2013 annual atlantic conferences mezzanine market survey atlantic... · note: represents $55.0...

ATLANTIC CONFERENCES INC.!

2013 Annual Atlantic Conferences Mezzanine Market Survey

Prepared by Preston Walsh & Lamar Horne PNC Mezzanine Capital

Atlantic Conferences Symposium on Mezzanine & Middle Market Finance

May 14, 2013

© 2013 Atlantic Conferences Inc. www.AtlanticConferences.com (508) 529-2455

ATLANTIC CONFERENCES INC.! 2

Summary Overview •  Objective: Capture current mezzanine market conditions and key drivers of

deal terms

•  Solicited 163 mezzanine / BDC market participants vs. 161 last year –  Survey pool was relatively static –  Seven firms no longer active compared to seven in 2012 and eight in

2011

•  73 total respondents vs. 72 last year –  8 new respondents; 7 no longer active – three changed sources of

capital –  Some data flaws because respondents did not answer all questions –  Spoke to approximately 10 - 20% of respondents –  Respondents report slowdown in Q1 2013

•  Results limited by survey methodology –  Some analyses limited by sample size


•  Absence of deal volume in 1Q 2013

•  Supply of capital dramatically exceeds demand for loans

•  Leverage levels touch historically high levels

•  Refinancings dominate 1Q activity in leveraged loan market

•  Mezzanine market has continued to become more competitive

–  Capital continues to flow to lower middle market

–  Lenders not mindful of default risk

–  No bad credits – liquidity solves almost all problems

–  Quality transactions with Sponsors seeking greatest competition

•  Risk-adjusted pricing remains attractive relative to other less desirable alternatives

•  2013 market is under significant pressure –  Market conditions resembling 2007

–  Bifurcation of pricing still predominates

Mezzanine Investment Environment


Average Debt Multiples of Middle-Market LBO Loans

Source: S&P Capital IQ

3.6x 3.4x 3.3x 3.1x2.6x 2.8x 3.0x 3.0x

3.4x3.8x 3.7x

3.2x2.6x

3.1x3.7x 3.7x

4.6x

1.2x1.2x

0.8x 0.9x

1.0x1.0x 0.9x 1.0x

0.9x0.6x 1.1x

1.1x

0.8x0.6x

0.5x 0.6x

0.5x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q1 2013

Senior Debt Sub Debt / Other Debt

4.8x4.6x

4.1x 4.0x3.6x 3.8x 3.9x 4.0x

4.3x 4.4x4.8x

4.3x

3.7x

4.2x 4.3x

3.4x

5.1x


Recent Transaction Timing Months Since Last Exit

2011 % 2012 % 2013 %< 2 mos 28 45.2% 26 37.7% 26 39.4%2 mos - 4 mos 15 24.2% 30 43.5% 22 33.3%4 mos - 6 mos 11 17.7% 4 5.8% 9 13.6%6 mos - 8 mos 3 4.8% 4 5.8% 0 0.0%8 mos - 10 mos 0 0.0% 0 0.0% 4 6.1%10 mos - 12 mos 2 3.2% 2 2.9% 3 4.5%> 12 mos 3 4.8% 3 4.3% 2 3.0%Total 62 100.0% 69 100.0% 66 100.0%

Average Months 3.4 3.4 3.7Median Months 2.0 2.0 2.5

Months Since Last Platform Investment2011 % 2012 % 2013 %

< 2 mos 28 43.8% 29 40.8% 26 37.7%2 mos - 4 mos 16 25.0% 28 39.4% 30 43.5%4 mos - 6 mos 11 17.2% 8 11.3% 4 5.8%6 mos - 8 mos 4 6.3% 5 7.0% 5 7.2%8 mos - 10 mos 1 1.6% 0 0.0% 0 0.0%10 mos - 12 mos 1 1.6% 1 1.4% 3 4.3%> 12 mos 3 4.7% 0 0.0% 1 1.4%Total 64 100.0% 71 100.0% 69 100.0%

Average Months 4.1 2.9 2.2Median Months 2.0 2.0 2.0


Survey Respondents

Note: Represents $55.0 billion in total mezzanine funds under management Average current fund size: $415.4 million Median current fund size: $240.0 million

Note: Represents $27.1 billion in total mezzanine funds under management

2005 Current Fund Size

$0-$75 M13%

$151-$400 M29%

$401-$800 M18%

> $800 M9%

$76-$150 M31%

Note: Represents $56.0 billion in total mezzanine funds under management Average current fund size: $440.5 million Median current fund size: $238.0 million

$0-$75 M9%

$76-$150 M16%

$151-$400 M42%

$401-$800 M22%

> $800 M11%


$0-$75 M10%

$76-$150 M18%

$151-$400 M38%

$401-$800 M23%

> $800 M11%


ATLANTIC CONFERENCES INC.!

Traditional Mezz38%

Institutional14%

LP / Co-investor8%

SBIC28%

BDCs12%

2012

7

Respondents: Changing Mix

Note: Institutional includes all respondents that derive over 50% of capital from their parent company.

2005

Traditional Mezz52%

Institutional24%

LP / Co-investor11%

SBIC4%

BDCs9%

Traditional Mezz32%

Institutional16%LP / Co-investor

8%

SBIC30%

BDCs14%

2013


Data Collected

- Dedicated mezzanine fund? - Competition comparison- Size of most recent fund - Target returns - Capital under management - Target coupon - Recent EBITDA exit multiple - Leverage levels- Type of exit - Volume of deal flow

- Months since last exit

Recent Transaction Information- Months since last platform investment - Aggregate transaction value - Company revenues - Total leverage multiple - Form of investment - Total investment multiple - Industry segment - Coupon (current and PIK)- Use of proceeds - Fee / Warrant - Industry segment - Years to maturity - Mezzanine amount - Target returns

Market Trends ComparisonMezzanine Firm Information


The Companies

2005 Company Revenues< $25 M

19%

$25-$49 M25%

$50-$74 M19%

$75-$99 M11%

$100-$249 M20%

> $250 M 6% < $25 M

19%

$25-$49 M30%

$50-$74 M16%

$75-$99 M2%

$100-$249 M23%

> $250 M 10%

2012 Company Revenues

Average Revenue: $93.9 million

Median Revenue: $50.0 million

< $25 M 24%

$25-$49 M18%

$50-$74 M19%

$75-$99 M3%

$100-$249 M25%

> $250 M 11%

2013 Company Revenues

Average Revenue: $107.1 million

Median Revenue: $56.5 million


The Companies (Cont.)

Service 32%

Manufacturing 39%

Distribution 7%

Other 22%

2012 Industry

Service 36%

Manufacturing 38%

Distribution 16%

Other 10%

2013 Industry


The Companies (Cont.)

$0$50

$100$150$200$250$300$350$400

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110Aggr

egat

e Tr

ansa

ction

Val

ue

Mezzanine Investment Size ($ in MM)

Transaction Value and Mezzanine Investment Size Comparison

2013 Survey Data 2012 Survey Data

Linear (2013 Survey Data) Linear (2012 Survey Data)


Mezzanine Participation

Sponsored Buyout

62%

Unsponsored Buyout

10%

Recap13%

Acquisition/Consolidation

12%

Internal Growth 3%

Use of Proceeds

2012

Funded Sponsor 63%

Fundless Sponsor

10%

Sole Institutional Investor

27%

Mezzanine Role

Sub and Preferred and/or

Common59%

Sub Only26%

Sub and Preferred

15%

Form of Investment

Sponsored Buyout

42%

Unsponsored Buyout

14%

Recap21%

Acquisition/Consolidation

16%

Internal Growth 7%

Use of Proceeds

Sub and Preferred and/or

Common59%

Sub Only26%

Sub and Preferred

15%

Form of Investment

Funded Sponsor 56%

Fundless Sponsor

11%

Sole Institutional Investor

33%

Mezzanine Role

2013


Coupon and PIK

Number of Transactions Current Rate 2011 % 2012 % 2013 %< 11.0% 4 6.3% 10 14.1% 6 8.3%11.0% - 11.9% 1 1.6% 0 0.0% 13 18.1%12.0% - 12.9% 44 68.8% 50 70.4% 41 56.9%13.0% - 13.9% 9 14.1% 7 9.9% 8 11.1%14.0% - 14.9% 5 7.8% 1 1.4% 4 5.6%> 15.0% 1 1.6% 3 4.2% 0 0.0%Total 64 100.0% 71 100.0% 72 100.0%

Average Coupon 12.2% 12.1% 11.9%Median Coupon 12.0% 12.0% 12.0%

Average PIK 2.1% 2.2% 1.7%Median PIK 2.0% 2.0% 2.0%

Average Total 14.3% 14.2% 13.6%Median Total 14.0% 14.0% 14.0%


Fee

Number of Transactions Fee 2011 % 2012 % 2013 %None 1 1.6% 1 1.4% 4 5.6%< 1.0% 0 0.0% 0 0.0% 0 0.0%1.0% 0 0.0% 0 0.0% 1 1.4%1.5% 0 0.0% 2 2.8% 1 1.4%2.0% 36 58.1% 48 67.6% 48 66.7%2.3% 2 3.2% 2 2.8% 2 2.8%2.5% 16 25.8% 10 14.1% 9 12.5%> 2.5% 7 11.3% 8 11.3% 7 9.7%Total 62 100.0% 71 100.0% 72 100.0%

Average Fee 2.2% 2.2% 2.0%Median Fee 2.0% 2.0% 2.0%


Maturity

Number of Transactions Maturity 2011 % 2012 % 2013 %2 Years 0 0.0% 0 0.0% 0 0.0%3 Years 1 1.6% 1 1.4% 2 2.8%4 Years 0 0.0% 3 4.3% 2 2.8%5 Years 35 54.7% 39 55.7% 30 42.3%6 Years 13 20.3% 14 20.0% 21 29.6%7 Years 11 17.2% 10 14.3% 13 18.3%8 Years 3 4.7% 3 4.3% 3 4.2%9 Years 0 0.0% 0 0.0% 0 0.0%10 Years 1 1.6% 0 0.0% 0 0.0%Total 64 100.0% 70 100.0% 71 100.0%

Average Maturity 5.8 5.6 5.6


Leverage

Number of Transactions Total Leverage Multiple 2011 % Cum. % 2012 % Cum. % 2013 % Cum. %< 3.0x 8 12.9% 12.9% 6 8.3% 8.3% 13 18.3% 18.3%3.0x - 3.5x 21 33.9% 46.8% 33 45.8% 54.2% 23 32.4% 50.7%3.5x - 4.0x 13 21.0% 67.7% 11 15.3% 69.4% 12 16.9% 67.6%4.0x - 4.5x 11 17.7% 85.5% 11 15.3% 84.7% 13 18.3% 85.9%4.5x - 5.0x 6 9.7% 95.2% 10 13.9% 98.6% 6 8.5% 94.4%5.0x - 5.5x 3 4.8% 100.0% 1 1.4% 100.0% 1 1.4% 95.8%> 5.5x 0 0.0% 100.0% 0 0.0% 100.0% 3 4.2% 100.0%Total 62 100.0% 100.0% 72 100.0% 100.0% 71 100.0% 100.0%

Average Leverage Multiple 3.7x 3.7x 3.6xMedian Leverage Multiple 3.6x 3.5x 3.5x

Sponsored Deals - Average Leverage Multiple 3.5x 3.8x 3.8xSponsored Deals - Median Leverage Multiple 3.4x 3.6x 3.7x

Non-Sponsored Deals - Average Leverage Multiple 3.8x 3.5x 3.4xNon- Sponsored Deals - Median Leverage Multiple 3.6x 3.4x 3.5x


Equity Ownership

(1) Excludes transactions with no response (2) Excludes all transactions with no equity ownership

Number of Transactions

Equity Ownership 2011 % 2012 % 2013 %None 13 26.0% 7 14.9% 13 24.5%1.0% - 1.9% 3 6.0% 3 6.4% 4 7.5%2.0% - 3.9% 8 16.0% 10 21.3% 8 15.1%4.0% - 5.9% 11 22.0% 10 21.3% 7 13.2%6.0% - 7.9% 6 12.0% 2 4.3% 6 11.3%8.0% - 10% 0 0.0% 0 0.0% 2 3.8%> 10% 9 18.0% 15 31.9% 13 24.5%Total 50 100.0% 47 100.0% 53 100.0%

Average Equity Ownership (1) 6.5% 12.1% 8.2%Median Equity Ownership (1) 4.0% 5.0% 4.0%

Average Equity Ownership (1) (2) 8.8% 13.9% 10.7%Median Equity Ownership (1) (2) 5.0% 5.0% 6.0%

% of Deals with Warrants 45.3% 18.6% 16.1%% of Deals with Equity Buy-In 51.7% 72.9% 66.7%% of Deals with Warrants and/or Equity Buy-In 83.3% 86.7% 82.4%


IRR

Number of Transactions Target IRR 2011 % 2012 % 2013 %< 16.0% 7 11.1% 12 17.6% 19 27.5%16.0% - 16.9% 8 12.7% 7 10.3% 10 14.5%17.0% - 17.9% 12 19.0% 15 22.1% 10 14.5%18.0% - 18.9% 10 15.9% 10 14.7% 9 13.0%19.0% - 19.9% 6 9.5% 2 2.9% 3 4.3%< 20.0% (Sub-Total) 43 68.3% 46 67.6% 51 73.9%

20.0% - 21.9% 13 20.6% 8 11.8% 10 14.5%22.0% - 22.9% 2 3.2% 6 8.8% 5 7.2%23.0% - 25.0% 5 7.9% 5 7.4% 2 2.9%> 25.0% 0 0.0% 3 4.4% 1 1.4%Total 63 100.0% 68 100.0% 69 100.0%

Average IRR 18.4% 18.6% 17.6%Median IRR 18.0% 17.9% 17.0%

5 - Year Treasury 2.1% 0.8% 0.7%

Average Spread 16.3% 17.8% 16.9%Median Spread 15.9% 17.1% 16.3%


Summary of Key Pricing Terms

Terms 2011 2012 2013Average Coupon 12.2% 12.2% 11.9%Median Coupon 12.0% 12.0% 12.0%

Average PIK 2.1% 2.1% 1.7%Median PIK 2.0% 2.0% 2.0%

Average Fee 2.2% 2.2% 2.0%Median Fee 2.0% 2.0% 2.0%

Average Equity Ownership 12.1% 12.1% 8.2%Median Equity Ownership 5.0% 5.0% 4.0%

% of Deals with Warrants 18.6% 18.6% 16.1%% of Deals with Warrants and/or Equity Buy-In 86.7% 86.7% 82.4%

Average Target IRR 18.6% 18.6% 17.6%Median Target IRR 17.9% 17.9% 17.0%


IRR by Total Leverage

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

27.5%

30.0%

1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 6.0x 6.5x

Expe

cted

Rat

e of R

etur

n

Total Leverage Ratio2013 Survey Data 2012 Survey Data Linear (2013 Survey Data)


IRR by Company Revenue

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

27.5%

30.0%

$0 $50 $100 $150 $200 $250 $300 $350 $400

Expe

cted

Rat

e of R

etur

n

Company Revenue ($ in MM)


IRR by Mezzanine Investment Size

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

27.5%

30.0%

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75

Expe

cted

Rat

e of R

etur

n

Mezzanine Investment Size ($ in MM)


IRR by Investment Size

(1) Reflects both warrants and equity buy-in.

2012 IRR Summary

Investment Current % With Average Years to Expected Size Number Coupon PIK Fee Equity (1) Equity (1) Maturity IRR< $5.0 million 13 12.9% 2.5% 1.9% 100.0% 11.7% 4.9 21.4%$5.0 - $9.9 million 21 11.9% 2.6% 2.1% 90.5% 14.7% 5.3 19.5%$10.0 - $20.0 million 21 11.9% 2.2% 2.3% 81.8% 5.1% 5.6 17.2%> $20.0 million 16 12.4% 1.3% 2.4% 77.8% 17.2% 6.7 17.6%

2013 IRR Summary

Investment Current % With Average Years to Expected Size Number Coupon PIK Fee Equity (1) Equity (1) Maturity IRR< $5.0 million 16 12.3% 2.0% 1.9% 75.0% 6.9% 5.3 18.8%$5.0 - $9.9 million 20 12.0% 2.0% 2.0% 85.0% 8.9% 5.1 17.9%$10.0 - $20.0 million 20 12.0% 1.4% 2.2% 90.0% 8.3% 5.9 17.7%> $20.0 million 14 11.4% 1.4% 2.1% 57.1% 5.2% 6.4 15.7%


IRR by Size and Industry

0.0%2.5%5.0%7.5%

10.0%12.5%15.0%17.5%20.0%22.5%25.0%

< $10 MM $10 M - $20 MM > $20 MM

Expe

cted

Rat

e of R

etur

n

Mezzanine Investment Size

Service Manufacturing Distribution/Other


IRR by Size and Use of Proceeds

Note: Based on the data collected, there were no Internal Growth transactions, which fit the $10 million - $20 million and > $20 million investment size criteria. Additionally, there were no Unsponsored Buyout transactions which fit the > $20 million investment size criteria.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

< $10 MM $10 M - $20 MM > $20 MM

Expe

cted

Rat

e of

Ret

urn


Sponsored Buyout Recap Acquisition/Consolidation Unsponsored Buyout Internal Growth


IRR by Size and Mezzanine Role

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

< $10 MM $10 M - $20 MM > $20 MM Total

Expe

cted

Rat

e of R

etur

n


Funded Sponsor Not-Funded Sponsor


Market Trend Data

2011 2012 2013 2011 2012 2013Competition Percent Percent Percent Coupon Percent Percent PercentMore Competitive 76.1% 67.5% 68.5% Lower 43.3% 44.2% 58.9%Unchanged 20.9% 1.3% 27.4% Unchanged 56.7% 53.2% 37.0%Less Competitive 3.0% 31.2% 4.1% Higher 0.0% 2.6% 4.1%

2011 2012 2013 2011 2012 2013Leverage Levels Percent Percent Percent Returns Percent Percent PercentLower 3.0% 1.3% 2.7% Lower 75.8% 63.6% 65.8%Unchanged 20.9% 32.5% 30.1% Unchanged 24.2% 33.8% 30.1%Higher 76.1% 66.2% 67.1% Higher 0.0% 2.6% 4.1%

2011 2012 2013Transaction Volume Percent Percent PercentLower 20.9% 19.5% 50.0%Unchanged 31.3% 41.6% 40.3%Higher 47.8% 39.0% 9.7%


Exit Multiples

2011 % of 2012 % of 2013 % of Multiple of EBITDA Exits Exits Exits Exits Exits Exits < 5.0x 2 3.3% 3 7.1% 3 7.1%5.0x - 5.9x 8 13.3% 7 16.7% 11 16.7%6.0x - 6.9x 17 28.3% 11 26.2% 9 26.2%7.0x - 7.9x 11 18.3% 4 9.5% 15 9.5%8.0x - 10.0x 18 30.0% 13 31.0% 19 31.0%> 10.0x 4 6.7% 4 9.5% 5 9.5%

2011 Avg. % of 2012 Avg. % of 2013 Avg. % of Exit Type Multiple Exits Multiple Exits Multiple Exits IPO 8.0x 5.5% NA 3.8% NA 0.0%Sale to Strategic 7.5x 32.7% 8.9x 30.8% 8.5x 29.5%Sale to Financial 7.3x 32.7% 8.2x 34.6% 7.4x 39.3%Recap 6.7x 29.1% 6.8x 30.8% 7.2x 31.1%


Market Returns and Spreads

(1)  1995 – 2007 are end-of-year yields (Source: Citigroup’s High Yield Composite Index) (2)  2011 reflects the yield as of April 27, 2011, 2012 reflects the yield as of May 7, 2012., 2013 reflects the yield as of May 3, 2013 (Source: S&P ‘B’ Rated

High Yield Index) (3)  Approximations based on market data (for illustration purposes)

1995 2000 2011 2012 2013Five-Year Treasuries 7.8% 5.0% 2.1% 0.8% 0.7%

Average Mezzanine Targeted IRR 22.7% 19.1% 18.4% 18.6% 17.6%Spread Over Treasuries 14.9% 14.1% 16.3% 17.8% 16.9%

High Yield (1) (2) 9.8% 14.6% 6.8% 7.0% 4.9%Spread Over Treasuries 2.0% 9.5% 4.7% 6.3% 4.2%

Average Buyout Equity Targeted IRR (3) 30.0% 27.5% 20.0% 20.0% 19.0%Spread Over Treasuries 22.2% 22.5% 17.9% 19.2% 18.3%

Buyout Equity Targeted IRR Less Mezzanine Targeted IRR 7.3% 8.4% 1.6% 1.4% 1.4%


Conclusions

•  Pronounced near term supply-demand imbalance •  Capital availability has driven increased competition

–  Increased competition has compounded for three years –  Pricing has dropped but

–  Increased bifurcation by size and sponsored / non-sponsored deals –  Sponsored pricing is the most competitive in the history of survey

–  Leverage levels approaching historical highs

•  Mezzanine strictly lower middle market asset class –  Pressure from high yield markets –  Capital seeking yield over time

•  Default risks not priced in

•  What is the outlook for 2013 –  Supply / demand rebalance? –  Return to 2007? –  Increasing pressure on returns and leverage?

2013 annual atlantic conferences mezzanine market survey atlantic... · note: represents $55.0...

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