Richard Byrne - assets1b.milkeninstitute.orgassets1b.milkeninstitute.org/assets/Events/Conferences/Global... · 10 Barclays 3,106 4% 11 UBS ... 13 RBS 2,237 3% 14 Starwood Mortgage

#MIGlobal #MIGlobal

Richard Byrne

#MIGlobal

69%

17% 12%

31%

83% 88%

0%

20%

40%

60%

80%

100%

2002 2013 1H 2014

Banks (U.S. and non-U.S.) Non-banks

Traditional Lenders Exiting Middle Market Space

Traditional lenders continue to shift focus away from the middle-market leveraged loan market

Over the past decade, the share of primary middle market loans issued by banks has fallen significantly

We believe a combination of regulatory and structural changes has led to banks leaving middle market lending, resulting in a significant funding gap

Increasing need for capital

Significant number of middle market loan maturities continue to come due

Source: S&P LCD, SDC, Reuters.

Note: Middle market defined as issuers with EBITDA of $50 million or less. Data reflects share of non-bank investors in middle market leveraged loans. Views

expressed are those of BSP.

Primary Middle-Market Leveraged Loan Market* Middle Market Loan Maturities*

$0bn

$20bn

$40bn

$60bn

$80bn

$100bn

$120bn

$140bn

2015 2016 2017 2018 2019

Non-Sponsored Sponsored

#MIGlobal

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD

Lower Rated New Issuance Defaulted Debt

Lower Rated Issuance Leads to Increased Defaults

Note: Views expressed are those of BSP. Opinions, estimates, forecasts and statements of financial market trends above are based on current market conditions and

are subject to change without notice. While the information provided here is believed to be reliable it should not be assumed to be accurate or complete. The views and

strategies described may not be suitable for all investors.

Source: JPM as of October 1, 2014. Lower-rated new-issues include: Split B, CCC, and Not Rated securities.

Increased

Lower Rated

New

Issuance…

…Leads to

Increased

Defaults

High-yield new issuance. $ in billions

Lower Rated New HY Issuance and Defaulted Debt

#MIGlobal

0

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

($ in billions)

Destruction of CRE Lending Capacity Three of the top four lenders in 2007 no longer exist or have exited the US CMBS lending business

Approximately 44% of 2007 market capacity has been destroyed, which could rise to a 50% reduction in market capacity assuming

the exit of some additional, significant European banks

2007 Top 15 Lenders

= Finance companies Strikethrough

CMBS Issuance (Excluding Agency CMBS)

= High risk of exiting business in next 24 months

Red Text

= No longer exist or exited CMBS lending

Source: Commercial Mortgage Alert, Bank of America Merrill Lynch Global Research.

Notes: Views expressed are those of BSP.

2013

RankLender

2013 Total

($in mm)

% of

Total

1 JP Morgan 10,470 13%

2 Deutsche Bank 10,127 13%

3 Goldman Sachs 7,060 9%

4 Morgan Stanley 6,214 8%

5 Wells Fargo 5,829 7%

6 Cantor CRE 5,265 7%

7 Bank of America 5,212 7%

8 RBS 4,814 6%

9 Citigroup 4,770 6%

10 UBS 2,835 4%

11 Barclays 2,795 4%

12 Ladder Capital 2,229 3%

13 Starwood Mortgage 1,513 2%

14 Jefferies LoanCore 1,444 2%

15 Liberty Island 831 1%

2013 Top 15 Lenders

2015-2017

Projected to be

~2x 2012-2014

2014 Top 15 Lenders 2007

RankLender

2007 Total

($ in mm)

% of

Total

1 Wachovia 24,175 10.8%

2 Bank of America 15,624 7.0%

3 Lehman Brothers 14,794 6.6%

4 Credit Suisse 14,730 6.6%

5 Morgan Stanley 13,785 6.2%

6 J.P. Morgan 11,948 5.3%

7 UBS 9,699 4.3%

8 Deutsche Bank 9,593 4.3%

9 Bear Stearns 9,563 4.3%

10 RBS Greenwich 9,175 4.1%

11 Merrill Lynch 8,642 3.9%

12 Goldman Sachs 8,470 3.8%

13 Citigroup 6,917 3.1%

14 LaSalle Bank 6,811 3.0%

15 Countrywide 6,701 3.0%

2 0 14

Ra nkLe nde r

2 0 14

Tota l ($ in

mm)

% of

Tota l

1 Deutsche Bank 13,719 16%

2 JP Morgan 11,176 13%

3 Wells Fargo 5,998 7%

4 Cantor CRE 5,762 7%

5 Bank of America 5,504 6%

6 Morgan Stanley 5,331 6%

7 Citigroup 5,087 6%

8 Goldman Sachs 4,811 6%

9 Ladder Capital 3,493 4%

10 Barclays 3,106 4%

11 UBS 2,959 3%

12 Credit Suisse 2,328 3%

13 RBS 2,237 3%

14 Starwood Mortgage 1,618 2%

15 Rialto Mortgage 1,494 2%

#MIGlobal

High Leverage Levels & Low Quality Issuance Distressed Opportunities:

Median New Issue Loan Leverage CCC-rated Bonds and Loan Issuance

(% of Market Size)

4.0x 4.1x 4.3x 4.3x

4.4x

4.9x

3.7x

4.1x 3.9x

4.4x 4.6x

4.7x 4.9x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD

2014*

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1998 2000 2002 2004 2006 2008 2010 2012 2014

CCC Bonds + Loans (Issuance % of Market Size)

Source: CCC Bonds and Loans as a % of Market Size from Deutsche Bank Credit Strategy Chartbook as of October 31, 2014. Median New Issue Loan

Leverage from Pitchbook Q3 2014 * Through 9/30/2014

Note: Please see disclaimer on the last page of this presentation for more information. Views expressed are those of BSP. Opinions, estimates, forecasts and

statements of financial market trends above are based on current market conditions and are subject to change without notice. While the information provided

here is believed to be reliable it should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

#MIGlobal

Dealer Inventory & HY Turnover Have Fallen Significantly Distressed Opportunities

Primary Dealer Corporate Bond Inventory vs.

High Yield & Leveraged Loan Outstanding HY Debt Outstanding vs. 12 Month Turnover (Trace)

Source: Dealer Inventory is Goldman Sachs “The state of play in the leveraged finance market: Ok for now” from 10/8/2014. HY & LL Outstanding is LCD. 12-

Month Turnover is Barclays Research, "Liquidity in the Small Stuff," US Credit Alpha, 12 Sept. 2014. 2014 volume is straight-line annualized.

Note: Please see disclaimer on the last page of this presentation for more information. Views expressed are those of BSP. Opinions, estimates, forecasts and

statements of financial market trends above are base don current market conditions and are subject to change without notice. While the information provided

here is believed to be reliable it should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2001 2003 2005 2007 2009 2011 2013

Corporate Bond Dealer Inventory

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0

200

400

600

800

1,000

1,200

2005 2007 2009 2011 2013

HY Debt Turnover (%)

#MIGlobal #MIGlobal

David Warren

Source: .

#MIGlobal

US CMBS Maturity “Wall”

Source: Credit Suisse, Trepp. Includes legacy CMBS conduit maturities.

Drop in maturities due to liquidations, prepayments, defeasance, and amortization.

80

120 122

321

45

104 113

262

-

50

100

150

200

250

300

350

2015 2016 2017 Total

Expected CMBS maturities, April 2014 Balance Remaining, April 2015

#MIGlobal

Recent US CMBS Issuance

Source: Barclays Capital, Commercial Mortgage Alert.

Includes conduit, single borrower, and floating rate fusion (excludes agency CMBS).

44

79

89

114

-

20

40

60

80

100

120

140

2012 2013 2014 YTD 4/24/15,annualized

#MIGlobal #MIGlobal

Thomas Finke

#MIGlobal

Covenant Lite Loans Become Majority of Market Share

Source: S&P/LCD as of March 31, 2015.

Oct-1 2 Jan-1 3 Apr-1 3 Jul-1 3 Oct-1 3 Jan-1 4 Apr-1 4 Jul-1 4 Oct-1 4 Jan-1 5 Apr-1 5

25%

30%

35%

40%

45%

50%

55%

60%

COVENANT LITE SHARE OF OUTSTANDINGS

#MIGlobal

European Banks Retreat, High Yield Bond Market Emerges

Source: FactSet as of March 31, 2015.

2005 2006 2007 2008 2009 201 0 201 1 201 2 201 3 201 4

€3.2T

€3.4T

€3.6T

€3.8T

€4.0T

€4.2T

€4.4T

€4.6T

€4.8T

€5.0T

€50B

€100B

€150B

€200B

€250B

€300B

€350B

EUROPEAN CORPORATE BORROWING

Bank Lending to Non-Financial Corporations - Euro Zone (Left)BofA Merrill Ly nch European Currency High Yield - Constrained / Non-Financials - Market Value (Right)

-€570B

+€275B

#MIGlobal

High Yield Corporate Spreads

Source: Factset, Credit Suisse, Bank of America Merrill Lynch and Babson Capital as of April 17 , 2015. PAST

PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. It is not possible to invest directly in

an Index.

Apr May Jun Jul Aug Sep Oct Dec Jan Feb Mar Apr

300bps

350bps

400bps

450bps

500bps

550bps

392

466

492

503

West Euro Lev Loan Index DM3 Spread CS Lev Loan Index DM3 SpreadBAML European Currency High Yield OAS BAML U.S. High Yield Master OAS

#MIGlobal

Increased Institutional Interest

Note: For illustrative purposes only. Return ranges are gross and based on Babson’s market

observations as of March 31, 2015.

2-4% 3-5% 5-7% 12-15% 15%+ 10-13% 7-10%

Traditional Commercial Bank Strategies Traditional Institutional Strategies

Broadening Institutional Investor Interest

Traditional middle market leveraged finance is becoming increasingly institutionalized

Increasing Risk / Return Spectrum

Traditional

commercial

bank loans

Performing

asset based

loans

Middle market

1st lien loans

Mezzanine,

subordinated

debt

Middle market

private equity

Middle market

unitranche

loans

Middle market

2nd lien loans

#MIGlobal

Global Private Credit Return Profile

1. S&P LCD 1Q15 U.S. Middle Market Review. Represents all-in institutional spreads of LBOs. Middle market

defined as issuers with less than $50 million in EBITDA

U.S. middle market loan historically offer a return premium to broadly syndicated loans

495

558

200

250

300

350

400

450

500

550

600

650

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q15

U.S. Large Market U.S. Middle Market

U.S. Middle Market vs. Large Corporate Loan Spreads (bps)

#MIGlobal #MIGlobal

Steven Tananbaum

#MIGlobal

Markets are Late Mid-Cycle

0

1

2

3

4

5

6

Leverage Ratios

Source: Source: Leveraged ratios from S&P LCD using 1st lien and junior debt over EBITDA. Leveraged

Loan acquisition finance and CCC & below volume from JP Morgan Credit Strategy research. As of 3/31/2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

Acquisition Finance Debt to EBITDA

% of total issuance

#MIGlobal

CCC Expected to Underperform

Default Rate Increase

Prior Year Default Rate

CCC Index Return

HY Index Return

CCC Index Underperformance

1989 +2.2% 3.6% -18.4% +0.4% -18.7%

1998 +1.2% 2.2% -6.3% +3.0% -9.3%

1999 +2.4% 3.3% +1.5% +2.5% -1.0%

2008 +3.5% 1.0% -38.3% -26.4% -11.9%

2015 Going Higher

2.1% +1.6% +2.4% -0.8%

Source: Moody’s Speculative default rates; Merrill Lynch HY Index Returns since 1998. Previously Credit

Suisse HY Index Returns. As of 3/30/2015

Over the past 30 years, when default rates rise by at least 1% during periods of low default, the CCC

Index has significantly underperformed the overall HY Index by -10% on average

#MIGlobal

Performance Across Credit Quality

2015 Return

Difference to ML HY

Index

2014 Return

Difference to ML HY

Index

2013 Return

Difference to ML HY

Index

ML HY Index 2.55% - 2.50% - 7.42% -

BB 2.67% +12 bps 5.34% +284 bps 5.19% -223 bps

B 2.71% +17 bps 1.32% -118 bps 7.47% +6 bps

CCC / Lower 1.78% -77 bps -2.57% -507 bps 12.96% +554 bps

Source: Merrill Lynch HY Index Returns. As of 3/31/2015

#MIGlobal

Average: 20.7%

Period of Above Average

Defaults Rates

Average: 15.4%

Period of Above Average

Defaults Rates

Growing Distressed Universe When annual default rates reach the 5% area, Distressed Debt (i.e. Debt with Spreads greater then

1000bps) is typically 18% of the index or a market size of $250 billion today

1%

8% 6%

25%

17%

24%

5% 3% 3% 1%

6%

63%

10%

4%

14%

6% 2%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Percentage of Merrill Lynch HY Index with Spreads Greater than 1000bps

Source: Merrill Lynch High Yield Index; Moody’s Global Speculative Grade Default Rates.

As of 12/31/2014

#MIGlobal

Energy and Commodities Sector Expansion

9% 10% 13%

15% 19% 19%

0%

5%

10%

15%

20%

2004 2006 2008 2010 2012 2015

Energy and Commodities % of HY Bond Index

Source: Energy, Commodity and TMT sector weightings based on Credit Suisse HY Bond Index as of

March 31, 2015

11% 13% 18%

24% 32%

38%

0%

10%

20%

30%

40%

1989 1991 1993 1995 1997 1999

Energy and Commodities % of HY Bond Index

#MIGlobal

Technology Expansion with CCC Issuance Technology sector has grown over the past 3 years with increased issuance of CCC bonds with leverage

ratios increasing over the last 5 years

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2012 2013 2014

Technology as % of CCC Issuance

Source: S&P LCD; Leverage ratio base don JP Morgan research

3

4

5

6

7

8

2011 2012 2013 2014

Leverage Ratio of LBO Technology

#MIGlobal

Structured Finance Issuance Vs Corporate Issuance

Source: SIFMA for Structured Finance issuance; SP LCD, Barclays Research for Corporate issuance

2.1 2.2

2.1

0.5 0.6

1.2

1.8 1.9

2.6 2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2005 2006 2007 2013 2014

Structured Finance Issuance Corporate Bond and Loan IssuanceUS & Europe Issuance in $ Trillions

Ratio of Structured Finance to Corporate Issuance

1.8 1.3 1.1 0.2 0.2

#MIGlobal #MIGlobal

Michael Hintze

#MIGlobal

Credit Market Cycle: Opportunity Returning

Source: CQS and Bloomberg, as at 7January 2015.

Market Evolution Since 2011

High Volatility / High Spread

Low Volatility / High Spread Low Volatility / Low Spread

High Volatility / Low Spread

Spread Spread

Volatility

H1 2011

Q4 2011

Q4 2012/ Q1 2013 Q2 2014

Q3 2014

Current

2015/16? 2015/16?

#MIGlobal

Euro Non-Financial Issuance Up Significantly

Source: Citi Research, Dealogic, as at 17 April 2015.

Year-to-date € IG issuance, €bn

#MIGlobal

European Dispersion is Back: Uncoupling in Credit…

Source: Bloomberg, as at 17 April 2015.

One Market, Two Outcomes: Wider High Yield Spreads

but Tighter High Grade Spreads

80

90

100

110

120

130

140

150

200

250

300

350

400

450

500

October2013

January2014

April2014

July2014

October2014

January2015

April2015

bp

s

bp

s

High Yield High Grade (RHS)

#MIGlobal

Decompression in High Yield Creates Opportunity

Source: J.P. Morgan, Markit Group, ‘European High Yield Weekly Analytics’, 31 March 2015.

For illustrative purposes.

European High Yield Total Returns

#MIGlobal

Xover Dispersion Provides Opportunity

Source: CQS, Bloomberg as at 20 April 2015. For illustrative purposes.

Excludes index constituents with spreads greater than 800 bps.

Index Constituents (LHS) iTRAXX Xover 5 year Series 21 (RHS)

50

150

250

350

450

550

650

0

100

200

300

400

500

600

700

800

January2013

June2013

October2013

March2014

July2014

December2014

April2015

bp

s

bp

s

#MIGlobal

European Senior Secured Loans:

Paid to Move up in the Capital Structure

Source: 1Bloomberg, BoAML Euro High Yield Constrained Index (HEC0) as at 28 February 2015.

Institutional Tranches refer to loans which are syndicated to institutional / non-bank investors.

For illustrative purposes only. It is not possible to invest directly in an index. 2S&P LCD European Leveraged Lending Review, as at 28 February 2015.

BoAML Euro High Yield Constrained Index (HEC0)1 vs.

Institutional Tranches of Europe Primary Senior Secured Loans2

200

400

600

800

1000

December2011

June2012

December2012

July2013

January2014

August2014

February2015

bp

s

BoAML Europe High Yield Constrained IndexEuropean Primary Senior Secured Loan Spread over Euribor

#MIGlobal

Primary Dealer Inventories of Corporate Bonds Have Dropped

as Bond Market Volume Has Risen

Source: FRB, Haver Analytics, DB Global Markets Research, as at April 2015.

#MIGlobal

Saudi Arabia as the Swing Producer

Source: Bloomberg, 28 December 2014.

1998-99 2001-02 2006-07 2008-09 2013-14

Oil Price (55.8%) (39.7%) (23.6%) (67.9%) (50.8%)

Saudi Output (70.4%) (88.7%) (40.5%) (67.3%) (11.7%)

OPEC Output (42.5%) (64.7%) (19.1%) (44.5%) (6.3%)

(% decline in the price of oil and output)

#MIGlobal

Marginal Cost Curve for Global Oil

Source: Morgan Stanley Research, ‘Crude Oil: 2015 Outlook’, 5 December 2014.

Prices Likely to Remain Low

#MIGlobal

Is this the End of OPEC?

Saudi Arabia no longer a Swing Producer

Source: IMF Working Paper, ‘Economic Growth and Government Spending

in Saudi Arabia: an Empirical Investigation’, January 2014.

Rising defence and education expenditures in 2013 led to fixed surplus declining to

5.8% and fiscal break even price of oil rose to $89/bbl vs $78/bbl in 2012

Saudi Arabia: Government Expenditures: by Sector 1970-20101

#MIGlobal

TARGET2 Balances

Source: http://www.eurocrisismonitor.com/, as at 14 April 2015

Individual euro area NCB's, International Financial Statistics (IFS).

€m

-450

-250

-50

150

350

550

750

January2007

August2008

March2010

November2011

June2013

February2015

Belgium Germany Estonia Ireland Greece Spain

France Italy Cyprus Luxembourg Malta Netherlands

Austria Portugal Slovenia Slovakia Finland Latvia

#MIGlobal

TARGET2 Balances

Source: http://www.eurocrisismonitor.com/, as at 14 April 2015

Individual euro area NCB's, International Financial Statistics (IFS).

€m

-450

-250

-50

150

350

550

750

January2007

August2008

March2010

November2011

June2013

February2015

Germany Greece Spain Italy Luxembourg Netherlands

€513,365

€103,421

€8,010

(€91,157)

(€164,566)

(€192,417)

#MIGlobal

Spike in Claims Indicates Stress in Greece and Cyprus

Source: European Central Bank, Statistical Data Warehouse, 21 April 2015

Claims on Euro Area Credit Institutions Including Emergency Liquidity

Assistance (ELA)

0

50

100

150

200

250

300

19

98

-W5

3

20

00

-W1

8

20

01

-W3

6

20

03

-W0

2

20

04

-W2

0

20

05

-W3

7

20

07

-W0

3

20

08

-W2

1

20

09

-W3

9

20

11

-W0

4

20

12

-W2

2

20

13

-W4

0

20

15

-W0

6

€ b

n

1998 2000 2001 2003 2004 2005 2007 2008 2009 2011 2012 2013 2015

#MIGlobal #MIGlobal

Mike Milken

Source: Bloomberg and International Monetary Fund. Note: Includes cash and near cash items.

Increase in Corporate Cash Balances Cash holdings of publicly listed companies, percent of GDP

17

6 7 8 6

4

13

9 6

1 3

7 3 4

42

37

30

21

16 15 13 12

10 9

7 7 6 5

0

5

10

15

20

25

30

35

40

45

Japan$2030

China$3686

U.K. $847 France$612

Korea$205

Spain$208

Canada$227

U.S. $2102 Brazil$229

Russia$181

India$137

Germany$255

Italy $126 Mexico$61

Q4 2005 Q4 2014Percent of GDP

US$ billions

Corporate cash balances

15

61

23 15

22 7

25

8 8

155

138

90

65 52

45 33

14 14

0

20

40

60

80

100

120

140

160

180

Apple +909% GE +126% Microsoft +285%Google +323% Cisco +134% Oracle +537% Pfizer +31% Chevron +79% Merck +74%

US$ billions

Source: Bloomberg. Note: Cash and marketable securities.

Percent change

Japanese Companies’ Cash Stockpiles

0.1

1.7

0.8 1.0 1.0

0.4

0.1

2.4 2.3

1.6

1.2

0.6 0.4 0.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Toyota Softbank Honda Motor Mitsubishi Mitsui Rakuten Sony

2007 2014US$ trillions

Source: Bloomberg 1/27/15.

S&P 500 leverage has fallen

0

1

2

3

4

5

6

2001 2003 2005 2007 2009 2011 2013 2015

Net debt-to-EBITDA

Source: Bloomberg.

U.S. corporate profits

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000 2002 2004 2006 2008 2010 2012 2014

US$ trillions

Source: BEA, Bloomberg. Note: U.S. corporate profits without IVA and CCA profits before tax, seasonally.

S&P 500 value

7

8

9

10

11

12

2007 2008 2009 2010 2011 2012 2013 2014 2015

Enterprise value to T12M EBITDA

Sources: Bloomberg.

Sources: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises, Carmen M.

Reinhart / Milken Institute

• 1828

• 1898

• 1902

• 1914

• 1931

• 1937

• 1961

• 1964

• 1983

• 1986

• 1990

• 1832

• 1868

• 1911

• 1914

• 1931

• 1982

• 1999

• 2008

•1876

•1915

•1931

•1940

•1959

•1965

•1978

•1982

•2000

• 1826

• 1848

• 1860

• 1865

• 1892

• 1898

• 1983

• 1990

• 1995

• 1998

• 2004

Brazil Ecuador

• 1839

• 1885

• 1917

• 1918

• 1947

• 1957

• 1991

• 1998

Russia

•1826

•1843

•1852

•1893

•1932

•2011

Greece Turkey Venezuela

• 1982

• 1986

• 1992

• 2001

• 2004

Nigeria

Sovereign Debt Defaults

Systemically important banks tier 1 capital ratio

0 2 4 6 8 10 12 14 16 18

Deutsche Bank

Barclays

HSBC

BNP Paribas

Royal Bank of Scotland

Goldman Sachs

Wells Fargo

Bank of America

Citigroup

JP Morgan Chase

Percent

Source: Bloomberg (4/5/2015)

Systemically important banks leverage

0 2 4 6 8 10 12

Wells Fargo

Bank of America

Citigroup

JPMorgan Chase

Goldman Sachs

HSBC

BNP Paribas

Credit Suisse

Societe Generale

Deutsche Bank

Common equity/total assets, percent

Source: Thomson Reuters.

Notes: BBVA and Barclays from Q3 2014, all else from Q4 2014.

Concentration of Three Largest Banks Total assets of top 3 banks, percent of home country’s GDP

0%

50%

100%

150%

200%

250%

300%

France United States

Crédit Agricole

Société Générale

263% of GDP ($6.5 T)

50% of GDP ($9.1T)

J.P. Morgan Bank of America

Citigroup BNP Paribas

Note: Data for Q4 2014. U.S. ratio reflects IFRS accounting treatment for derivatives; under GAAP, the ratio is 36%. Sources: Bankscope, SNL.

Total bank assets relative to GDP Q4 2014

552% 524%

373%

293% 283% 261% 249%

222%

Ireland Cyprus France Spain Portugal Germany Italy Germany

Percent of GDP


Assets of the 4 biggest banks Q4 2014

340% 304%

239% 220%

162% 151% 123% 113% 99%

60%

Percent of GDP

Sources: BankScope, Milken Institute.

Assets of the 4 Biggest Banks Q4 2014

340% 304%

239% 220%

162% 151% 123% 113% 99%

60%

Percent of GDP

Sources: BankScope, Milken Institute.

Unit labor costs in Europe Q4 2014

116 114

112

106 103

98

Italy France Germany Ireland Greece Portugal

85

90

95

100

105

110

115

120

Source: OECD.

Source: OECD

Euro area unit labor costs

90

100

110

120

130

140

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

France Germany Greece Ireland ItalyIndex (2000 = 100)

Job Creation Since 1970

Source: OECD.

90

110

130

150

170

190

210

1970 1975 1980 1985 1990 1995 2000 2005 2010

United States

Western Europe

Europe 26% Japan 9%

U.S. 59% Other 6%

US + Japan = 68%

Market Capitalization: 1950

Unit Labor Costs in Europe

100

105

110

115

120

125

GREECE PORTUGAL ITALY IRELAND SPAIN GERMANY

Index (2005 = 100)

Source: European Central Bank, Q4 2011

Central Bank Assets

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

BoE BoJ Fed ECBUS$ trillions

Source: Datastream.

Source: Bloomberg.

Central bank target interest rates

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012 2013 2014 2015

BoE Fed ECB BoJPercent

US 10-year Treasury yields

0

2

4

6

8

10

12

14

16

18

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ten-year Treasury yield, percent

Average: 6.57 percent

Source: Bloomberg.

AAA corporate bond spreads

0

0.5

1

1.5

2

2.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Euro UKPercent over government bonds

Source: Thomson Reuters. Eurozone benchmark yields are compared with German government yields.

BBB corporate bond spreads

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Europe UKPercent over government bonds

Source: Thomson Reuters. Notes: 5 year benchmark indices used. Eurozone benchmark yields are compared with German government yields.

Public pension assumptions vs. corporate bond yields

0 1 2 3 4 5 6 7 8 9

AAA

AA

A

BBB

Median assumption

Source: Thomson Reuters, Bloomberg, NASRA. Note: 5 year corporate benchmark indices used.

Percent

Median public pension annualized returns

0

2

4

6

8

10

12

14

16

18

1 yr 3 yr 5 yr 10 yr 20 yr 25 yr

Percent

Median assumption: 7.75%

Source: NASRA.

Average expected return assumptions

0%

2%

4%

6%

8%

10%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sources: Goldman Sachs., Milliman.

Government bond returns in 2015

-35 -30 -25 -20 -15 -10 -5 0 5

Greece

Spain

Italy

Germany

France

Ireland

UK

Australia

Mexico

Japan

US

Total returns in US$, YTD, percent


Seven-year asset class real return forecasts As of December 2014

5.4

3.8 2.9

1.3 1.2 0.4 0

-0.3 -0.6 -1.8

-2.9 -3.4

-6

-4

-2

0

2

4

6

Timber Emergingequity

Emergingdebt

Int'l largecap

equity

Int'lsmall cap

equity

U.S. highqualityequity

Inflationlinkedbonds

Cash U.S.bonds

U.S. largecap

equity

U.S. smallcap

equity

Int'lhedgedbonds

Percent

Source: GMO.

Long-term U.S. Treasury yields have dropped Treasury yield curves

0

1

2

3

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

Percent

1/1/15

4/8/15

Source: Bloomberg.

Oil prices

0

20

40

60

80

100

120

140

2013 2014 2015

Price of crude oil per barrel, US$

WTI

Brent


Markets pricing in sovereign yields in a year 10-year sovereign bonds

0

0.5

1

1.5

2

2.5

3

3.5

2012 2013 2014 2015

U.K.

1 year forward rates, percent

Eurozone

U.S.

Source: Bloomberg.

Total U.S. credit market debt

0

10

20

30

40

50

60

70

'50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14

US$ trillions

Total credit market debt outstanding

GDP

Debt/GDP (1950-1980): 1.5

Source: Federal Reserve, BEA. Note: Total credit market debt includes that owed by domestic nonfinancial, the financial sectors, and the rest of the world.

U.S. high yield corporate bond yield

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015

Yield to worst, percent

Source: Bloomberg. Note: Yield to Worst. BofA ML U.S. HY Master II.

U.S. high yield corporate bond yield

0

1

2

3

4

5

6

7

8

9

2010 2011 2012 2013 2014 2015

Option-adjusted spread, percent

Source: Bloomberg. Note: Bank of America Merrill Lynch U.S. HY Master II. OAS.

Interbank lending rates

0

1

2

3

4

5

6

7

8

9

10

2001 2003 2005 2007 2009 2011 2013 2015

Percent

China UK

US

Japan

EU

Sources: Datastream.

Euro area loans

-20

-10

0

10

20

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rolling 12 month percent change


To households

To financial intermediaries

To non-financial corporations

European bank deposits

300

800

1,300

1,800

50

100

150

200

250

2000 2003 2006 2009 2012 2015

Euros billions

Italy

Ireland

Greece

Portugal

Spain

Greece vs. Euro area government bond yields

0

2

4

6

8

10

12

14

2013 2014 2015

Greece

Portugal

Italy

Spain

Ireland

France

Germany

10 year government bonds, percent


Euro area unemployment rates

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Percent Greece

Spain

Ireland

Portugal

Italy

Germany


Greece primary budget balance

-12

-10

-8

-6

-4

-2

0

2

4

6

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Percent of GDP OECD forecast for 2015


U.S. loan amendments

0%

25%

50%

75%

100%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Amended

Unchanged

Percent of total loan terms

Source: Bloomberg.

Global corporate leverage

0123456789

10

Emerging Asia DevelopedAsia

Latin America Middle Eastand Africa

EasternEurope

North America WesternEurope

IG HYAverage corporate debt/EBITDA ratio

Source: Bloomberg.

U.S. corporate profitability

0 5 10 15 20 25 30 35 40 45 50

Financials

Oil & Gas

Health Care

Industrials

Consumer Services

Basic Materials

Technology

Consumer Goods

Utilities

Telecom

HY

IG

2010-2015 revenue growth, percent

163%

Source: Bloomberg.

U.S. corporate ratings changes

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Upgrades

Downgrades

Percent of total changes

Source: Bloomberg.

U.S. corporate ratings changes

0

1

2

3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Up/Down Ratio

Source: Bloomberg.

Note: Ratio means credit rating upgrades divided by credit rating downgrades.

U.S. energy sector credit term structure

0

50

100

150

200

250

1 Yr 2Yr 3Yr 4Yr 5Yr 7Yr 10Yr

Bps

0

500

1,000

1,500

2,000

1 Yr 2Yr 3Yr 4Yr 5Yr 7Yr 10Yr

Bps

Source: Bloomberg.

Note: As of 4/22/15.

Investment grade High yield

European peripheral sovereign default risks have fallen

Sovereign 5-year credit default swap rates

40

140

240

340

440

540

640

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Index, 100=4/18/13

Portugal

Italy

Ireland Spain

Source: Bloomberg.

Nonbank direct loans to European companies increase

0

10

20

30

40

50

60

70

80

2012 2013 2014

Deal count

Source: Deloitte.

Note: Deal location as of Q4 2014.

France 25%

U.K. 43%

Germany 13%

Rest of Europe

19%

Deal location

Most European alternative lending is LBO-related

0

10

20

30

40

50

LBO Dividend recap Refinancing Bolt-on M&A Growth capital

U.K. Euro

Deal purpose, percent

Source: Deloitte.

Note: As of Q4 2014.

Unitranche is a popular structure for European direct lending

0

10

20

30

40

50

Senior Unitranche Second lien Mezzanine PIK/other

U.K.

Euro

First lien

Deal structure, percent

Source: Deloitte.

Note: “PIK” refers to payment in kind lending. As of Q4 2014.

Banks vs. non-bank banks G-20 countries

0

400

800

1,200

Total assets, percent of GDP

Banks

Non-bank banks

Source: Financial Stability Board.

Note: As of Q4 2014.

Assets of non-bank financial intermediaries G-20 member countries

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US$ trillions

Source: Global Shadow Banking Monitoring Report 2013, Financial Stability Board.

Emerging market corporate bonds By credit rating

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014

BBB+ to AAA

CCC+ to BBB

Below CCC+

US$ billions

Source: Bloomberg.

Note: S&P ratings.

Emerging market corporates raise international debt

0

100

200

300

400

500

600

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Europe Latin America & Caribbean Asia & Pacific Africa & Middle East

Outstanding, US$ billions

Source: BIS.

Note: Non-financial corporate international debt securities outstanding. By

residence of issuer.

China’s debt

-10

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RMB trillions Non-bank debt

Bank loans

Source: Datastream.

Note: “Non-bank debt” refers to entrusted loans, trust loans, bank acceptance, and corporate bond

financing.

U.S. vs. European leveraged loan performance

55

65

75

85

95

105

2006 2007 2008 2009 2010 2011 2012 2013 2014

Index, 100=1/1/07

Europe

U.S.

Source: S&P, Bloomberg.

Notes: S&P/LSTA U.S. Leveraged Loan Index, S&P European Leveraged Loan Index.

Commercial bank treasury holdings

0

0.5

1

1.5

2

2.5

0

5

10

15

20

25

30

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Treasury holdings (R)

Treasury holdings, percent of total credit (L)

US$ trillions Percent

Sources: Federal Reserve.

Fed treasury holdings

0

1

2

3

0

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Percent

Treasury holdings, percent of total assets (L)

Treasury holdings (R)

US$ trillions

Sources: Federal Reserve.

Investors buying corporate bonds as dealers retreat

0

200

400

600

800

1000

1200

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Corporate bonds, US$ billions

Dealer inventory

Including ETFs

Mutual fund assets

Sources: Citi, ICI, NY Fed, Bloomberg, Haver Analytics, U.S. Department of the Treasury.

U.S. corporate debt markets

0.0

0.5

1.0

1.5

2.0

1996 2002 2008 2014

US$ trillions

0

2

4

6

8

10

1996 2002 2008 2014

Source: SIFMA.

Issuance Outstanding

U.S. corporate debt outstanding

0

1

2

3

4

5

6

2004 2006 2008 2010 2012 2014

US$ trillions

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2004 2006 2008 2010 2012 2014

Source: MarketAxess.


U.S. corporate bond trading volume

8

9

10

11

12

13

14

15

16

2006 2008 2010 2012 2014

US$ billions

4

5

6

7

8

9

10

11

12

2006 2008 2010 2012 2014

Source: SIFMA.

Note: Publicly traded and 144A, excludes issues with maturities of one year or less and convertible bonds. 3 month rolling averages used.


U.S. corporate bond turnover has fallen

70

80

90

100

110

120

130

2005 2008 2011 2014

12 month rolling turnover, percent

2008 low

Source: MarketAxess, FINRA TRACE.

Note: Investment grade bond turnover shown. Turnover is the total amount traded as a percent of the

amount outstanding for the bonds traded.

U.S. corporate bond trade sizes

1,300

1,500

1,700

1,900

2010 2011 2012 2013 2014

Average trade size, US$ millions

350

450

550

2010 2011 2012 2013 2014

Source: Market Axess.

Note: 3 month rolling average used.

Institutional trades (100K+) Total trades

U.S. corporate bond average maturity

7

8

9

10

11

12

13

14

15

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Years

Source: SIFMA.

Dealer corporate bond holdings decline

70

80

90

100

110

120

2007 2014

-21%

US$ billions

0

50

100

150

200

250

2002 2005 2008 2011 2014

US$ billions

Source: TABB, MarketAxess.

Notes: Balance sheet capacity estimated.

Large dealer capacity Dealer inventory

U.S. corporate bond average dealer mark-up

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013 2014

bps

Bid

Offer

Source: MarketAxess.

Note: Data is for investment grade bonds. The dealer mark up on the bid side plus the offer side is equal

to the total bid-ask spread.

Dow Industrials: 1973-77 and 2008-14

5000

7000

9000

11000

13000

15000

17000

500

600

700

800

900

1000

1100

578 on Dec. 6, 1974

6,547 on March 9, 2009

DJIA, 1973-1979 DJIA, 2008-2014

Sources: S&P LCD, JPMorgan, Wells Fargo. 11/11/14)

Investor Base for Non-investment Grade Loans

0%

20%

40%

60%

80%

100%

Banks CLOs Hedge, distressed and… Prime rates funds, financial…

Covenant-lite loans in the U.S.

0

20

40

60

80

100

120

140

160

180

2010 2011 2012 2013 2014

US$ billions

Covenant-lite

Other leveraged loans

Source: Bloomberg.

European Credit is a Bank Market Bonds and loans as a share of total corporate debt, 2014

0%

20%

40%

60%

80%

100%

Spain Ireland Germany Italy Portugal France UK

Loans Bonds

Sources: BIS, ECB.

U.S. vs. Europe high yield debt markets

56 39

7 41

61 66 89

128 147 136

43

148

264

224

329 336

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012 2013

Europe U.S.

Issuance, US$ billions

Source: SIFMA.

Note: Data as of Q3 2013. Europe includes Western and Eastern Europe.

U.S. CLO market

0

20

40

60

80

100

120

140

0

10

20

30

40

50

60

70

H1 2010 H1 2011 H1 2012 H1 2013 H1 2014

US$ billions

Deal count (R)

Deal count

Deal value (L)

Source: Appleby.

U.S. leveraged loan volume

0

100

200

300

400

500

600

700

2007 2008 2009 2010 2011 2012 2013 2014

US$ billions

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014

Source: S&P LCD.

Large corporates Middle market

Middle market vs GDP

0 2 4 6 8 10 12 14 16

United States

China

Japan

US Middle Market

Germany

US$ trillions

Source: S&P LCD.

LBO leverage multiples

6.2x

4.9x

4.0x

4.7x

5.2x 5.3x 5.4x 5.8x

5.6x

4.5x

3.3x

4.2x 4.3x 4.5x

4.8x

5.3x

3

4

5

6

7

2007 2008 2009 2010 2011 2012 2013 2014

Leverage multiples

Large corporate Middle market

Source: S&P LCD.

Leveraged loans multiples

4.9x

3.7x

4.1x

3.9x

4.4x

4.6x 4.7x

4.9x 4.8x

4.3x

3.4x

3.7x

4.2x 4.3x

4.8x

5.0x

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014

Leverage multiples

Source: S&P LCD.

International Games Technology Similar Bonds

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2/20 2/27 3/6 3/13 3/20 3/27 4/3 4/10 4/17 4/24

Yield to Maturity, percent

USD

EUR

Source: OECD.

Note: USD security matures 2025, EUR matures 2023.

High-yield benchmark bonds

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

2010 2011 2012 2013 2014 2015

Coupon, percent

EUR

USD

Source: Bloomberg. Notes: The USD and EUR High Yield Corporate Bond Indices are rules-based, market-value weighted indices engineered to measure USD and EUR denominated high yield, fixed-rate securities publicly issued in the U.S. and Euro bond markets. To be included in the index a security must have a minimum par amount of 200-250MM.

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