GC2016 - TUES 230PM - Credit Markets FINAL · This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities.
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#MIGlobal
Default Signals
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Speculative Grade DefaultsNote: Please see disclaimer on the last page of this presentation for more information. Views expressed are those of BSP. Opinions, estimates, forecasts and statements offinancial 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 reliableit should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.Source: Moody’s. Data as of November 30, 2015.*Assumes previous spike was in 1983.
7 years*
8 years 7 years 7 years
#MIGlobal Source: St. Louis Federal Reserve Database. Data as of 04/25/2016.
Nonfinancial Corporate Debt as a Percent of GDP
Nonfinancial Corporate Debt has Risen to Prior Recession Levels
20%
25%
30%
35%
40%
45%
50%Recession Non-financial Corp. Debt / GDP
Source:ThomsonReuters(4/07/16).
Central Bank Target Interest Rates Remain Low
‐1
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Percent
European Central Bank
Bank of England
Bank of JapanU.S. Fed
#MIGlobal
Source: Bureau of Economic Analysis. Data as of 12/31/2015. We calculate a measure of the debt service ratio (interest only) for nonfinancial corporate business using the National Income and Product Account measures of “net interest and misc. payments” and “undistributed profits after tax with inventory valuation adjustment and capital consumption adjustment, adding back capital consumption (depreciation).
Nonfinancial Corporate Interest Payments as a % of Estimated Cash Flow
Manageable Interest Burdens Mitigate Default Risk in the Near Term
0.00%
1.25%
2.50%
3.75%
5.00%
6.25%
7.50%
8.75%
20%
30%
40%
50%
60%
70%
80%
90%U.S. Corporate 12-Month Trailing Default Rate (rhs) Interest payments as a % of Cash Flow Estimate (lhs)
#MIGlobal
MidCap: Growth of balance sheetMidCap has demonstrated strong growth since inception driven by a combination of organic growth and recent acquisitions
205 400 782 957
1,666 1,735
5,608
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 2013 2014 2015
US$ Millions
Note: 2015 includes ~$1.9 billion of loans acquired from MGEC consisting primarily of leveraged loans.Source: MidCap Financial (12/2015).
#MIGlobal
MidCap: Diversification across businessesToday MidCap is a diversified lender across eight business areas
2013
Healthcare Asset Based Lending58%
Healthcare Real Estate
13%
Healthcare Leveraged Loans 18%
Life Sciences11%
2015
Healthcare Asset Based Lending24%
General Asset Based Lending2%
Lender Finance6%
Healthcare Real Estate
7%
General Real Estate
6%
General Leveraged Loans44%
Healthcare Leveraged Loans4%
Life Sciences 7%
Source: MidCap Financial.
#MIGlobal
High Yield Trading VolumesIn March 2016, average daily High Yield trading volumes were $10 billion representing the highest on record
0
2
4
6
8
10
12TRACE High Yield Average Daily Trading Volumes by Month ($ Billions)
Source: As of March 31, 2016; SIFMA / FINRA TRACE volumes.
Average
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Market Liquidity Profile
0%
40%
80%
120%
160%
200%
0
1
2
3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016A
High Yield Trading Volumes ($ Trillions) % of HY Market Outstandings
Source: TRACE HY Volumes as of March 31,2016; SP LCD for High Yield Outstanding.
High Yield Trading Volumes relative to Market Size
US HY Bond Market Size
0.6 0.7 0.7 0.7 1.5 1.6 1.70.8 1.0 1.1 1.3 1.7
There can be no assurance that the investment opportunities described herein will be available in the future or, if available, achieved.This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities.
Please refer to the page entitled “General Statement” at the end of this presentation when reviewing the information presented herein.
6/30/2014 3/31/2016
Sharp Increase in Stressed High Yield Credits1
1 Based on market value of bonds outstanding, $ bnSource: Bank of America Merrill Lynch, DW Partners; as of 3/31/2016
Spread
201‐500 bps
0 – 200 bps
500‐1,000 bps
>1,000 bps
Total Outstanding HY Debt: $1,344 bn
Total Outstanding HY Debt: $1,174 bn
$170 bn
$1,008 bn
$134 bn
$31 bn
$584 bn
$357 bn
$197 bn
$36 bn
There can be no assurance that the investment opportunities described herein will be available in the future or, if available, achieved.This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities.
Please refer to the page entitled “General Statement” at the end of this presentation when reviewing the information presented herein.
Increased “Stressed” Corporate Credit
10
Industry Breakdown of “Stressed” Corporates1 Indicative Non-Energy Companies Trading at Stressed Levels2
1 Based on $ market value of bonds outstanding
2 Represents an indicative bond in the company’s capital structure
Source: Bank of America Merrill Lynch, DW Partners; as of 3/31/2016
Company Sector Spread Debt Outstanding1
Sprint Communications 1024 33,965
Valeant Consumer, Non-Cyclical 1029 30,883
iHeartCommunications Communications 1500 20,588
Windstream Services Communications 1071 10,853
Bombardier Industrial 1012 9,684
Scientific Games Consumer, Cyclical 1500 8,410
Teekay Corp Industrial 2000 7,443
Genworth Financial Financial 1150 6,740
Avaya Holdings Communications 2000 5,967
Navistar International Consumer, Cyclical 1372 5,286
Toys R’ Us Consumer, Cyclical 1735 5,691
Knight Capital Holdings Financial 1018 5,017
Clear Channel Worldwide Communications 1083 4,929
Neiman Marcus Group Consumer, Cyclical 1033 4,711
Hexion Inc. Basic Materials 1226 3,918
Sears Holdings Consumer, Cyclical 1409 3,144
Claire’s Stores Consumer, Cyclical 2512 2,503
Avon Products Consumer, Non-Cyclical 1221 2,314
Advanced Micro Devices Technology 1555 2,260
inVentiv Health Consumer, Non-Cyclical 1094 2,117
Energy, 36%
Basic Materials, 12%
Cons. Discretionary
12%
Communications12%
Cons. Staples9%
Industrial9%
Technology, 5%Financial, 3%Utilities, 2%
#MIGlobal
High Yield Bond Supply from Fallen AngelsThe High Yield market is expected to see $200 billion of Fallen Angels in 2016, representing over 15% of the total market
85 14 7 18 33
123
33 36
108
25 36
95
227
59 70
137 124 117
195 200
0%
5%
10%
15%
20%
25%
30%
35%
0
50
100
150
200
250
300
350
Source: Merrill Lynch research. Goldman Sachs Research for Fallen Angel Candidates based on BBB non Emerging market issuers on negative watch for downgrade. As of March 31, 2016Fallen Angels are defined as investment grade corporates whose credit rating was lowered to high yield.
% of Total US High Yield MarketFallen Angel Volumes and Par Outstanding ($ Billions)
42%
Cumulative Fallen Angels as % of HY Outstandings
54% 40+%
2002 Cycle 2008 Cycle Current
0%
20%
40%
60%
80%
100%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Loan mutual funds, financial and insurance companies Hedge,distressed and high-yield funds CLOs Banks
Institutional Investor Base for Non-investment Grade Loans
Sources:S&PLCD(4/11/16).
#MIGlobal
Market Dispersion by Credit Quality – Bonds
Market Dispersion by Credit Quality Lower Quality Paper Diverging
Note: Views expressed are those of BSP. Opinions, estimates, forecasts and statements of financial market trends aboveare based on current market conditions and are subject to change without notice. Source: JP Morgan. Data presented is as of 3/24/2016.
Spread (bps) Spread (bps)
CCC
B
BBBBB200
600
1,000
1,400
1,800
2,200
Jan‐2014 Jun‐2014 Nov‐2014 May‐2015 Oct‐2015 Mar‐2016200
400
600
800
1,000
1,200
1,400
1,600
Jan‐2011 Jan‐2012 Jan‐2013 Jan‐2014 Jan‐2015 Jan‐201
CCC‐BB Spreads Differential
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Source: Credit Suisse, Barclays, Citi, Guggenheim Investments. Data as of 04/22/2016. Representative Indices: Bank loans: Credit Suisse Leveraged Loan Index; High-Yield Corporate Bonds: Credit Suisse High-Yield Corporate Bond Index; AA Corporate Bonds: Barclays Investment-Grade Corporate Bond index, AA subset; Agency MBS: Barclays U.S. Aggregate Index (Agency Bond subset); CLO AA and CLO 2.0 BB: JPM CLOIE Index, CMBS 2.0 AA: Barclays CMBS 2.0 Index (AA subset), Treasuries: Barclays U.S. Aggregate Index (Treasuries subset), Non-Agency RMBS: Based on BAML and Guggenheim Trading Desk Indicative Levels.
Cross Fixed-Income Asset Class Yield and Duration
Bank Loans, CLOs, and Non-Agency RMBS Offer a Yield Advantage With Limited Duration Risk
CMBS 2.0 AACLO 2.0 AA
CLO 1.0 AA
High Yield Corporate Bonds
Bank Loans
AA Corporate BondsTreasuriesAgency MBS
CLO 2.0 BB
Non-Agency RMBS Alt-A / Option ARM
0%
2%
4%
6%
8%
10%
12%
0 yrs 1 yrs 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs 8 yrs
Yiel
d
Rate Duration
There can be no assurance that the investment opportunities described herein will be available in the future or, if available, achieved.This presentation is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities.
Please refer to the page entitled “General Statement” at the end of this presentation when reviewing the information presented herein.
Opportunity Set in Commercial Mortgage Markets“Wall of Maturities” in CMBS accelerates in 2016 and 2017 (USD billion)
Source: Barclays, DW Partners; as of 12/31/2015.
$0
$20
$40
$60
$80
$100
$120
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Maturing Balance, excluding defeased Balance coming open for prepayment, excluding defeased
#MIGlobal
Structured Finance IssuanceStructured Products issuance is a fraction of Corporate issuance post 2008 crisis
0
1
2
3
2005 2006 2007 2013 2014 2015 1Q2016
Structured Finance Issuance Corporate Bond and Loan Issuance
Source: As of March 31, 2016; SIFMA for Structured Finance issuance; SP LCD, Barclays Research for Corporate issuance.
US & Europe Issuance ($ Trillions)
Ratio of Structured Products to Corporate Issuance
2.0x 1.6x 1.3x 0.2x 0.3x 0.3x 0.2x
#MIGlobal
Structured Products Too Big To IgnoreStructured Products issuance is significantly lower from record levels in 2006, although current outstandings are $5 trillion representing a significant opportunity set
0
1
2
3
2006 2015
Source: As of December 31, 2015; SIFMA. Structured products include Global CDO/CLO, Global ABS, Global CMBS, Global Non Agency RMBS
Structured Products Issuance ($ Trillions)
-75%
0
1
2
3
4
5
6
7
8
2006 2015
Structured Products Outstandings ($ Trillions)
-30%
Global Liquidity – Sovereign Wealth Funds(US$ Billions)
1. Government Pension Fund of Norway $8252. Abu Dhabi Investment Authority $7733. China Investment Corp. $7474. SAMA Foreign Holdings of Saudi Arabia $6325. Kuwait Investment Authority $5926. SAFE Investment Company of China $4747. Hong Kong Monetary Authority $4428. Government of Singapore Investment Corp. $3449. Qatar Investment Authority $25610. National Social Security Fund (China) $236
Source: SWFInstitute(4/26/2016).
Increase in Corporate Cash Balances 2006 to 2016Cash holdings of publicly listed companies, percent of GDP
21%16%
4%
26%16% 15%
3%15% 13%
4%
21%
1%
115%
59% 59% 58%52%
35% 34%26% 22% 20% 19% 13%
0%10%20%30%40%50%60%70%80%90%100%110%120%130%
Japan France China Canada UK Spain SouthKorea
US Italy Brazil Germany Russia
Q12006 Q12016PercentofGDP
Note:Cashandmarketablesecurities,latestGDPdataavailable.Source:Bloomberg(4/07/16).
18 21
61
15 258
258 8
215
103 10278
60 5123 13 11
0
40
80
120
160
200
240
Apple+167%
Microsoft+387%
GE+68% Google+412%
Cisco+144%
Oracle+502%
Pfizer‐8%
Merck+63%
Chevron+40%
Q42007 Q42015US$billions
Note:CashandmarketablesecuritiesSource:Bloomberg(4/07/16).
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