KeyBanc Capital Markets’ Debt Capital Markets The KeyBanc Capital Markets® Debt Capital Markets team represents one of the strongest full-service debt-side investment banking, sales, trading and distribution platforms in the nation. We use a blend of real world perspectives, backed by robust capabilities and relationships, to help our clients use leverage to grow, make acquisitions, and enhance operations. For additional information regarding this newsletter, please contact the individuals listed below: Andrew Frawley 216.689.4288 [email protected]Steve Rasoletti 216.689.3228 [email protected]Disclosure: KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. This report was not issued by our research department. The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete, and it should not be relied upon as such. This report does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity.
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KeyBanc Capital Markets’ Debt Capital Markets
The KeyBanc Capital Markets® Debt Capital Markets team represents
one of the strongest full-service debt-side investment banking, sales,
trading and distribution platforms in the nation. We use a blend of real
world perspectives, backed by robust capabilities and relationships, to
help our clients use leverage to grow, make acquisitions, and enhance
Disclosure: KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”),
are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.
This report was not issued by our research department. The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete, and it should not be relied upon as such. This report does not purport to be a
complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and
particular needs of any individual person or entity.
Junior Debt Market Analysis
2
Executive Summary
KeyBanc Capital Markets (KBCM) conducts a quarterly survey of mezzanine and junior debt participants to measure
market conditions and transaction terms
The junior debt capital markets (including mezzanine, subordinated, second lien structures, etc.) are not as well documented or
organized as the senior debt markets or the equity or venture capital markets
– This challenge is even more pronounced in the lower end of the middle market (typically companies <$50 million of EBITDA)
Our survey and resulting newsletter is an attempt to address the lack of market information noted above
We have been conducting our survey since 2011 and have aggregated the data for review and analysis
Unless otherwise stated, statistics found in this analysis reflect the average of answers provided since inception of survey
I. Executive Summary
Junior Debt Market Analysis
3
Executive Summary (cont’d)
In a typical quarter since Q2 2011, junior capital providers who respond to our survey:
Transaction Flow /
Closed Transactions
Transaction
Structure Terms and Conditions Fund Overview
Source: KeyBanc Capital Markets Junior Debt Survey
I. Executive Summary
Invest across a wide range
of industries
Have $220.3 million
available to invest
A typical investment size of
$18.1 million per transaction
May or may not need to
begin fundraising in the next
twelve months, but expect
that process to take 10.9
months
Generally speaking, funds
are getting larger and capital
providers are looking to put
larger amounts of capital in
each transaction
See opportunities from a
range of sources, with 61.7%
involving a sponsor
On a quarterly basis:
– Review 44.8 opportunities
– Submit 7.5 LOIs
– Close 3.7 transactions
In 4Q16:
– Reviewed 41.7
opportunities
– Submitted 4.5 LOIs
– Closed 2.4 transactions
Of note, on average, ~23%
of funds do not close any
transactions during a given
quarter
For completed transactions
– Senior debt to EBITDA
multiple is 3.3x
– Total debt to EBITDA
multiple is 3.7x
The typical capital structure
includes
– 48.6% of senior debt
– 16.9% of junior debt
– 34.5% of equity
On a quarterly basis:
– Cash pay rate is 12.0%
– Average PIK rate is 2.0%
– Total expected IRR is
14.1%
– 59.8% of transactions
have warrants equal to
4.9% of the fully-diluted
equity
In 4Q16:
– Cash pay rate is 11.3%
– PIK rate is 2.0%
– Total expected IRR is
13.9%
Junior Debt Market Analysis
4
KBCM Junior Debt Market Analysis
Debt providers continue to consider a broad range of industries and many continue to be industry generalists
– Approximately 40%-50% of our respondents do not have any industry focus
There is general consistency over the last four quarters
Industries of Interest
Source: KeyBanc Capital Markets Junior Debt Survey
II. Fund Profiles
Q1 2016 Q3 2016 Q4 2016 Q2 2016
Industrial Manufacturing
Business Services
Health Care
Consumer
Information Services
Transportation and Logistics
Professional, Scientific, and Technical Services
Basic Materials
Technology
Education
Finance and Insurance
Construction, Engineering and Infrastructure Services
Energy and Utilities
Hospitality
Real Estate
Do not have any industry specialization
Other
41%
47%
24%
35%
35%
29%
18%
18%
18%
24%
18%
12%
6%
12%
0%
47%
38%
31%
19%
19%
13%
25%
19%
13%
6%
19%
13%
19%
0%
6%
0%
50%
36%
36%
36%
32%
28%
28%
16%
24%
16%
20%
12%
12%
12%
8%
4%
40%
Junior Debt Market Analysis
5
KBCM Junior Debt Market Analysis
Capital for Deployment
Typical Investment Size
Significant capital remains available as debt providers flush with
cash continue to seek investment opportunities
68% of funds reported $100 million or more of capital available
In the most recent quarter, ~30% of respondents reported >$500
million of capital available
Debt providers seeking to place more than $25 million per
investment had increased steadily to 57.0% leading into 2015,
but dropped off to 25% leading into 2016, and eventually 0% in
2Q16, but have recently bounced back to 28%
– In our experience (and supported by this data), there are
essentially two primary junior debt markets
• One for companies with >$10 million of EBITDA
• One for companies with <$10 million of EBITDA
– For transactions >$50M, this is developing into another
definable and distinct market segment
Please note: KBCM bifurcated the typical investment size question to measure maximum and minimum investments – which may impact survey results
Source: KeyBanc Capital Markets Junior Debt Survey