Capital Markets Industry Insights - Fall 2016

I N D U S T R Y I N S I G H T S :
Capital Markets
Q 3 2 0 1 6 R e v i e w

Capital Markets Industry Insights | Q3 2016
Middle-market issuers enjoyed a welcoming lending environment
this quarter during which leverage providers took on increased
levels of fundamental risk. This tolerance for increased risk
reflected improving macroeconomic conditions on the one hand
and appetite for yield on the other.
While aggregate issuance of high-yield bonds and leveraged
loans declined modestly this quarter, we observed a migration of
appetite toward those credit and hedge funds with higher
risk/return parameters.
The return of leveraged recapitalizations largely offset a decline in
middle market M&A related financing. Modestly positive fund
inflows facilitated the successful absorbing of recap issuance.
Market analysts continued to closely follow monetary policy, even
as major central banks largely stood pat for the quarter. To our
surprise, geopolitical developments (other than a sharp, though
brief, Brexit scare) and macroeconomic strengthening, had little
lasting impact on market conditions.
Central banks remain
accommodative, though
signals from the Federal
Reserve suggest a December
rate hike.
In light of improving
macroeconomic conditions, credit
sources are taking on higher
degrees of fundamental risk.
Lenders are focused on well-
structured transactions; we noted
increased appetite for growth-
oriented financings (typically
including unfunded acquisition lines).
2
Highlights

Executive Summary
Middle-market issuers were greeted by strong demand this quarter
from mainstream credit sources as well as those seeking higher
degrees of risk and return. Commercial banks, while largely hewing
to traditional leverage parameters, exhibited unusually high
leverage tolerance for larger deals in noncyclical spaces. Business
development companies returned to the market as their portfolio
challenges began to abate. This mainstream demand was
supplemented by increased activity among credit and hedge funds,
as well as historically passive investors initiating direct credit
programs. We observed increasingly aggressive credit parameters
among these opportunistic participants, wherein borrowers were
offered alternatives with higher leverage and structural
characteristics.
Macroeconomic fundamentals continued to improve, though the
focus remained on monetary policy. With an increasingly stark
dichotomy of views at the Federal Reserve, volatility persisted in
anticipation of clearer guidance on the pace and timing of rate
hikes. Ultimately, central banks largely held pat in the third quarter,
with the European Central Bank electing to continue its stimulus
program, and the Fed left benchmark rates unchanged. The Bank
of Japan, rather than cut into further negative territory, announced
that it would maintain its easing program and focus on managing
long-term yields.
Much of our activity this quarter involved transactions designed to
facilitate organic and acquisition oriented growth, among other
objectives. An improving macroeconomic backdrop, combined with
the broadening of investment strategies among market participants,
has allowed us to deliver increasingly holistic solutions to our
clients. In particular, financings that incorporate unfunded
acquisition lines alongside funded term loans have become
increasingly widely available.
We anticipate that issuers will enjoy the benefits, in coming
quarters, of a diverse universe of market participants offering an
array of credit solutions. The market for ordinary course leverage
should continue to be welcoming; this appetite will increasingly be
complemented by solutions of a higher risk/higher reward, offering
deeper leverage and more aggressive structures. Consequently,
borrowers will enjoy an unusually broad menu of solutions from
which to choose.
3

LEVERAGE MULTIPLES
SENIOR
EBITDA OF $10MM - $20MM
2.50x - 3.50x
3.00x - 4.00x
TOTAL DEBT
3.50x - 4.50x
4.00x - 5.50x
Indicative Middle-Market
Credit Parameters
4

PRICING EBITDA OF $10MM - $20MM EBITDA OF $20MM - $50MM
SECOND LIEN
LIBOR + 7.00% - 10.00%
LIBOR + 6.50% - 9.50%
LIBOR + 6.50% - 9.50%
LIBOR + 6.00% - 9.00%
SUBORDINATED
DEBT
11.00% - 13.00% 10.00% - 12.00%
UNITRANCHE
LIBOR + 7.00% - 9.50%
LIBOR + 6.50% - 9.00%
LIBOR + 6.50% - 9.00%
LIBOR + 6.00% - 8.50%
Indicative Middle-Market
Credit Parameters
FIRST LIEN
LIBOR + 3.00% - 4.00% (bank)
LIBOR + 2.75% - 3.50% (bank)
LIBOR + 4.50% - 6.50% (non-bank)
LIBOR + 4.00% - 6.00% (non-bank)
LIBOR + 2.75% - 3.50% (bank)
LIBOR + 2.50% - 3.25% (bank)
LIBOR + 4.00% - 6.00% (non-bank)
FIRST LIEN
INFORMATION IN RED REPRESENTS PRIOR QUARTER VIEW
5

Capital Markets Industry Insights | Q1 2016Capital Markets Industry Insights | Q3 2016
The number of high-yield issuances this quarter ticked up modestly, though dollar
volume fell from the second quarter and remains below long-term averages. Given the
largely benign near-term monetary policy outlook, relatively little discretionary bond
financing occurred this quarter.
Total High-Yield Bond Issuance
Source: SDC Platinum
109.2 111.2
116.3
105.2
90.9 88.1
124.8
103.2
90.9
114.9
105.7
84.1
52.6
59.1
72.6
64.9
347 344 362
283
302
282
409
320
290
326
316
220 159
142 140 146
100
200
300
400
500
4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
$0
$50
$100
$150
THOUSANDS
Total Bond Volume ($B) Number of Deals
New
Issuance
6

490.4 506.4
596.5
547.8
607.9
485.2
621.9
509.1
671.9
436.5
664.0
599.4 599.2
397.6
694.5
470.2
1,123
888
1,104
1,054
1,212
1,030
1,218
1,140
1,187
893
1,246
1,024
1,134
862
1,111
862
700
900
1,100
1,300
1,500
$0
$200
$400
$600
$800
THOUSANDS
Total Loan Volume ($B) Number of Deals
The total dollar volume of new loan issuance declined, as did the number of
transactions, in the third quarter. On a trailing two-month basis, aggregate dollar volume
and, to a lesser extent, the number of transactions completed, moved toward historical
means(1).
Total Loan Issuance
New
Issuance
(1) We attribute the spike in Q2 activity to the deferring of planned Q1 issuance, in light of volatile market conditions early in the year.
7

Consistent with our observations on total loan issuance, third quarter dollar volume and
the number of transactions declined, though less so in the middle-market. We note that
middle-market issuance on a trailing two-quarter basis continued to be strong, as we
observed a migration of appetite toward those credit and hedge funds with higher
risk/return parameters.
Total Loan Issuance (EBITDA < $50MM)
220.1
256.2
294.3
219.4
285.5
271.1
307.5
231.7
256.7
174.4
306.8
242.6
267.6
171.1
322.0
259.5
868
666
855
797
922
804
959
890 895
671
942
805
869
670
868
689
500
750
1,000
1,250
$0
$70
$140
$210
$280
$350
THOUSANDS
Total Loan Volume ($B) Number of Deals
New
Issuance
8

Fund
Flows
Issuance of collateralized loan obligations (CLOs) increased modestly this quarter. The
relative importance of CLOs in the middle-market diminished somewhat as credit funds,
hedge funds and BDCs exhibited increased risk appetite.
Total CLO Issuance
23.6
26.3
16.0 17.0
24.6
22.6
38.3
32.4
30.7 30.8
28.6
1.9
19.6
8.2
18.0
19.9
46
52
34
36
53
45
69
58
63
57
55
36
40
20
42 41
0
20
40
60
80
$0
$10
$20
$30
$40
$50
$60
Total Fund Flows ($B) Number of Deals
9

Leveraged loan fund inflows grew in each month of the third quarter. It appears that
mutual fund investors are positioning themselves for a rising yield environment.
Source: Investment Company Institute; Lipper FMI
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
($20)
($15)
($10)
($5)
$0
$5
$10
$15
MILLIONS
High-Yield Bond Fund Flows Leveraged Loan Fund Flows
Total Fund Flows ($B)
Fund
Flows
Mutual Fund Flows
10

Leverage Mean total leverage multiples for middle-market financings remained at ~5.0x this quarter.
The amount of first lien debt, however, increased by approximately 0.3x, reflecting a
rotation of lender appetite to single source unitranche structures and away from bifurcated
senior/junior structures. While commercial banks continue to demonstrate modest risk
appetite, credit funds and BDCs, among others, filled the void with unitranche solutions.
Leverage Multiple (EBITDA < $50MM)
4.4x
4.9x
4.7x
5.3x
4.5x
4.7x
5.1x 5.2x
4.8x 4.8x
4.4x
5.6x 5.7x
4.9x 5.0x 5.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
First Lien Second Lien SubordinatedDebt / EBITDA Multiple
11

Middle-market M&A transaction volume declined modestly versus last quarter, though
aggregate transaction value held nearly constant. The recent increase in leveraged recap
activity contributed to what we believe was an aberrant M&A slowdown.
Middle-Market M&A Volume (Target EBITDA < $50M)
172.3
130.4
112.8
263.4
181.4
150.6
206.8
199.4
165.1
189.0
154.2
245.7
157.2
119.4
201.4
188.2
2.8
2.2 2.1
2.5 2.6 2.5 2.6 2.6
2.7 2.6
2.7
2.6
2.4 2.4
2.7
2.0
1.0
1.8
2.6
3.4
4.2
5.0
$0
$50
$100
$150
$200
$250
$300
THOUSANDS
THOUSANDS
Total M&A Volume ($B) Number of Deals
(thousands)
Transaction
Volume
12

Dividend recapitalizations for both sponsor- and management-owned businesses
represented an atypically large proportion of loan and private note activity this quarter.
The return of lender appetite for recaps, combined with attractive risk-adjusted leverage
costs and friendly call terms, triggered broad consideration of recaps in lieu of asset
sales.
Loan Issuance for Dividend Recapitalizations
$15.7
$17.8
$27.3
$14.0
$10.7
$17.0
$18.3
$13.4
$4.1
$6.5
$15.2
$12.8
$3.1
$0.2
$14.2 $13.8
$0
$5
$10
$15
$20
$25
$30
Total Loan Volume ($B)
Transaction
Volume
13

Yields Yields on high-yield bonds and leveraged loans fell approximately 100bps and 60bps
respectively this quarter. Two notable drivers of the corporate rally are the rally in oil
prices providing some breathing room for highly leveraged energy companies and
continued monetary stimulus in Europe and Japan.
U.S. Corporate High-Yield Bonds & Leveraged Loans
4.5%
5.5%
6.5%
7.5%
8.5%
9.5%
10.5%
HUNDREDS
Barclays U.S. Corporate High Yield S&P/LSDA U.S. Leveraged Loan 100 All LoansYields (%)
14

Treasury yields were volatile during the third quarter, fluctuating in a ~35bps band for
10-year Treasury bonds, but ultimately ending nearly unchanged as the major central
banks largely stood pat for the quarter. Geopolitical developments and macroeconomic
strengthening had little lasting impact on market conditions.
2, 5 and 10 Year Treasury Yields
0.0%
1.0%
2.0%
3.0%
4.0%
2 Year 5 Year 10 YearYield (%)
Yields
15

Spreads between long-term and short-term Treasury yields decreased only 5bps during
the quarter, after several quarters of yield curve flattening.
0
50
100
150
200
250
300
2 Year vs. 10 Year Treasury Spread
Spread (bps)
Yields
16

Macroeconomics
Update
Macroeconomic conditions in the U.S. continued to strengthen in the
quarter. Positive jobs reports and strong GDP growth projections buoyed
markets. According to the Federal Reserve the unemployment rate stayed
essentially flat at 5.0%, as the labor force participation rate rose to 62.9%
in September. Given this backdrop, and the absence of near-term fiscal
stimulus, monetary policy continued to warrant analysts’ focus.
U.S. Real GDP Growth
Source: Federal Reserve
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
GDP Growth Rate
17

Michael Brill
Head of U.S. Private Capital Markets
+1 212 871 5179
michael.brill@duffandphelps.com
Bob Bartell, CFA
Global Head of Corporate Finance
+1 312 697 4654
bob.bartell@duffandphelps.com
Steve Burt
Global Head of M&A
+1 312 697 4620
steve.burt@duffandphelps.com
Dave Althoff
Global Co-head of Industrials M&A
+1 312 697 4625
david.althoff@duffandphelps.com
Josh Benn
Global Head of Consumer, Retail,
Food & Restaurants
+1 212 450 2840
josh.benn@duffandphelps.com
Brian Cullen
Head of U.S. Restructuring
+1 424 249 1645
brian.cullen@duffandphelps.com
Brooks Dexter
Global Head of Healthcare M&A
+1 424 249 1646
brooks.dexter@duffandphelps.com
Ross Fletcher
Managing Director, Canada M&A
+1 416 361 2588
ross.fletcher@duffandphelps.com
Brian Pawluck
Managing Director, Canada Restructuring
+1 416 364 9756
brian.pawluck@duffandphelps.com
Kevin Iudicello
Managing Director, Technology M&A
+1 650 354 4065
kiudicello@pmib.com
Jon Melzer
Global Co-head of Industrials M&A
+1 212 450 2866
jon.melzer@duffandphelps.com
Jim Rebello
Global Head of Energy M&A
+1 713 986 9318
james.rebello@duffandphelps.com
Contact Us
18

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For more information please visit:
www.duffandphelps.com
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serve a diverse range of clients from offices around
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M&A advisory and capital raising services in the United States are provided
by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners
is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital
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Capital Markets Industry Insights - Fall 2016

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