 32% in 2007. Equity Contribution 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 1997 1999 2001 2003 2005 2007 2009 YTD '11 Source: S&P LCD 42.0% 32.1% 7.6x 7.5x 7.1x 6.9x 5.9x 6.7x 7.0x 7.2x 8.5x 8.1x 9.3x 8.3x 6.6x 8.4x 8.4x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 1997 1999 2001 2003 2005 2007 2009 YTD '11 Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others Peak 45.6%
  • 29. Credit Markets2.
  • 30. 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Rate(percent) High-Yield Investment Grade 10-yr Treasury Credit Markets -- Interest Rates (Investment Grade, High‐Yield, and Treasuries) 30  High-yield and treasuries spreads were tight from 2002 to 2007, evidence of the extremely easy credit prior to the credit crisis. In November 2008, spread hit record high of 21.7%.  Spreads between investment grade, high-yield and treasuries approximate the early 2008 pre-crisis level.  Along with heightened volatility in the equity markets, high-yield spread has surged to 8.6% in August 2011, a 15% increase from 7.5% in July. Source: Bloomberg; Merrill Lynch US High Yield Master II Index Historical Average Rates and Relationships 21.7% 8.6% 3.7% 2.2%
  • 31. 4.0x 3.6x 3.5x 3.9x 4.1x 4.4x 5.0x 4.9x 5.3x 4.4x 3.4x 4.0x 4.9x 3.3x 3.0x 3.3x 3.4x 2.4x 3.9x 4.4x 4.8x 4.6x 3.3x 3.1x 3.5x 4.2x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jun-11 Total Debt/EBITDA Senior Debt/EBITDA Credit Markets -- Middle‐Market Credit Statistics 31  As the economy began its recovery in 2010, leverage multiples for middle-market LBO transactions increased from 2009 reflecting a trend of improvement of companies and the health of the credit market. Source: S&P LCD Leveraged Buyout Credit Statistics since 1999
  • 32. $295 $480 $535 $153 $77 $233 $132 $289 $94 $144 $144 $69 $166 $287 $166 $176 $0 $100 $200 $300 $400 $500 $600 2005 2006 2007 2008 2009 2010 YTD 8/25/10 YTD 8/25/11 $inbillions Leveraged Loans High Yield Bonds Credit Markets -- New Debt Issuance 32  Leveraged loan issuances have increased and 2010 volume has more than tripled 2009 volume levels. Issuance volume through August of 2011 has already exceeded 2010 levels.  High-yield issuances continue to set records year-to-date with $176 billion issued. New issuances started to slow in August 2011. Source: Piper Jaffray & S&P LCD New Issuance Volume 56.1% Combined Increase
  • 33. Strategic Buyers Purchasing Power3.
  • 34. -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2007 2008 2009 2010 2011 AnnaulGrowth(%) $inbillions Strategic Buyers Purchasing Power -- Record Amounts of Cash 34  Corporate balance sheets flushed with cash, totaling $1.75 trillion in June 2011.  Although corporate profits have grown for the past nine quarters, the growth is moderating. Source: Capital IQ S&P 500 Cash and Equivalents 67.2% Increase Since Q1 2009 Record low interest rates for corporate debt issuers: IBM – 1.00% (3 years) Google – 1.25% (3 years) Johnson &Johnson – 2.15% (5 years) McDonald’s - 3.50% (10 years) Baker Hughes – 5.125% (30 years) Petrohawk Energy – 7.25% (8 years)
  • 35. Private Equity Environment4.
  • 36. Private Equity Environment -- Overview 36  Private equity firms establish funds by raising capital from investors such as public and private pension funds, endowments and foundations.  The funds are generally 10 years commitment with 5 years investment period. They seek investments to generate 20+% rate of return by utilizing leverage.  Typically charge investors 2% management fee on committed capital and 20% carry fee on its investments.  There are approximately 4000+ private equity groups in the U.S. today, a five-fold increase from 10 years ago. Source: Dow Jones Private Equity Analyst U.S. Private Equity Fundraising (1996 – August 2011) $32.4 $65.9 $101.4 $112.5 $206.5 $121.1 $91.8 $58.1 $113.5 $184.5 $291.7 $355.6 $311.7 $102.2 $86.3 $79.0 $0 $50 $100 $150 $200 $250 $300 $350 $400 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD 2011 $inbillions Corporate Finance Mezzanine Venture Capital Others
  • 37. Private Equity Environment – Fundraising and Commitments by States 37  Fundraising struggled to regain footing in 2010. $86.3 billion raised – lowest amount since 2003.  $79 billion raised to-date through August 2011, a 39% increase from same period last year. Total for the year is expected to surpass 2010 level.  A significant amount of the capital was raised by firms located outside of Texas. Source: Dow Jones Private Equity Analyst U.S. Fundraising ($ in billions) Dropped 15.5% from 2009 2010 Commitments by State ($ in billions) Source: Dow Jones Private Equity Analyst; (1) includes Oklahoma and Colorado Type of Fund # of Funds $ Amount # of Funds $ Amount LBO/Corporate Finance 138 $53.3 117 $56.6 Fund of Funds 41 6.4 40 6.5 Mezzanine 27 6.2 20 3.3 Other PE 11 8.8 12 3.6 VC 119 11.6 69 9.1 Total 336 $86.3 258 $79.0 FY 2010 YTD August 2011 Other States 29% International 0.1% New York 37% California 20% Massachusetts 8% Texas 4% Other Southwest (1) 2%
  • 38. $43 $77 $150 $198 $230 $222 $232 $263 $292 $237 $378 $475 $396 $386 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD Q2 2011 $inbillions Cumulative Overhang Equity Raised Equity Invested Private Equity Environment -- Equity Raised & Cumulative Overhang 38  The proliferation of institutional private investment funds has created a significant buildup of un-invested capital (“overhang”).  In the near term, reduced fundraising, combined with an accelerated investing environment and higher equity contributions, will diminish the build up of private equity overhang. Source: Pitchbook, Inc. Private Equity Raised & Cumulative Overhang 18.7% Decline
  • 39. 8.4 4.3 3.3 2.7 1.9 0.7 3.0 11.0 3.0 3.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Annualized 2011 YearstoInvestDryPowderatAnnualRates Private Equity Environment -- Dry Powder Investment Years 39  The chart below depicts the number of years to invest dry powder, computed by dividing cumulative overhang by annual private equity capital investment Source: Pitchbook, Inc. Dry Powder Investment Years
  • 40. Private Equity Environment -- Use of Leverage in Recapitalization (Example) 40 2x Additional Leverage 100% Increase In Enterprise Value ($ in thousands) 2.0x 3.0x 4.0x Valuation: TTM EBITDA $10,000 $10,000 $10,000 Valuation Multiple 3.3x 5.0x 6.7x Enterprise Value $33,203 $49,835 $66,535 Sources & Uses: Debt $20,000 $30,000 $40,000 Equity 13,203 19,835 26,535 Total Capitalization $33,203 $49,835 $66,535 Equity Returns with 7.5% Annual Growth 25.0% 25.0% 25.0% Equity Returns at $67MM Valuation with Less Debt 12.8% 17.8% 25.0% Required Annual Growth to Satisfy Min 25% Equity Returns 21.7% 15.3% 7.5% Total Leverage
  • 41. Private Equity Environment – Case Study (American Central Gas Technologies, Inc.) 41 Range of Indications of Interests 11.1x 10.9x 10.3x 10.2x 8.9x 8.6x 7.9x 7.4x 7.4x 7.4x 6.9x 6.8x 6.2x 5.9x 4.6x $225.0 $220.8 $210.0 $207.5 $180.0 $175.0 $160.0 $151.0 $150.0 $150.0 $140.0 $137.5 $125.0 $120.0 $94.0 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x $0.0 $50.0 $100.0 $150.0 $200.0 $250.0 A B C D E F G H I J K L M N O EBITDAMultiple EnterpriseValue($inmillions) Financial Buyer Strategic Buyer
  • 42. Private Equity Environment -- Case Studies 42 Minority Recapitalization Pinnergy, Ltd. has completed a minority recapitalization led by The Stephens Group, LLC. GCP acted as exclusive advisor to Pinnergy, Ltd. Management Buyout VLS Recovery Services, LLC has completed a management buyout led by Prudential Capital Group. GCP served as exclusive financial advisor to VLS Recovery Services Recapitalization Spitzer Industries, Inc. has executed a recapitalization with The Stephens Group, LLC. GCP acted as exclusive advisor to Spitzer Industries, Inc.
  • 43. Taxes5.
  • 44. Taxes -- Long Term Capital Gains Tax Rates 44 Long Term Capital Gains Tax Rate % (1954-2012) Source: taxpolicycenter.org  In December 2010, the reduced capital gains tax law was extended through the end of 2012.  The extension relieved some of the urgency to sell, but may contribute to increased M&A activity over the next 15 months. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 25% 37% 40% 28% 20% 28% 20% 15% 2 Year Extension?
  • 45. Conclusions6.
  • 46. Conclusions  Deleveraging process by consumers and the government may take years and will restrict/prevent normal U.S. GDP growth  Demographics/aging workforce  Healthcare costs, “reregulation” and potentially higher taxes add additional head winds  Emerging markets so far propping up the U.S. economy  While overhang of private equity is shrinking, the uninvested capital is high by historical standard  Strategic buyers (with record amounts of cash) will need acquisitions to offset slower organic revenue growth  Record low cost of debt capital  Demographics (baby boomers selling businesses) 46  Exit window can open and close anytime  Easier to slow process down than speed process up  React quicker to strategic or private equity inquiry  Audits, management, ownership transfers  U.S. economy goes from slow/no growth to a downturn - would be difficult for fix with rates already at record lows and deficits at record highs o Deteriorating U.S. economy could create additional pressure on large U.S. banks with mortgage loan exposure o Fannie Mae and Freddie Mac challenges  European sovereign debt and bank crises gets worse. How does Euro issue get resolved?  Slowdown in emerging markets  Stock market downturn  One or more of the above and/or continued uncertainty would put acquiring entities (both strategics and private equity groups) either on hold or reduce terms and valuation U.S. Economic Challenges are Structural, Not Cyclical M&A Activities (assuming no major economic shock) will Accelerate What Could Go Wrong Be Prepared
  • 47. Strategic Alternatives OverviewConclusions -- Duff & Phelps Services Overview 47 Service Lines Industry Coverage United States Atlanta, Austin, Boston, Chicago, Cincinnati, Dallas, Denver, Detroit, Morris Town, Houston, Los Angeles, New-York, Philadelphia, Plano, San Francisco, Seattle, Silicon Valley Europe Amsterdam, London, Munich, Paris Asia Shanghai, Tokyo Cross Border Engagements Cross Border Engagements Cross Border Engagements Atlanta, Austin, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles, Morristown, New York, Philadelphia,Plano, San Francisco, Santa Monica, Seattle, Silicon Valley, Toronto, Washington AsiaEurope North America MERGERS & ACQUISITIONS  Exclusive Sale Transactions  Distressed Asset Sales  Corporate Divestitures  Leveraged Buyouts  Buy-Side Acquisition Advisory  Review of Strategic Alternatives PRIVATE PLACEMENTS & CAPITAL RAISING  Senior Debt Arranging  Mezzanine Debt Placements  Equity Placements  Leveraged Recapitalizations  Private Investments in Equity  ESOP Corporate Finance FINANCIAL RESTRUCTURINGS & RECAPITALIZATIONS  Plans of Reorganization  Lender & Creditor Negotiations  DIP and Exit Financings  Exchange/Tender Offers  Rights Offerings  Business Plan/Debt Analysis TRANSACTION OPINIONS & FINANCIAL ADVISORY  Fairness Opinions  Commercially Reasonable Ops.  Corporate Financing Consulting  Solvency Opinions  Business & Security Valuation  Dispute Analysis & Litigation Ranked #2 restructuring firm in the U.S. Ranked #4 provider of fairness opinions Aerospace and Defense Business Services Energy and Mining Engineering/Construction Food and Agribusiness Healthcare Industrial Products Technology and Media Global Footprint
  • 48. www.boyarmiller.com Real Estate Finance Thomas O. Fish – Jones Lang LaSalle Executive Managing Director Co-Head Real Estate Investment Banking
  • 49. Current Environment - Debt Markets • Europe’s sovereign debt crisis continues to rattle global markets. • The S&P 500 plunged 18% from a 3-year high on April 29 through August 8 in large part over concern that Europe will fail to contain its debt crisis. • The 2-year swap spread – considered a gauge of fear in the debt markets – rose to a one-year high on August 23. Risk aversion has sent investors back to the Treasuries, driving down yields. • Spreads have widened across all credit sectors, including commercial real estate. • CMBS spreads are now approximately 300 basis points, 100 b.p. increase over last 2 months. • Mostly offset by decrease in Treasury yields. 10-year T-bill = 2.15%, vs.3.18% in July. • 5 year T-bill = 1%!!! Downgrade = Price Increase?!? • CMBS which still offers attractive yields on a risk-adjusted basis compared to other fixed-income instruments. • US commercial property sales increased to $97 billion year-to-date through July, compared to $49 billion for the same period in 2010, an increase of 98%. • Banks have arranged over $21B in CMBS this year, led by retail and office properties, compared with $11B in all of 2011. Won’t make $35-40B forecast. • Portfolio lenders continue to grow their books. Insurance companies have raised their production goals for 2011 and are able to tackle larger loans that securitized lenders are wary of warehousing. • Lenders are aggressively quoting 5-10 year deals in the 4-6% range at LTVs up to 75%
  • 50. Source: Bloomberg, Jones Lang LaSalle Current Global Government Yields Concern remains over The “PIIGS” Global 10-Year Government Yields 1.03% 2.22% 2.22% 5.04% 5.14% 8.62% 10.38% 17.81% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Japan Germany US Spain Italy Ireland Portugal Greece
  • 51. Source: ACLI, Federal Reserve, Wells Fargo, Jones Lang LaSalle Commercial RE Debt Maturities by Lender Bank maturities dominate landscape and will be most challenged • $900 billion of debt maturing through 2013, $682 billion of which is bank debt • Many loans - no option other than foreclosure or restructuring/modification • GOOD NEWS: There is still a lot of relatively inexpensive debt/equity available with LTVs up to 75%
  • 52. Source: JPMorgan, Jones Lang LaSalle CMBS Troubled Loan Update Special servicers have $76 billion of volume to work through Loans in Special Servicing as % of CMBS outstanding $34 $70 $76 4.96% 10.92% 12.77% $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 (Billions) 1.50% 2.25% 3.00% 3.75% 4.50% 5.25% 6.00% 6.75% 7.50% 8.25% 9.00% 9.75% 10.50% 11.25% 12.00% 12.75% Volume in SS As % of all CMBS
  • 53. Source: FDIC, Jones Lang LaSalle Bank Troubled Loan Update A Long Way to go to Reach Early-2008 Levels Future Distressed Loans from Banks - 30+ Days Delinquent $80 $90 $104 $124 $151 $166 $176 $180 $190 $181 $178 $167 $164 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 (Billions) CRE Loans OREO Total
  • 54. Source: Mortgage Bankers Association, Jones Lang LaSalle CRE Delinquency by Lender Type CMBS at 9%; Life Co’s and Agencies in Great Shape
  • 55. Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $5 million US CRE Sales Volume 2011 off to a good start and could reach 2004 levels US Sales Volume $83 $104 $127 $231 $310 $364 $513 $145 $55 $125 $49 $97 $0 $75 $150 $225 $300 $375 $450 $525 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jan - July 2010 Jan - July 2011 (Billions) 2011 may reach 2004 level
  • 56. Property Investment by Market Type Primary markets still dominate; however, balance starting to move Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $2.5 million
  • 57. Source: Credit Suisse, JPMorgan, Jones Lang LaSalle CMBS Issuance Markets need to stabilize FAST to meet $35 - $40 billion forecast
  • 58. Source: Bloomberg, Jones Lang LaSalle CRE Spreads Spreads widening over last two months – 75 – 100bps.
  • 59. Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle Cap Rates Versus Corporates Property is offering a much better risk-adjusted yield
  • 60. Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle Property Spread to US Treasury Cap rates are over 400 basis points higher than the 10-Year Treasury
  • 61. Source: Real Capital Analytics, Jones Lang LaSalle Cap Rates by Property Type Yields are back to 2004 / 2005 levels
  • 62. SUMMARY • CMBS is “taking a knee” until stability returns – hard to price • Portfolio lenders still very much open for business • Debt rates are still ridiculously low • Lenders / investors still picky – looking for great product, location and sponsorship, creeping out to secondary markets. • Equity investors are still underallocated • Will underwriting change to reflect slower recovery? Too soon to tell.
  • 63. www.boyarmiller.com Commercial Banking James S. D’Agostino, Jr., – Encore Bank Chairman of the Board & CEO
  • 64. There are a lot of banks in Houston
  • 65. There are a lot of banks in Houston • Three TBTF banks have 60% of market • Out-of-town banks control over 75% of market • Local banks have $24B in loans FBR Capital Markets & Co. Houston Bank Review 2nd Quarter, 2011 FDIC Deposit Market Share Report June 30, 2010
  • 66. How Are Banks Doing? • Much Better – More capital – More liquidity – Fewer problem assets • But…
  • 67. How Are Banks Doing? • Revenues weak • Loans weak • Margins weak • Costs rising Trouble ahead?
  • 68. Regulatory Environment
  • 69. Are Banks Lending? YES! BUT
  • 70. Are Banks Lending? • Land Loans • Construction & Development Loans • Commercial Real Estate Loans • Mortgage Loans • Commercial & Industrial Loans
  • 71. What’s a Borrower to do? • Build A Relationship • Build Good Financial Data • Strengthen Ties Beyond Banker • Know Your Bank
  • 72. Questions & Answers