Download Corporate Senior Loans Role Model US?

Corporate Senior Loans
Role Model US?
Wiesbadener Investorentag, Wiesbaden, June 21 2013
Elizabeth O’Reilly– Head of Investor Relations, Structured Finance
[email protected]
For information purposes only - „handed over on behalf of AXA Investment Managers Paris“
Confidential Presentation prepared specifically for Professional Clients under MiFiD
Not for retail clients
1
Corporate Senior Loans:
Why and Why with AXA Investment Managers?
 Structural & Market Opportunity
 Our Track Record and Competitive Edge
2
Corporate Senior Loans:
Definition and main Characteristics
Corporate Senior Loans come under various names: •
•
•
Loans
Bonds
3
Credit risk based
on the ability of the
issuer to generate
cash-flows and
refinance
bank loans
senior secured loans
leveraged loans
Secured
by physical assets
and/or equity shares of
the issuers
Floating rate
Margin over Euribor
pre-payable at anytime at
par
Average life of
3 to 5 years
Usually unsecured,
frequently
subordinated
Fixed rate
callable at specific
conditions after some time
Average life of
Typically 7 to 10
years
Protective Covenants
(on leverage, cash flow
cover, additional debt,
dividends, etc…)
Usually No Covenant
Corporate Senior Loans:
The most senior Corporate Debt Asset
Priority of corporate payments
Highest priority
High historical
recovery rate
Senior Secured Loans
Senior Unsecured Debt (HY)
Subordinated Debt (HY/Mezzanine)
Low historical
recovery rate
Equity
Lowest priority
4
Asset Class positioning:
Corporate Senior Loans have good Features
Bull market
Volatile market
Client’s market
views
Corporate
capital
structure
Client’s objective
Loans
HY bonds
Convertible Bonds
Earnings strategy
Capital gain strategy
Seniority in
default
Capital charge
39%
20%
Expected
recovery rate
5
70 – 80%
Equity
30 – 40%
0%
Corporate Senior Loans: Portfolio Considerations
Diversifying HY Credit exposure with limited overlap with HY markets and low correlation to other asset
classes (19.7% long-term correlation with S&P 500)
Overlap Bonds vs Loans - CS HY & Loans indices
Overlaps: 12.5%
Loans vs Bonds correlation – CS indices as of Dec 2011
HY Loans EUR HY Loans US HY Bonds EUR HY Bonds US
HY Loans EUR
100%
78%
59%
59%
HY Loans US
78%
100%
77%
67%
HY Bonds EUR
59%
77%
100%
84%
HY Bonds US
59%
67%
84%
100%
6
Corporate Senior Loans: Volatility
Low historical
volatility:
7
• 3-5% historically in the US
• 4-6% in Europe
• Increased slightly over the last years crisis
Corporate Senior Loans: Strategic Allocation
 Attractive Capital Preservation features – 75-80% Historical Recovery:
 A carry-generative strategy with positive sensitivity to interest rates:
• Through seniority in capital structure
• Security attached to loans
• Return driven by income rather than prices
• A floating rate product offering positive sensitivity to
interest rates
CS indices as of Dec 2011
8
Corporate Senior Loans: A Structural Opportunity

The disintermediation in the US has been ongoing since 20 years: in the early nineties, 60% to 70% of issued loans
were on the banks books. Actually less than 10% are still in their books. Institutional took profit from this situation,
increasing their share from 20% to 80%.

US: Loans have become a common asset: for example Insurance companies do invest between 6% and 9% in
corporate loans.

Europe: The banking disintermediation that follows the crises allows investors to source more loans : the move may
require ten years at least to reach the US market disintermediation level, as most deals are private and corporate
need to adapt.

European loan market is young, multi juridictional, mostly private but attractive in terms of returns.
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Corporate Senior Loans: Market Timing Opportunity
The Corporate Loan Market is a secured Fixed Income asset class, with strong edges:

carry investment and diversification : unique way to get exposed to Private Companies.

capital preservation: security, seniority and covenants: recovery rate is exceptional (70/80% historically)

floating rate exposure

short duration: 3 / 4 years

geographic differences: Europe is mostly private and US mostly public
Why investing now in corporate Loans?

Asset sourcing is supported by the current market players reconfiguration :
– regulation challenges issuance of CLOs (122a in Europe, potentially implemented in the US in 2013)
– reshaping of the investor base (for instance retail mutual funds now represent 10-15% of the market in the US)
– banks dominated but now they are reducing further their lending appetite for non investment grade issuers (Banks
deleveraging and desintermediation – Basel III)

Market conditions are good for investors, in term of risks & returns
– credit spread and low default environment give a prognosis for strong earnings
– high recovery helps protecting against downside
– floating rate allows credit market investments with a positive sensitivity to the rising rate environment.

European investors are underinvested in loans whether European or US.
Premium: at current yields, the European loan market offers an attractive 550/600 bps of excess spread,
while the US loan market brings 350/400 bps p.a. excess spread over Libor after default (*)
(*): considering a 60% conservative recovery rate, 4% annual default rate and 4 years maturity
10
European Loans: Market Snapshot

Strong and resilient total return performance of the European loan market over last 12 months.

Largely supported by capital appreciation and continued recovery of sub-par loans

3Y discount margin in Europe stands at Euribor + 559 bps Vs 650 bps in Q4 2012. Average loan prices now stands at 90.5% (280bps
more than in the previous quarter).

Lagging 12-month default rate for the S&P European Leveraged Loan Index (ELLI) decreased to 5.9% in March 2013, from 6.6% in
December 2012. Expect to remain in a 4-5% in near future

Sound new leveraged loan issuance in Europe in 1Q13, amounted to €15.5billion (€ 21Bn EUR for HY bonds)

Repayment rate stands at 4.8% quarterly
As of May 2013 – Credit Suisse Indices
Approximate Size of the Market
EURO LOANS
EUR 300Bn
Performance year-to-date
+3.89%
Performance 2012
+10.39%
Discounted margin 3 years
Euribor + 559bps
Spread (CS)
371bps
Average Market Price (CS)
90.49%
Defaults 2012
6.60%
New issues Q1 2013
15.52 Bn EUR
Q1 2013 repayment rate
4.9%
2013 S&P LCD buy side survey expected default rate
6.4%
Primary Average Yield 2012
4-6%
Estimated Excess Spread after Defaults*
518bps
*(Credit Suisse Indices as of May 2013, considering a 60% conservative recovery rate, 4% annual default rate in Europe and 4 years maturity)
11
Corporate Senior Loans:
Why with AXA Investment Managers?
 Structural & Market Opportunity
 Our Track Record and Competitive Edge
12
AXA IM’s Track Record & Investment Philosophy
“We believe the key to superior long-term returns in the HY loan market is trying to generate stable current
income and avoid principal loss through fundamental credit analysis to identify issuers with strong credit
trends”
Market-Value funds Composite
* Composite of AXA IM Leverage Finance outstanding market value
mandates and funds excluding cash when a freeze of investment has
been requested by clients
** Benchmark: The Credit Suisse Western European Leveraged Loan
Index (WELLI)
Past performance is not indicative of, or does not constitute a
representation or guarantee of future results. These projections
estimates are not necessarily a reliable indicator of future results.
Performance calculations are based on the reinvestment of gross
dividends or management or distribution. Index’s performance is
calculated on the basis of gross dividend reinvested
Oct05-February 2013
Cumulative Perf.
13
Fund Composite
Credit Suisse WELLI
35.78%
33.55%
AXA IM Distinctiveness
 One of the largest and most experienced players in Europe
• 13 years track-record, first entrant in the market in 2000 / 134years average experience for individuals in the team
• 14 dedicated credit research analysts, on sector coverage
 The most diversified European platform dedicated to managing Corporate Loans:
• manages mandates, open-ended funds and CLOs
• covers Investment Grade to leveraged loans, small caps to large size deals, across European & US loans markets
 In-house structuring capability to offer customized ad-hoc solution (optimization under Solvency II, accounting or P&L constraints)
 Superior track-record in credit selection – 1.2% default rate p.a. across all funds vs. 5% on average for the non-investment grade
asset class globally according to S&P.
 1st decile on CLO management returns: 100% of AXA CLOs are paying cash flows to their Equity clients, when less than 60% of other
managers are doing it !
Clear management style & sound systematic process:
•
•
•
14
active, Top-Down and Collegial approach
total return strategy process, with a strong focus on credit selection & defaults reduction
replicating the market in bull phases but significantly outperforming in bear markets
A Global Team: Europe & US
Renaud Tourmente
Head of Corporate Credit
Corporate Credit Research (No. years experience)
Olivier Testard (21 )Deputy Head
Chemicals, Retail
Hortense de Lamaze (7)
Healthcare, Utilities
Cyrille Macé (14)
Business Services, Building Materials,
Dean Batley (30)
Financials, Autos
Xavier Boucher (8)
Telecom & Cable, Publishing
Guillaume Benoit (4)
Junior Analyst
Stephanie Ferrieu (17)
Banks, Capital Goods,Packaging
Mounia Maliki (4)
Junior Analyst
Sandrine Richard (18)
MidCap Généraliste
Antoine Tissier (25)
MidCap Généraliste
Laurent Cordelette (17)
Head of Transaction Support
Patrick Tinchant (25)
Denis Debernard (10)
Structuring
Anne-Lise Lengrand (13)
Head of Structuring & Product
Development
Meriem Tamarzizt
Structurer
Philippe Affouard (25)
Yasser El Mahi (5)
TBA
15
HY Loans Portfolio Management
Yannick Le Serviget (Paris) (14)
Senior PM & Head of HY Loans trading
Alexandre Thierry (Paris) (7)
Portfolio Manager
Investor Relations (Paris)
Elizabeth O’Reilly (15)
Loans US (Greenwich)
Jean-Philippe Levilain (14)
Senior PM
Joel Serebranski (25)
Senior PM / Credit Analyst
Enoch Chu (6)
Credit Analyst
Vera Fernholz
Senior Analyst (19)
 13 years track-record in the HY Loans market
Isa Schulz (14)
Food & Beverage, Leisure
Transaction Support
Jean-Philippe Levilain
Head of Structured Finance US
Lead Portfolio Manager High Yield Loans
Quantitative Modelling
Jalel Kallel (8)
 proven history of investing in European mid-market credit
instruments (Senior Secured, Second Liens, Mezzanine,
private placement, PIK loans)
 sector specialists
 work-out experience
 in depth knowledge of capital structure and legal
documentation in European jurisdictions
Our unique Sourcing Capability

One-stop shop historically invested since 2000
–
first entrant in the European loan market, which is mostly private
–
senior Secured loans, Second Lien and mezzanine loans
–
large caps and midcaps
–
across Western Europe
–
par and stressed
–
all currencies
 Established relationship over 13 years with major
private equity houses and debt advisors
Private
Equity
Corporate
Partnership with major banks

–
–
–
first entrant in the European loan market
a fixed-income behemoth and one of the largest European asset manager
a pioneer as an investor and manager of Structured Credit vehicles since
1997
–
Banks
active loan trading counterparty with average volumes sell- and buy-side
of EUR 2 bn p.a.
 More than 800 transactions reviewed over last 10 years
16
Sourcing
capability
Debt
Advisors
AXA IM and the Corporate Senior Loans Market
Investment Strategy & Proposed Illustrative Asset Allocation
•
Allocation targets issues with high likelihood of coupon payment with low volatility, i.e. will favour shorter-dated
paper and amortizing loans
•
In the longer-end, allocation primarily to new primary issuance with higher facial spread and more protective
features (tight documentation, higher equity buffer…) and maturity beyond current “maturity wall”
•
Allocation to large flow names, mostly high Bs and low BBs at issue in resilient industries (Cable and Telecom,
Healthcare, Food)
•
Some barbell between B names yielding 7-8% and Crossover/BBBs yielding 4% to dampen the volatility of the
NAV and optimize the risk-adjusted return
•
Current limited allocation to HY bonds as valuation seems rich (equivalent yield vs loans despite seniority of the
latter) – ca. 8%
•
Current limited allocation to junior debt as macro environment not supportive – ca. 2%
For illustrative purpose only.
17
(as of February 2013)
Summary

Current regulations and constraints on banks balance sheet are
–
accelerating the disintermediation of the loan market
–
offering the opportunity for Institutional investors to enter an asset class that offers high current income, some capital
preservation features, portfolio diversification and some hedging against interest rates increase

The loan market is a structural opportunity and a market opportunity

Thanks to 13 years experience, AXA IM has strived to establish its leadership throughout

–
one of the largest dedicated platforms in Europe both in terms of staff and assets under management
–
global capability in Europe and the US
–
board membership at the Loan Market Association for 10 years and
–
a robust track-record throughout different full credit cycles
AXA IM platform is positioned to take advantage of the current dislocation in the loans market and long-term trend for
disintermediation, that requires superior credit capabilities, a proven sourcing ability as well as structuring skills

AXA IM manages a full range of funds/mandates to match various investor risk reward targets, and could for example provide
long-term total returns between 5% and 10% p.a. depending on risk appetite while mitigating the risk of capital loss
18
Disclaimer
This Material is indicative only. It is not a valuation and it contains, on a non exhaustive basis, information on the High Yield Loans Expertise, AXA Investment Managers and track record of several transactions
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