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Rudolph Tanzi Professor of Neurology,
Harvard Medical School; Vice
Chair, Neurology Research,
Massachusetts General
Hospital
The Art and Science of Capital Structure
Mark Attanasio Co-Founder and
Managing Partner, Crescent Capital
Group
Michael Milken
Chairman, Milken Institute
Emanuel Friedman CEO, EJF Capital
Mitchell Julis
Co-Founder, Co-Chairman and
Co-CEO, Canyon Partners, LLC
Jonathan Sokoloff
Managing Partner, Leonard Green &
Partners
#MIGlobal
Important Disclosures
Manny Friedman slides
#MIGlobal Source: EJF Capital LLC.
Public Non-Bank Landscape (1)
Europe United States
Business Development
Companies (6)(1)
0 ~60
Specialty Finance Companies (1)
~10 ~180
Property Real Estate
Investment Trust (8)(1)
~80 ~150
European Bank Environment (5)
(Stated in Trillions $)
GDP Bank Assets
United States (4) (5) 17.7 15.52
Europe 27+2 (2) (3)
16.3 45.50
(1) EJF Estimates ; (2) GDP is 2014 Estimate of the EU-27 countries provided by Bloomberg
Financial /Eurosource; (3) Total Bank Assets are as of 2013 which are the last available numbers
from the European Bank Authority. Added Norway and Switzerland (2013) Eurostat; (4) GDP is
2014, http://bea.gov/newsreleases/national/GDP/ GDPnewsrelease.htm. March 27, 2015;
European specialty finance opportunity: a virtual desert
#MIGlobal
European specialty finance opportunity: a virtual desert
Source: International Monetary Fund.
European Bank Environment (5)
Largest Institutions Total Assets (Bn$)
TCE/TA
Deposits / Loans + Securities
GDP (Bn$)
Germany 3,165.1 Deutsche Bank Commerzbank
1,862.49 607.79
3.15% 4.10%
29.42% 53.63%
France 2,334.8 BNP Paribas Credit Agricole Group BPCE Societe Generale
2,264.76 1,732.09 1,333.39 1,425.91
3.36% 1.99% 3.88% 3.09%
35.96% 44.41% 48.53% 32.15%
Italy 1,761.5 Unicredit Intesa Sanpaolo
920.20 704.61
5.00% 5.86%
55.11% 38.28%
Spain 1,153.7 Banco Santander BBVA
1,380.26 688.82
4.06% 6.67%
62.09% 58.75%
Netherlands 714.4 ING Group Rabobank Group
1,082.21 742.38
4.92% 3.36%
68.22% 57.23%
Ireland 202.1 Allied Irish Banks (AIB) Bank of Ireland
117.13 141.48
7.54% 5.44%
59.60% 61.99%
United Kingdom 2,422.4 HSBC Barclays RBS
2,634.14 2,064.02 1,597.16
5.75% 3.49% 4.25%
62.06% 34.96% 46.25%
Switzerland (GDP, 2013) (7) 685.4 UBS Credit Suisse
1,115.60 967.54
4.15% 3.84%
45.72% 51.94%
Average Average U.S. (Top 25)
1,230.63 569.16
4.42% 8.58%
49.81% 85.75%
#MIGlobal
New subdebt rules: catalyst for major consolidation of small banks
Source: World Bank.
#MIGlobal
Important Disclosures
Institute/Milken slides
#MIGlobal
Company
#MIGlobal
Credit cycles: growth rate of U.S. nonfinancial corporate debt
-10%
-5%
0%
5%
10%
15%
20%
1952 1962 1972 1982 1992 2002 2012
Percent change year-over-year
Source: Federal Reserve.
#MIGlobal
Tobin’s q at highest level since tech bubble Market value of non-financial corporate equities divided by replacement cost
0
1
2
1951 1958 1965 1972 1979 1986 1993 2000 2007 2014
Price / replacement cost ratio
Median: 0.72 2014 Q4: 1.10
Source: Federal Reserve.
#MIGlobal
Falling leverage for public U.S. and U.K. companies
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net debt to EBITDA ratio
U.K. (FTSE 100)
U.S. (S&P 500)
Source: Bloomberg.
#MIGlobal
Global corporate bond issuance
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
Investment grade High yieldUS$ trillions
Source: Bloomberg.
#MIGlobal
U.S. corporate bond issuance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
Investment grade High yieldUS$ trillions
Source: Bloomberg.
#MIGlobal
U.S. leveraged loan volume
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
US$ trillions
Source: Bloomberg.
#MIGlobal
U.S. loan volume
0.0
0.5
1.0
1.5
2.0
2.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
US$ trillions
Leveraged loans
Source: Bloomberg.
#MIGlobal
Median leverage ratio by debt rating
0
0.5
1
1.5
2
2.5
3
3.5
4
AA to AAA A BBB High yield
Debt to EBITDA
Source: World Bank.
#MIGlobal
High yield maturity dates by year
0
200
400
600
800
1000
1200
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Number of issues
Source: Bloomberg.
#MIGlobal
Leverage: U.S. and European banks
0 5 10 15 20 25 30
HSBC
Royal Bank of Scotland
BNP Paribas
Barclays
Deutsche Bank
Citigroup
Bank of America
Wells Fargo
JP Morgan Chase
Goldman Sachs
Source: Bloomberg 4/17/2015.
#MIGlobal
Tier 1 capital ratio: U.S. and European banks
0 2 4 6 8 10 12 14 16 18
BNP Paribas
HSBC
Barclays
Royal Bank of Scotland
Deutsche Bank
JP Morgan Chase
Wells Fargo
Citigroup
Bank of America
Goldman Sachs
Source: Bloomberg 4/17/2015.
#MIGlobal
Investment grade maturity dates by year
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Number of issues
Source: Bloomberg.
#MIGlobal
S&P 500 company buybacks and dividends
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Buybacks DividendsUS$ billions
Source: Bloomberg.
#MIGlobal
Buybacks account for significant portion of returns of capital
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Buyback yield Dividend yieldPercent
Source: Bloomberg.
#MIGlobal
Corporate tax rates
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
U.S. Asia average U.K. Europe average
Percent
Source: KPMG.
#MIGlobal
Record low 10-year Treasury yields
0
2
4
6
8
10
12
14
16
18
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Percent
Average: 6.5%
Source: Bloomberg.
#MIGlobal
Real interest rates trending downward US Federal Funds rate minus year-over-year core inflation
-4
-2
0
2
4
6
8
10
12
1980 1985 1990 1995 2000 2005 2010 2015
Percent
Source: Thomson Reuters.
#MIGlobal
Corporate cash balances
Source: Bloomberg
15
61
23 15
22 7
25
8 8
155
138
90
65 52
45 33
14 14
0
20
40
60
80
100
120
140
160
Apple+909%
GE+126%
Microsoft+285%
Google+323%
Cisco+134%
Oracle+537%
Pfizer+31%
Chevron+79%
Merck+74%
Q4 2007 Q4 2014US$ billions
#MIGlobal
Corporate cash balances
Source: Bloomberg
17%
6% 7% 8% 6%
4%
13%
9%
42%
37%
30%
21%
16% 15% 13% 12%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Japan China U.K. France Korea Spain Canada U.S.
Q4 2005 Q4 2014Percent of GDP
#MIGlobal
Market cap to assets ratio of largest five U.S. banks
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Bank of America JP Morgan Citigroup Wells Fargo US Bancorp
Market cap to assets ratio
Source: Bloomberg.
#MIGlobal
U.S. monthly CLO issuance
0
2
4
6
8
10
12
14
16US$ billions
Source: Bloomberg.
#MIGlobal
Bank failures throughout U.S. history
0
100
200
300
400
500
600
1934 1944 1954 1964 1974 1984 1994 2004 2014
Failures
Source: FDIC.
#MIGlobal
Dividend payout ratios around the world
20
30
40
50
60
70
80
90
1975 1980 1985 1990 1995 2000 2005 2010 2015
Europe ex U.K. U.S. Japan U.K.Percent of net income
Source: Thomson Reuters.
#MIGlobal
Growing peer-to-peer lending on Lending Club and Prosper
0
0.5
1
1.5
2
2.5
Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014
Loan issuance, US$ billions
Sources: Lending Club, Prosper.
#MIGlobal
American and British households deleveraging
100
110
120
130
140
150
160
170
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percent of disposable income
U.S.
U.K.
Source: Thomson Reuters.
#MIGlobal
Public debt offsetting private deleveraging
-10
0
10
20
30
40
50
60
70
80
90
100
1991 1995 1999 2003 2007 2011 2015
Net debt, percent of GDP
U.K.
Euro area
U.S.
Source: Thomson Reuters.
#MIGlobal
Emerging market corporates raise international debt
0
100
200
300
400
500
600
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Europe Latin America & Caribbean Asia & Pacific Africa & Middle East
US$ billions outstanding
Source: BIS.
Note: Non-financial corporate international debt securities outstanding.
#MIGlobal
U.S. covenant-lite leveraged loans
0
10
20
30
40
50
60
70
80
90
100
Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014
Issuance, US$ billions
Source: S&P / LCD.
#MIGlobal
Aaa, Baa spreads over 10-year Treasuries
0
100
200
300
400
500
600
700
2000 2002 2004 2006 2008 2010 2012 2014
Basis points
Aaa
Baa
Source Bloomberg.
“A country does not go bankrupt.”
Source: New York Times, September 14, 1982.
—Walter Wriston
Former CEO of Citibank
A Greek History of Default
“In the 4th century BC, the Temple of Delos had to take an 80% haircut on loans extended to 13 Greek city-states.”
Source: Financial Times 11/4/11
— Kenneth Rogoff and Carmen Reinhart
“Greece has been in default for roughly one out of every two years
since it gained independence (1829).”
Source: Financial Times 11/4/11
A Greek History of Default
Kenneth Rogoff and Carmen Reinhart
Sovereign Debt Defaults
Sources: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises, Carmen M. Reinhart / Milken Institute
• 1828
• 1898
• 1902
• 1914
• 1931
• 1937
• 1961
• 1964
• 1983
• 1986
• 1990
• 1832
• 1868
• 1911
• 1914
• 1931
• 1982
• 1999
• 2008
•1876
•1915
•1931
•1940
•1959
•1965
•1978
•1982
•2000
• 1826
• 1848
• 1860
• 1865
• 1892
• 1898
• 1983
• 1990
• 1995
• 1998
• 2004
Brazil Ecuador
• 1839
• 1885
• 1917
• 1918
• 1947
• 1957
• 1991
• 1998
Russia
•1826
•1843
•1852
•1893
•1932
•2011
Greece Turkey Venezuela
• 1982
• 1986
• 1992
• 2001
• 2004
Nigeria
Sovereign Loans:
Historically the Riskiest Debt
Argentina’s Defaults
1830 1890 1915
1930s 1982 1989
1951 1956 2001 2007 2014
Source: Reinhart and Rogoff. Note: Includes external, domestic, and provincial defaults.