Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
© 2015 Deloitte LLP. All rights reserved.
Clear as mud?
The outlook for restructuring
markets in 2015 5 March 2015
1
Agenda
Debt Market Update Floris Hovingh
Economic Backdrop Henry Nicholson
Restructuring Implications Henry Nicholson
2
3
Economic Backdrop Henry Nicholson
UK GDP UK GDP is back above pre crisis levels and growing steadily
Real UK GDP since 2008 (index 2008 Q1 = 100)
Source: OECD
UK employment UK employment is at record high levels
UK workforce
Source: ONS
Cost of living
Year on year change in disposable income
Source: Asda Income Tracker (December 2014)
The cost of living squeeze is easing as disposable income rises
Inflation
CPI inflation
Source: ONS, OBR
Consumers are benefiting from positive economic trends…
Oil price Recent inflation decline helped by falling oil price…
Brent crude oil $/bbl
Source: Thomson Reuters
Commodity prices …and falling commodity prices
Gold spot price
Source: Bloomberg
Silver spot price Platinum spot price
Interest rate expectations The expected rise in interest rates keeps getting pushed out
Source: Bank of England, OBR
Market expectation for Bank Rate
Consumer debt
UK household gross debt to income
Source: ONS, OBR
Consumer debt has fallen but is forecast to grow rapidly
Government debt
Public sector deficit (excluding public sector banks) vs public sector net debt as % of GDP
Source: ONS
Deficit levels have fallen but government debt has not yet been tackled
Political background There is a very high likelihood that we will have another election without a clear winner
Source: Election Calculus (Prediction based on opinion polls from 08 Feb 15 to
27 Feb 15, sampling 10,871 people)
General election outcome predictions
Source: Paddy Power
European GDP trends Economic performance in Europe continues to be sluggish
Source: OECD
Eurozone (18 countries) annual GDP growth rate
European GDP to Debt Wide range of economic performance across the EU
Source: Eurostat
2013 GDP growth vs. debt as % of GDP
Global instability The areas outside of Europe’s borders are potentially unstable
Source: AON political risk map
17
Debt Market Update Floris Hovingh
Deloitte UK print A4 (21.00 cm x 29.70 cm)
Trends 2012:
- Macro economic
uncertainty
- Eurozone issues
- Sovereign debt issues
- Conservative debt market
- Banks are feeling the
pressure
Deloitte UK print A4 (21.00 cm x 29.70 cm)
Trends Today:
- Start of an upward trend
- Sovereign debt issues remain
- Eurozone issues still there
- Have the debt and equity
markets moved ahead of
itself?
- What about the
fundamentals?
On the
Back to 2001 & 2007?
Market cap $569B
Operating cash flow $13B
Factor 47x!
Deloitte UK print A4 (21.00 cm x 29.70 cm)
Overheated market:
Current drivers of debt markets
A new “Golden Age” of leveraged finance Key drivers
21 ©2015 Deloitte LLP. All rights reserved.
Reassessment
of the asset
class
Banks
Institutions Direct lending funds
HY desks
CLOs
Lack of
new deal
supply
Never had
it so good? Competition
Leverage
on leverage
Surplus
liquidity in US
Uptick in
new CLOs
1 2 3
Reassessment of the asset class Default rates have been moderate apart from market disruptions in 2002 and 2008
22 ©2015 Deloitte LLP. All rights reserved.
Source: S&P Capital IQ LCD
-1.00%
1.00%
3.00%
5.00%
7.00%
9.00%
11.00%
13.00%
15.00%
9/1
/200
0
2/1
/200
1
7/1
/200
1
12
/1/2
001
5/1
/200
2
10
/1/2
002
3/1
/200
3
8/1
/200
3
1/1
/200
4
6/1
/200
4
11
/1/2
004
4/1
/200
5
9/1
/200
5
2/1
/200
6
7/1
/200
6
12
/1/2
006
5/1
/200
7
10
/1/2
007
3/1
/200
8
8/1
/200
8
1/1
/200
9
6/1
/200
9
11
/1/2
009
4/1
/201
0
9/1
/201
0
2/1
/201
1
7/1
/201
1
12
/1/2
011
5/1
/201
2
10
/1/2
012
3/1
/201
3
8/1
/201
3
1/1
/201
4
6/1
/201
4
11
/1/2
014
Defa
ult r
ate
s
Loan default rates
Default Rates
1
Surplus liquidity…where does it come from? Central banks injecting cheap money in the circulation
23 ©2015 Deloitte LLP. All rights reserved.
2
Monetary stimulus Scary relationship….
24 ©2015 Deloitte LLP. All rights reserved.
2
M&A
$0B
$20B
$40B
$60B
$80B
$100B
3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14
Quarterly M&A leveraged loan volume
US Europe
Source: S&P Capital IQ LCD
Surge in Q3 US M&A activity not mirrored in Europe
Supply side constraints
25 ©2015 Deloitte LLP. All rights reserved.
3 3
How long this is going to continue?
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
Share of deals with leverage of more than 6x
6-7x debt/EBITDA 7x or more debt/EBITDA
Effects of competitive tension in loan markets Debt structures evolving
27 ©2015 Deloitte LLP. All rights reserved.
Source: S&P Capital IQ LCD
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
2007 2008 2009 2010 2011 2012 2013 2014 Jan-15
Annual pro forma debt/EBITDA ratios
First lien/EBITDA Second lien/EBITDA Other debt/EBITDA
€0B
€2B
€4B
€6B
€8B
€10B
€12B
2006 2007 2008 -2009
2010 2011 2012 2013 YTD22/9/13
YTD22/9/14
Via loan market Via bond market
Dividends taken out via loan and HY bond markets
Effects of competitive tension in loan markets Debt structures evolving
28 ©2015 Deloitte LLP. All rights reserved.
Source: S&P Capital IQ LCD
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
€0B
€2B
€4B
€6B
€8B
€10B
€12B
€14B
€16B
€18B
€20B
2007 2008-2011 2012 2013 2014
Cov-lite loan volume
Cov-lite volume Share of institutional volume
0
2
4
6
8
10
12
14
16
18Number of institutional facilities flexed up/down (rolling 3 months)
Flex up Flex down
Signs of lender pushback
Flexed up facilities overtake flexed down in H2 2014
29 ©2015 Deloitte LLP. All rights reserved.
Source: S&P Capital IQ LCD
95.00
95.50
96.00
96.50
97.00
97.50
98.00
98.50
99.00
99.50
100.00
3-Oct-14 3-Nov-14 3-Dec-14 3-Jan-15
Loan flow average bid
Europe US
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%TLB YTM, B-rated: US vs Europe
Europe US
Yield Divergence
Yields increase but divergence emerges between US and Europe
30 ©2015 Deloitte LLP. All rights reserved.
Source: S&P Capital IQ LCD
Source: S&P Capital IQ LCD
Mid-market direct lending still going strong
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Evolution of the US leveraged debt market
Bank funding Non Bank funding
Banks vs. institutional investors
Share of primary loan market
32 ©2015 Deloitte LLP. All rights reserved.
Source: Preqin. Special Report: Private Debt, November 2014
60
83 88
94
137
69
23
41 45
60
77
37
0
20
40
60
80
100
120
140
160
2009 2010 2011 2012 2013 2014 YTD
Year of Final Close
Annual private debt fundraising, 2009 - 2014 YTD
No. of Funds Closed Aggregate Capital Raised ($bn)
Source: S&P Capital IQ LCD
13 8
13
25 21
13 15
26 20
5
5
10
3 17
9 8
19
12
3
2
2
3
6
4 7
10
8
8
3
7
9
11
18
13
0
10
20
30
40
50
60
70
80
Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14
Number of deals completed
UK France Germany Other
2
3
How has the rise of private debt impacted the mid-market? Alternative lenders mainly competing on senior structures
33 ©2015 Deloitte LLP. All rights reserved.
32.3%
46.1%
6.0%
11.4%
4.2%
40.0% 38.6%
0.5%
15.2%
5.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Senior Unitranche Second lien Mezz PIK/other
Deal structure overview
UK Euro
79% first lien
Source: Deloitte Alternative Lender Deal Tracker Source: Deloitte Alternative Lender Deal Tracker
34 ©2015 Deloitte LLP. All rights reserved.
Considerations for private debt funds
Ability to originate sufficient deals to deploy capital and scale up
How do you continue to meet returns of 8 - 10% for senior risk in a market where
there is yield compression?
Is the fund-bank collaboration sustainable?
How do you differentiate as a fund?
More secondary trading of underperforming credits
Structures in amend and extends to be priced “on market” in waivers
Different negotiations dynamics
More complex restructurings given the bespoke nature of structures
Predictions for future restructuring
in the mid-market
What structures are we seeing?
4.5x
-1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
Senior + mezz
EB
ITD
A (
x)
4x
1.5x
-1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
Senior & mezz
EB
ITD
A (
x)
6x
-1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
Unitranche
EB
ITD
A (
x)
1.5x
4.5x
-1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
Senior
EB
ITD
A (
x)
36 ©2015 Deloitte LLP. All rights reserved.
Second lien – why and how? What is the best way of accessing it?
1. Senior only
Challenges?
• Stretch leverage?
• Traditional bank holds?
2. Senior + Mezzanine
Challenges?
• Stretch leverage?
• Traditional bank holds?
• Intercreditor?
• Deliverability?
• Covenants?
3. Unitranche
Sell down to
senior…leaving the
rest as 2nd lien
Challenges?
• Stretch leverage?
• Traditional bank holds?
• Intercreditor?
• Deliverability?
• Covenants?
• Acquisition facilities?
• Expensive?
4. 2nd lien
2nd
Lien
Challenges?
• Stretch leverage?
• Traditional bank holds?
• Intercreditor?
• Deliverability?
• Covenants?
• Acquisition facilities?
• Expensive?
• Cake…and eat it?
The Future?
Trends 2018?
- Supply and demand
rebalancing
- Increase in M&A activity
- Interest rate normalisation
- Shift away from bank lending
to a US Style funding model
- The big hangover?
- Alternative lenders leading
restructurings not banks
- Winners and losers
39
Restructuring Implications Henry Nicholson
Source: Deloitte UK & European restructuring market outlook 2015
Conclusions So what does this mean for UK restructuring markets?
Although Oil &
Gas and
Commodities
will continue to
face challenges
Similarly High
Yield structures
vulnerable to
shocks
Conclusions So what does this mean for European restructuring markets?
Unstable
borders
AQR and
Forbearance
Economic
Weakness
QE
“Specific
geographies”
Euro
stability
Q&A
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each
of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its
member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend
upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the
contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific
circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material
in this publication.
© 2015 Deloitte LLP. All rights reserved.
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square,
London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.