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  • Private Equity Opportunities In Distressed Assets Jay Koh

    October 2013 Confidential

  • Private Equity Opportunities In Distressed Assets October 2013 02

    Whats Next?

    If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace

    of purchases later this year

    FOMC Meeting, June 19, 2013

    Conditions in the job market today are still far from what all of us would like to see. The committee has concern that rapid tightening of financial conditions in

    recent months would have the effect of slowing growth.

    FOMC Meeting, September 18, 2013

  • Private Equity Opportunities In Distressed Assets October 2013 03

    Whats Next?

    Source: Capital IQ.

    Source: JP Morgan: Key Emerging Markets and Developed Asia Fund Flow Weekly, September 2013. *Source: Bernanke, FOMC Meeting. June 19, 2013

    (8,000) (6,000) (4,000) (2,000)

    - 2,000 4,000 6,000 8,000

    10,000 12,000

    Total Emerging Markets G lobal EmergingMarkets

    Asia (Ex. J apan) Latin America EMEA

    Emerging Markets Fund F lows ($ Millions)

    2013 YTD August 2013

    5.09%

    10.64%

    -2.00%

    0.00%

    2.00%

    4.00%

    6.00%

    8.00%

    10.00%

    12.00% Developed Market Public Equity Performance (J une - YTD)

    S &P 500 EURO S TOXX

  • Macro Overview

  • Private Equity Opportunities In Distressed Assets October 2013 05

    Market Environment: Understanding the Yield Chase

    + Investors have moved to higher risk credit

    Index Yield

    A2/P2 Non-financial (30-day) 0.34%

    3-Month LIBOR 0.24%

    CPI-U (August) 1.80%

    Barclays US Aggregate Index 2.38%

    Money Market Returns (as of October 10, 2013)

    Source: Bloomberg, JP Morgan, Barclays, Board of Governors of the Federal Reserve System, Bureau of Labor Statistics. CPI-U represents the CPI for all urban consumers (for all items) in August and 12-month trailing. 1. Index price levels as of 11 October 2013. 2. Yield as of 15 October 2013

    0

    10

    20

    30

    40

    50

    0

    500

    1000

    1500

    2000

    2007 2008 2009 2010 2011 2012 2013 YTD (10/10)

    %

    spre

    ad, b

    p

    High Yield Leveraged Loans VIX - RHS Axis

    Cash returns are negligible and below inflation Tradition Fixed Income Benchmarks Harbor Significant Risk-Free Exposure

    + Minimal increase in rates could wipe out index returns

    + Current income strategies are expensive

    + High yield market trading above par1 + U.S: 103.6 percent of par + Euro: 105.2 percent of par + Sterling: 106.1 percent of par

    + Leveraged loan market trading near par + U.S: 98.4 percent of par1

    + The Republic of Rwanda priced a $400 million senior unsecured bond at 6.625% coupon

    + Currently trades at ~8.1% yield2

  • Private Equity Opportunities In Distressed Assets October 2013 06

    Market Environment: A New Interest Rate Environment

    Source: Bloomberg.

    + Significant steepening since the beginning of 2013

    Date 12/31/2012 06/19/2013 09/18/2013

    2/5s 0.48% 0.94% 1.11%

    2/10s 1.51% 2.05% 2.37%

    2/30s 2.70% 3.10% 3.43%

    U.S. Treasury Rate Curve

    -

    0.50

    1.00

    1.50

    2.00

    2.50

    3.00

    3.50

    4.00

    1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

    Inte

    rest

    Rat

    e, %

    12/31/2012 6/19/2013 (Taper) 9/18/2013 (Taper Delay)

  • Distressed Market

  • Private Equity Opportunities In Distressed Assets October 2013 08

    Characteristics of Distressed Investing Cyclical / Episodic

    Process Oriented Event Driven

    Deep Value

    + Capital market events + Refinancing risk + Supply / demand dynamics

    + Internal and external drivers + Cash flow coverage of fixed costs + Leveraged balance sheets

    + Strategic defaults + Protection from run on company by suppliers + Pension management issues + Legal liabilities

    + Broad market distress correlates with + Business cycles + GDP expansion / recession cycles + Global trade and capital flows

    + Idiosyncratic episodes create momentary increases in systemic risk

    + Fraud: 2000 2002 + Tort actions: 2002 2003 + Labor: 2005 2008 + GFC: 2008 2009

    + Rising uncertainty contributes to rising required rates of return and lower entry prices

    + Yields and prices inversely related

    + Contractual or structural limits cap universe of buyers + Selling pressure exceeds buying power

    + Prices fall below intrinsic or liquidation values + Capital appreciation and time dominate return

    scenarios

    + Bankruptcy + Legislative rules + Court dynamics + Corporate and capital structure + Investor groups

    + Reorganization and restructuring + Negotiation

    + M&A transactions + Regulatory constraints

  • Private Equity Opportunities In Distressed Assets October 2013 09

    Risks of Distressed Investing Execution Risk

    Process Risk Default Risk

    Valuation Risk

    + The question of solvency + Near-term driven by current assets and current

    liabilities + Long-term cash flow is insufficient to service

    fixed costs including financing costs

    + Looming maturities can provide an impediment to solvency and trigger default

    + Access to capital markets mitigates this risk

    + Strategic financial restructurings are often interpreted as defaults despite being executed outside the purview of the courts

    + Sourcing + Idea generation + Price discovery

    + Counterparty

    + Long dated settlement processes + Concentrated portfolio construction

    + Liquidity + Deal size + Exit strategy

    + Valuation is highly subjective + Assumption based modeling methodologies

    + Market or enterprise value + The value of the firm through the instrument that

    bears the majority of the equity risk

    + Intrinsic value + The value of the firm as a whole + May be different from market value

    + Liquidation value + Selling value of assets or businesses

    + Bankruptcy / reorganization process + Complicated corporate and capital structures + Diverse holders with divergent interests + Court process contains significant level of

    interpretation + Heavily reliant on negotiation

    + M&A process

    + Access to capital to help fund purchase price + 363 sale process in court

    + Regulatory process + Regulatory oversight to mature industries

  • Private Equity Opportunities In Distressed Assets October 2013 010

    Broad-Based Approach Siguler Guffs Distressed Opportunities Funds Evaluate Many Asset Classes

    CORPORATE Senior Secured

    Bank Loans Bonds

    Trade Claims Preferred / Common Equity

    STRUCTURED PRODUCTS Residential MBS

    Asset-backed Securities Commercial MBS

    Collateralized Loan Obligations Collateralized Debt Obligations

    REAL ESTATE Core vs. Non-core

    Debt vs. Equity Office

    Warehouse Retail

    Hospitality

    SPECIAL SITUATIONS Financials / Banks

    Non-performing Loans Secondaries

    Pharmaceutical Royalties Ships / Shipping

    Aircraft

    Opportunistic Investment Spectrum

  • U.S Corporate Debt & Equity

  • Private Equity Opportunities In Distressed Assets October 2013 012

    The Quest for Yield has Contributed to a Significant Tightening of Spreads

    Sources: JP Morgan Chase Research, S&P/LCD

    589

    1731

    657 577

    754

    561 561

    377

    1415

    608

    499

    611 534

    482

    250

    450

    650

    850

    1050

    1250

    1450

    1650

    1850

    2007

    2008

    2009

    2010

    2011

    2012

    2013 YTD

    High Yield Leveraged Loans

    Corporate Debt and Equity Yi

    eld

    Spr

    ead

    (bas

    is p

    oint

    s)

  • Private Equity Opportunities In Distressed Assets October 2013 013

    As Issuance Increases

    154 208

    160 91 129 126

    242 312 290

    474 536

    125 219

    435 475

    670 619

    0

    200

    400

    600

    800

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013 YTD

    High Yield Leveraged Loans

    Sources: JP Morgan Chase Research, S&P/LCD

    Corporate Debt and Equity N

    ew Is

    suan

    ce ($

    billi

    ons)

    and Leverage Rises...

    5.2x 4.5x

    4.0x 3.7x 3.8x 3.9x 4.2x 4.3x 4.4x

    4.9x

    3.8x 4.0x 4.2x 4.2x

    4.9x

    0.0x

    1.0x

    2.0x

    3.0x

    4.0x

    5.0x

    6.0x

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    Leve

    rage

    Mul

    tiple

    of N

    ew

    Issu

    ance

    Source: S&P/LCD

  • Private Equity Opportunities In Distressed Assets October 2013 014

    A Default Cycle Builds

    Sources: JP Morgan Chase Research, S&P/LCD; default rate calculated as a percentage of outstanding high yield and/or leveraged loan issuance in dollars

    1.1% 1.3%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    1998

    1999