Middle Market Restructuring Remains Active Despite Seemingly Slower Workout Activity, Says Morgan Joseph TriArtisan
March 15 2012 - 11:15AM
Business Wire
Despite a seemingly sanguine market for workouts and
restructurings, middle market companies appear to continue to face
issues and the current credit cycle has yet to end, says the
investment banking firm of Morgan Joseph TriArtisan LLC (“Morgan
Joseph”).
In its latest Restructuring Quarterly Newsletter, the firm
observes that while the larger public and widely syndicated credit
markets are fully recovered, that might not be the situation for
the middle market and bank facilities. The Report’s view contrasts
with early 2012 headlines of historically low leveraged loan
default rates and falling volumes of public bankruptcies that would
otherwise suggest a slow next couple of years for workouts and
restructurings.
Says Managing Director James D. Decker, who heads the
Restructuring Group, “Admittedly, publicly available data in this
market is hard to come by, but our own experience of increasing
activity in 2011 over 2010 suggests middle market trends may not be
mirroring the macro recovery.”
The Report also notes that available data on shared national
credits (SNC’s), representing at least $20 million in loan
commitments held by three or more federally supervised
institutions, suggests a slightly different view on the credit
market, one, it adds, “that is still in process.”
“There are over $2.5 trillion in SNCs (5 times that of the
leveraged loan market) and nearly 80% are set to mature prior to
the end of 2014,” the report says. “Although the percentage of
criticized SNCs has fallen since 2009, they remain well above
pre-Lehman levels. Combine these facts with the well documented
2012-2014 end of reinvestment windows of legacy CLOs, which have
supported the leveraged loan market, and one might think twice
about calling an end to this credit cycle.”
In other developments, Morgan Joseph reports:
- Continued growth of relative value
investors, specifically hedge funds and high yield accounts, is
raising the cost of borrowing in the leveraged loan market. While
CLOs returned to the top as a percentage of market share, the trend
towards a more diversified lender base with a reduced role for
securitized investment vehicles continues. Accordingly, pro rata
spreads in the second half of 2011 are up from the first half
despite increased competition and much lower volume in the third
and fourth quarters last year. Specifically second lien loan
spreads jumped more than 100 bps from the third quarter with
lenders requiring larger upfront fees and higher LIBOR floors.
- Strong performers and larger businesses
are witnessing a resurgence in buy-out multiples, while the “have
nots” in the lower end of the middle market and turnarounds
continue to struggle to shed leverage and refinance. The average
purchase price multiples in the fourth quarter exceeded 9.0x, the
highest level in the past 15 years, excluding 2007 and 2008. The
Report cites that in the fourth quarter of 2011 private equity
firms sat on dry powder of $477 billion, which at current
investment rates means that fund managers would not fully invest
their funds and will need to return capital to investors, resulting
in “an uncommon situation to say the least.” And with Eurozone
concerns subsiding and the retail engine fueling new loans and high
yield issuance, further growth in purchase multiples look
certain.
- A substantial increase in Chinese
investors willing to invest in distressed businesses. Their
increased interest in US domestic assets results from the PRC being
forced to purchase massive quantities of US dollars from “private”
markets in China in order to keep the Yuan inexpensive relative to
the US dollar and other western currencies. Flush with investible
US dollars and other foreign reserves, and given the Eurozone
issues, along with paltry US Treasury returns and a desire to
transition from factories to higher value ownership of IP
technology, the PRC is motivated to find avenues to invest directly
or indirectly in US businesses.
- A decline in Asset Based Lending of
approximately 60% from the first quarter of 2010 to the third
quarter of 2011, reaching spreads below 200bp before rebounding to
225bp in the fourth quarter. The trend was largely due to fierce
competition among banks and loan funds seeking “safer” investments,
at a slight premium to treasuries.
- The high yield pipeline at the
beginning of 2012 is larger than it has been since 2009, indicating
another big year in the high yield space. The market cooled in the
second half of 2011 after a blockbuster 2010 and 1H2011. Market
uncertainty in 2H2011 and a decline in near term maturities
dramatically slowed the volume of high yield take-outs,
contributing to the overall decline in 2011 volume.
About Morgan Joseph TriArtisan LLC
Morgan Joseph TriArtisan LLC (www.mjta.com) is an investment
bank engaged in providing financial advice, capital raising and
private equity investing. The firm’s services include mergers,
acquisitions and restructuring advice, in addition to private
placements and public offerings of equity and debt.
Note to the Media: A copy of the full report is available by
contacting Cristina Bacon, of Anreder & Company, at
cristina.bacon@anreder.com, or 212-532-3232.