U.S. Bank Loan Capital Markets – Market Snapshot

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U.S. Bank Loan Capital Markets – Market Snapshot April 2, 2012 Peter Kline 312-325-8983 Richard Jones 312-325-8906 Kavian Boots 312-325-8723 Daniel Chapman 877-673-2258 Jeffrey Duncan 704-335-4570 Michael Mahoney 314-418-3571 Leveraged Loan Market Market Commentary: Activity in the leveraged loan market continues to build, with issuance jumping 71% to $106 billion in 1Q12 from $62 billion in 4Q11. Despite this sequential improvement, leveraged loan issuance dropped some 25% Indicative Leveraged Pricing Average New-Issue Pricing (YTM) in 1Q12 versus the same period in 2011. Much like the year ago period, the majority (52%) of 1Q12 volume supported refinancing activity, and M&A volume Ratings Jun-11 Sep-11 Dec-11 Mar-12 remained noticeably light at $26 billion or 25% of 1Q12 issuance and 10% below BB/BB- 4.57% 5.92% 4.43% 4.55% 4Q11. The relative lack of M&A activity - although some promising situations loom on the horizon - continues to mystify, as the European crisis moves to the back pages and economic indicators continue to show improvement domestically. Modest net new issuance, combined with surging demand for the asset class, has B+/B 6.27% Source: Standard & Poor's LCD 8.37% 7.20% 6.12% contributed to an issuer friendly technical environment. Opportunistic deal flow, including loan repricings, amend-to-extend deals, and dividend dealsare now widely accepted for quality issuers, and comprised 45% of 1Q12 volume. Moreover, the supply/demand imbalance continues to pressure yields, now hitting their lowest level since last June. Overall, leveraged loan pricing in 1Q12 tightened the most in the single-B space, while double-B pricing remained relatively flat. The BB/BB- and B+/B indices came in at 4.55% and 6.12%, respectively, in March, from 4.43% and 7.20%, respectively, in December. Noteworthy Deal: Dispensing Dynamics International City of Industry, California Asset Based Finance Market Market Commentary: Asset-based loan volume continues to be light since the peak in 2Q11 making for the third straight quarter of declining volumes. The market continues to be dominated by refinancings versus new money transactions, with little news of additional LBO transactions being added to the forward calendar. One industry that seems to be active is the Metals Industry, in which we’ve seen at least four borrowers come to market to increase their line of credit to support tuck-in acquisitions and working capital growth, including O’Neal Steel, Olympic Steel, Steel Pipe & Supply, and McJunkin Red Man. Even with a slow pipeline, most lenders expect pricing to stabilize during the year with anticipation of bank regulation and Basel III liquidity requirements impacting banks’ pricing models. Noteworthy Deal: Titanium Metals Corporation Dallas, Texas Metals U.S. Bank was the Sole Book Runner and Administrative Agent on a new $83 million senior secured set of facilities for Dispensing Dynamics International, a California-based manufacturer of paper-towel and soap dispensers. Kinderhook Industries, LLC is the sponsor. The $15 million revolver and $68 million term loan, both five-year facilities, backed the purchase of The Colman Group, parent of the San Jamar (an international supplier of food safety tools and disposable dispensers) and Chef Revival (a supplier of chef and crew apparel, kitchen gloves, towels, and insulated bags) brands. Pricing on the deal, which closed at the end of February, was L+500 bps, with a 1.50% LIBOR floor, and a 98.5 issue price. U.S. Bancorp served as Sole Bookrunner and Administrative Agent on a new $200 million, 5-year, syndicated ABL revolving credit facility for Titanium Metals Corporation. The new facility will help support working capital growth anticipated in the commercial aerospace industry, which the company primarily serves. This information represents the opinion of U.S. Bancorp and is not intended to be a forecast of future events, a guarantee of future results or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. This report is intended for institutional investors only. Please send an email to andrew.hensel@usbank.com if you wish to be removed from the mailing list for this document. 2 Indicative Asset Based Pricing Grid LIBOR Spreads Deal Size Credit Fundamentals $125mm Strong/Stable 150 – 200 175 – 225 Storied Credits 225 – 275 250 - 300 Undrawn pricing typically ranges from 37.5 to 50.0 bps, with a grid t hat is to usage of the facility.
U.S. Bank Debt Capital Markets – Market Snapshot April 2, 2012 Terry Martin 646-935-4581 Violet Grecu 877-673-2289 David Wood 312-325-8745 Michael Dullaghan 612-336-7629 Amanda Lamberti 314-325-2025 Private Placements Market Market Commentary: Private Placement Market issuance activity continues at a moderate pace. During the month of February, we saw a solid $3.5 billion in issuance, following the robust $4.9 billion in volume seen in January. Total YTD 2012 volume now stands at over $8.4 billion. Investor liquidity continues to be strong, and is driving favorable, issuer-friendly structures such as attractive pricing, lengthening tenors and delaying funding options. U.S. Treasury yields experienced some volatility in March and increased above 2.0% for the 10-year, a level not seen since October 2011. In reaction to increasing Treasuries, credit spreads are expected to modestly decline. Regardless, coupons remain attractive and near historical record low levels. Transactions for foreign issuers continue to dominate the new issue calendar. YTD 2012, cross-border transactions have represented over 65% of issuance. Given the continued heightened levels of cross-border issuance, investors are particularly eager to invest in transactions for domestic issuers presently. Noteworthy Deal: Financial Services U.S. Bancorp is serving as Joint Lead Placement Agent on a $64 million senior notes offering for a financial services company. The company is a holding company with an NAIC 1 rating profile. The company seeks two tranches: (1) an $11 million 5-year bullet; and (2) a $53 million 20-year final / 10.25-year average life amortizing tranche. Proceeds will be used to support capital expenditures. The transaction will include a partial delayed funding of 6 months. High Grade Market Commentary (for the week ended March 30 th ) Public Debt Market Private Placement Spreads to U.S. Treasury NAIC Rating 5-Year (bps) 7-Year (bps) 10-Year (bps) 1 180-200 175-225 175-200 2 225-250 225-275 250-300 3 475-575 (if available) 525-650 (if available) 525-650 (if available) Source: Private Placement Monitor (as of February 2012) Please note that actual pricing will be sector and issuer specific. Given this and the market’s volatility; drastic spread changes could occur at anytime. Please contact Terry Martin at (646) 935-4581 to review and discuss potential individual basis. As we close out the first quarter of 2012 we take a look back at the largest 1st quarter on record in terms of new issue supply, and the 3rd largest quarter of all time. Q1 finishes with a monthly average of $95 billion in new issue supply, and a weekly average of $22 billion, both well above historical averages. We’ll be focused on whether or not this feverish pace can be sustained over the balance of the year, or if what we are experiencing is the continued advancement of funding plans which will leave most expecting a slower than normal second half of the year. The consensus would be that we are off to a remarkable start and at some point the other shoe has to drop. A number of risk factors could potentially lead to a slowdown; Sovereign issues, politics and the upcoming election, or disappointing economic news here in the states. Market participants will continue to focus on anything that could potentially derail this impressive run in investment grade credit, and we would not be surprised if we see some profit taking during signs of weakness. This week finished with just under $20 billion in new supply as the market started experiencing some fatigue late in the week as the book build process was somewhat slower than what has become the “norm”. New issue concessions started off the week in negative territory but as the week wore on; issuers lost leverage and were required to pay up (roughly 15 bps NIC for deals Wednesday - Friday vs. flat for deals Monday & Tuesday). The broader market continues to perform well with the Dow closing just 40 points off the recent 52-week high and finishing Q1 +8.14%; a similar story with the S&P, closing out Q1 +12%. We continue to see cash pouring into high grade bond funds with an additional $1.5 billion inflow this week making the YTD figure +$17.3 billion which equates to a weekly average inflow of $1.4 billion. The month of April is typically slower from a volume standpoint as we enter into Q1 earnings season. The 10-year average for April just above $40 billion, and we would anticipate something in the $45-60 billion range for April. High Yield Market Commentary (for the week ended March 30th ) Volume in the high yield new issue market picked up this week and we passed the $30 billion mark for the month and the $90 billion market for the quarter. This makes the first quarter of 2012 the busiest quarter on record, surpassing the fourth quarter of 2010, which held record at $84+ billion. Since the end of last year, the market environment has created very favorable conditions for high yield issuance. On the supply side, never before seen low rates in the high yield market has encouraged issuers to continue to refinance their debt. With 2012 and 2013 issues largely refinanced, we are starting to see issuers refinance their 2014, 2015 and 2016 maturities. On the demand side the record breaking low yields in the US treasury, corporate and other markets has made high yield one of the few places to find yield, albeit at historically low levels for the asset class. The secondary market was softer this week, closing Thursday back over 600 bps, at +602. Despite this weakness in the secondary market, new issues performed well post pricing. All deals broke post pricing either at issue bid or better. The big winner of the week was Lawson Software (Caa1/B-). They priced over a $1 billion of 7-year non-call 3-year notes at par to yield 9.375% and bonds traded up almost 4 points post pricing. Again we saw another inflow into the sector with $457 million being put into high yield funds. While this is down from the previous week, it is still the seventeenth inflow in a row for over $18 billion in that time frame. Investment Products and Services are available through U.S. Bancorp Investments, Inc., member of FINRA and SIPC, an investment advisor, a brokerage subsidiary of U.S. Bancorp, and an affiliate of U.S. Bank. U.S. Bank is not responsible for and does not guarantee the products, services, or performance of it affiliates and third party providers. This information represents the opinion of U.S. Bancorp and is not intended to be a forecast of future events, a guarantee of future results or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. This report is intended for institutional investors only. Not a Deposit ● Not FDIC Insured ● Not Guaranteed by the Bank ● May Lose Value ● Not Insured by any Federal Government Agency 3
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