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Q4 2015
Broader Market Volatility Disrupts
Leveraged Finance Markets
In This Report
Underwriting standards tighten as
lenders rethink risk appetites
Leveraged Finance
Interest rates jump in the fourth
quarter but aren’t likely to follow last
year’s post-January reversion
High-yield market continues energy/
non-energy bifurcation
Highlights from William Blair’s
January 2016 leveraged finance survey
FRONT LINE INSIGHTS
Broader Market Volatility Disrupts
Leveraged Finance Markets
Syndicated loan activity
slows dramatically and flex
activity surges as arrangers
struggle with unpredictable
market conditions.
Investor concerns about plummeting
oil prices, China’s growth, and U.S.
interest rates spilled over into debt
markets in the fourth quarter. The
widespread repricing of risk among
lenders and arrangers resulted in
higher pricing, lower liquidity, and
tighter underwriting standards across
leveraged finance markets.
The market disruptions were
particularly acute in the syndicated
loan market. Based on increased
investor concern about corporate
earnings and the health of the
global economy, CLO formation
slowed considerably, creating a
supply/demand imbalance. To
capitalize on the resulting price
dislocations in high-yield bonds,
value-focused institutional investors
migrated from second-lien loans
toward the high-yield market. This,
combined with a decreased
willingness by arrangers to add
risk to their balance sheets, caused
syndicated loan activity to slow
precipitously for much of the
fourth quarter.
Throughout the quarter, middlemarket activity was much steadier
than the market for larger, rated deals.
This was primarily due to the fact that
middle-market lenders have more
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stable funding sources and tend to
focus more on maintaining
relationships with financial sponsors
when make lending decisions.
In this quarter’s Leveraged Finance
report, we look at the trends that
shaped underwriting standards,
interest rates, and the high-yield
market in the fourth quarter. We also
examine why, despite following a
similar pattern to what was seen 12
months ago, 2016 could be shaping up
to be a very different pricing
environment than 2015.
Underwriting Standards Tighten as
Lenders Rethink Risk Appetites
During the fourth quarter, there was a
dramatic shift in sentiment among
lenders and arrangers. Signaling a
belief among credit market
participants that the U.S. economy
may be nearing the end of its
current expansion phase, lenders
and arrangers have displayed
significantly lower risk appetites
over the past several months.
Lenders are still willing to do
deals, but they are being much
more prudent about the types of
companies they are willing to
underwrite and the amount of
leverage they are willing to put
on a company.
Average leverage for LBOs in the
fourth quarter was 5.3x, down from
5.7x for all of 2015 and 5.8x for 2014.
The downturn in risk appetites has
been particularly sharp in cyclical endmarkets. Not surprisingly, William
Blair’s quarterly survey of leveraged
finance market participants showed
that the energy, building products, and
automotive sectors saw the biggest
2014 vs. 2015: Similar Q4 Pattern, But Where Do We Go From Here?
In both 2014 and 2015, interest rates for leveraged loans rose during the fourth
quarter, and last year rates quickly reverted to their three-year averages after
February. Technical challenges and a downturn in lenders’ and arrangers’ risk
appetites, however, suggest that elevated rates may have staying power in 2016.
500
450
400
350
300
Jul
Source: S&P LCD
Aug
Sep
Oct
Nov Dec
2014
Jan
2015
Feb
Mar
Apr
May
pullback by lenders during the fourth
quarter. During the quarter, larger,
higher-rated transactions increased as
a percentage of new issuances. Debt
rated BB- and higher represented 56%
of fourth-quarter volume, up from
31% in 2014.
As 2016 began, there was optimism
that the institutional loan market
would improve in January. But the
technical challenges that hampered
activity in the fourth quarter
continued into January, and the steep
equity selloff over the first several
weeks of 2016 have put a further
damper on risk appetites. While
headlines will show that January 2016
LBO volume was up more than 60%
from January 2015, this growth was
driven by several large deals as
investors migrate to stronger credits.
The median first-lien term loan LBO
facility size in January 2016 was $1.3
billion, compared with $325 million in
January 2015. Further, the
institutional second-lien market
remains essentially shut down with
only one second-lien facility getting
done during January 2016, compared
with nine in January 2015.
Interest Rates Jump in Fourth Quarter,
But Aren’t Likely to Follow Last Year’s
Post-January Reversion
Interest rates for B-rated loans rose in
the fourth quarters of both 2014 and
2015. While rates quickly reverted to
their three-year average after
February 2015, it is too early to know
what markets will look like in spring
2016. However, there are many
reasons to believe that interest
rates will not follow the path of early
2015. The recent supply/demand
imbalance in the syndicated loan
market, the change in lender
sentiment, and the tightening of
underwriting standards all suggest
that this year’s period of elevated
rates may have more staying power.
In the syndicated loan market, interest
rates rose throughout fourth quarter
2015 as arrangers often were forced
to flex transactions significantly
upward to clear the market. The
degree of this flexing reflects the
differences between the fourth
quarters of both years. Given the
unpredictability of the market over
the past several months, the average
increase in yield for B2 and B3 deals
that flexed in fourth quarter 2015 was
75 basis points more than for deals
that flexed in fourth quarter 2014.
Throughout this period of volatility,
rates in the middle market have been
much more stable than larger deals.
For many of the transactions involving
smaller, unrated syndicated loans that
William Blair has worked on recently,
rates have risen 25 basis points to 50
basis points. Unitranche pricing has
been more of a mixed bag. Unitranche
providers that also buy institutional
loans have increased rates due to
relative value considerations;
meanwhile, firms that focus
exclusively on non-syndicated
transactions have held rates steady.
High-Yield Market Continues
Energy/Non-Energy Bifurcation
The precipitous drop in oil prices
reverberated throughout the highyield market during the fourth
quarter. The Federal Reserve’s longanticipated decision to begin raising
interest rates and the closure of
Third Avenue’s Focused Credit Fund
also made headlines in December,
although only the latter had a material
impact on the high-yield market,
according to Dan Hannis, managing
director of William Blair’s high-yield
bond trading group.
In terms of performance, the highyield market continued its bifurcation
into energy and non-energy assets.
Energy bonds, on average, traded at
66 cents on the dollar as of December
31, while non-energy bonds closed the
year at 93 cents. For all of 2015, the
high-yield energy index was down
23.8%, compared to a -1.4% return for
the broader index ex-energy.
Two bright spots in the high-yield
market were consumer staples and
healthcare. Spreads for high-yield
bonds in the consumer staples sector
tightened by 10 basis points, as rising
macroeconomic uncertainty provided
support for these companies. Highyield bonds in the healthcare and
pharmaceutical industries rebounded
in late 2015, and spreads tightened 70
basis points in December.
To learn more about these and other
trends shaping leveraged finance
markets, please do not hesitate to
contact us.
William Blair
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MARKET UPDATE AND ANALYSIS
Underwriting Tightens Amid Q4 Volatility
Broader market volatility spilled over to leveraged finance markets in the fourth
quarter, causing a marked downshift in leverage levels. The impact in the middle
market was more muted than in the market for large corporate deals.
LBO Leverage Multiples
7.0x
5.8x
5.4x
5.3x
5.3x 5.7x
5.2x
5.3x
6.0x
4.8x
4.5x
4.3x
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x
2011
2012
2013
2014
2015
Middle Market
Large Corporate
5.1x 5.2x
4Q15
Sources: S&P LCD
Leveraged Loan Activity Slows in Q4
Leveraged Finance
Market Analysis
Each quarter we look
behind the numbers to
examine the market
dynamics that are
driving trends in pricing
and volume in leveraged
finance transactions.
Driven largely by disruptions in the syndicated loan market, LBO loan volume
dropped precipitously in the fourth quarter. There were long stretches during the
quarter when no syndicated transactions were completed, and many of the deals
that got done had to be placed through club arrangements.
LBO Loan Volume ($ in billions)
$189
$200
$150
$82
$100
$36
$50
$5
$35
$52
$85
$51
$68
$8
$0
2007
2008
2009
2010
2011 2012
data
2013
2014
2015
4Q15
Sources: S&P LCD
High-Yield Issuance Falls as Oil Continues to Drop
Falling oil prices and the closing of Third Avenue’s Focused Credit Fund
dominated headlines in the high-yield market during the fourth quarter. The
$36.3 billion of high-yield issuance in fourth quarter 2015 represents a 41%
decrease from fourth quarter 2014.
High-Yield Bond Volume ($ in billions)
$400
$287
$300
$164
$200
$144
$68
$100
$345
$322
$310
$218
$262
$0
2007
Sources: S&P LCD
3
2008
2009
2010
2011
data
2012
2013
2014
2015
Highlights from William Blair’s January 2016 Leveraged Finance Survey
Each quarter William Blair surveys midmarket leveraged finance professionals representing leading commercial banks, credit
funds, BDCs, commercial finance companies, and other credit providers. This quarter’s survey comprised 10 questions
(including the three shown below) to measure the current tone and direction of midmarket leveraged finance.
Included in the survey is the Market Index Measure, which asks respondents to rate overall conditions in the leveraged finance
market. On a scale of 1 to 5, with 5 being the most borrower-friendly conceivable, respondents rated conditions as 3.4, the
least borrower-friendly reading since the survey began in 2014.
To receive the results of the full January 2016 survey, please contact Mark Birkett at [email protected].
Pricing: For 2016, do you expect pricing for
your primary debt offering to increase,
decrease, or stay the same?
70%
49%
56%
40% 35%
23%
11%
6%
Increase
3Q15
Decrease
4Q15
The percentage of respondents who expect pricing to
increase over the next 6 to 12 months increased from
6% in July 2015 to 56% in January 2016.
9%
Remain the Same
1Q16
46%
36%
23% 18%
13%
9%
Leverage and Terms: For 2016, do you expect
leverage and transaction terms to tighten,
loosen, or remain the same?
68%
61%
Increase
3Q15
Decrease
4Q15
26%
Reflecting the broader resetting of risk appetites in the
fourth quarter, the percentage of respondents who expect
leverage and transactions terms to tighten over the next 6
to 12 months increased from 9% in July 2015 to 61% in
January 2016.
Remain the Same
1Q16
Sector focus: Are there any sectors or industries where your firm is proceeding more aggressively or
cautiously today compared with six months ago?
Not surprisingly, lenders have become much more cautious in energy and other commodity-driven, cyclical industries.
At the other end of the spectrum, food and beverage, healthcare, and IT/software/hardware are three areas where lenders
have become the most aggressive.
Energy and Energy Services
Building Products / Construction
Automotive / Transportation
Retail and Restaurant
Chemicals
Other Industrial / Manufacturing
Education
Financial Services / Specialty Finance
Media
Consumer Products / Services
Professional Services
Distribution
Packaging
IT /Software / Hardware
Health Care
Food and Beverage
69%
52%
49%
39%
31%
25%
24%
21%
20%
20%
19%
15%
13%
13%
12%
8%
More Cautiously
4%
5%
8%
7%
11%
13%
12%
17%
20%
19%
15%
17%
17%
24%
29%
33%
More Aggressively
William Blair
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WILLIAM BLAIR LEVERAGED FINANCE INVESTMENT BANKING
William Blair
by the Numbers
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Drawing on our deep product expertise and the strength of
our relationships, William Blair has built a leading leveraged
finance franchise. Business owners turn to us for outstanding
execution in support of their capital-raising objectives.
completed transactions
since 2008
Recent transactions include:
arranged financing
since 2012
$10.5bn+
400+
lender and alternative credit
provider relationships
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William Blair’s Leveraged Finance team structures and arranges debt capital
in support of acquisitions, recapitalizations, and growth through its well
established relationships with debt capital providers globally.
• $6.4 billion of completed/pending financing arranged since 2014
• Specialists who are experts in complex engagements, including those
requiring insightful credit positioning and the arrangement of multiple
layers of capital
• Robust distribution capabilities providing a 360° view of the market;
relationships with over 400 lenders and significant transaction experience
with alternative credit providers
• Real-time, proprietary view of the leveraged finance market from William
Blair’s global M&A and debt advisory practices
• Senior banker attention and unbiased, objective advice; senior bankers
average more than 20 years of experience
• Thoughtful, customized financing processes that produce
outstanding outcomes
Our Debt Capital Markets team provides clients with access to various debt
capital markets, including high-yield and investment-grade notes, convertible
bonds, syndicated term loans, preferred stock, and other debt securities
purchased by institutional investors.
• Debt underwriting, placement, and advisory services related to the
public and private/144A markets
• 40+ institutional sales and trading professionals based in Chicago and
New York
• Market maker in 500 high-yield bond and investment-grade issues;
400 preferred issues
• National account coverage of 700+ Tier 1 institutional buyers and
regional investors
With more than 150 senior
bankers around the world,
William Blair has completed
more than 2,000 advisory and
financing transactions totaling
more than $200 billion in value
for our clients*
Leveraged Finance
Kelly Martin
Managing Director
+1 312 364 8832
[email protected]
Michael Ward
Managing Director
+1 312 364 8529
[email protected]
Mark Birkett
Director
+1 312 364 5483
[email protected]
Matt Thomas
Director
+1 312 364 5261
[email protected]
Jason Sutherland
Vice President
+1 312 364 8961
[email protected]
Olivier Lopez
Vice President
+1 312 364 8460
[email protected]
* In the past five years as of
January 31, 2016
William Blair
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Disclosure
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William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC
are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company,
L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair
International, Ltd is authorized and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom.
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About William Blair
Investment Banking
William Blair’s investment banking group combines significant transaction experience,
rich industry knowledge, and deep relationships to deliver successful advisory and
financing solutions to our global base of corporate clients. We serve both publicly traded
and privately held companies, executing mergers and acquisitions, growth financing,
financial restructuring, and general advisory projects. This comprehensive suite of
services allows us to be a long-term partner to our clients as they grow and evolve.
From 2011-2015, the investment banking group completed more than 350 merger-andacquisition transactions worth $95 billion in value, involving parties in 26 countries and
four continents, was an underwriter on more than 20% of all U.S. initial public offerings,
and raised more than $120 billion in public and private financing.