leveraged finance annual review / outlook 2014

SPONSORED BY

LEVERAGED

FINANCEAN

NUAL REVIEW

/ OUTLO

OK

JANUARY 2014

2013 IN REVIEW YEAR IN REVIEW BY JAMES CROMBIE

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 signifi-cant 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 advan-tage of the debt issuance opportunity.

Bloomberg Brief Leveraged Finance

Newsletter Ted Merz Executive Editor [email protected] +1-212-617-2309

Bloomberg News Robert Burgess Managing Editor [email protected] +1-212-617-2945

Leveraged Finance James Crombie Editor [email protected] 212-617-3590

Reporter David Holley [email protected] 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 [email protected] 212-617-6975

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MONTH EVENT

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

FEB

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

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

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.

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.

JUL

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

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

AUG

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

The lowest volume for U.S. corporate-bond trading since 2008 underscore the potential for market disruptions.

SEP

Private-equity firms obtain buyout loans at the fastest pace in six years.

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

OCT

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.

NOV The biggest year for CLOs since 2007 is propped up by deals managed by Blackstone and Carlyle.

DEC

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.

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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 JAMES CROMBIE

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

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

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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)

Source: Bloomberg LP

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Average Yield (Right Axis)



OUTLOOK / 2013 RANKINGS BLOOMBERG DATA

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

UNDERWRITER RANK RANK 1-YR EARLIER

SHARE (%)

PROCEEDS ($BN) ISSUES

JPMorgan 1 1 11.7 44.3 326

BAML 2 2 10.1 38.3 318

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

Goldman Sachs 6 6 7.4 28.0 211

Morgan Stanley ▲ 7 9 7 26.4 181

Barclays ▼ 8 7 6.6 25.2 187

Wells Fargo ▼ 9 8 6 22.8 204

RBC ▲ 10 11 3.6 13.6 125

Source: Bloomberg LP 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

JPMorgan 2 2 12.2 42.92 351

Wells Fargo 3 3 6.9 24.27 219

Credit Suisse 4 4 6.8 23.94 192

Barclays 5 5 6.8 23.87 171

Citi 6 6 5.1 18.04 133

RBC ▲ 7 10 5 17.64 149

Deutsche Bank ▲ 8 9 4.8 16.92 174

Goldman Sachs ▼ 9 7 4.7 16.40 159

GE Capital ▲ 10 11 4 14.05 191


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


SHARE (%)


JPMorgan ▲ 1 3 8.5 10.82 99

Goldman Sachs ▼ 2 1 8.1 10.33 85

Deutsche Bank ▼ 3 2 7.6 9.75 96

Credit Suisse ▲ 4 11 5.9 7.58 72

BNP Paribas ▲ 5 7 5.9 7.53 73

Citi ▼ 6 5 5.8 7.42 51

Morgan Stanley ▼ 7 6 5.7 7.24 51

Barclays ▼ 8 4 5.3 6.80 67

HSBC 9 9 4.3 5.47 56

BAML 10 10 4.1 5.29 51


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


SHARE (%)


Deutsche Bank 1 1 9 15.2 58

BNP Paribas ▲ 2 4 8.1 13.7 57

JPMorgan ▼ 3 2 7.2 12.1 48

UniCredit ▼ 4 3 5.7 9.7 49

RBS 5 5 5.1 8.6 34

HSBC ▲ 6 8 4.8 8.2 48

Goldman Sachs 7 7 4.4 7.4 38

BAML ▲ 8 19 4.3 7.2 34

Credit Agricole ▲ 9 21 3.8 6.3 37

ING ▲ 10 16 3.3 5.5 40


2014 Sell-Side Analyst Predictions

BONDS LOANSISSUANCE ($BN) RETURN (%) DEFAULT RATE (%) SPRD (BP) ISSUANCE ($BN) CLOS ($BN) RETURN (%) DEFAULT (%) SPRD (BP)

JPMorgan 300 5.00 Sub 2.0 425 400 60-70 4.5 Sub 2 410BAML 220-240 4-5.00 2.2 350 450 65-75 4.0 - 420Citi 325 2.50 2.0 400 375 - 3.0 2 -Credit Suisse - 5.00 2-3.0 529 - - 5.0 3 to 4 -Deutsche 260 3.90 1.5 360 360 60-70 4.3 1.5 450Barclays 270-295 3-4.00 2-2.5 350 340-360 75-85 3.5-4.5 2-2.5 -MS 334 2.80 1.9 427 419 65-75 4.0 0.5 448UBS 325-335 2.10 3.4 425 575-600 - 6.5 - 425RBS 348 6.33 2.8 400 - - - - -2013 Actual 380 7.40 2.2 400 660 82 4.9 2.2 435

Source: Bloomberg LP NIM<GO>


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 De-cember. Comments have been edited and condensed.

Ann BenjaminNeuberger BermanHIgh-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 de-fault rates is in the smaller companies and middle market companies that are used to financing in the high-yield bond market.”

Ann Benjamin

John Fraser3i Debt Management U.S.Managing Partner

“The trend toward increasingly borrower-friendly 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

John Fraser

Kevin LockhartJefferiesCo-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 compa-nies. 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?”.”

Kevin Lockhart

Kevin SherlockDeutsche BankHead 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 see-ing 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.”

Kevin Sherlock

Dan RobertsMacKay ShieldsHead 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 ex-ceed 2013 levels given the high demand for floating rate investments.”

Dan Roberts

Beth MacLeanPimcoLoan 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 de-mand and it won’t just be from the CLOs. When you’re in a low-default, strong credit fundamental environment, a lot of inves-tors are willing to take more risk and move into that second-lien space.”

Beth MacLean


Covenant Light Sales Ballooned, Mostly B/B+

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.

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US LOANS 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.

More Proceeds Used for LBOs, Dividends

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

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Leveraged Loan Volume Jumped 57 Percent

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

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Second-Lien Deal Count Surged 64 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.

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Market leading intelligence Bloomberg Briefs publishes 18 newsletters to help you stay ahead of the markets. Individual and group subscriptions available. Visit www.bloombergbriefs.com to subscribe or take a trial. Or call Annie Gustavson at +1-212-617-0544.

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Index Recouped More Crisis-Related Losses

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

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S&P/LSTA Leveraged Loan Index

Source: S&P/LSTA

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.

BB Loans Offered More Spread Than BB Minus

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.

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S&P Initial Tranche Rating

Average Margin at Close Average bps per turnMax bps per turn Min bps per turn


CLO Issuance Reaching Pre-Crisis Levels

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

020406080100120140160180

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Loan Funds Saw Big Inflows During July-August

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

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continued from previous page

U.S. LOANS…

MONITOR LIQUIDITY FOR MULTIPLE BONDS FIW <

GO

>



Libor Floors Dropped for All Loan Classes

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

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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.

More First-Lien Deals Had Libor Floor

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

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Second-Lien Margin Fell More Than First Lien

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.

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Average New Issue Loan Price Rose Year-on-Year

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

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U.S. LOANS…

WANT TO DOWNLOAD HISTORICAL PRICING TO EXCEL? <HELP>



U.S. LOANS CLICK ON TABS TO VIEW MATURITIES BY SECTOR

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

Biggest U.S. Institutional Leveraged Term Loan Tranches of 2013 ISSUER S&P

RATINGSIGNING

DATE MATURITY ISSUE PRICE

LIBOR FLOOR

SPREAD AT CLOSE SECTOR USE OF PROCEEDS

Hilton Worldwide Ba3 10/25/13 10/25/20 99.50 100 300 Consumer, Cyclical Refinance, GCPHJ Heinz Ba2 6/7/13 6/5/20 99.75 100 250 Consumer, Non-cyclical Acquisition, Refi, LBOClear Channel Caa1 5/31/13 1/30/19 - - 675 Communications RefiDell International Ba2 10/29/13 4/29/20 99.00 100 350 Consumer, Non-cyclical LBOAsurion Ba2 2/21/13 5/24/19 99.50 125 325 Financial RefiSabine Pass NA 5/28/13 5/28/20 - - 300 Energy Develop/Construct, RefiTribune Ba3 12/27/13 12/27/20 99.75 100 300 Communications Acquisition, Refi, GCPValeant Pharma Ba1 8/5/13 8/5/20 98.50 75 375 Consumer, Non-cyclical Acquisition, GCPBiomet B1 9/25/13 7/25/17 99.75 - 350 Consumer, Non-cyclical RefiNeiman Marcus B2 10/25/13 10/25/20 99.50 100 400 Consumer, Cyclical LBOHJ Heinz Ba2 6/7/13 6/7/19 99.50 100 225 Consumer, Non-cyclical LBO, RefiChrysler Ba1 6/21/13 5/24/17 - 100 325 Consumer, Cyclical RefiChrysler NA 12/23/13 5/24/17 - 75 275 Consumer, Cyclical RefiBMC Software B1 9/10/13 9/10/20 99.00 100 400 Technology LBOFreescale Semiconductor B1 3/1/13 3/1/20 99.00 125 375 Technology RefiIneos B1 5/8/13 5/4/18 - 100 300 Basic Materials RefiDel Monte B1 2/5/13 3/8/18 - 100 300 Consumer, Non-cyclical RefiNuveen Investments B2 4/29/13 5/13/17 - - 400 Financial RefiNuveen Investments B 1/29/2013 5/13/17 - - 500 Financial RefiNeiman Marcus B 2/8/2013 5/16/2018 - 100 300 Consumer, Cyclical Refi

Source: Bloomberg LP LSRC <GO>

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U.S. LOANS…

Second-Lien: Biggest U.S. Institutional Leveraged Term Loan Tranches of 2013 ISSUER TRANCHE

SIZE ($M)S&P

RATINGSIGNING


LIBOR FLOOR


Fieldwood Energy 1725 B2 9/30/13 9/30/20 97.0 125 712.5 Energy AcquisitionSamson Investment 1000 B1 12/18/13 9/25/18 - 100 400.0 Energy RefinanceEP Energy 750 Ba3 5/2/13 5/24/18 - 75 275.0 Energy RefinancePerformance Food Group 750 B3 5/14/13 11/14/19 99.5 100 525.0 Consumer, Cyclical Refinance, Div. PayTemplar Energy 700 B3 11/25/13 11/25/20 98.0 100 700.0 Energy AcquisitionTravelport 630 Caa2 3/11/13 1/31/16 99.0 150 800.0 Consumer, Cyclical Refinance, GCPQuicksilver Resources 625 B2 6/21/13 6/21/19 97.0 125 575.0 Energy Refinance, GCPTWCC Holding 625 B3 6/26/13 6/26/20 99.0 100 600.0 Communications Recap, Div. Pay, GCPBJ'S Wholesale Club 600 Caa2 11/18/13 3/31/20 99.5 100 750.0 Consumer, Cyclical Refinance, Div. PayCarestream Health 500 Caa1 6/7/13 12/7/19 98.0 100 850.0 Consumer, Non-cyclical Refinance, Div. PayRite Aid 500 B3 6/21/13 6/21/21 - 100 387.5 Consumer, Cyclical RefinanceNuveen Investments 500 Caa1 4/29/13 2/28/19 - 125 525.0 Financial Refinance


Dividend Payment: Largest U.S. Institutional Leveraged Term Loan Tranches ISSUER TRANCHE

SIZE ($M)S&P

RATINGSIGNING


LIBOR FLOOR


Carestream Health 1850 B+ 6/7/2013 6/7/2019 98.5 100 400 Consumer, Non-Cyc Refi, Div. PayBJ's Wholesale 1500 B- 11/18/2013 9/26/2019 99.5 100 350 Consumer, Cycl Refi, Div. PayAptalis Pharma 1250 B+ 10/4/2013 10/2/2020 99 100 500 Consumer, Non-Cyc Refi, Div. PayGenerac Power 1200 BB- 5/31/2013 5/31/2020 99.75 75 275 Industrial Refi, Div. Pay, RecapLa Frontera 1150 BB- 5/10/2013 9/30/2020 99 100 350 Utilities GCP, Div. PayMultiPlan 1030 B+ 2/15/2013 8/18/2017 NA 100 300 Consumer, Non-Cyc Refi, Div. Pay, RecapHarbor Freight Tools 1000 B+ 7/26/2013 7/26/2019 99.75 100 375 Industrial Refi, Div. PayRegal Cinemas 983 BB 4/19/2013 8/23/2017 NA NA 250 Consumer, Cycl Working Cap, Refi, Div. PayMagic Newco 922 B+ 8/16/2013 12/12/2018 NA 100 400 Technology Refi, Div. PayTransDigm 900 B 7/1/2013 2/28/2020 98 75 300 Industrial Refi, Recap, Div. Pay


LBO Funding: Biggest U.S. Institutional Leveraged Term Loan Tranches ISSUER TRANCHE

SIZE ($M)S&P

RATINGSIGNING


LIBOR FLOOR


HJ Heinz 6550 BB 6/7/2013 6/5/2020 99.75 100 250 Consumer, Non-Cyc LBO, RefiDell International 4660 BB+ 10/29/2013 4/29/2020 99 100 350 Consumer, Non-Cyc LBOHJ Heinz 2950 BB 6/7/2013 6/7/2019 99.5 100 225 Consumer, Non-Cyc LBO, RefiNeiman Marcus 2950 B 10/25/2013 10/25/2020 99.5 100 400 Consumer, Cycl LBOBMC Software 2880 B+ 9/10/2013 9/10/2020 99 100 400 Technology LBOGardner Denver 1900 B 7/30/2013 7/30/2020 99.5 100 325 Industrial LBO, RefiHUB International 1870 B 10/2/2013 10/2/2020 99.5 100 375 Financial LBO, RefiDell International 1500 BB+ 10/29/2013 10/29/2018 99.5 100 275 Consumer, Non-Cyc LBOBrand Energy 1275 B 11/26/2013 11/26/2020 99.5 100 375 Consumer, Non-Cyc LBO, GCPAlbertsons 1150 BB- 3/21/2013 3/21/2016 99 125 450 Consumer, Non-Cyc LBO, Refi



Libor Floors Used in More Deals, Trend Lower

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.

80

90

100

110

120

130

140

0%

2%

4%

6%

8%

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12%

14%

16%

18%

20%

Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4

2012 2013

Basis

poi

nts

Incl

ude

Libo

r Flo

or

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


EUROPE LOANS 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.

More Europe-Based Issuers Tapped U.S. Market

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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Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4

2011 2012 2013Av

erag

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argi

n (b

p)

Issu

ance

(Bill

ions

)

Issuance (Left Axis)

Average Margin (Right Axis)


European Loan Issuance Jumped 39 Percent

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

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Issuance (Left Axis) Deal Count (Right Axis)


Refinancing Volume Rose, Margin Fell in 2013

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

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Refinanced New Money Average Margin at Close


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Lowest-Rated Returned Most, Distressed Second

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.

0 5 10 15 20 25

U.S. BB Credit

BAML U.S. HY

U.S. Single B

U.S. Distressed

U.S. CCC and Lower

Full Year Total Return (%)

2013

2012

Source: BAML, S&P, LSTA

U.S. BONDS 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.

Bond Fund Inflows Peaked in July, September

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

(3,500)

(2,500)

(1,500)

(500)

500

1,500

2,500


Flow

s ($m

)

Junk Bond Mutual Funds

Junk ETFs

Source: Lipper

High-Yield Bond Issuance Hit Record High

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

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350

400

Jan Feb Mar Apr May June Jul Aug Sept Oct Nov Dec

Issu

ance

($bn

)

2013 2011 2012


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

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.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

%

Basis

Poi

nts

Spread To Worst (Left Axis) YTW (Right Axis)

Source: BAML

Prior spread low, Oct 2007

May: Junk YTW at Record Low Under 5%

TRACK ECONOMIC FORECASTSECFC <

GO

>



Communications Most Active Sector for Issuance

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

0 20,000 40,000 60,000

Utilities

Technology

Basic Material

Industrial

Financial

Cons., Cyclical

Cons., Non-Cycl

Energy

Communications

Issuance ($m)

2013

2012


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 indus-try after jumbo issuance by Sprint and MetroPCS. Refinancing remained the dominant use of proceeds, despite a year-on-year fall.

Refinancing Still Dominant, Lower Year on Year

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

0 40,000 80,000 120,000

Intercompany Loan

Capex

Div. Pay to Shareholders

Share Buyback

Tier-1 Capital

GCP

Loan Payment

Acquisition

Refinance Debt

Issuance ($m)

2013 2012


September Biggest Month; Tenor, Coupon Higher

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

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%

$bn

Volume (Left Axis) Average Coupon (Right Axis)Average Tenor (Right Axis)


Double B Rated Saw Big Year-on-Year Increase

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.

0

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B B- B+ BB BB- BB+ CCC CCC- CCC+

Issu

ance

($m

)

2012 2013



U.S.BONDS…

MONITOR COMMODITY PLAYS TO FIND OPPORTUNITY CPLY <

GO

>


Consumer Cyclical Issuers Dominated PIK Sales

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

36%

15% 13%

9%

8%

5%

5%

5% 4%

Consumer, Cycl

Communications

Consumer, Non-Cyc

Financial

Industrial

Technology

Basic Materials

Energy

Diversified


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 divi-dend payment and companies in the consumer-cyclical sector were the dominant borrowers.

Average Tenor of New PIK Issuance Declined

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.

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1987 1992 1996 2000 2004 2008 2012

Teno

r in

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s


PIK Bond Issuance at Highest Since Crisis

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.

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2006 2007 2008 2009 2010 2011 2012 2013

%

$, B

illio

ns

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


PIKs Used More for Dividend Than Debt Payment

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.

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2007

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LBO Funding Debt Repay Dividend Payment

Volu

me

Issu

ed ($

bn)


GLOBAL PIK SURVEY MATTHEW GEUDTNER, BLOOMBERG DATA ANALYST

LEARN HOW TO USE BLOOMBERG FUNCTIONS <HELP>


Average Coupon Falls to Lowest Since Crisis

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

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6

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8

9

2006 2007 2009 2010 2011 2012 2013

Year

s/%

Average Tenor Average Coupon


EUROPE BONDS 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.

Single B Issuance Saw Big Year-on-Year Surge

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

0 5 10 15 20

BBB-

CCC

BBB

CCC+

B-

B+

BB-

BB

B

BB+

Euros, billions

2013

2012

2011


Euro High-Yield Issuance Increased 58% in 2013

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.

0

20

40

60

80

100

120

2010 2011 2012 2013

EUR

Billi

ons


Issuance Slowed in Q4; Tenor Trended Higher

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

5

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8.5

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Year

s/%

EUR

Billi

ons

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


LOOKUP YOUR FUND WITH ONE CLICK FL <

GO

>


2013 JUNK BOND LEGAL ADVISER RANKINGS BLOOMBERG DATA

U.S. Issuer Advisers: Simpson Thacher Retained Lead for Issues, Skadden Moved Up Year on Year

ADVISER RANK RANK 2012 ISSUES SHARE

(%)PROCEEDS

($BN)

Simpson Thacher 1 1 65 7.5 25.8

Latham & Watkins 2 2 45 5.3 18.3

Skadden Arps ▲ 3 6 42 7.3 25.2

Kirkland & Ellis ▼ 4 3 35 5.3 18.2

Sullivan Cromwell ▲ 5 7 29 4.1 14.3

Vinson & Elkins ▼ 6 4 29 3.6 12.3

Paul Weiss ▼ 7 5 24 3.7 12.7

Davis Polk ▲ 8 12 20 3.3 11.4

Gibson Dunn ▲ 9 10 18 4.4 15.3

Ropes & Gray ▲ 10 17 15 1.6 5.4

Source: Bloomberg LP LALT <GO>

Euro Issuer Advisers (Ex-EM): Latham Jumped to Top of Ranking, Simpson Thacher Also Rose

UNDERWRITER RANK RANK 2012 ISSUES SHARE

(%)PROCEEDS

($BN)

Latham & Watkins ▲ 1 8 34 6.3 7.3

Simpson Thacher ▲ 2 6 31 5.3 6.1

Linklaters ▲ 3 7 27 10.8 12.5

Kirkland & Ellis ▲ 4 5 26 3.9 4.5

Clifford Chance ▼ 5 4 24 7.2 8.3

Allen & Overy ▼ 6 2 22 11.6 13.5

Shearman Sterling ▲ 7 9 15 3 3.5

White & Case ▲ 8 17 14 2.9 3.3

Ropes & Gray ▼ 9 3 13 3.3 3.8

Freshfields ▼ 10 1 12 3.2 3.8


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


(%)PROCEEDS

($BN)

Cahill Gordon 1 1 210 32.6 114.1

Latham & Watkins 2 2 82 8.6 30.2

Davis Polk ▲ 3 5 63 9.2 32.1

Shearman Sterling 4 4 56 8.7 30.3

Cravath Swaine ▲ 5 6 41 5.2 18.3

Simpson Thacher ▼ 6 3 39 4 13.9

Skadden Arps 7 7 26 3.1 11.0

Cleary Gottlieb ▲ 8 9 23 2.9 10.2

Milbank ▲ 9 13 22 3.3 11.5

White & Case ▲ 10 12 19 2 7.1


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


(%)PROCEEDS

($BN)

Latham & Watkins 1 1 65 17.8 21.5

Linklaters ▲ 2 7 39 13.4 16.2

Allen & Overy ▼ 3 2 34 15.3 18.5

Cravath Swaine ▼ 4 3 32 4.2 5.1

Shearman Sterling 5 5 27 9.2 11.2

Clifford Chance 6 6 16 3.7 4.5

Cahill Gordon ▼ 7 4 15 3.7 4.5

White & Case ▲ 8 13 14 3.5 4.2

Davis Polk ▲ 9 14 9 2.9 3.5

Loyens & Loeff ▲ 10 39 8 1.1 1.3



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