Leveraged Finance Annual Review / Outlook 2014

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01.14.14 www.bloombergbriefs.com

Bloomberg Brief | Leveraged Finance

2013 IN REVIEW
MONTH

JAN

YEAR IN REVIEW
BY JAMES CROMBIE

EVENT
Esther George, president of the Federal Reserve Bank of Kansas City, refers to the elevated
price of high-yield and leveraged loans.

Dell secures financing for its $24.4 billion buyout, the biggest LBO since the financial crisis.
FEB

Fed Governor Jeremy Stein warns that some credit markets, including corporate debt,
show signs of potentially excessive risk-taking.

MAR

Apollo Global leads a rebound in Europe’s market for CLOs.

APR

Investors favor triple C rated bonds by the most in 17 months as confidence mounts that
central banks will prop up debt markets through year-end.

MAY

2

Private-equity firms raise loans to pay themselves dividends at a pace exceeding frothy
pre-crisis levels.
Barclays raises its junk-bond return forecast to 6-8 percent, citing year-to-date total returns
of 5.3 percent.

Investor appetite for high-yield credit started
2013 strongly and closed the year in good
shape, casting off a mid-year wobble caused
by fears about the impact of Fed tapering.
Expectations of higher rates spurred record
cash flows into loan funds, while new highs
were set for both bond and loan issuance.
Fears of a high-yield bubble were stoked by
record low yields on junk bonds and significant increases in issuance of PIK notes. More
covenant-light, second-lien, LBO and dividend
fund raisings also raised alarm bells, not least
from regulators.
Whether issuance can be sustained at the
same pace in 2014 depends on mergers,
which bankers expect to be more active this
year. CLO sales will be key for loans, though
regulation may stifle this year’s revival.
Fund flows will likely dictate whether the
trend towards even greater concessions to
borrowers continues. As long as investors are
liquid and yield-hungry – and volatility remains
low – junk-rated companies will take advantage of the debt issuance opportunity.
Bloomberg Brief Leveraged Finance

JUN

Losses on junk-bond ETFs outpace the broader U.S. high-yield market by the most in three
years, signaling a slump for debt that traded at record-highs less than a month before.

Newsletter Ted Merz

Executive Editor tmerz@bloomberg.net

+1-212-617-2309

Junk bonds stage a comeback, with the biggest gain in 18 months.

Bloomberg News Robert Burgess

Managing Editor bburgess@bloomberg.net

+1-212-617-2945

Investors pump money into junk bonds globally at the fastest pace ever.

Leveraged Finance James Crombie

Editor jcrombie8@bloomberg.net

212-617-3590

JUL

The speculative-grade debt market hits $2 trillion, up from $243 billion in 1997.
AUG

The lowest volume for U.S. corporate-bond trading since 2008 underscore the potential for
market disruptions.
Private-equity firms obtain buyout loans at the fastest pace in six years.

SEP
Sprint raises $6.5 billion in the largest speculative-grade deal since 2008.

OCT

NOV

DEC

Fed and Office of the Comptroller of the Currency send letters to some of the biggest banks
asking them to avoid originating loans that can be considered “criticized.”
BlackRock CEO Laurence D. Fink says Fed policies contribute to “bubble-like markets,”
pointing to corporate debt as an area of concern.
The biggest year for CLOs since 2007 is propped up by deals managed by
Blackstone and Carlyle.
The number of U.S. companies with the lowest credit ratings jump to the highest in six
months after junk borrowers obtain a record amount of bonds and loans.
The market for junk loans increased to $683 billion, exceeding the 2008 peak of $596 billion.

Reporter
David Holley

dholley8@bloomberg.net

212-617-1311
Contributing
Daniel Covello
Analysts Lara Deke

Matthew Geudtner Srobana Ghosh

Michael Luongo Luke Reeve

Nikolas Trenchi Luminita Teodorescu
Afrim Zeka

Newsletter Nick Ferris

Business Manager nferris2@bloomberg.net
212-617-6975
Advertising Jeff Maniatty

jmaniatty@bloomberg.net

+1-203-550-2446

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3



4

LEVERAGED FINANCE 2013: BY THE NUMBERS
$2 trillion: Total market for dollar-denominated junk rated debt.
$1.3 trillion: Sales of junk bonds since the end of 2008.
24%: Junk issuance as a percentage of all U.S. corporate bond sales, up from 8% in 2008.
$683 billion: The market for junk-rated loans, exceeding the 2008 peak of $596 billion.
$1.6 trillion: Commercial and industrial loans outstanding, exceeding the prior high set October 2008.
42%: Loans considered “criticized,” or having a deficiency that may result in a loss,
according to the Fed and the Office of the Comptroller of the Currency.

46%: Percentage of loans issued as covenant light.
767%: Increase in loan issuance for LBOs since 2009.
4836%: Increase in loan issuance for dividend payments since 2009.
2.2%: U.S. leveraged loan default rate in December, down from 3.1 percent a year earlier.
62: Moody’s-rated corporate debt issuers that defaulted, compared with 63 in 2012.
$17 billion: Issuance of triple C rated bonds, up from $13 billion in 2012.
$32 billion: Second-lien loan issuance, up from $18 billion in 2012.
$22.5 billion: Issuance of PIK bonds globally, up from $12.9 billion in 2012.
$6.9 billion: Amount of PIK issuance to fund dividend payments.
$24.4 billion: The size of Dell’s LBO, the biggest since the financial crisis.
$90 billion: Total U.S. LBO volume, up from $65 billion in 2012.
25%: U.S. leveraged loan market share held by JPMorgan and BAML combined, down from 42 percent in 2004.
1.3%: Average fee on a U.S. high-yield bond, down from 2.0% in 2009.
4.986%: Yield to worst on BAML high-yield index May 9, lowest on record, down from 22.653% in 2008.

Source: Bloomberg LP, Morgan Stanley, Moody’s, Standard & Poor’s Capital IQ Leveraged Commentary and Data.


BIG PICTURE

5


JAMES CROMBIE

U.S. Loan Issuance Sets Record Amid Jump in Cov-Light, LBOs, Dividends

Total Loan Issuance ($bn)

600
500

50

Cov Lite Loan Volume (Left Axis)
LBO+Div. Pay Volume (Left Axis)
Other Institutional Loan Volume (Left Axis)
Cov Lite as % of Total (Right Axis)
Second Lien Volume ($bn, Rt Axis)

45
40
35
30

400

25
300

%/$bn

700

20
15

200

10

100

5

0

0

2010
Source: Bloomberg LP

2011

2012

2013

Issuers Sell Higher Percentage of Junk Bonds at Lower Yields in U.S.
400

30

Junk as % of All U.S. Corp. Sales (Right Axis)

25

Average Yield (Right Axis)

300
20

250
200

15

150

10

100
5

50
0
2003 2004

0
2005

2006

2007

2008

2009

2010

2011

2012

2013

%

U.S. Junk Bond Issuance ($bn)

350

Junk Bond Issuance Volume (Left Axis)



OUTLOOK / 2013 RANKINGS

6

BLOOMBERG DATA

2014 Sell-Side Analyst Predictions
BONDS
JPMorgan
BAML
Citi
Credit Suisse
Deutsche
Barclays
MS
UBS
RBS
2013 Actual

LOANS

ISSUANCE ($BN)
300
220-240
325
260
270-295
334
325-335
348
380

RETURN (%) DEFAULT RATE (%) SPRD (BP)
5.00
Sub 2.0
425
4-5.00
2.2
350
2.50
2.0
400
5.00
2-3.0
529
3.90
1.5
360
3-4.00
2-2.5
350
2.80
1.9
427
2.10
3.4
425
6.33
2.8
400
7.40
2.2
400

ISSUANCE ($BN) CLOS ($BN)
400
60-70
450
65-75
375
360
60-70
340-360
75-85
419
65-75
575-600
660
82

RETURN (%)
4.5
4.0
3.0
5.0
4.3
3.5-4.5
4.0
6.5
4.9

DEFAULT (%)
Sub 2
2
3 to 4
1.5
2-2.5
0.5
2.2

SPRD (BP)
410
420
450
448
425
435
NIM<GO>


JPMorgan Retained Lead Position in U.S. High-Yield
Bond Underwriter Ranks; Deutsche Moved Up
RANK

RANK 1-YR
EARLIER

SHARE
(%)

JPMorgan

1

1

11.7

44.3

326

JPMorgan

BAML

2

2

10.1

38.3

318

Goldman Sachs

Citi

3

3

9.1

34.7

258

Deutsche Bank

4

5

7.9

30.1

239

Credit Suisse

5

4

7.9

30.1

218

BNP Paribas

6

6

7.4

28.0

211

Citi

7

9

7

26.4

181

Morgan Stanley

8

7

6.6

25.2

187

Barclays

9

8

6

22.8

204

HSBC

9

9

10

11

3.6

13.6

125

BAML

10

10

UNDERWRITER

Deutsche Bank
Credit Suisse

▲
▼

Goldman Sachs
Morgan Stanley
Barclays
Wells Fargo
RBC

▲
▼
▼
▲

PROCEEDS
ISSUES
($BN)

JPMorgan Beat Goldman to Lead Euromarket
Corporate High-Yield Ranking Ex-Emerging Markets

LEAG <GO>


BAML Bested JPMorgan in U.S. Leveraged Loan
New Money League; RBC Rose Three Places

▲
▼
▼
▲
▲
▼
▼
▼

SHARE
(%)

BAML

1

1

12.5

43.83

392

Deutsche Bank

JPMorgan

2

2

12.2

42.92

351

BNP Paribas

Wells Fargo

3

3

6.9

24.27

219

JPMorgan

Credit Suisse

4

4

6.8

23.94

192

UniCredit

Barclays

5

5

6.8

23.87

171

RBS

Citi

6

6

5.1

18.04

133

HSBC

7

10

5

17.64

149

Goldman Sachs

8

9

4.8

16.92

174

BAML

9

7

4.7

16.40

159

Credit Agricole

10

11

4

14.05

191

ING

Deutsche Bank
Goldman Sachs
GE Capital

▲
▲
▼
▲


LEAG <GO>

SHARE
(%)

PROCEEDS
ISSUES
($BN)

1

3

8.5

10.82

2

1

8.1

10.33

85

3

2

7.6

9.75

96

4

11

5.9

7.58

72

99

5

7

5.9

7.53

73

6

5

5.8

7.42

51

7

6

5.7

7.24

51

8

4

5.3

6.80

67

4.3

5.47

56

4.1

5.29

51

LEAG <GO>

Deutsche Bank Retained Lead in EMEA High-Yield
Loans Bookrunner Ranks; BNP Rose Two Places

RANK 1-YR
EARLIER

RBC

RANK 1-YR
EARLIER


RANK

UNDERWRITER

PROCEEDS
ISSUES
($BN)

RANK

UNDERWRITER

RANK

RANK 1-YR
EARLIER

SHARE
(%)

1

1

9

15.2

58

▲
▼
▼

2

4

8.1

13.7

57

3

2

7.2

12.1

48

4

3

5.7

9.7

49

5

5

5.1

8.6

34

▲

6

8

4.8

8.2

48

7

7

4.4

7.4

38

▲
▲
▲

8

19

4.3

7.2

34

9

21

3.8

6.3

37

10

16

3.3

5.5

40

UNDERWRITER


PROCEEDS
ISSUES
($BN)

LEAG <GO>



7

2014 OUTLOOK
Diversify, Be Nimble as Borrower-Friendly Terms Persist: Investors, Bankers
Diversification, risk retention and a low default rate are among the top themes for 2014, say investors and bankers. M&A is expected
to make a comeback, fuelling financing opportunity from LBOs. The trend toward increasingly borrower-friendly deal terms gives some
investors cause for concern. While some market watchers welcome the prospect of an uncharacteristically boring year for high-yield
bonds, others say that the speed and extent of Fed tapering is a macro wild card. They spoke to Bloomberg Brief’s David Holley in December. Comments have been edited and condensed.

Dan Roberts

Kevin Lockhart

John Fraser

Dan Roberts
MacKay Shields
Head of Global Fixed Income, CIO
“2014 will need to be the year of
diversification. Many strategies are too
concentrated in duration risk and too
constrained by benchmarks to adapt.
On the margin we favor high-yield bonds
over loans. We expect issuance in high
yield to decline in 2014. Issuance in the
loan market is likely to meet or even exceed 2013 levels given the high demand
for floating rate investments.”

Kevin Lockhart
Jefferies
Co-Head of Leveraged Finance
“The issuers that won’t be able to get the
covenant-light loans – the more difficult
credits – will probably have to go to the
bond market to get financing. Those are
likely to be the 10, 11 percent deals. The
loan market is going to continue to be
strong, but it will not finance all companies. The demand for high yield will still be
there for public companies and CFOs are
saying, “Why would I not do high yield at
record low interest rates?””
.
John Fraser
3i Debt Management U.S.
Managing Partner
“The trend toward increasingly borrowerfriendly deal terms, both in terms of
economics, credit agreement terms, and
capital structures is one of the things
I spend the most time worrying about.
Beyond that, it’s a lack of visibility on new
money, new issue deal flow. Right now it’s
hard to tell what kind of volume we’ll see
on the true new money side of the market
place. Next to overall credit quality, that’s

Beth MacLean

Kevin Sherlock

Ann Benjamin

Beth MacLean
Pimco
Loan Portfolio Manager
“Risk retention is going to be one of the
biggest stories. As long as there is excess
demand in the market, you’ll continue to
see cov-lite, second-lien loans, six month
call protection. We’ll continue to see
second-lien issuance because there is demand and it won’t just be from the CLOs.
When you’re in a low-default, strong credit
fundamental environment, a lot of investors are willing to take more risk and move
into that second-lien space.”
Kevin Sherlock
Deutsche Bank
Head of U.S. loans and High-Yield
Capital Markets
“High-yield investors are a bit more
tactical, more short duration than long
duration and that’s why we’re also seeing a massive amount of inflows into the
leveraged loan market as some protection
against a rising rate environment. [This
year] feels like it’s going to be a lot like
[2013], which was pockets of instability as
you go through macroeconomic numbers
and what happens with the taper.”
Ann Benjamin
Neuberger Berman
HIgh-Yield Bond, Leveraged Loan
Lead Portfolio Manager
“Defaults are going to stay low. If you
look at what’s going to mature in 2014 and
2015: In 2014 it’s $37 billion. In 2015, it’s
$66 billion. Keep in mind that the market
is roughly $1.5 trillion. Where you would
see the potential higher risk of higher default rates is in the smaller companies and
middle market companies that are used to
financing in the high-yield bond market.”


US LOANS

8


LARA DEKE AND NIKOLAS TRENCHI, BLOOMBERG DATA ANALYSTS

Second-Lien Surge Contributes to Record Year for Leveraged Loans in 2013
U.S. leveraged loans hit a new high for issuance in 2013, fueled by an increase in covenant-light and second-lien volume. The average
transaction size for first-lien deals jumped to $294 million from $206 million in 2012. Borrowers raised $79 billion to pay dividends.

Leveraged Loan Volume Jumped 57 Percent
$900
$800

Billions

$700
$600

$35

3500

Unsecured (Left Axis)
1st Lien (Left Axis)

180
Volume (Left Axis)

$30

3000

2nd Lien (Left Axis)

160
140

Deal Count (Right Axis)

2500

2000


$25
$20

100

$15

80

$500
1500

$400
$300

Billions

$1000

Second-Lien Deal Count Surged 64 Percent

1000

$0
2009

2010

2011

2012

$5

0

$100

60

$10

500

$200

120

$0

2013

40
20
0

2009

2010

2011

2012

2013

Total loan issuance, including institutional and pro-rata, rose to $882 billion last year, up 57 percent year on year. Second lien jumped 73 percent.

Second-lien issuance jumped to $31.9 billion in 164 deals, up from $18.5
billion and 101 deals in 2012. Volume was more than triple 2011 sales.

Covenant Light Sales Ballooned, Mostly B/B+

More Proceeds Used for LBOs, Dividends

B-

B

B+

BB-

BB

BB+

BBB-

Issuance (Billions)

Issuance (Billions)

$200

BBB

$150
$100

700

$12

600

$10

500

$8

400

Issuance (Left Axis)

$6

300

Average Margin (Right Axis)

200

$2

$50

$4

100

$0
$0
2009

0

Qtr3
2010

2011

2012

2013

Institutional covenant-light loan volume was $300 billion, more than three
times the $99 billion sold the year before, and 46 percent of the total.

Average margin (bp)

$14

$250

Qtr4

2011

Qtr1

Qtr2

Qtr3

Qtr4

2012

Qtr1

Qtr2

Qtr3

Qtr4

2013

Loan volume for dividend payment and LBOs saw large year-on-year
increases to a post-crisis high.

continued on next page

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9


U.S. LOANS…
continued from previous page

CLO Revival, Mutual Fund Inflows Propel Margins Lower, Prices Higher
A jump in CLO issuance and unprecedented mutual fund inflows chasing floating-rate assets helped drive loan prices up in 2013. The
main loan index rose close to pre-crisis highs, while price discrepancies appeared in the BB ratings band.

CLO Issuance Reaching Pre-Crisis Levels

Loan Funds Saw Big Inflows During July-August

CLO Issuance ($bn)

$12

$10
$8

$6
$4

$2

2011


2012
2013
Preliminary Pipeline
CLO Issuance
Average AAA CLO Spread
Preliminary Pipeline Average AAA Spread

Loan Mutual Funds

1,600

Loan ETFs

1,400
1,200
1,000

800
600
400

Jan

Nov

Jul

Sep

May

Jan

Mar

Nov

Jul

Sep

May

Jan

Mar

Nov

Jul

Sep

May

$0

1,800

Flows ($m)

180
160
140
120
100
80
60
40
20
0

$14

Average AAA Spread (bps)

$16

200

2014

0

(200)
Jan Feb Mar
Source: Lipper

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

After a long post-financial crisis hibernation, the CLO market is on track to
match pre-crisis levels.

Above-average inflows to loan mutual funds helped keep margins tight in
2013. Fund gains were concentrated in the third quarter.

Index Recouped More Crisis-Related Losses

BB Loans Offered More Spread Than BB Minus

105

95
90
Margin (bps)

85
80

75
70

65
60
Jan-06 Jan-07
Source: S&P/LSTA

Average Margin at Close
Max bps per turn

S&P/LSTA Leveraged Loan Index

100

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

The benchmark S&P/LSTA loan index came close to its pre-crisis highs
as loans returned 4.9 percent for 2013.

500
450
400
350
300
250
200
150
100
50
0
BBB-


BB+

BB

Average bps per turn
Min bps per turn

BB-

B+

B

B-

S&P Initial Tranche Rating

BB rated loans paid 333 basis points at close on average, more than the
325 basis points paid by deals rated one notch lower, at BB minus.

MONITOR LIQUIDITY
FOR MULTIPLE BONDS

FIW

<GO>




10

U.S. LOANS…

Second Lien Leads Margin Decline, Price Rise as Libor Floors Diminish
Second-lien issuers enjoyed lower margins and higher prices for new issue loans in 2013, while Libor floors dropped for all classes of
leveraged loans. Compared to 2012, more first-lien deals included a Libor floor.

Average New Issue Loan Price Rose Year-on-Year

Second-Lien Margin Fell More Than First Lien
450

900

400

250

840

200

820

150

Basis Points

Basis Points

2nd Lien

Unsecured

99

860

300

50

1st Lien

880

350

100

99.5

800
1st Lien (Left Axis)

Unsecured (Left Axis)

2nd Lien (Right Axis)

760
2012

98

780

0
2011

98.5

2013

97.5
2010

2011

2012

2013

Second-lien loans saw the biggest contraction in margin last year, at 801
basis points on average, down from 874 basis points the previous year.

Issuers took less of a discount on their new issue loans at all levels. Unsecured deals priced at 99.3 on average, up from 98.1 in 2012.

Libor Floors Dropped for All Loan Classes

More First-Lien Deals Had Libor Floor
100%

300
1st Lien

2nd Lien

Unsecured

80%

250
Libor Floor (bp)

90%
70%
60%

50%

200

40%
30%

150

20%

1st lien without floor

1st lien with floor

10%

100
2009

2010

2011

2012

2013

Investors accepted lower Libor floors. Second-lien tranches had a floor of
114 basis points on average, down from 295 basis points in 2012.

0%
2010

2011

2012

2013

A higher percentage of first-lien transactions included a Libor floor, at 76
percent, up from 63 percent in 2012.

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U.S. LOANS


11

CLICK ON TABS TO VIEW MATURITIES BY SECTOR


Loan Maturity Schedule Gets Busier in 2016, Focused on Consumer Non-Cylical Names
All

$12
$4
$3
$10
$2
$2

Loans Maturing (Billions)
Loans Maturing (Billions)

$9
$10
$8
$3
$7
$8
$2
$6

Basic Materials
Communications
Consumer, Cyclical

$6
$2
$1
$5
$1
$4
$4
$1
$3
$1
$2
$2
$1

Consumer, Non-cyclical

Financial

Jan
Mar
Apr
Mar
Jun
Jul
Apr
May
Aug
May
Aug
May
Oct
Jul
Jul
Oct
Jun
Nov
Sep
Sep
Sep
Dec
Sep
Jan
Nov
Nov
Apr
Dec
Oct
Feb
Jan
Jan
Jun
Feb
Mar
Nov
Mar
Mar
Jul
Apr
May
May
Feb
May
Aug
Jul
Jul
Jul
Jul
Sep
Aug
Sep
Aug
Sep
Nov
Oct
Aug
Oct
Nov
Nov
Mar
Dec
Sep
Dec
Jan
Jan
Apr
Feb
Apr
Dec
Mar
Mar
May
Apr
Jun
Jan
May
May
Jun
Aug
Jun
Apr
Jul
Jul
Jul
Oct
Aug
Jun
Sep
Nov
Oct
Nov
Dec
Dec
Dec

$0
$0
2014
2014
2014 2014
2014
2014

2015
2015
2015
2015 2015

Industrial
Technology

2016
2016
2016
20162016
2016

Utilities

Biggest U.S. Institutional Leveraged Term Loan Tranches of 2013
ISSUER
Hilton Worldwide
HJ Heinz
Clear Channel
Dell International
Asurion
Sabine Pass
Tribune
Valeant Pharma
Biomet
Neiman Marcus
HJ Heinz
Chrysler
Chrysler
BMC Software
Freescale Semiconductor
Ineos
Del Monte
Nuveen Investments
Nuveen Investments
Neiman Marcus

S&P
RATING
Ba3
Ba2
Caa1
Ba2
Ba2
NA
Ba3
Ba1
B1
B2
Ba2
Ba1
NA
B1
B1
B1
B1
B2
B
B

SIGNING
DATE
10/25/13
6/7/13
5/31/13
10/29/13
2/21/13
5/28/13
12/27/13
8/5/13
9/25/13
10/25/13
6/7/13
6/21/13
12/23/13
9/10/13
3/1/13
5/8/13
2/5/13
4/29/13
1/29/2013
2/8/2013

MATURITY
10/25/20
6/5/20
1/30/19
4/29/20
5/24/19
5/28/20
12/27/20
8/5/20
7/25/17
10/25/20
6/7/19
5/24/17
5/24/17
9/10/20
3/1/20
5/4/18
3/8/18
5/13/17
5/13/17
5/16/2018

ISSUE
PRICE
99.50
99.75
99.00
99.50
99.75
98.50
99.75
99.50
99.50
99.00
99.00
-

LIBOR
FLOOR
100
100
100
125
100
75
100
100
100
75
100
125
100
100
100

SPREAD
AT CLOSE
300
250
675
350
325
300
300
375
350
400
225
325
275
400
375
300
300
400
500
300

SECTOR
Consumer, Cyclical
Communications
Financial
Energy
Communications
Consumer, Cyclical
Consumer, Cyclical
Consumer, Cyclical
Technology
Technology
Basic Materials
Financial
Financial
Consumer, Cyclical

USE OF PROCEEDS
Refinance, GCP
Acquisition, Refi, LBO
Refi
LBO
Refi
Develop/Construct, Refi
Acquisition, Refi, GCP
Acquisition, GCP
Refi
LBO
LBO, Refi
Refi
Refi
LBO
Refi
Refi
Refi
Refi
Refi
Refi
LSRC <GO>



12

U.S. LOANS…

Second-Lien: Biggest U.S. Institutional Leveraged Term Loan Tranches of 2013
ISSUER
Fieldwood Energy
Samson Investment
EP Energy
Performance Food Group
Templar Energy
Travelport
Quicksilver Resources
TWCC Holding
BJ'S Wholesale Club
Carestream Health
Rite Aid
Nuveen Investments

TRANCHE
SIZE ($M)
1725
1000
750
750
700
630
625
625
600
500
500
500

S&P
RATING
B2
B1
Ba3
B3
B3
Caa2
B2
B3
Caa2
Caa1
B3
Caa1

SIGNING
DATE
9/30/13
12/18/13
5/2/13
5/14/13
11/25/13
3/11/13
6/21/13
6/26/13
11/18/13
6/7/13
6/21/13
4/29/13

MATURITY
9/30/20
9/25/18
5/24/18
11/14/19
11/25/20
1/31/16
6/21/19
6/26/20
3/31/20
12/7/19
6/21/21
2/28/19

ISSUE
PRICE
97.0
99.5
98.0
99.0
97.0
99.0
99.5
98.0
-

LIBOR
FLOOR
125
100
75
100
100
150
125
100
100
100
100
125

SPREAD
AT CLOSE
712.5
400.0
275.0
525.0
700.0
800.0
575.0
600.0
750.0
850.0
387.5
525.0

SECTOR

USE OF PROCEEDS

Energy
Energy
Energy
Consumer, Cyclical
Energy
Consumer, Cyclical
Energy
Communications
Consumer, Cyclical
Consumer, Cyclical
Financial


Acquisition
Refinance
Refinance
Refinance, Div. Pay
Acquisition
Refinance, GCP
Refinance, GCP
Recap, Div. Pay, GCP
Refinance, Div. Pay
Refinance, Div. Pay
Refinance
Refinance
LSRC <GO>

Dividend Payment: Largest U.S. Institutional Leveraged Term Loan Tranches
ISSUER
Carestream Health
BJ's Wholesale
Aptalis Pharma
Generac Power
La Frontera
MultiPlan
Harbor Freight Tools
Regal Cinemas
Magic Newco
TransDigm

TRANCHE
SIZE ($M)
1850
1500
1250
1200
1150
1030
1000
983
922
900

S&P
RATING
B+
BB+
BBBBB+
B+
BB
B+
B

SIGNING
MATURITY
DATE
6/7/2013
6/7/2019
11/18/2013 9/26/2019
10/4/2013
10/2/2020
5/31/2013
5/31/2020
5/10/2013
9/30/2020
2/15/2013
8/18/2017
7/26/2013
7/26/2019
4/19/2013
8/23/2017
8/16/2013
12/12/2018
7/1/2013
2/28/2020

ISSUE
PRICE
98.5
99.5
99
99.75
99
NA
99.75
NA
NA
98

LIBOR
FLOOR
100
100
100
75
100
100
100
NA
100
75

SPREAD
AT CLOSE
400
350
500
275
350
300
375
250
400
300

SECTOR
Consumer, Non-Cyc
Consumer, Cycl
Consumer, Non-Cyc
Industrial
Utilities
Consumer, Non-Cyc
Industrial
Consumer, Cycl
Technology
Industrial


USE OF PROCEEDS
Refi, Div. Pay
Refi, Div. Pay
Refi, Div. Pay
Refi, Div. Pay, Recap
GCP, Div. Pay
Refi, Div. Pay, Recap
Refi, Div. Pay
Working Cap, Refi, Div. Pay
Refi, Div. Pay
Refi, Recap, Div. Pay
LSRC <GO>

LBO Funding: Biggest U.S. Institutional Leveraged Term Loan Tranches
ISSUER
HJ Heinz
Dell International
HJ Heinz
Neiman Marcus
BMC Software
Gardner Denver
HUB International
Dell International
Brand Energy
Albertsons

TRANCHE
SIZE ($M)
6550
4660
2950
2950
2880
1900
1870
1500
1275
1150

S&P
RATING
BB
BB+
BB
B
B+
B
B
BB+
B
BB-

SIGNING
MATURITY
DATE
6/7/2013
6/5/2020
10/29/2013 4/29/2020
6/7/2013
6/7/2019
10/25/2013 10/25/2020
9/10/2013
9/10/2020
7/30/2013
7/30/2020
10/2/2013
10/2/2020
10/29/2013 10/29/2018
11/26/2013 11/26/2020
3/21/2013
3/21/2016

ISSUE
PRICE
99.75
99
99.5
99.5
99
99.5
99.5
99.5
99.5
99

LIBOR
FLOOR
100
100
100
100
100
100
100
100
100
125

SPREAD
AT CLOSE
250
350
225
400
400
325
375
275
375
450

SECTOR
Consumer, Non-Cyc
Consumer, Non-Cyc
Consumer, Non-Cyc
Consumer, Cycl
Technology
Industrial
Financial
Consumer, Non-Cyc
Consumer, Non-Cyc
Consumer, Non-Cyc

USE OF PROCEEDS
LBO, Refi
LBO
LBO, Refi
LBO
LBO
LBO, Refi
LBO, Refi
LBO
LBO, GCP
LBO, Refi
LSRC <GO>


EUROPE LOANS

13


LUKE REEVE, BLOOMBERG DATA ANALYST

Bigger Volume at Lower Margin, Libor Floor; More Europeans Raised Dollars in U.S.
Issuance of leveraged loans in Europe rose 39 percent in 2013, though it is still lagging behind the U.S. Refinancing activity dominated
as borrowers took advantage of declining Libor margins. European borrowers increasingly accessed the U.S. market.

400
300

200

6

2010

2011

2012

100

0

2013

2011

2012

Nov

Jul

Sep

May

Jan

Mar

Nov

Jul

0

Sep

0

2009

200

4

Jan

0

300

8

2

100

10

400

10

May

20

12

Jan

30

600
500

Mar

40

Average Margin at Close

14

Nov

50

New Money

Margin (bps)

Issuance in euros (Billions)

60

Refinanced

16

500

70
Issuance (Euro, billions)

18

Jul

80

600


Sep


May

90

Refinancing Volume Rose, Margin Fell in 2013

Mar

European Loan Issuance Jumped 39 Percent

2013

Issuance of leveraged loans in Europe rose 39 percent last year to 82
million euros from 530 transactions.

Refinancing was an increasing proportion of proceeds raised from leveraged loans. The average margin ended the year 23 basis points lower.

Libor Floors Used in More Deals, Trend Lower

More Europe-Based Issuers Tapped U.S. Market
600

$10

500

110

8%

100

6%
4%
0%

80
Qtr1


Qtr2

Qtr3
2012

Qtr4

Qtr1

Qtr2

Qtr3

$6

300

Average Margin (Right Axis)

$4

200
100

$0

Qtr4

0

Qtr3

2013

A higher volume of issuance incorporated a Libor floor. The average floor
fell to 100 basis points, from 121 basis points in the second quarter.

400


$2

90

2%

$8

Average margin (bp)

10%

$12
Issuance (Billions)

12%

700

130

14%

$14

120

16%
Include Libor Floor

140

Tranches with Libor Floor (Left Axis)
Average Floor (Right Axis)

18%

Basis points

20%

Qtr4

2011

Qtr1

Qtr2

Qtr3

2012

Qtr4

Qtr1

Qtr2

Qtr3

Qtr4

2013

European companies with U.S. subsidiaries raised $34 billion in the U.S.
leveraged loan market, up from $13 billion in 2012.

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14


U.S. BONDS

15


DANIEL COVELLO AND MICHAEL LUONGO, BLOOMBERG DATA ANALYSTS

Record-Setting Year for Issuance, Low Yields; Junkiest Junk Does Best for Investors
Junk-bond issuance hit an all-time low, while the yield on the benchmark BAML index scraped an historic low under 5 percent in May.
The lowest-rated bonds returned most to investors, whose skittish views were highlighted by volatile fund flows data.

High-Yield Bond Issuance Hit Record High

Yield Fell to All-Time Low; Spread Least Since ‘07

400

2500

350
2012

2000

250

Basis Points

Issuance ($bn)

2011

25

YTW (Right Axis)

200
150
100

20

1500

15

May: Junk YTW at
Record Low
Under 5%

1000

%

2013

300

Spread To Worst (Left Axis)

10

500

5

50

Prior spread low, Oct 2007

0
Jan Feb Mar

Apr

May June

Jul

Aug

Sept

Oct

Nov

Dec

0
2004 2005
Source: BAML

0
2006

2007

2008

2009

2010

2011

2012

2013

Junk-bond issuance exceeded the 2012 total on a cumulative basis
throughout the year. Speculative-grade sales beat 2011 by 54 percent.

The spread closed 2013 at its lowest since Oct. 2007. The yield to worst
ended at 5.7 percent, having dropped just below 5 percent in May.

Lowest-Rated Returned Most, Distressed Second

Bond Fund Inflows Peaked in July, September
2,500

U.S. CCC and Lower

1,500
U.S. Distressed

Junk Bond Mutual Funds
Junk ETFs

Flows ($m)

500

U.S. Single B

2013
2012

BAML U.S. HY

(500)
(1,500)

U.S. BB Credit

(2,500)

0

5

10

15

20

25

Full Year Total Return (%)

Source: BAML, S&P, LSTA

Junk bonds rated CCC and lower returned 13 percent in 2013, down from
20.3 percent in 2012. The high-yield index returned 7.4 percent.

(3,500)
Jan Feb Mar
Source: Lipper

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Junk-bond mutual funds saw large outflows in June, followed by aboveaverage inflows in July and September.

ECFC

<GO>

TRACK ECONOMIC FORECASTS


16


U.S.BONDS…

Double B Ratings, Communications Sector Drive Issuance; Refinancing Most Common Use
September was the biggest month for issuance in a year driven by an increase in BB sales. Communications was the most-active industry after jumbo issuance by Sprint and MetroPCS. Refinancing remained the dominant use of proceeds, despite a year-on-year fall.

September Biggest Month; Tenor, Coupon Higher
60

Volume (Left Axis)
Average Tenor (Right Axis)

50

Average Coupon (Right Axis)

9.0

80,000

7.0

10

6.5

0

6.0
Jan

Feb Mar

Apr May

Jun

Jul

Aug

Sep

Oct

Nov

Issuance ($m)

20

%

7.5

2013

60,000

8.0

30

2012

70,000

8.5

40
$bn

Double B Rated Saw Big Year-on-Year Increase

40,000
30,000
20,000

10,000
0

Dec


50,000

B

B-

B+

BB

BB-

BB+

CCC

CCC-

CCC+


September marked the biggest month for high-yield bond issuance, while
both average coupon and tenor ended the year higher.

Bonds rated double B saw the biggest year-on-year increases in issuance
volume, driven by bond sales at the bottom of that rating group.

Communications Most Active Sector for Issuance

Refinancing Still Dominant, Lower Year on Year

Communications

Refinance Debt

Energy

Acquisition

Cons., Non-Cycl

Loan Payment

Cons., Cyclical

GCP

Financial

Tier-1 Capital

Industrial

2013

2012

Share Buyback
2013

Basic Material

Div. Pay to Shareholders

2012

Technology

Capex

Utilities

Intercompany Loan
20,000

40,000

60,000

Issuance ($m)

Communications was the biggest sector for issuance last year, accounting
for 18 percent of the total, following an 18 percent rise in sales.

0

40,000

80,000

120,000

Issuance ($m)

Refinancing was again the most common use of proceeds, with 43 percent of the total, despite a 4 percent decline from 2012.

MONITOR COMMODITY
PLAYS TO FIND
OPPORTUNITY

CPLY

<GO>

0


GLOBAL PIK SURVEY

17


MATTHEW GEUDTNER, BLOOMBERG DATA ANALYST

Pay-in-Kind Issuance at Highest Since 2007; Dividend Payment Volume Soared
PIK bond issuance was an important theme for 2013. Volume was the highest globally since 2007. More PIK bonds were raised for dividend payment and companies in the consumer-cyclical sector were the dominant borrowers.

PIKs Used More for Dividend Than Debt Payment

PIK Bond Issuance at Highest Since Crisis
35

PIK Issuance (Left Axis)
Proceeds for Div. Pay (Left Axis)
% Proceeds for Div. Pay (Right Axis)

25

10

25

20

20
15

%

15
10

10

8
6

4
2

2007


2008

2009

2010

2011

2012

Debt Repay

2013

2012

2011

2010

2009

2008

2007

2006

2013

2012

2011

2010

2009

2008

2007

LBO Funding

2013

2006

0

2006

2008

5

0

2007

0

5

2006

$, Billions

12

30
Volume Issued ($bn)

30

Dividend Payment


PIK issuance, at $23 billion, was the highest since the $28 billion issued
in 2007. A greater volume was used to pay dividends than in 2012.

Some $6.1 billion in PIK bonds was raised last year to pay dividends, up
from $3.7 billion in 2012 and more than the $4.8 billion for refinancing.

Consumer Cyclical Issuers Dominated PIK Sales

Average Tenor of New PIK Issuance Declined
14

Consumer, Cycl

4%

5%

36%

12
10

Financial
Industrial

8%

Technology
Basic Materials

9%

Energy
Diversified
13%

15%

Tenor in Years

Communications
Consumer, Non-Cyc

5%
5%

8
6
4
2
0
1987


Consumer cyclical accounted for 36 percent of PIK bonds issued in 2013,
more than twice the next most active sector, which was communications.

1992

1996

2000

2004

2008

2012


The average tenor of PIK issuance was 5.6 years in 2013, down from 5.9
years in 2012. Tenor hit a seven-year peak of 8.7 years in 2007.

LEARN HOW TO USE
BLOOMBERG FUNCTIONS

<HELP>


EUROPE BONDS

18


SROBANA GHOSH, BLOOMBERG DATA ANALYST

European Junk Issuers Boost Sales at Higher Tenors, Lowest Average Coupon Since 2007
European junk bond issuance volume soared in 2013 as issuers took advantage of lower coupons and higher tenors. Deals rated BB+
accounted for the bulk of this, while single B and B minus rated borrowers saw the biggest year-on-year increase.

Issuance Slowed in Q4; Tenor Trended Higher
14
12

8

10

80

7.5

40
20
0
2010

2011

2012

7

6

6.5
6

2

60

8

4

EUR Billions

EUR Billions

100

8.5

Av. Coupon (Right Axis)
Av. Tenor (Right Axis)

120

5.5

0

2013

Years/%

Euro High-Yield Issuance Increased 58% in 2013

5

Jan Feb Mar

Apr May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total issuance of speculative-grade bonds in Europe jumped to 124 billion
euros equivalent in 2013, almost double the 63 billion euros sold in 2012.

European junk issuance slowed in the fourth quarter, while the average
coupon and tenor both finished the year higher than in January.

Average Coupon Falls to Lowest Since Crisis

Single B Issuance Saw Big Year-on-Year Surge

9

BB+
B

7

BB

6

BB-

5

4

Average Tenor

B+

Average Coupon

BCCC+

1

2011

BBB-

0
2006
2007

2012

CCC

2

2013

BBB

3

2009

2010

2011

2012

2013

The average coupon on European high-yield debt fell to 6.4 percent,
down from 7.3 percent in 2012 and the lowest since 2007’s 5.4 percent.

0

5


10

Euros, billions

15

20

Single B rated issuance jumped to 17.4 billion euros in 2013 from 4.8 billion euros in 2012, while B minus sales leapt to 12 billion euros.

LOOKUP YOUR FUND
WITH ONE CLICK

FL

<GO>

Years/%

8


2013 JUNK BOND LEGAL ADVISER RANKINGS
U.S. Issuer Advisers: Simpson Thacher Retained
Lead for Issues, Skadden Moved Up Year on Year
RANK
2012

SHARE
(%)

PROCEEDS
($BN)

BLOOMBERG DATA

U.S. Manager Advisers: Cahill Dominated, Davis
Polk, Cravath Moved Up Ranking

1

1

65

7.5

25.8

Cahill Gordon

1

1

210

32.6

114.1

Latham & Watkins

2

2

45

5.3

18.3

Latham & Watkins

2

2

82

8.6

30.2

3

6

42

7.3

25.2

Davis Polk

3

5

63

9.2

32.1

4

3

35

5.3

18.2

Shearman Sterling

4

4

56

8.7

30.3

5

7

29

4.1

14.3

Cravath Swaine

5

6

41

5.2

18.3

6

4

29

3.6

12.3

Simpson Thacher

6

3

39

4

13.9

7

5

24

3.7

12.7

Skadden Arps

7

7

26

3.1

11.0

8

12

20

3.3

11.4

Cleary Gottlieb

8

9

23

2.9

10.2

9

10

18

4.4

15.3

Milbank

9

13

22

3.3

11.5

10

17

15

1.6

5.4

10

12

19

2

Sullivan Cromwell
Vinson & Elkins
Paul Weiss
Davis Polk
Gibson Dunn
Ropes & Gray

LALT <GO>


Euro Issuer Advisers (Ex-EM): Latham Jumped to
Top of Ranking, Simpson Thacher Also Rose
UNDERWRITER
Latham & Watkins
Simpson Thacher
Linklaters
Kirkland & Ellis
Clifford Chance
Allen & Overy
Shearman Sterling
White & Case
Ropes & Gray
Freshfields

RANK

▲
▲
▲
▲
▼
▼
▲
▲
▼
▼


RANK
2012

ISSUES

SHARE
(%)

White & Case

▲
▲
▼
▲
▲
▲

ISSUES

PROCEEDS
($BN)

Simpson Thacher

Kirkland & Ellis

RANK

SHARE
(%)

RANK

▲
▼
▲
▼
▼
▲
▲
▲

UNDERWRITER

RANK
2012

ADVISER

Skadden Arps

ISSUES

19


7.1
LALT <GO>


Euro Manager Advisers (Ex-EM): Linklaters Gained,
Allen & Overy Fell Last Year

PROCEEDS
($BN)

UNDERWRITER

RANK

RANK
2012

1

1

65

17.8

21.5

2

7

39

13.4

16.2

3

2

34

15.3

18.5

4

3

32

4.2

5.1

ISSUES

SHARE
(%)

PROCEEDS
($BN)

1

8

34

6.3

7.3

Latham & Watkins

2

6

31

5.3

6.1

Linklaters

3

7

27

10.8

12.5

4

5

26

3.9

4.5

Cravath Swaine

5

4

24

7.2

8.3

Shearman Sterling

5

5

27

9.2

11.2

6

2

22

11.6

13.5

Clifford Chance

6

6

16

3.7

4.5

7

9

15

3

3.5

Cahill Gordon

7

4

15

3.7

4.5

8

17

14

2.9

3.3

White & Case

8

13

14

3.5

4.2

9

3

13

3.3

3.8

Davis Polk

9

14

9

2.9

3.5

10

1

12

3.2

3.8

Loyens & Loeff

10

39

8

1.1

1.3

LALT <GO>

Allen & Overy

▲
▼
▼

▼
▲
▲
▲


LALT <GO>



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20

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Leveraged Finance Annual Review / Outlook 2014