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Explore the shifting landscape of debt markets in 2009, from bank pressures to corporate loans and bond issuance. Learn key themes, market conditions, and the outlook for the year ahead.
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An adviser’s perspective Swagata Ganguly Director, Rothschild AFG March 2009
What did we say last year? Our outlook for 2008 was… • Legitimate concerns about a further wave of stress in the financial sector • Large underwriting positions reserved for trophy investment grade transactions • Little evidence that conditions in the credit markets will improve significantly in 2008 • Leveraged borrowers will suffer liquidity constraints and we are already seeing increased restructuring activity • Corporate borrowers will experience price and covenant pressure
The current debt market …..unfortunately it was far worse
Belgium Lux’bourg Iceland UK Netherlands Germany Ireland Austria France Italy Portugal Switzerland Greece Spain Which banks have raised capital? Nordics Source IMF, Financial Times • Note • 2007 GDP used Bad news… and good news
Actions taken by the Irish Government • 100% deposit guarantee scheme • In October 2008, Ireland became an early mover fully guaranteeing all deposits of six Irish banks for two years (Allied Irish, Anglo Irish, Bank of Ireland, EBS, Irish Life and Irish Nationwide) • Recently announced that it will examine how the Scheme could be revised • Nationalisation of Anglo Irish Bank • Nationalised in January 2009 following a severe loss of market confidence despite reaching a tentative agreement to receive €1.5bn just a few weeks prior • Bank recapitalisations • Bank of Ireland and Allied Irish Banks each accepted €3.5bn in preference shares
Key debt market themes 2 3 1 Only the best raise new debt No ‘new money’ deals Pricing is ‘prohibitive’ • Focus on existing exposures • Borrowers have few options • Transaction needs ‘deal of the century’ business case for banks • Use of ‘breaches’ or extra liquidity need to reprice all facilities 4 6 New markets being tapped 5 5-20 banks needed for a deal Clients fear the worst • Schuldschein • ‘Private private’ placements with institutions • Asset based lending • Private equity debt funds • Yen investors • Sovereign wealth funds • Cash rich clients • Buying back debt cheaply or ‘over borrowing’ to provide liquidity headroom • Cash poor clients • Worried about covenant breach or payment default • Paying up for extra liquidity or headroom if available • “18 banks underwrite £3bn Angel Trains “transaction” • “7 banks arrange £11bn EDF financing for British Energy” • “10 banks launch €19bn Gas Natural loan” • “BAA financing banks include Export Development Canada, La Caxia and ICO as MLAs” • “Yell approaches 330 banks”
Overview of market conditions • Several debt markets appear to be frozen • Leveraged market is effectively shut • Securitisation markets (excluding repo deals) have now been closed since July 2007 • Monoline business model has collapsed • Those markets which are “open” remain challenging for potential borrowers • Bond issuance very rarely possible for non-investment grade • Private Placement market similarly selective • Corporate loans and bonds often carry margin of >3x 2007 levels • And pricing has increased across all available instruments The markets have changed enormously over last 18 months
Bank markets Main themes • Banks under pressure • Most banks under huge pressure to reduce lending / conserve capital • Relationship matters enormously, but may not be enough • Clearers looking to support existing clients but exiting “Tier 2” relationships • More and more banks aggressively pursuing ancillary business • Large financings require many bank “clubs” / common terms • Any new money will be for shorter maturities and higher fees • 2009 outlook • Whilst the 12 month outlook remains relatively bleak, the strongest corporates are still able to secure new debt • And smaller corporates continue to (successfully) seek amendments or forward starts to ensure ongoing access to capital • Bank nationalisation now rampant across Europe following bail-outs
Bank markets Western Europe corporate loan issuance Source: LoanConnector
Bond markets Main themes • Volume of issuance • € issuance in 2009YTD has already exceeded total issuance from January to May 2008 • Pricing • New issue spreads are starting to tighten from historic wides • Not just the obvious names coming to market in 2009 • Fresenius issued the first high yield bond in 18 months • Cyclical companies, such as John Deere and St. Gobain • Demand • Not only is the market open, but many bonds are being oversubscribed • Casino, rated BBB-, was 5 times oversubscribed on its €500m 3.5 year notes, priced at mid-swaps + 530bps
Bond markets € corporate bond issuance Source: DealLogic
US private placement market Main themes • Q4 2008 was one of the quietest quarters seen • Only $700m priced vs. c$7bn in Q4 2007 • None the less, investors sound cautiously positive • January USPP Industry Forum showed that 80% of participants are not cutting back on 2008 investment levels • 40% will actually allocate more money to USPPs than last year • The consensus view was that investors will selectively consider credits lower down the spectrum but no lower than BBB-; Full covenant packages typically required • Market open for the “right” issuers, structure and size • Bord Gais, raised $450m this year, making it the second largest deal of 2009 (T + 375bp – 400bp) • Qinetiq at T+535bp, ABF at base rate + 475bp , Cobham at T + 425bp
Securitisation Main themes • Primary securitisation markets remains closed • Only €8bn of primary issuances publicly sold to end-investors in 2008 • In the US, new issues have been mainly in the auto, credit card and student loan sectors • Investors have cash but are afraid to invest due to risk of MTM losses if spreads widen further • No clear view on when market will reopen • Investors need to regain confidence in quality of ratings and stability of spreads before subscribing to new issues • No immediate catalyst evident which might kick start the normalisation of European ABS • Most banks do not expect securitisation markets to reopen before 2010… • Borrow short, lend long investors represented up to 50% of the market
Securitisation ABS Spreads UK RMBS (bps) CMBS (bps) Source: JP Morgan
Global default rates Investment grade vs. speculative grade Global default rates: investment grade vs. speculative grade (%) Source: S&P
What deals are being done today Typical terms for an ‘A’ rated credit • Terms pre-crunch • Terms today… Maturity 3 years max Pricing 150-200 bps Upfront fees 80-100 bps Maturity 5 – 7 years Pricing 30-40 bps Upfront fees 10-20 bps
What deals are being done today? Covenant resets – main themes • Focus is on transactions that leave existing capital structure ‘broadly’ in place • Process often involves: • Adjustment of covenants (change, suspension, deferral) • Repricing (fees, margin, PIK / PIC, warrants) • Operational restrictions • ‘New money’ and associated protections • Reprofiling of amortisation • Incentives to raise equity, make disposals, generate cash • Most requests in context of debt related relief • Few requests seeking approvals regarding acquisitions, sales of divisions, add-on debt facilities etc • Really a spectrum of deal types that cross over into full restructurings • Deals often move over time
What deals are being done today? Covenant resets – issues / challenges • Maintain confidence and control • Accept changed circumstances – self-help, prevention • Relationship vs. work out bankers • Invest in robust financial information • Management credibility • Realistic, clear and actionable proposals • Experienced and non-conflicted advisers • Loss of confidence and control • Debt trading from relationship banks to distressed funds • News flow • Reporting accountants / lawyers • ‘Drains up’ due diligence • Cost and resource consumption
Current facilities, unchanged Forward start facility available from maturity date of current facility Facilities Bust banks Tier 2 banks Tier 2 banks Core / supportive banks Core / supportive banks Time What deals are being done today? Forward start facilities (FCF) • FSF is a possible solution for credit-worthy corporates looking to extend their maturity on bank debt, but likely to lose some members of their syndicate • Extension is all-bank consent, but will not need same size facility • Assuming core banks supportive, a forward start facility is possible • Recent forward start facilities include: • William Hill • Marston’s • Arcelor-Mittal • Persimmon • Reed Elsevier • Wolseley
What deals are being done today? The solution might come from equity • Investors remain receptive for equity raisings • Flurry of rights issues in 2008 and 2009YTD • Majority of issuers approaching markets to strengthen balance sheets • 26 out of largest 43 rights issues) • Rights issues in 2009 include Cookson (£255m), Xstrata (£4,116m), Wolseley (£1,052m) and Workspace (£87m) • Structuring of rights issues in 2009 will be affected by increased risk aversion of underwriting banks: • High discounts reflecting high market volatility • Rigorous due diligence and risk decision process • Relatively large underwriting syndicates to spread risk • Take-up commitments from major shareholders and sub-underwriting from new investors crucial for success
What does this mean for you? Clients have had to adapt swiftly to the new landscape • Funding is now a top priority • Decisions which previously may have been down to the FD now need Board debate and approval • Capex reductions, dividend cuts, cost cutting, disposals and JV’S • Capital structure is a key issue • Balance sheets need to be deleveraged in order to achieve a sustainable level of debt • Value will now often fall in the debt although unclear if lenders want to recognise that reality • Resolution in some sectors remains some time off, due to uncertainty relating to new clearing value of assets • Lenders willing to support a business if they believe the prospect for equity and value is “real” • Equity willing to support a business if lenders’ position is realistic
What does this mean for you? Clients have had to adapt swiftly to the new landscape (cont.) • Diversifying sources of debt • With reduced liquidity companies are having to consider all options to meet their requirements • Processes need to be completed more rapidly • The rapidly changing environment means that companies have to take advantage of small windows of opportunity Companies need expert advice to help navigate the markets
Outlook for 2009 • Global economy will continue to be in recession • Continued deleveraging for banks, companies and individuals • Retained profits will have to be the companies’ source of funding • Even good businesses will need to be restructured • Total capital structure solutions – Equity, debt and M&A • Banks will roll over exposures but nationalisation now rampant 2009 will continue to be difficult - companies must be innovative in their financing solutions