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Testimony Before the ABI Chapter 11 Reform Commission

Testimony Before the ABI Chapter 11 Reform Commission. Field Hearing 17 th Annual LSTA Conference New York October 17, 2012. Ted Basta SVP, Analysis and Data The Loan Syndications and Trading Association (LSTA). The Size and Importance of the Leveraged Loan and High Yield Bond Markets.

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Testimony Before the ABI Chapter 11 Reform Commission

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  1. Testimony Before the ABI Chapter 11 Reform Commission Field Hearing 17th Annual LSTA Conference New York October 17, 2012 Ted Basta SVP, Analysis and Data The Loan Syndications and Trading Association (LSTA)

  2. The Size and Importance ofthe Leveraged Loan andHigh Yield Bond Markets

  3. Leveraged Loans and High Yield Bonds RepresentMore than 6% of U.S. Fixed Income Assets Leveraged Loans 3% High Yield Bonds 3% Asset Backed 5% High Grade Bonds 18% Mortgage-Related 23% Total Size of Fixed Income Market $38 Trillion

  4. In 2001 the Wall Street Journal Began Covering the Leveraged Loan Market - Today the Leveraged Loan Market Provides Funding to Almost 1,500 Individual Companies Source: Wall Street Journal

  5. There is More Than $1.5 Trillion in Total Leveraged Debt Outstanding (HY Bonds & Institutional Loans) - With an Estimated $2.7 Trillion Traded Annually by Year-End 2012 Leveraged Debt Outstanding Leveraged Debt Secondary Trading Volume Source: Thomson Reuters & LSTA Trade Data Study Source: S&P Capital IQ LCD

  6. Since 2010, The Leveraged Loan and High Yield Bond MarketsHave Provided Corporate Borrowers With $1.7 Trillion in Funding Source: S&P Capital IQ LCD

  7. Senior Secured Loans sit Atop the Capital Structure and Offer Corporate America a Private and Cheaper Source of Funding Senior Secured Loans High • Primary Market Yields for B-Rated Unsecured Bonds and Institutional Loans High Yield Bonds Convertible Securities Payment Seniority Preferred Stock Common Stock Low Source: S&P Capital IQ LCD

  8. The Last Three Default Cycles (1,000 Corporate Defaults)Illustrate the Significance of Capital Structure • Leveraged loans are typically the most senior debt in a company’s capital structure and often have first-lien claim to the company’s assets in the event of bankruptcy. Historical US Spec. Grade Default Rate Average Recoveries in Three Default Cycles Source: Moody’s Investor Services

  9. The Distribution of Recoveries Over the Past Two Years AcrossBoth Markets Illustrates the Importance of Senior Security Source: Fitch Ratings

  10. As the Leveraged Loan and HY Unsecured Bond Markets Seized upin 2009, the Secured Bond Market Became a Major Source of Funding Source: S&P Capital IQ LCD

  11. The LeveragedLoan Market Liquidity and the Lender Base

  12. Over the Past 12 Years, The Primary Source of LeveragedLending has Been the Institutional Lender Base Source: S&P Capital IQ LCD

  13. Secondary Trading Liquidity Levels Remained MostlyConstant Before, During and After the US Recession Source: S&P/LSTA LLI & LSTA Trade Data Study Source: S&P Capital IQ LCD

  14. The Secondary Leveraged Loan Market Allows Managersto Actively Trade in Order to Shift Around Risk Allocation Source: LSTA Trade Data Study Source: S&P/LSTA LLI & LSTA/TR LPC MTM

  15. As Market Conditions Change so Doesthe Lender Base for Leveraged Loans Share of Non-Bank Leveraged Primary Lending Source: S&P Capital IQ LCD

  16. Hedge, Dis. & HY Funds are Critical in theEffective and Efficient Transfer of Risk Source: S&P Capital IQ LCD & LSTA/TR LPC MTM Pricing

  17. Case Studies on Liquidity and Performance in Bankruptcy

  18. Idearc (Orig. Deal Size = $6.5B) & Masonite (Orig. Deal Size = $1.5B) Filed For Bankruptcy in March 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened Source: LSTA Trade Data Study & LSTA/TR LPC MTM

  19. Chrysler Corp. (Orig. Deal Size = $9.5B) & General Growth Prop.(Orig. Deal Size = $2B) Filed For Bankruptcy in April 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened Source: LSTA Trade Data Study & LSTA/TR LPC MTM

  20. Delphi Automotive Corporation Filed for Bankruptcy October, 2005~Hedge Funds Recapitalize the Companyto Allow it to Re-Organize Despite Heavy Volatility Completed its Post-Re-Org IPO on 11/11 at $22 Filed for Bankruptcy 10/05 Hedge Funds Recap Company Source: LSTA/TR LPC MTM

  21. Debtor-In-Possession (DIP) Financing Liquidity and Performance

  22. The LSTA Has Tracked 56 Companies That Have Accessed the DIP Market Since 2006, Providing Them With the Liquidity Needed to Operate and Restructure While in Bankruptcy~Only 2 Companies Liquidated

  23. DIP Lending is Critical to the Preservationand Subsequent Appreciation of Enterprise Value Source: LSTA Trade Data Study & LSTA/TR LPC MTM

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