The 5th Annual Current State of the Capital MarketsBreakfast Forum
September 8, 2011
www.boyarmiller.com
Equity and thePublic MarketsAndrew D. Kanaly – Kanaly TrustChairman & CEO
Copyright 2009 Kanaly Trust. All rights reserved.
Market Performance
Index Performance as of August 31, 2011
EQUITIES 3 Month YTD 12 Months S&P 500 (8.9) (1.8) 18.5 DJIA (7.0) 2.1 19.0 Nasdaq (8.8) (2.2) 23.3 Russell 2000 (14.0) (6.5) 22.2 MSCI EAFE (11.6) (5.7) 10.5 MSCI Emerging Mkts (10.6) (8.3) 9.4
FIXED INCOME BarCap US Treasury Interm 3.1 5.5 3.9 BarCap Inv. Grade Credit 1.7 5.8 4.9 ML US High Yield (2.9) 2.7 7.9 BarCap 1-10yr Muni 2.2 5.1 3.0
ALTERNATIVES HFRI Global Hedge Fund (5.1) (5.6) (0.9) DJ Wilshire REIT (7.0) 6.8 19.8 DJ UBS Commodity (1.3) 1.3 25.8 Gold 18.9 28.5 46.4 Crude Oil (13.5) (2.8) 23.5
Copyright 2009 Kanaly Trust. All rights reserved.
Copyright 2009 Kanaly Trust. All rights reserved.
Copyright 2009 Kanaly Trust. All rights reserved.
Credit Market Stress Is Building
Copyright 2009 Kanaly Trust. All rights reserved.
European Sovereign Debt Crisis
Copyright 2009 Kanaly Trust. All rights reserved.
U.S. Manufacturing in a Soft Patch
Copyright 2009 Kanaly Trust. All rights reserved.
New Jobless Claims Need to Move Below 400K
Copyright 2009 Kanaly Trust. All rights reserved.
Employment Recovery Far From Normal
(E0028D)
Monthly Data 6/30/2007 - 6/30/2012
*Dates of expansions designated by the National Bureau of Economic Research. Expansion starting dates used: November 1970, March 1975, July 1980, November 1982, March 1991, and November 2001.
Recession ended in June 2009.
Current Expansion ( )
Average of Last Six Post World War II Expansions*
( )
58.258.358.458.558.658.758.858.959.059.159.259.359.459.559.659.759.859.960.060.160.260.360.460.560.660.760.860.961.061.161.261.361.461.561.661.761.861.962.062.162.262.362.462.562.662.762.862.963.0
58.258.358.458.558.658.758.858.959.059.159.259.359.459.559.659.759.859.960.060.160.260.360.460.560.660.760.860.961.061.161.261.361.461.561.661.761.861.962.062.162.262.362.462.562.662.762.862.963.0
S D 2008
M J S D 2009
M J S D 2010
M J S D 2011
M J S D 2012
M J
Employment-Population Ratio vs Average of Last Six Expansions
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Copyright 2009 Kanaly Trust. All rights reserved.
Household Balance Sheets Much Improved
Copyright 2009 Kanaly Trust. All rights reserved.
S&P 500
Copyright 2009 Kanaly Trust. All rights reserved.
Commodities
Copyright 2009 Kanaly Trust. All rights reserved.
Too Much Debt is the Long-term Problem
Copyright 2009 Kanaly Trust. All rights reserved.
Balancing the Budget Requires Substantial Reform
Source: Office of Management and Budget, Fiscal 2011 Requested Budget
Copyright 2009 Kanaly Trust. All rights reserved.
Lack of Credit Prevents Robust Recovery
• Credit is the lifeblood of economic growth• The largest banks have reduced lending by over 25%
Copyright 2009 Kanaly Trust. All rights reserved.
Investment Strategy
Portfolios should be geared more toward capital preservation to manage significant downside risks:
• Pursue ultra-diversification, utilizing traditional asset classes as well as alternative investment strategies (stocks & bonds are not the only choices)
• Actively manage the asset mix, and look for opportunities to hedge
• Equity exposure should focus on high quality global businesses trading at attractive valuations (bias to large caps, emerging markets)
• Be highly selective with fixed income: avoid high yield debt, and invest in only the most creditworthy municipal issuers
• Add to inflation protection when it is cheap
Copyright 2009 Kanaly Trust. All rights reserved.
Current Allocations
Traditional 30% Equity60% Equity 30% Fixed
ASSET CLASS 40% Fixed 40% AltsLarge Cap Equity 30.00% 8.50% Small Cap Equity 15.00% 6.25% Micro Cap Equity 3.25% International Equity 10.00% 8.00% Emerging Markets 5.00% 4.00% Fixed Income 40.00% 30.00% Liquid Alternatives 11.00% Hedged Equity 6.00% Commodities 5.00% MLPs 5.00% REITs 3.00% Managed Futures 10.00% Expected Return 7.60% 8.60%Standard Deviation 10.74% 8.16%Sharpe Ratio 0.34% 0.56%
Copyright 2009 Kanaly Trust. All rights reserved.
Kanaly Trust Investment Performance – as of 8/31/2011
2011 YEAR TO DATE ASSET CLASS PERFORMANCEAugust 2011
Equity Only -6.2% -3.5%Fixed Income - Taxable -1.0% 1.5%ALTs - No MLPs -1.2% 1.8%ALTs - With MLPs -1.1% 2.0%
Growth & Income Portfolio - Taxable (1) -2.8% -0.5%Growth & Income Portfolio - Tax Free (1) -2.5% -0.1%Income Portfolio (2) -0.4% 6.0%
S&P 500 Index -5.4% -1.8%Barclays US Aggregate Bond Index 1.5% 5.9%BarCap 1-10Yr Muni Index 1.3% 5.1%
S&P 500 (60%) / Intermediate Taxable (40%) -2.7% 1.3%S&P 500 (60%) / Intermediate Tax Free (40%) -2.7% 1.0%
*
Footnotes
The asset allocation models above represent an approximation of how the portfolios perform; actual results may differ from the models. Returns are shown before fees and are not AIMR/GIPS compliant. The return information provided above represents past performance and is not necessarily indicative of future results. Further, specific client portfolio(s) investment returns and results may vary from figures noted above based on account-specific circumstances.
(1) The current allocation of the Growth & Income portfolio is 35% Equity, 25% Fixed Income, 33% Alternatives, and 7% Cash.(2) The current allocation of the Income Portfolio is 80% Fixed Income and 20% Dividend Paying Equities.
Copyright 2009 Kanaly Trust. All rights reserved.
20
Equity and the Public MarketsSeptember 8, 2011
www.boyarmiller.com
Private Equity and Mergers & AcquisitionsDavid W. Sargent – Duff & Phelps SecuritiesManaging Director
M&A1.
M&A -- Activity Drivers
23
Cost of Debt Capital
Access to Debt Capital
Private Equity Environment
Strategic Buyers Purchasing Power
Taxes
2008 2009 20112010
Economic Outlook
M&A -- Overall U.S. M&A Activity
24
Source: William Blair & Company
U.S. Overall M&A Transactions and Deal Value
$1,609
$871
$567 $687
$992
$1,298
$1,645 $1,754
$1,086
$881
$1,085
$430
$689
$523
$689
$0
$500
$1,000
$1,500
$2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09YTD
6/30/11YTD
6/30/10YTD
6/30/11YTD
Undisclosed Middle Market > $750M Deal Value
# of
Tra
nsac
tions
Deal Value ($ in billions)
60.2% Increase In Deal Value
31.7% Increase In Deal Value
1 Year Period2 Year Period
$462
$279 $258
$291
$352 $364
$419
$465
$356
$235
$364
$101
$198
$163
$198
0
100
200
300
400
500
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09YTD
6/30/11YTD
6/30/10YTD
6/30/11YTD
Deal Value ($ in billions)
# of
Tra
nsca
tion
s
< $50 $50-250M $250-750M Deal Value
M&A -- Middle-Market M&A Activity
25
Recovery in the financing markets resulted in a general upturn in M&A activity in 2010, following 2 years ofdecline.
Deal value year-to-date is up 21.5% driven primarily by an increase in larger-sized transactions, offsetting a17.9% decline in the total number of transactions.
The tone in recent months has been more cautious owing to a uncertain economic recovery.
Source: William Blair & Company
U.S. Middle-Market M&A Transactions and Deal Value
96.0% Increase in Deal Value
21.5% IncreaseIn Deal Value
2 Year Period 1 Year Period
M&A -- Transactions by Industry Sector
26
The distribution of transactions by industry has remained largely unchanged.
M&A Transactions by Industry Sector
Source: William Blair & Company
2007 2009 YTD 2011
Other 20%Electronics 17%
Construction 4%
Consumer 4%
Energy 7%
Finance 7%
Healthcare 9%Industrials 6%
Services 15%
Real Estate 5%
Retail 2%
Telecomm 4%
Other 18% Electronics 21%
Construction 2%Consumer 3%
Energy 9%
Finance 6%Healthcare 11%Industrials 6%
Services 13%
Real Estate6%
Retail 2%
Telecomm 3%
Other 17% Electronics 23%
Telecomm 4%Retail 2%
Real Estate4%
Services11%
Industrials 5%Healthcare 13%
Finance 8%
Energy 8%
Consumer2%
Construction3%
961
825
685
1,054 1,115
$142
$116
$83
$165
$152
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011
Deal Value ($ in billions)
# of
Dea
ls
# of Deals Transaction Value
M&A -- Activity in the Energy Sector
27
Energy Sector Activity as a % of Total M&A Transactions
Source: Capital IQ
The energy sector has shown a significant uptick in activity, almost doubling in number of transactions from2009 through June 2011.
Deal value in energy-related deals represented more than 20% of total M&A deal value in 2010, making energythe most active industry sector.
6.5% of Total M&A
Transactions
7.2% of Total M&A
Transactions
Peak – 21.8% of Total M&A Deal Value
M&A -- Purchase Price Multiples by Sources
28
Source: S&P LCD
Purchase Price Multiples for Middle-Market LBOs
Competition and pre-financial crisis leverage multiples are driving the increase in purchase price multiples.
Private equity sponsors continue to “over equitize” middle-market LBO transactions, contributing an average of42% equity year-to-date in 2011 compared to 32% in 2007.
Equity Contribution
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
1997 1999 2001 2003 2005 2007 2009 YTD '11
Source: S&P LCD
42.0%
32.1%
7.6x 7.5x7.1x 6.9x
5.9x
6.7x7.0x 7.2x
8.5x8.1x
9.3x
8.3x
6.6x
8.4x 8.4x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
1997 1999 2001 2003 2005 2007 2009 YTD '11
Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others
Peak 45.6%
Credit Markets2.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Rate
(per
cent
)
High-Yield Investment Grade 10-yr Treasury
Credit Markets -- Interest Rates (Investment Grade, High-Yield, and Treasuries)
30
High-yield and treasuries spreads were tight from 2002 to 2007, evidence of the extremely easy credit prior tothe credit crisis. In November 2008, spread hit record high of 21.7%.
Spreads between investment grade, high-yield and treasuries approximate the early 2008 pre-crisis level.
Along with heightened volatility in the equity markets, high-yield spread has surged to 8.6% in August 2011, a15% increase from 7.5% in July.
Source: Bloomberg; Merrill Lynch US High Yield Master II Index
Historical Average Rates and Relationships
21.7%
8.6%
3.7%
2.2%
4.0x
3.6x 3.5x
3.9x4.1x
4.4x
5.0x 4.9x
5.3x
4.4x
3.4x
4.0x
4.9x
3.3x3.0x
3.3x 3.4x
2.4x
3.9x
4.4x4.8x
4.6x
3.3x3.1x
3.5x
4.2x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jun-11
Total Debt/EBITDA Senior Debt/EBITDA
Credit Markets -- Middle-Market Credit Statistics
31
As the economy began its recovery in 2010, leverage multiples for middle-market LBO transactions increasedfrom 2009 reflecting a trend of improvement of companies and the health of the credit market.
Source: S&P LCD
Leveraged Buyout Credit Statistics since 1999
$295
$480
$535
$153
$77
$233
$132
$289
$94
$144 $144
$69
$166
$287
$166 $176
$0
$100
$200
$300
$400
$500
$600
2005 2006 2007 2008 2009 2010 YTD 8/25/10
YTD8/25/11
$ in
bill
ions
Leveraged Loans High Yield Bonds
Credit Markets -- New Debt Issuance
32
Leveraged loan issuances have increased and 2010 volume has more than tripled 2009 volume levels. Issuancevolume through August of 2011 has already exceeded 2010 levels.
High-yield issuances continue to set records year-to-date with $176 billion issued. New issuances started toslow in August 2011.
Source: Piper Jaffray & S&P LCD
New Issuance Volume
56.1% Combined Increase
Strategic Buyers Purchasing Power3.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2007 2008 2009 2010 2011
Annaul Growth (%
)$
in b
illio
ns
Strategic Buyers Purchasing Power -- Record Amounts of Cash
34
Corporate balance sheets flushed with cash, totaling $1.75 trillion in June 2011.
Although corporate profits have grown for the past nine quarters, the growth is moderating.
Source: Capital IQ
S&P 500 Cash and Equivalents
67.2% Increase SinceQ1 2009
Record low interest rates for corporate debt issuers:
IBM – 1.00% (3 years)Google – 1.25% (3 years)Johnson &Johnson – 2.15% (5 years)McDonald’s - 3.50% (10 years)Baker Hughes – 5.125% (30 years)Petrohawk Energy – 7.25% (8 years)
Private Equity Environment4.
Private Equity Environment -- Overview
36
Private equity firms establish funds by raising capital from investors such as public and private pension funds,endowments and foundations.
The funds are generally 10 years commitment with 5 years investment period. They seek investments to generate20+% rate of return by utilizing leverage.
Typically charge investors 2% management fee on committed capital and 20% carry fee on its investments.
There are approximately 4000+ private equity groups in the U.S. today, a five-fold increase from 10 years ago.
Source: Dow Jones Private Equity Analyst
U.S. Private Equity Fundraising (1996 – August 2011)
$32.4
$65.9
$101.4$112.5
$206.5
$121.1
$91.8
$58.1
$113.5
$184.5
$291.7
$355.6
$311.7
$102.2$86.3 $79.0
$0
$50
$100
$150
$200
$250
$300
$350
$400
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD2011
$ in
bill
ions
Corporate Finance Mezzanine Venture Capital Others
Private Equity Environment – Fundraising and Commitments by States
37
Fundraising struggled to regain footing in 2010. $86.3 billion raised – lowest amount since 2003.
$79 billion raised to-date through August 2011, a 39% increase from same period last year. Total for the year isexpected to surpass 2010 level.
A significant amount of the capital was raised by firms located outside of Texas.
Source: Dow Jones Private Equity Analyst
U.S. Fundraising ($ in billions)
Dropped 15.5% from
2009
2010 Commitments by State ($ in billions)
Source: Dow Jones Private Equity Analyst; (1) includes Oklahoma and Colorado
Type of Fund # of Funds $ Amount # of Funds $ Amount
LBO/Corporate Finance 138 $53.3 117 $56.6
Fund of Funds 41 6.4 40 6.5
Mezzanine 27 6.2 20 3.3
Other PE 11 8.8 12 3.6
VC 119 11.6 69 9.1
Total 336 $86.3 258 $79.0
FY 2010 YTD August 2011
Other States 29%
International 0.1%
New York 37%
California 20%Massachusetts 8%
Texas 4%
Other Southwest(1)
2%
$43 $77
$150
$198 $230 $222 $232
$263
$292 $237
$378
$475
$396 $386
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD Q22011
$ in
bil
lions
Cumulative Overhang Equity Raised Equity Invested
Private Equity Environment -- Equity Raised & Cumulative Overhang
38
The proliferation of institutional private investment funds has created a significant buildup of un-invested capital(“overhang”).
In the near term, reduced fundraising, combined with an accelerated investing environment and higher equitycontributions, will diminish the build up of private equity overhang.
Source: Pitchbook, Inc.
Private Equity Raised & Cumulative Overhang
18.7% Decline
8.4
4.3
3.32.7
1.9
0.7
3.0
11.0
3.0 3.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 Annualized2011
Year
s to
Inv
est D
ry P
owde
r at
Ann
ual R
ates
Private Equity Environment -- Dry Powder Investment Years
39
The chart below depicts the number of years to invest dry powder, computed by dividing cumulative overhangby annual private equity capital investment
Source: Pitchbook, Inc.
Dry Powder Investment Years
Private Equity Environment -- Use of Leverage in Recapitalization (Example)
40
2x AdditionalLeverage
100% IncreaseIn EnterpriseValue
($ in thousands)2.0x 3.0x 4.0x
Valuation:TTM EBITDA $10,000 $10,000 $10,000Valuation Multiple 3.3x 5.0x 6.7xEnterprise Value $33,203 $49,835 $66,535
Sources & Uses:Debt $20,000 $30,000 $40,000Equity 13,203 19,835 26,535Total Capitalization $33,203 $49,835 $66,535
Equity Returns with 7.5% Annual Growth 25.0% 25.0% 25.0%
Equity Returns at $67MM Valuation with Less Debt 12.8% 17.8% 25.0%
Required Annual Growth to Satisfy Min 25% Equity Returns 21.7% 15.3% 7.5%
Total Leverage
Private Equity Environment – Case Study (American Central Gas Technologies, Inc.)
41
Range of Indications of Interests
11.1x 10.9x10.3x 10.2x
8.9x 8.6x7.9x
7.4x 7.4x 7.4x6.9x 6.8x
6.2x 5.9x
4.6x
$225.0 $220.8 $210.0 $207.5
$180.0 $175.0 $160.0
$151.0 $150.0 $150.0 $140.0 $137.5
$125.0 $120.0
$94.0
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
A B C D E F G H I J K L M N O
EBITDA M
ultipleEn
terp
rise
Val
ue ($
in m
illi
ons)
Financial Buyer Strategic Buyer
Private Equity Environment -- Case Studies
42
Minority Recapitalization
Pinnergy, Ltd. has completed a minority recapitalization led by The Stephens Group, LLC.
GCP acted as exclusive advisor to Pinnergy, Ltd.
Management Buyout
VLS Recovery Services, LLC has completed a management buyout led by Prudential Capital Group.
GCP served as exclusive financial advisor to VLS Recovery Services
Recapitalization
Spitzer Industries, Inc. has executed a recapitalization with The Stephens Group, LLC.
GCP acted as exclusive advisor to Spitzer Industries, Inc.
Taxes5.
Taxes -- Long Term Capital Gains Tax Rates
44
Long Term Capital Gains Tax Rate % (1954-2012)
Source: taxpolicycenter.org
In December 2010, the reduced capital gains tax law was extended through the end of 2012.
The extension relieved some of the urgency to sell, but may contribute to increased M&A activity over the next15 months.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
25%
37%40%
28%
20%
28%
20%
15%2 Year
Extension?
Conclusions6.
Conclusions
Deleveraging process by consumers and the government may take years and will restrict/prevent normal U.S. GDP growth
Demographics/aging workforce
Healthcare costs, “reregulation” and potentially higher taxes add additional head winds
Emerging markets so far propping up the U.S. economy
While overhang of private equity is shrinking, the uninvested capital is high by historical standard
Strategic buyers (with record amounts of cash) will need acquisitions to offset slower organic revenue growth
Record low cost of debt capital
Demographics (baby boomers selling businesses)
46
Exit window can open and close anytime
Easier to slow process down than speed process up
React quicker to strategic or private equity inquiry
Audits, management, ownership transfers
U.S. economy goes from slow/no growth to a downturn -would be difficult for fix with rates already at record lows and deficits at record highs
o Deteriorating U.S. economy could create additional pressure on large U.S. banks with mortgage loan exposure
o Fannie Mae and Freddie Mac challenges
European sovereign debt and bank crises gets worse. How does Euro issue get resolved?
Slowdown in emerging markets
Stock market downturn
One or more of the above and/or continued uncertainty would put acquiring entities (both strategics and private equity groups) either on hold or reduce terms and valuation
U.S. Economic Challenges areStructural, Not Cyclical
M&A Activities (assuming no major economic shock) will Accelerate
What Could Go Wrong Be Prepared
Strategic Alternatives OverviewConclusions -- Duff & Phelps Services Overview
47
Service Lines Industry Coverage
United StatesAtlanta, Austin, Boston, Chicago, Cincinnati, Dallas, Denver, Detroit, Morris Town, Houston, Los Angeles, New-York, Philadelphia, Plano, San Francisco, Seattle, Silicon Valley
EuropeAmsterdam, London, Munich, Paris
AsiaShanghai, Tokyo
Cross Border Engagements
Cross Border Engagements
Cross Border Engagements
Atlanta, Austin, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles, Morristown, New York, Philadelphia, Plano, San Francisco, Santa Monica, Seattle, Silicon Valley, Toronto, Washington
AsiaEurope
North America
MERGERS & ACQUISITIONS
Exclusive Sale Transactions Distressed Asset Sales Corporate Divestitures
Leveraged Buyouts Buy-Side Acquisition Advisory Review of Strategic Alternatives
PRIVATE PLACEMENTS & CAPITAL RAISING
Senior Debt Arranging Mezzanine Debt Placements Equity Placements
Leveraged Recapitalizations Private Investments in Equity ESOP Corporate Finance
FINANCIAL RESTRUCTURINGS & RECAPITALIZATIONS
Plans of Reorganization Lender & Creditor Negotiations DIP and Exit Financings
Exchange/Tender Offers Rights Offerings Business Plan/Debt Analysis
TRANSACTION OPINIONS & FINANCIAL ADVISORY
Fairness Opinions Commercially Reasonable Ops. Corporate Financing Consulting
Solvency Opinions Business & Security Valuation Dispute Analysis & Litigation
Ranked #2 restructuring firm in the U.S.
Ranked #4 provider of fairness opinions
Aerospace and Defense Business Services
Energy and Mining Engineering/Construction
Food and Agribusiness Healthcare
Industrial Products Technology and Media
Global Footprint
www.boyarmiller.com
Real Estate FinanceThomas O. Fish – Jones Lang LaSalleExecutive Managing DirectorCo-Head Real Estate Investment Banking
Current Environment - Debt Markets• Europe’s sovereign debt crisis continues to rattle global markets.
• The S&P 500 plunged 18% from a 3-year high on April 29 through August 8 in large part over concern that Europe will fail to contain its debt crisis.
• The 2-year swap spread – considered a gauge of fear in the debt markets – rose to a one-year high on August 23. Risk aversion has sent investors back to the Treasuries, driving down yields.
• Spreads have widened across all credit sectors, including commercial real estate. • CMBS spreads are now approximately 300 basis points, 100 b.p. increase over last 2 months.• Mostly offset by decrease in Treasury yields. 10-year T-bill = 2.15%, vs.3.18% in July. • 5 year T-bill = 1%!!! Downgrade = Price Increase?!?• CMBS which still offers attractive yields on a risk-adjusted basis compared to other fixed-income
instruments. • US commercial property sales increased to $97 billion year-to-date through July, compared to $49
billion for the same period in 2010, an increase of 98%. • Banks have arranged over $21B in CMBS this year, led by retail and office properties, compared with
$11B in all of 2011. Won’t make $35-40B forecast.• Portfolio lenders continue to grow their books. Insurance companies have raised their production
goals for 2011 and are able to tackle larger loans that securitized lenders are wary of warehousing. • Lenders are aggressively quoting 5-10 year deals in the 4-6% range at LTVs up to 75%
Source: Bloomberg, Jones Lang LaSalle
Current Global Government YieldsConcern remains over The “PIIGS”
Global 10-Year Government Yields
1.03%2.22% 2.22%
5.04% 5.14%
8.62%
10.38%
17.81%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Japan Germany US Spain Italy Ireland Portugal Greece
Source: ACLI, Federal Reserve, Wells Fargo, Jones Lang LaSalle
Commercial RE Debt Maturities by LenderBank maturities dominate landscape and will be most challenged
• $900 billion of debt maturing through 2013, $682 billion of which is bank debt• Many loans - no option other than foreclosure or restructuring/modification • GOOD NEWS: There is still a lot of relatively inexpensive debt/equity available with LTVs up to 75%
Source: JPMorgan, Jones Lang LaSalle
CMBS Troubled Loan UpdateSpecial servicers have $76 billion of volume to work through
Loans in Special Servicing as % of CMBS outstanding
$34
$70
$76
4.96%
10.92%
12.77%
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
Jan-09
Feb-09Mar-09
Apr-09May-09
Jun-09Jul-09
Aug-09Sep-09
Oct-09Nov-09
Dec-09Jan-10
Feb-10Mar-10
Apr-10
May-10Jun-10
Jul-10Aug-10
Sep-10Oct-10
Nov-10Dec-10
Jan-11Feb-11
Mar-11Apr-11
May-11Jun-11
Jul-11
(Billi
ons)
1.50%
2.25%
3.00%
3.75%
4.50%
5.25%
6.00%
6.75%
7.50%
8.25%
9.00%
9.75%
10.50%
11.25%
12.00%
12.75%
Volume in SS As % of all CMBS
Source: FDIC, Jones Lang LaSalle
Bank Troubled Loan UpdateA Long Way to go to Reach Early-2008 Levels
Future Distressed Loans from Banks - 30+ Days Delinquent
$80$90
$104
$124
$151
$166$176 $180
$190$181 $178
$167 $164
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
(Billio
ns)
CRE Loans OREO Total
Source: Mortgage Bankers Association, Jones Lang LaSalle
CRE Delinquency by Lender TypeCMBS at 9%; Life Co’s and Agencies in Great Shape
Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $5 million
US CRE Sales Volume2011 off to a good start and could reach 2004 levels
US Sales Volume
$83$104
$127
$231
$310
$364
$513
$145
$55
$125
$49
$97
$0
$75
$150
$225
$300
$375
$450
$525
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jan - July2010
Jan - July2011
(Billi
ons)
2011 may reach 2004 level
Property Investment by Market TypePrimary markets still dominate; however, balance starting to move
Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $2.5 million
Source: Credit Suisse, JPMorgan, Jones Lang LaSalle
CMBS IssuanceMarkets need to stabilize FAST to meet $35 - $40 billion forecast
Source: Bloomberg, Jones Lang LaSalle
CRE SpreadsSpreads widening over last two months – 75 – 100bps.
Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle
Cap Rates Versus CorporatesProperty is offering a much better risk-adjusted yield
Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle
Property Spread to US TreasuryCap rates are over 400 basis points higher than the 10-Year Treasury
Source: Real Capital Analytics, Jones Lang LaSalle
Cap Rates by Property TypeYields are back to 2004 / 2005 levels
SUMMARY
• CMBS is “taking a knee” until stability returns – hard to price
• Portfolio lenders still very much open for business
• Debt rates are still ridiculously low
• Lenders / investors still picky – looking for great product, location and sponsorship, creeping out to secondary markets.
• Equity investors are still underallocated
• Will underwriting change to reflect slower recovery? Too soon to tell.
www.boyarmiller.com
Commercial BankingJames S. D’Agostino, Jr., – Encore BankChairman of the Board & CEO
There are a lot of banks in Houston
There are a lot of banks in Houston
• Three TBTF banks have 60% of market
• Out-of-town banks control over 75% of market
• Local banks have $24B in loans
FBR Capital Markets & Co. Houston Bank Review 2nd Quarter, 2011 FDIC Deposit Market Share Report June 30, 2010
How Are Banks Doing?
• Much Better– More capital– More liquidity– Fewer problem assets
• But…
How Are Banks Doing?
• Revenues weak• Loans weak• Margins weak• Costs rising
Trouble ahead?
Regulatory Environment
Are Banks Lending?
YES! BUT
Are Banks Lending?
• Land Loans
• Construction & Development Loans
• Commercial Real Estate Loans
• Mortgage Loans
• Commercial & Industrial Loans
What’s a Borrower to do?
• Build A Relationship
• Build Good Financial Data
• Strengthen Ties Beyond Banker
• Know Your Bank
Questions & Answers