NW Growth Financing ConferenceThe Thawing of the Credit Markets:Is Your Company Freezer Burnt?<br />Moderator:  Curtis Fra...
2<br />SPONSORED SYNDICATED LOAN MARKET<br />2Q2010<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Us...
However, the 1Q10 mini-revival in dividend deals and even a few repricings stalled in June as the loan market cooled. Leav...
Through June, sponsor-to-sponsor deals totaled $10.5 billion, or 39% of overall activity, the highest share on record.</li...
This increase has been driven by a myriad of factors :
More liquidity in the market;
Still tepid “actual” deal flow;
Improved visibility in financial projections from sellers;
Lower anticipated defaults in lender portfolios resulting in a more accommodating stance from credit committees;
A reversion to mimicking the broadly syndicated market for structure; and
The desire to put an early dent in 2010 budgets.</li></ul>Avg. Debt/EBITDA Ratio for  Sponsored Middle-Market Transactions...
The volatility in the loan market has led to increased pricing over 1Q10 levels with pricing in the L+500-550 bps range wi...
Through June 30th, issuers have placed $10.5 billion (total) and $8.8 billion (sponsored) of loans and bonds to back divid...
2010’s class of dividends have been relatively conservative so far, with rating agencies and accounts generally skeptical ...
The average post-dividend leverage multiple for 2010 deals is 4.3x.
2010 dividends have allowed PE firms to recoup 76% of their original investment, on average (although barely half of 2006’...
Total Leverage	4.25x - 5.00x
Minimum Equity Contribution	35%-40%
Senior Pricing (L + bps) 	475 – 525
Floors (bps)	150 – 200
Closing Fees (unrated deals)	1.50%-2.00%
Amortization (unrated deals) 	5%+ p.a.
Excess Cashflow Recapture	50-75%
Tenors	5 years
Delayed Draw Term Loans	Yes
Covenant Package	Leverage + FCCR
Financial Covenant Cushions	20%
Full Underwrites	Yes
Market Flex Language	Economics </li></ul>This is Fifth Third’s view of middle market transactions today.  <br />
12<br />Comparable Transactions<br />
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The Thawing of the Credit Markets

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Panel discussion at the 2010 Northwest Growth Financing Conference

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The Thawing of the Credit Markets

  1. 1. NW Growth Financing ConferenceThe Thawing of the Credit Markets:Is Your Company Freezer Burnt?<br />Moderator: Curtis Fraser, Chase<br />Glenn Burroughs, PNC Business Credit<br />Thomas Cleveland, Access Business Finance<br />Raymond Yager, Fifth Third Bank<br />
  2. 2. 2<br />SPONSORED SYNDICATED LOAN MARKET<br />2Q2010<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>3<br />Middle Market Sponsored Volume<br /><ul><li>Sponsored issuance increased 281% year-over-year and 78% over 1Q10 to $11.7 billion.
  3. 3. However, the 1Q10 mini-revival in dividend deals and even a few repricings stalled in June as the loan market cooled. Leaving sponsors to focus on sponsor-to-sponsor trades.
  4. 4. Through June, sponsor-to-sponsor deals totaled $10.5 billion, or 39% of overall activity, the highest share on record.</li></ul>Source: LPC<br />Sponsored Volume 2Q10<br />Source: S&P<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>4<br />Middle Market Sponsored - Leverage<br /><ul><li>The leverage multiples for middle market transactions are now in the 3.00x-3.50x range on a senior basis and 4.50x to 5.00x on a total basis.
  5. 5. This increase has been driven by a myriad of factors :
  6. 6. More liquidity in the market;
  7. 7. Still tepid “actual” deal flow;
  8. 8. Improved visibility in financial projections from sellers;
  9. 9. Lower anticipated defaults in lender portfolios resulting in a more accommodating stance from credit committees;
  10. 10. A reversion to mimicking the broadly syndicated market for structure; and
  11. 11. The desire to put an early dent in 2010 budgets.</li></ul>Avg. Debt/EBITDA Ratio for Sponsored Middle-Market Transactions<br />Source: S&P<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>5<br />Middle Market Sponsored - Pricing<br /><ul><li>Lenders are still expecting sponsors to contribute at least 30-40% equity to capital structures.
  12. 12. The volatility in the loan market has led to increased pricing over 1Q10 levels with pricing in the L+500-550 bps range with 1.75-2.0% LIBOR floors and 98 OID’s. </li></ul>Avg. Spread of Sponsored Transactions 1997- 2Q10<br />481.25<br />464.06<br />Source: S&P<br />Note: Middle Market issuers defined as issuers with EBITDA < $50mm.<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>6<br />Pro Forma Credit Statistics of Sponsored Middle-Market Transactions <br />Source: S&P<br />EBITDA is adjusted for cost savings and synergies<br />Data excludes Media and Telecom prior to 2002<br />Note: Middle Market issuers defined as issuers with EBITDA < $50mm.<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>7<br />Middle Market Sponsored Volume by Industry – 1H10<br />Source: S&P<br />Note: Middle Market issuers defined as issuers with EBITDA < $50mm.<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>8<br />Middle Market Sponsored Volume by Purpose – 1H10<br />Source: S&P<br />Note: Middle Market issuers defined as issuers with EBITDA < $50mm.<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>9<br />Dividend Financing<br /><ul><li>Dividend financing has been a major theme this year as private equity firms tap the now liquid debt markets to harvest gains.
  13. 13. Through June 30th, issuers have placed $10.5 billion (total) and $8.8 billion (sponsored) of loans and bonds to back dividends payments, versus just $8.0 billion (total) in all of 2009.
  14. 14. 2010’s class of dividends have been relatively conservative so far, with rating agencies and accounts generally skeptical of equity extraction.
  15. 15. The average post-dividend leverage multiple for 2010 deals is 4.3x.
  16. 16. 2010 dividends have allowed PE firms to recoup 76% of their original investment, on average (although barely half of 2006’s 147%).</li></ul>Source: S&P<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>10<br />OVERVIEW OF FIFTH THIRD - SFG<br /><ul><li> Fifth Third Bank | All Rights Reserved | For Internal Use Only</li></li></ul><li>11<br />SFG Middle Market View<br /><ul><li>Senior Leverage: 3.00x - 3.50x
  17. 17. Total Leverage 4.25x - 5.00x
  18. 18. Minimum Equity Contribution 35%-40%
  19. 19. Senior Pricing (L + bps) 475 – 525
  20. 20. Floors (bps) 150 – 200
  21. 21. Closing Fees (unrated deals) 1.50%-2.00%
  22. 22. Amortization (unrated deals) 5%+ p.a.
  23. 23. Excess Cashflow Recapture 50-75%
  24. 24. Tenors 5 years
  25. 25. Delayed Draw Term Loans Yes
  26. 26. Covenant Package Leverage + FCCR
  27. 27. Financial Covenant Cushions 20%
  28. 28. Full Underwrites Yes
  29. 29. Market Flex Language Economics </li></ul>This is Fifth Third’s view of middle market transactions today. <br />
  30. 30. 12<br />Comparable Transactions<br />
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  52. 52. Bank Failures- S& L Crisis vs. todaySource: FDIC<br />S&L Crisis<br />1,409 banks failed between 1989 and 1993<br />Cost of the crisis $160.1 billion<br />Today<br />2008 bank failures – 25<br />2009 bank failures – 140<br />As of July 16, 2010 – 105<br />Troubled banks – 700 +<br />Net charge offs<br />2006 - $ 27.0bil<br />2007 - $ 44.1bil<br />2008 - $ 100.4bil<br />2009 - $ 187.4bil<br />Q1 2010 - $52.4bil<br />
  53. 53. Asset ValuesSource: GoIndustry DoveBid<br />Semiconductor and PCB industries - In a current state of growth with high demand for high grade good quality equipment. Lead times for new equipment is forcing buyers to the secondary market.<br />Transportation- Alternate fuels have not really hit this market in a big way. Hybrids are expensive and may be difficult without government supported tax breaks. California new laws will create problems in this sector as conversion to less polluting engines is expensive. Other states will follow.<br />Bio-Pharmaceuticals- Steady and strong with consolidation in R&D. This is an industry that quickly obsoletes older equipment when testing and research are through.<br />Plastics-Injection molding is the largest sector in this industry with extrusion and blow molding the smaller sectors. Performance is estimated to be up for 2010 from 2009 for Injection, and dropping somewhat for extrusion and blow molding.<br />Current conditions - There is an uptake in the market. Lower inventories have created the move up in manufacturing. The question is, whether it is sustainable and for how long. Many companies have cleaned up their bottom lines and are working with fewer people. Bottom line, we need to invest in manufacturing goods the world wants to buy.<br />
  54. 54. Great American Group<br />Machinery & Equipment<br />Above data based on Great American Group’s liquidation activities in addition to consultations with our network of commodity-specific advisors.  Participants compared used equipment values and level of trade observed in Q2 2010 as compared with Q1 and projected value trends into Q3.<br />
  55. 55. Dodd-Frank Wall Street Reform and Consumer Protection Act<br />
  56. 56. Implications<br />Require in excess of 243 new rule makings by 11 different federal agencies.<br />Expect 5,000 pages on new regulations. Promises to generate historic levels of red tape.<br />No expiration date on powers.<br />Creates environment of regulatory uncertainty and deter lending in the near term and increase the cost of credit.<br />Eliminates the use of Trust Preferred Securities by Bank Holding Companies to raise Tier 1 Capital- higher level of capital will be required.<br />Derivatives more costly impacting producers of commodities and food.<br />
  57. 57. Provide permanent bailout authority to FDIC<br />Alters the use of the FDIC from a traditional deposit insurance that guarantees the same deal for every bank to a tax you pay the government and the government decides which bank it wants to replace.<br />Increases the cost of non-deposit funding and the static saving for smaller banks disappears. Affects the pricing and availability of home loans.<br />Insurance premiums will increase due to higher insurance limits and no limit on the size of the FDIC fund.<br />Trust the same regulators that Failed the last time.<br />
  58. 58. New 10 member Financial Stability Oversight Council and a new Bureau of Consumer Affairs<br />Expect a destabilized financial system by stifling innovative products while failing to detect dangers posed by existing ones.<br />Increase in credit costs for consumers and businesses tighter credit markets as fewer loans will be granted.<br />New disclosure and reporting requirement adding to the compliance costs.<br />Banks forces to invest in lawyers and lobbyists to keep up with the law.<br />Assumes that policy makers are able to predict financial crisis.<br />
  59. 59. Fat Cat Banker<br />
  60. 60. Fannie and Freddie Forever<br />Lack of Government sponsor enterprise reform makes the bill an inadequate response to the 2008 financial crisis.<br />Hundreds of provisions unrelated to the original mission and fails to address the major cause of the mortgage meltdown. <br />According to the Wall Street Journal- it weakens the US economy and reduces economic growth. <br />Ignores the role of loose monetary policy in driving the housing bubble.<br />

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