2017 – A Look Ahead (Third of a Series)

Last week we punctured the myth that the influx of new private debt funds is creating excess demand for the level of deal supply of middle market senior loans [link]. We now turn our attention to credit quality. How will this year fare for credit investors relative to years past, and expectations?

First, let's separate the creditworthiness of the borrower from the structures imposed upon them. In general, top-line performance of middle market companies should receive support from the economy over the next year or so. While specific tax, trade, and fiscal policies are evolving, domestic tailwinds should be sufficient in the short-run to give some lift to US-centric businesses.

Of course, not all sectors will feel the same breeze at their backs. Heathcare, for example, is likely to be subject to regulatory changes. Retailers will be challenged by some international tariff proposals being discussed...

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QUOTE OF THE WEEK

“Animal spirits seem to have taken over investor appetite and the markets.”
– Craig Russ, director of bank loan research, Eaton Vance. 

Chart of the Week: Great Expectations

Feb 13 2017 Chart

The vast majority of respondents to William Blair’s survey on leverage lending conditions believe leverage and terms will either loosen or remain unchanged.

Lead Left Spotlight

Eric Green and Mark O’Keeffe

Eric Green & Mark O’Keeffe

Global Co-Head & Portfolio Manager - Middle Market Capital

Muzinich

"Unlike in the U.S., banks are a factor in Europe."

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Michael Ewald

Managing Director

Bain Capital Credit

"You can’t have a top down thesis in private credit since the market is illiquid."

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David Petrucco, Ed Cerny, & Mark Gudis

Founding Partners

Backcast Partners

"Forecasting asks where historical trends will take you in the future. Backcasting is asking, where do you want to be in the future."

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andrew-brady-smaller-photo

Andrew Brady

Managing Director & Leveraged Loan Portfolio Manager

Marathon Asset Management

"When too many credits are priced the same, one can conclude that many are mispriced."

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Mickey Levy

Chief Economist for US and Asia

Berenberg Capital Markets

"Corporate tax reform and some easing of burdensome regulations likely would boost business investment spending."

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tom-cassidy

Tom Cassidy

Managing Director

US Bank

" Our PE clients are attracted to the commitment we have to build a deep relationship over the long term."

Read Interview

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Features

Leveraged Loan Insight & Analysis – 2/13/2017

Covenant-lite volume will likely hit another record high in 1Q17

Covenant-lite loan volume has already reached US$90 bn in 1Q17 with two more months still left to go this quarter. With another US$35bn still in process, 1Q17 will likely be a brand new record high for covenant-lite issuance. Covy-lite volume had just hit a brand new record high last quarter at US$128bn, smashing the previous record set in 1Q14. These robust volumes are largely taking place during big refinancing waves like in the current environment...

The Pulse of Private Equity – 2/13/2017

Will elevated US PE inventory contribute to continued secondary buyout activity?

It is difficult to get a sense of just how many middle-market companies there are in the US, which is a critical statistic to have on hand when analyzing the impact of the heightened private equity inventory. According to a recent installment of the Middle Market Power Index from American Express and Dun & Bradstreet, there were 182,578 firms that had between $10 million and $999 million in revenue in 2016...

Private Debt Intelligence – 2/13/2017

Private Debt Investors Delighted with Fund Performance

At the end of 2016, Preqin conducted surveys with over 90 private debt investors in order to gauge their satisfaction with the performance of the private debt asset class and to ascertain their investment plans for both 2017 and long-term future.

More than a quarter (27%) of private debt investors surveyed stated that the performance had exceeded their expectations, an increase of nine percentage points compared to the end of 2015...

Leveraged Loan Insight & Analysis – 2/6/2017

Overall LBO leverage on the rise in 1Q17

Average leverage levels on both large corporate and institutional middle market LBO deals have shown a meaningful jump in 1Q17. With refinancings and repricings dominating the leveraged loan market, investors seem more willing to stretch on new money LBO deals. The average leverage level so far in 1Q17 is at 5.0 times first lien and 6.50 times total debt to EBITDA, up from 4.6 times senior by 6.1 times total last quarter...

Middle Market Deal Terms at a Glance

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Feb 13 2017 SPP

report

State of the Capital Markets – Fourth Quarter 2016 Review and First Quarter 2017 Outlook

Review of Current Market Conditions/ Analysis of Capital Markets Metrics Including Covenants, Pricing, and Leverage/ Review of Credit Quality/ Outlook for First Quarter 2017

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Special Report: Why Sponsors Matter

Beginning in September 2016 The Lead Left published a series of articles on sponsors. This report consolidates those articles. Enhancing Corporate Value/span> Working with Family-owned Companies Non-­Sponsored Lending Revealed Non-traditional Sponsors

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State of the Capital Markets – Third Quarter 2016 Review and Fourth Quarter 2016 Outlook

Review of Current Market Conditions/ Analysis of Capital Markets Metrics Including Covenants, Pricing, and Leverage/ Review of Credit Quality/ Outlook for Fourth Quarter 2016