CreditRiskMonitor.com, Inc. · OTC:CRMZ
CreditRiskMonitor.com — Credit Risk Conditions Update webinar (July 2015)
36 slides from CreditRiskMonitor.com's conference presentation, Jul 29, 2015
Slide 1: Are You Prepared for a Credit Downturn?
Are You Prepared for a Credit Downturn? A Conversation with Dr. Edward Altman
Slide 2: Agenda
Agenda Introduction & Housekeeping Keynote: Are We in a Credit Bubble? Q&A 2
Slide 3: Welcome!
Welcome! Dr. Edward Altman Pat McParland Professor of Finance SVP, Marketing NYU Stern School of Business CreditRiskMonitor 3
Slide 4: Housekeeping
Housekeeping Can also ask questions via email: [email protected] All attendees will receive: Paper Recording Copy of slides 4
Slide 5: What we'll cover today
What we’ll cover today What is happening in the credit markets? Are we in a credit bubble (and what does that mean)? Is it about to burst? What would the impact be on you, your customers and your vendors when it does? 5
Slide 6: Keynote Presentation
Keynote Presentation
Slide 7: Credit Markets: Is It a Bubble?
Credit Markets: Is It a Bubble? Dr. Edward Altman NYU Stern School of Business Credit Risk Conditions Update CreditRisk Monitor July 29, 2015 7 7
Slide 8: Is It a Bubble?
Is It a Bubble? • Or, Just Opportunistic Debt Financing? • Focus on Default Rates in Credit Markets • Length of Benign Credit Cycles • Coincidence with Recessions: U.S. & European Scenarios • Comparative Health of High-Yield Firms (2007 vs. 2012/2014) • High-Yield and CCC New Issuance • LBO Statisti
Slide 9: Historical H.Y. Bond Default Rates
Historical H.Y. Bond Default Rates Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions), 1971 – 2015 (7/15)) Par Value Par Value Default Par Standard Outstandinga Defaults Rates Par Value Value Default Deviation Year ($) ($) (%) Outstanding* Defaults Rates (%) Ye
Slide 10: Default Rates on High-Yield Bonds
Default Rates on High-Yield Bonds Quarterly Default Rate and Four-Quarter Moving Average 1989 – 2015 (2Q) 6.0% 16.0% 14.0% 5.0% 12.0% 4 - Quarter Moving Average 4.0% 10.0% Quarterly Default Rate 3.0% 8.0% 6.0% 2.0% 4.0% 1.0% 2.0% 0.0% 0.0% Quarterly Moving Source: Author’s Compilations 10
Slide 11: Historical Annual European High-Yield Default Rates
Historical Annual European High-Yield Default Rates 20% 33.91% 18% 17.28% 16% 14% 12.43% 12% Default Rate 10% 8% 6.56% 6% 4% 3.20% 2.35% 2.60% 1.97% 1.60% 2% 1.20% 0.97% 1.00% 1.06% 0.97% 0.70% 1.02% 0.86% 0.53% 0% 2Q15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Slide 12: Historical Default Rates and Recession Periods in the U.S.
Historical Default Rates and Recession Periods in the U.S. High-Yield Bond Market (1972 – 2015 (2Q)) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 – 12/01,
Slide 13: YTM & Option-Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes
200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 6/1/2007 7/27/2007 9/21/2007 11/16/2007 1/15/2008 3/11/2008 5/6/2008 7/1/2008 8/26/2008 10/21/2008 12/16/2008 2/12/2009 June 01, 2007 – July 10, 2015 4/9/2009 Yield Spread (YTMS) OAS = 545bp 6/4/2009 YTMS = 540bp, 7/30/2009 6/12/07 (YTMS = 26
Slide 14: Comparative Health of High-Yield Firms (2007 vs. 2012/2014)
Comparative Health of High-Yield Firms (2007 vs. 2012/2014) 14
Slide 15: Z-Score Component Definitions and Weightings
Z-Score Component Definitions and Weightings Variable Definition Weighting Factor X1 Working Capital 1.2 Total Assets X2 Retained Earnings 1.4 Total Assets X3 EBIT 3.3 Total Assets X4 Market Value of Equity 0.6 Book Value of Total Liabilities X5 Sales 1.0 Total Assets 15
Slide 16: Z" Score Model for Manufacturers, Non-Manufacturer Industrials
Z” Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market Credits Z” = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 +3.25 X1 = Current Assets - Current Liabilities Total Assets X2 = Retained Earnings Total Assets X3 = Earnings Before Interest and Taxes Total Assets X4 = Book
Slide 17: Average Z-Score by S&P Bond Rating
Average Z-Score by S&P Bond Rating Rating Average Z-Score Standard Deviation AAA 6.2 2.1 AA 4.7 2.4 A 3.7 2.3 BBB 2.8 1.5 BB 2.4 1.9 B 1.8 1.9 CCC 0.3 1.2 D -0.2 2.5 Source: E. Altman and E. Hotchkiss (2006), Corporate Financial Distress and Bankruptcy, John Wiley & Sons, pp.247/248. 17
Slide 18: Comparing Financial Strength of High-Yield Bond Issuers in 2007 & 2012/2014
Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012/2014 Number of Firms Z-Score Z”-Score 2007 277 383 2012 404 488 2014 558 760 Average Z-Score/ Median Z-Score/ Average Z”-Score/ Median Z”-Score/ Year (BRE)* (BRE)* (BRE)* (BRE)* 2007 1.89 (B) 1.81 (B) 4.58 (B+) 4.61 (B+) 2012 1.66
Slide 19: Debt/EBITDA & Net Debt/EBITDA: U.S. High-Yield and Investment Grade
Debt/EBITDA & Net Debt/EBITDA: U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014*) Debt/EBITDA HY Debt/EBITDA IG Net Debt/EBITDA HY Net Debt/EBITDA IG 5.00 4.00 BB- B+ (796 obs.) 4.50 (781 obs.) BB- 3.50 BB+ (1,086 obs.) (1,126 obs.) 4.00 3.00 3.50 2.50 3.00 2.50 2.00 BBB BBB
Slide 20: Debt/Debt + Equity & Debt/MV Equity: U.S. High-Yield and Investment Grade
Debt/Debt + Equity & Debt/MV Equity : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014) Debt/Debt + Equity HY Debt/Debt + Equity IG Debt/MV Equity HY Debt/MV Equity IG 0.70 1.20 BB- BB (875 obs.) 0.60 (1,280 obs.) 1.00 0.50 0.80 0.40 BBB BBB- (978 obs.) (1,001 obs.) (711 obs
Slide 21: EBITDA/Interest Expense: U.S. High-Yield and Investment Grade
EBITDA/Interest Expense : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014) EBITDA/Int. Expense HY EBITDA/Int. Expense IG 10.00 9.00 8.00 BBB (863 obs.) 7.00 BBB- (841 obs.) 6.00 5.00 4.00 BB- 3.00 (821 obs.) B+ (1,196 obs.) 2.00 1.00 0.00 2004 2005 2006 2007 2008 2009 2010
Slide 22: Distribution of Credit Ratios for U.S. High-Yield Bonds, (2007 vs. 2014)
Distribution of Credit Ratios for U.S. High-Yield Bonds, (2007 vs. 2014) Debt/EBITDA EBITDA/Interest Expense 2014 BRE 2007 BRE 2014 BRE 2007 BRE 10% 1.36x A+ 0.87x AA+ 1.03x CCC 0.91x CCC 20% 2.23x BBB 1.75x A- 1.93x B- 1.59x CCC+ 30% 2.90x BB+ 2.40x BBB 2.55x B 2.05x B- 40% 3.56x BB 3.07x BB 3.36x
Slide 23: U.S. & European High-Yield Bond Market: New Issuance
U.S. & European High-Yield Bond Market: New Issuance ($ millions) 2005 – 2015 (2Q) 300,000 280,450.3 270,334.8 250,000 238,762.7 229,307.4 New Issuance ($ millions) 200,000 184,571.0 150,000 131,915.9 132,689.1 127,419.3 119,468.0 100,000 91,504.1 81,541.8 76,059.5 74,048.0 65,516.1 57,636.5 60,435.
Slide 24: U.S. & European High-Yield Bond Market: CCC Rated New Issuance
U.S. & European High-Yield Bond Market: CCC Rated New Issuance (%) 2005 – 2015 (2Q) 40% 37.4% New Issuance Rated CCC (%) 29.8% 30% 25.9% 21.7% 21.3% 19.3% 19.2% 20% 18.1% 18.2% 17.4% 16.3% 15.3% 15.3%16.7% 15.2% 13.4% 11.5% 11.6% 11.0% 10.6% 10% 9.0% 8.0% 7.8% 6.8% 6.2% 6.1% 5.1% 5.8% 3.8% 4.5% 3.0%
Slide 25: New Issues Rated B- or Below, Based on the Dollar Amount of Issuance
New Issues Rated B- or Below, Based on the Dollar Amount of Issuance (1993 – 2015 (2Q)) 70.00% 60.00% 51.25% 50.00% 40.75% 39.06% 40.00% 33.57% 32.97% 33.00% 30.41% 31.56% 31.95% 29.55% 29.22% 29.62% 29.19% 30.00% 27.27% 27.04% 26.73% 26.13% 23.35% 24.52% 21.48% 22.88% 21.38% 19.40% 21.02% 20.00% 18
Slide 26: Mortality Rates by Original Rating
Mortality Rates by Original Rating All Rated Corporate Bonds* 1971-2014 Years After Issuance 1 2 3 4 5 6 7 8 9 10 AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.01% 0.02% 0.01% 0.00% 0.00% 0.00% Cumulative 0.00% 0.00% 0.00% 0.00% 0.01% 0.03% 0.04% 0.04% 0.04% 0.04% AA Marginal 0.00% 0.00% 0.22% 0.08% 0.02%
Slide 27: Maturity Profile of Leveraged Debt – As of 12/31/14
Maturity Profile of Leveraged Debt – As of 12/31/14 250 228 228 200 200 184 171 156 155 150 $ (Billions) 106 98 100 84 72 59 58 50 35 18 22 19 13 1 0 0 0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Bonds Institutional Loans Source: S&P Capital IQ LCD 27
Slide 28: Purchase Price Multiples
Purchase Price Multiples Purchase Price Multiple excluding Fees for LBO Transactions 14x 11.9 12x 11.6 9.9 9.8 10x 9.7 9.7 9.4 9.1 8.9 9.0 8.8 8.8 8.7 8.7 8.5 8.8 8.4 8.3 8.1 8.2 8.1 8.0 7.8 8x 7.5 7.4 7.4 7.3 6.9 6.7 7.0 6.7 6.7 6.8 6.2 6.3 6x 5.2 4x 2x N/A 0x (# obs.) 1998 1999 2000 2001 2002 2003
Slide 29: Average Total Debt Leverage Ratio for LBO's
Average Total Debt Leverage Ratio for LBO’s: Europe and US with EBITDA of €/$50M or More 7.0x 6.6 6.2 6.0x 5.8 5.8 5.5 5.5 5.6 5.7 5.4 5.3 5.4 5.2 5.3 5.3 4.9 4.9 4.9 5.0x 4.8 4.8 4.7 4.7 4.6 4.5 4.5 4.5 4.4 4.1 4.0 4.0x 3.0x 2.0x 1.0x 0.0x 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Slide 30: LBO Statistics & Ratios: 2007 vs. 2014
LBO Statistics & Ratios: 2007 vs. 2014 (with Update for 1H15) 2007 2014 1H15 M&A/LBO as a % of Total Issuance 62% 41% 40% Purchase Multiple 9.1-9.9x 9.7-9.8x 9.4-11.9x Debt to EBITDA @ Inception 6.2x 6.0x 5.8x EBITDA to Cash Interest 2.1x 3.3x 2.8x Equity Contribution 31% 38% 40% Source: Guggenheim
Slide 31: Share of Large LBOs with Leverage More than 7x
Share of Large LBOs with Leverage More than 7x* 2004 – 2Q 2015 35% 30% 25% 20% 15% 10% 5% N/A N/A 0% 1H 15 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2Q 15 * Issuers with EBITDA >$50mm. Source: S&P Capital I.Q. 31
Slide 32: Lenders Leave the Lite On
Lenders Leave the Lite On 2003 – 2Q 2014 32
Slide 33: Q&A
Q&A
Slide 34: To ask questions
To ask questions Can also ask questions via email: [email protected] All attendees will receive: Paper Recording Copy of slides 34
Slide 35: Thank You!
Thank You! Our next webinar is August 26 – Don Burrelle, Global Credit Manager of Schlumberger Follow us: https://www.linkedin.com/company/creditriskmonitor Twitter: @crmz 35
Slide 36: Thank You!
creaditris monitor Thank You!
CreditRiskMonitor.com — Credit Risk Conditions Update webinar (July 2015) on 6ix