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MARKET INSIGHTS
1Q 2017
DEBT CAPITAL MARKETS
EXECUTIVE SUMMARY
• Despite the prospect of a higher interest rate environment, access and availability in the debt capital markets remain
open and attractive in both floating and fixed-rate segments.
• Loan demand related to M&A should continue, and we’re cautiously optimistic this demand will be accompanied
by a resurgence in traditional loan demand for core organic growth and investment.
• Banks maintain a solid appetite for new loans as we enter 2017; however, it remains to be seen if banks begin to become
more selective in their investment decisions in the overall context of a rising rate environment coupled (potentially) with
a less rigid regulatory environment.
• The institutional leveraged loan market is currently experiencing strong technical-driven appetite that is decidedly
issuer-friendly.
OVERALL LOAN MARKET
M&A volume reached the second-highest annual total on record in 2016 (2015 was the record) as companies used
a combination of balance sheet cash and relatively low-cost debt financing to drive strategic growth.
2016 M&A VOLUME SECOND-HIGHEST ON RECORD
M&A Lending ($ in billions)
$600
Lev. (excl. LBOs)
Non-Lev.
LBOs
$500
$400
$300
$200
2016
2015
2014
2013
2012
2011
2010
2009
2007
2008
2006
2005
2004
2003
2001
2002
2000
1999
$-
1998
$100
Source: PNC Capital Markets LLC, Thomson Reuters LPC, Federal Reserve Board Senior Loan Officer Survey
Debt Capital Markets
1
2
Debt Capital Markets
The robust year for M&A lending coincided with a “net
tightening” in bank lending standards through the first
three quarters of the year.
% OF BANKS TIGHTENING LENDING STANDARDS
30%
Banks tightened standards during this time as they
rationalized their capital in light of new regulatory
requirements, specifically around Basel III reform
measures developed by the Basel Committee on
Banking Supervision.
0%
-10%
1Q17
3Q16
1Q16
3Q15
1Q15
3Q14
1Q14
3Q13
1Q13
3Q12
-30%
1Q12
-20%
3Q11
As we move through the first quarter, banks’ renewed
interest in lending money remains intact as evidenced by
our investor experience as well as the most recent Senior
Loan Officer Survey released by the Federal Reserve Board
on February 6.
10%
1Q11
By the fourth quarter, however, the number of banks
tightening or loosening lending standards was fairly evenly
matched as more banks looked to grow loans as the year
wore on.
% of Respondents Reporting
20%
A. INVESTMENT-GRADE
Investment-grade loan volume in 2016 was on par with 2015’s record issuance. M&A financings propelled the volume,
reaching a record in 2016, and Q4 was the third-highest quarterly total of the past 10 years.
RECORD M&A FINANCING – $182 BILLION
$800
$120
$200
M&A
$180
$160
$600
$140
$500
$120
$400
$100
$80
$300
$60
$200
$40
$100
$100
I-G TL Volume ($ in billions)
$700
I-G M&A Volume ($ in billions)
Refinancing
$80
$60
$40
$20
$20
Source: PNC Capital Markets LLC, Thomson Reuters LPC, Federal Reserve Board Senior Loan Officer Survey
2016
2015
2014
2013
2012
2011
2010
$-
2009
2016
2015
2014
2012
2013
2011
2010
2009
2008
2007
2006
2005
2004
2003
$-
2008
$-
2007
I-G Refi. Volume ($ in billions)
RECORD I-GRADE TERM LOAN ISSUANCE
3
Debt Capital Markets
Despite banks more closely evaluating the profitability of their relationships, banks still sought funded assets, sending
I-G term loans to a record year at $98 billion. More than 60% of these Term Loans were used to back M&A deals.
Historically, spreads tighten significantly through the cycle. But thanks to the post-financial crisis regulatory environment,
BBB spreads have been relatively sticky at 125 bps, compared to the sub-50 bps levels of the last two cycles.
OUTLOOK
We expect economic growth and a continued interest
in M&A fueled by open debt markets to drive another
solid year.
I-G PRICING
L + 300
BBB
A
L + 200
AA
L + 150
L + 100
125 bps
93 bps
75 bps
L + 50
L+0
1H91
1H93
3Q94
3Q95
3Q96
3Q97
3Q98
3Q99
3Q00
3Q01
3Q02
3Q03
3Q04
3Q05
3Q06
3Q07
3Q08
3Q09
3Q10
3Q11
3Q12
3Q13
3Q14
3Q15
3Q16
Last, we expect clients to continue rationalizing the
number of relationships based on the depth of available
bank ancillary business.
Recession
L + 250
Drawn Margin (bps)
Assuming no change to the bank regulatory landscape,
we expect stable pricing to maintain current levels.
Regulatory relief may result in renewed spread tightening;
however, it is likely to be offset by rising short-term rates.
B. LEVERAGED/NON-INVESTMENT GRADE
Demand for leveraged loans surged in the fourth quarter
and is accelerating in the first quarter as Libor is rising and
technical factors make this an issuer-friendly market.
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
Source: PNC Capital Markets LLC, Thomson Reuters LPC, Federal Reserve Board, S&P Capital IQ LCD; BAML HY Index represents yield
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
$0.0
2Q12
As a result, CLOs, retail loan funds and also cross-over
investors are creating substantial demand for leveraged
loans that’s currently outstripping supply.
$35.0
1Q12
to floating rate loan funds at a torrid pace, injecting new
capital into the market that must be invested.
$40.0
CLO Issuance ($ in billions)
Collateralized loan obligations (CLOs), structured vehicles
that purchase leveraged loans, ramped up new issuance
late into the year as managers sought to issue new
vehicles ahead of new “risk-retention” rules that took place
on Christmas Eve. Further, investors are moving money
CLO ISSUANCE RISES IN 4Q16
4
Debt Capital Markets
With limited new-issue deals relative to demand, these
investors are significantly oversubscribing double-B and
even single-B new-issue Term Loan Bs. The result is
tighter pricing and higher secured and total leverage.
RETAIL INFLOWS ARE SURGING
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
NovD
ec
$2.00
$1.75
$1.75
$1.50
$1.50
$1.25
$1.25
$1.00
$1.00
$0.75
$0.75
$0.50
$0.50
$0.25
$0.25
$0.00
$0.00
($0.25)
($0.25)
($0.50)
($0.50)
($0.75)
($0.75)
($1.00)
($1.00)
($1.25)
($1.25)
($1.50)
Weekly Loan Flows
4- week Moving Average ($ in billions)
Weekly Fund Flows ($ in billions)
Jan
$2.00
Note that double-B, single-B, middle-market leveraged
and all leveraged loans are on top of their tightest levels in
more than four years.
Because of these technicals, we’re seeing loans bid well
above par and even 101, prompting issuers to reprice their
loans at the highest level in the last three years. We’re also
seeing loan spreads as tight as L+200 with no Libor floor
for a number of double-B–rated Term Loan Bs.
($1.50)
4-week Moving Average
SECONDARY INSTITUTIONAL SPREADS 2013 TO PRESENT
Current Spread
Min
Max
BB Loans
318
B Loans
467
CCC Loans
821
1,315
2,526
Second Lien Loans
741
1,103
2,021
Middle Market Loans
639
681
931
All Lev Loans
445
456
781
BAML HY Index
569
322
523
487
904
630
1,017
Loan spreads assume a three-year life
OUTLOOK
We expect new-issue and secondary institutional loan spreads to tighten as rates rise and investors allocate more money
to floating rate loans.
Source: PNC Capital Markets LLC, S&P Capital IQ LCD; BAML HY Index represents yield
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Debt Capital Markets
As a result, we expect more oversubscribed deals, a continued shift of fixed to floating as borrowers choose institutional
loan issuance (see adjoining chart), and institutional investors eyeing certain Term Loan A tranches to fill their loan
portfolios (we co-led First Data’s $1.3 billion, L+200, 3.4yr Term Loan A that closed in January, and institutional investors
snapped up hundreds of millions of dollars at par in the secondary). In short, the leveraged loan market is open and
available in 1Q17.
REPRICING ACTIVITY INCREASES
LEVFIN VOLUME SHIFTS TO LOANS
90.0%
$140.0
80.0%
$100.2
20.0%
10.0%
2015
2016
2015
2016
2014
2013
2012
2011
0.0%
2005
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
Jan-17
$0.0
30.0%
2010
$20.0
40.0%
2009
$40.0
50.0%
2008
$60.0
60.0%
2007
$80.0
70.0%
2006
$100.0
Lev. Loan % of Lev. Fin Volume
($ in billions)
$120.0
C. MIDDLE MARKET
Middle market syndicated loan volume was down slightly
from a weak 2015, hitting the lowest level since 2009.
TOTAL MIDDLE MARKET VOLUME
$250
Refinancings
$200
$150
$100
2014
2013
2012
2010
2009
2008
2007
2006
$0
2011
$50
In particular, there were far fewer refinancings in the nonsponsored space, as borrowers had little incentive to open
up their deals.
2005
New-money issuance was up and on par with recent
years; however, volume was down due to reduced
refinancing activity.
New Money
Volume ($ in billions)
All-in borrowing costs increased throughout the year
along with Libor, and loan spreads for general corporate
purposes in both the large corporate and traditional
middle market spaces ticked upwards.
Furthermore, slow growth and a lack of clarity around the direction of the economy and the election saw borrowers
hold off on debt for M&A or upsizing working capital and capex facilities.
Source: PNC Capital Markets LLC, S&P Capital IQ LCD; BAML HY Index represents yield, Thomson Reuters LPC
6
Debt Capital Markets
MIDDLE MARKET SPREADS OVER 3-MONTH LIBOR
Borrowing Costs (Libor Plus Spread)
8%
300.0
Large
7%
6%
3-month Libor
275.0
Avg. Libor Spread Large MM
250.0
5%
Libor Spread (bps)
4%
3%
2%
1%
Traditional
225.0
200.0
175.0
150.0
1Q01
4Q01
3Q02
2Q03
1Q04
4Q04
3Q05
2Q06
1Q07
4Q07
3Q08
2Q09
1Q10
4Q10
3Q11
2Q12
1Q13
4Q13
3Q14
2Q15
1Q16
4Q16
0%
2Q00
1Q01
4Q01
3Q02
2Q03
1Q04
4Q04
3Q05
2Q06
1Q07
4Q07
3Q08
2Q09
1Q10
4Q10
3Q11
2Q12
1Q13
4Q13
3Q14
2Q15
1Q16
4Q16
All-in cost (Libor+spread)
NON-SPONSORED NON-M&A MM SPREADS
Also, regulations and tightening credit standards forced some middle market borrowers to seek more expensive capital
outside the bank market.
However, we saw sponsored middle market issuance rise modestly, and direct lenders/alternative capital providers took
a greater share of the market, and some deal flow was “self-syndicated.” Aiding deal flow were private equity shops that
had dry powder to put to work.
OUTLOOK
We are cautiously optimistic for 2017 volume, as we expect more companies will amend facilities to extend maturities and
borrow to fund organic growth. In general, we expect fairly stable spreads, although, due to rising short-term rates, an
overall increase in all-in borrowing cost.
D. ASSET-BASED LENDING
At just over $75.0 billion, syndicated ABL volume in 2016 trailed year-ago totals of roughly $85.0 billion. At the outset, we
saw more unreported sole-lender deals and underreported clubbed deals for 1) traditional issuers in the middle market
and 2) larger issuers that historically would have relied on retail syndication.
The supply/demand imbalance continued to be the theme within the ABL market in 4Q16. At just under $5.0 billion, new
money ABL made up roughly one-third of total issuance in 4Q16. Of this total, financing to corporate lenders represented
more than 60% of new-money issuance. Investors continued to shy away from new-issue “criticized” credit profiles.
Sponsored middle market activity ended the year on a strong note as issuers and investors worked hard to deploy capital.
Sponsors benefited from higher hold levels from lead arrangers and relationship lenders. As more evidence, the “club”
market has stolen market share from traditional retail syndications.
Source: PNC Capital Markets LLC, Thomson Reuters LPC
Large MM: Borrower sales above $500mm, deal size $100–$500mm
Traditional MM: Borrower sales above $500mm, deal size <$100mm
7
Debt Capital Markets
At the smaller end of the sponsored market, ABL arrangers are teaming up with direct lenders and alternative capital
providers to deliver one-stop financing solutions. Some of these issuances are arranged as unitranche structures, a trend
that continues to gain momentum with select lenders.
ABL ISSUANCE BY INDUSTRY
ABL ISSUANCE BY PURPOSE
Other
16%
Oil and Gas
3%
M&A
DIP/Exit Fin.
Amend & Extends
Gen. Corp. Purp.
Wholesale
24%
Paper &
Packaging
3%
100%
% of Total ABL Issuance
90%
Business
Services
4%
Healthcare
5%
Automotive
6%
80%
70%
60%
50%
40%
30%
20%
Retail &
Supermarkets
19%
10%
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0%
General
Manufacturing
13%
2004
Chemicals,
Plastics &
Rubber
7%
Other
OUTLOOK
90
80
70
60
50
40
30
20
10
0
Drawn
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Undrawn
Undrawn Spread (bps)
450
400
350
300
250
200
150
100
50
0
2006
Thinner priced deals will remain a
challenge for pure buy-side investors
without cross-sell product offerings.
DRAWN/UNDRAWN SPREADS
2005
Lenders will continue to be focused
on overall return models and capturing
the share of issuer wallets as drawn/
undrawn spreads continue to remain
competitive. The technical landscape looks
relatively healthy given the lack of nearterm loan maturities and relatively low
issuer default rates.
Also, banks’ perceptions of the ABL
regulatory guidance will continue to evolve as tougher-rated credits will have a limited syndication audience.
Finally, in the middle market, ABL lenders will continue to seek relationships with direct lenders and alternative capital
providers in order to deliver one-stop solutions.
Source: PNC Capital Markets LLC, Thomson Reuters LPC
8
Debt Capital Markets
E. REAL ESTATE
ANNUAL REIT VOLUME
$110
$105.2
$102.4
$104.7
$100
Volume ($ Billions)
$90
$80
$70
$65.6
$60
$30
$27.2
$20
$10
$0
$62.3
$49.4
$47.5
$50
$40
$86.3
$81.6
$38.9
$20.8 $20.2
$28.3
$21.1 $19.0
$15.3
$48.9
$41.4
$29.6
$25.3
$3.3
2006
2007 2
008
Syndicated Loans
2009
2010 2
011
Unsecured Bonds
2012
2013
2014
2015
2016
Syndicated Loans Trailing 10 Yr Avg
The secured bank market has settled into a relative equilibrium as pricing has plateaued across segments. Lenders
continued to be circumspect about construction lending activities throughout 2016, saving their capital for the best
relationships and the greatest returns. Multi-family projects, in particular, came under special scrutiny throughout the
year. Fully funded term loans, backed by single assets and property pools, were the most desired asset class. Spreads
within the REIT bank market appear to have bottomed; however, the market compensated with some increases in fees
and wider participation in fee-earning roles within bank groups. Lender groups routinely shuffled as banks rationalized
their positions relative to ancillary income opportunities.
Source: PNC Capital Markets, SEC filings, Federal Reserve Board, Loan Pricing Corporation, S&P Capital IQ LCD, Bloomberg
9
Debt Capital Markets
OUTLOOK
Having experienced heavy refinance and opportunistic term financing volume since 2013, the REIT market is poised for
a bit of a breather. Borrowers are likely to continue the process of optimizing the match between bank group size, facility
size and ancillary fee pools. Pressure on REIT spreads, in this case, will remain to the upside. Property markets should
continue to operate at or near current spread levels given relative balance between loan supply (driven by high expected
refinancing requests) and demand (driven by competitive bank loan alternatives).
4Q16 U.S. REITS AVERAGE SPREAD
200
185.00
180
145.00
Draw Spread (bps)
160
140
120
120.00
96.67
105.00
100
80
60
40
20
12.50
15.00
>= A-/A3
BBB+/Baa1
20.00
25.00
30.00
0
BBB/Baa2
Drawn
BBB-/Baa3
Undrawn
FOR MORE INFORMATION
Visit pnc.com/dcm.
Source: PNC Capital Markets, SEC filings, Federal Reserve Board, Loan Pricing Corporation, S&P Capital IQ LCD, Bloomberg
Services such as public finance investment banking, securities underwriting, loan syndication, and securities sales and trading are provided
by PNC Capital Markets LLC (“PNCCM”). PNCCM, member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”)
and affiliate of PNC Bank, National Association (“PNC Bank”).
©2017 The PNC Financial Services Group, Inc. All rights reserved.
<BBB-/Baa3