Market Update January 2016 SPP’s Middle Market ?· Market Update January 2016 SPP’s Middle Market…

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    17-Sep-2018

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    Market Update January 2016

    SPPs Middle Market Leverage Cash Flow Market At A Glance Deal Component January 16 December 15 January 15

    Cash Flow Senior Debt

    (x EBITDA)

    $10.0MM EBITDA 2.50x-3.50x >$20.0MM EBITDA 3.00x-4.00x

    $10.0MM EBITDA 2.50x-3.50x >$20.0MM EBITDA 3.00x-4.00x

    $10.0MM EBITDA 2.00x-3.50x >$25.0MM EBITDA 3.00-4.25x

    Total Debt Limit (x EBITDA)

    $10.0MM EBITDA 3.75x-4.50x >$20.0MM EBITDA 4.00x-5.50x

    $10.0MM EBITDA 3.75x-4.50x >$20.0MM EBITDA 4.00x-5.50x

    $10.0MM EBITDA 3.75x-4.50x >$25.0MM EBITDA 4.00x-5.00x

    Senior Cash Flow Pricing

    L+3.00%-4.00% (bank) L+4.50%-6.50% (non-bank; potential for a 1.00% floor)

    L+2.50%-3.50% (bank) L+4.50%-6.00% (non-bank; potential for a 1.00% floor)

    L+3.00%-4.00% (bank) L+4.50%-6.00% (non-bank)

    Second Lien Pricing (Avg)

    $10.0MM EBITDA L+7.00%-9.00% floating (1.00% floor) >$20.0MM EBITDA L+5.50%-7.50% floating (1.00% floor)

    $10.0MM EBITDA L+7.00%-9.00% floating (1.00% floor) >$20.0MM EBITDA L+5.50%-7.50% floating (1.00% floor)

    $10.0MM EBITDA L+6.00%-9.00% floating (1.00% floor) >$25.0 MM EBITDA L+5.50%-7.50% floating (1.00% floor)

    Subordinated Debt Pricing

    $10.0MM EBITDA 11.0%-13.0% >$20.0MM EBITDA 10.0%-12.0% Warrants limited to special situations; Second lien may buy down rate to ~9.0%. Equity co-invests readily available.

    $10.0MM EBITDA 11.0%-13.0% >$20.0MM EBITDA 10.0%-12.0% Warrants limited to special situations; Second lien may buy down rate to ~9.0%.

    $10.0MM EBITDA 11.0%-13.0% >$25.0MM EBITDA 11.0%-12.0% Warrants limited to special situations; Second lien may buy down rate to ~9.0%.

    Unitranche Pricing $10.0MM EBITDA L+7.00%-8.50% (1.00% floor) >$20.0MM EBITDA L+6.00%-7.50% (1.00% floor) Potential for fixed rate with BDC or mezz lender. Most unitranche lenders allow a small ABL facility outside of the unitranche facility; larger ABL facilities are provided directly by unitranche lenders (internally arranged with ABL bank lender). Capex and acquisition lines are readily available. Equity co-invests readily available.

    $10.0MM EBITDA L+7.00%-8.50% (1.00% floor) >$20.0MM EBITDA L+6.00%-7.50% (1.00% floor) Potential for fixed rate with BDC or mezz lender. Most unitranche lenders allow a small ABL facility outside of the unitranche facility; larger ABL facilities are provided directly by unitranche lenders (internally arranged with ABL bank lender). Capex and acquisition lines are readily available.

    $10.0MM EBITDA L+6.00%-8.00% (1.00% floor) >$25.0 MM EBITDA L+5.50%-7.50% (1.00% floor) Potential for fixed rate with BDC or mezz lender. Most Unitranche lenders allow a small ABL facility outside of the loan.

    Libor Floors No Libor floor for club bank deals. Generally 1.00% floor for large, syndicated bank facilities, non-bank senior deals, second lien, and floating-rate unitranche facilities.

    No Libor floor for club bank deals. Generally 1.00% floor for large, syndicated bank facilities, non-bank senior deals, second lien, and floating-rate unitranche facilities.

    No Libor floor for most bank deals; 1.00% for non-bank deals, second lien, and floating-rate unitranche.

    Minimum Equity Contribution

    Acquisitions need 25.0%-40.0% total equity (inclusive of rollover); minimum 10.0% new cash combined with rollover or seller notes. The market continues to be increasingly sensitive to thin capitalization and will seek greater equity cushion in cyclical sectors and challenged credit stories. Fortunately, there is significant (and growing) interest in structured equity products to supplement equity contributions from independent sponsors, management teams, etc.

    Acquisitions need 25.0%-40.0% total equity (inclusive of rollover); minimum 10.0% new cash combined with rollover or seller notes. The market continues to be increasingly sensitive to thin capitalization and will seek greater equity cushion in cyclical sectors and challenged credit stories. Fortunately, there is significant (and growing) interest in structured equity products to supplement equity contributions from independent sponsors, management teams, etc.

    25.0%-35.0% total equity (including rollover); minimum 10.0% new cash combined with rollover or seller notes. Focus continues to be more on aggregate credit metrics (Total Debt/EBITDA, etc.) than on the level of equity contribution. Promote to Independent Sponsors will differ but fall in the 5.0%-15.0% range with or without a minimum return to common.

    Equity Co-Investment

    Equity co-investment is readily available for traditionally sponsored, independently sponsored, and unsponsored deals. Options include structured debt-like preferred as an adjunct to a sub or unitranche facility and heads-up equity (with or without a promote) from equity-only investors. Investors include BDCs, insurance companies, credit opportunity funds, SBICs, and traditional mezz funds.

    N/A N/A

    Recap Liquidity Recaps are becoming less palatable to lenders with Q4 recap activity among the lowest in years. High leverage recaps (above 3.00x/4.00x) are a non-starter for most banks and BDCs. Low leverage recaps with an acquisitional or accretive use of capital are still viable, but are subject to heightened scrutiny. Refinancings of sponsor-provided junior debt are still getting done.

    There is a profound drop in recap activity recorded for Q4 2015. The rationale for the significant drop can be attributed to a tighter and more risk adverse credit lending community and a significant jump in sponsors harvesting their portfolios (what was a recap in 2013 and 2014, is a sale in 2015).

    Recap activity is increasing as many sponsors continue to 2-Step closings. Funds close a deal on an expedited basis with legacy banks and sponsor bridge capital (generally structured as mezz or preferred), and then within 120 days, refinance and recap both the bridge capital and additional equity. Strong pricing fundamentals across the credit spectrum.

    Story Receptivity While the environment around high base rates and strict credit risk concerns develops, January is traditionally a ripe market for storied paper, distressed assets, and cyclical issuers. Non-bank lenders and credit opportunity funds are among the most aggressive lenders while unitranche loans are the most common form of financing. Expect a higher cost of capital as the markets account for higher risk.

    Story receptivity has sharply declined due to the traditional Q4 market influences (investors are trying to close deals by year-end and there is an increased focus on straightforward, non-storied issuers) and, in part, a greater secular credit risk rationalization at play in the middle market. This is a good time for challenging credits to prep materials with the intention to launch in January.

    January and February tend to be quiet months in the market and accordingly, story receptivity is at its best. Perfect time to engage those transactions that need to be remediated, or simply switch-out lender groups. There is no better time to get a larger, more receptive audience for a challenging credit than the next 90 days.

    Tone of the Market We kick off 2016 in a very different place than where we were a year ago. Base rates are higher, credit standards are stricter, and pricing for high-risk or leveraged profiles is at a premium. Yields for 144A and public high-risk bonds are approaching the 12% range (a new high since 2010). While middle market terms tend to be less volatile and stubbornly stable in light of high-yield dysfunction, the potential for contagion (tighter leverage and higher pricing metrics) is high.

    There may be a sea change underway in middle market leverage lending. Tighter leverage guidance for commercial banks, greater credit risk sensitivity by BDC lenders, and a growing perception that many credits are beginning to cycle down (more downgrades, increased leverage defaults, reduced EBITDA growth) have contributed to a more risk sensitive leveraged lending environment.

    The market kicks off 2015 with liquidity conditions that are as robust as they ever have been. Cash flow deal pricings are at all time lows and credit metrics are as aggressive as we have seen them in years. Banks will back off where total debt exceeds 5.00x, but most will aggressively bid middle market deals to 4.50x.

    *Changes from last month are in red

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