MARKET INSIGHTS
2Q 2017
DEBT CAPITAL MARKETS
EXECUTIVE SUMMARY
• Strong demand for new issuance in both loans and bonds contributed to tightening spreads across the board with the
possible exception of investment grade loans, where spreads have been surprisingly steady.
• If transaction volumes are any guide, uncertainty currently outweighs optimism as issuers take a pause and wait for
clarity on any number of potentially significant pieces of legislation coming out of the nation’s capital, such as tax reform,
healthcare reform, infrastructure spending and regulatory relief.
• We’re optimistic that once clarity is provided on the legislative outlook, corporate lending to support M&A will rebound
given the still historically high levels of corporate cash, growing optimism around an improving economy and,
particularly, bank and investor demand for assets.
• Overall, the market outlook is decidedly issuer-friendly, and especially so for leveraged and middle market borrowers,
as investor demand for loans far outstrips issuer supply.
INVESTMENT GRADE
The investment grade loan market is experiencing relatively flat pricing some six years out from the start of the current
recovery. Historically, these spreads have tightened as much as 50 bps further this far into the cycle, but thanks largely
to post-crisis commercial bank regulatory and capital requirements, spreads appear to have found some resistance at
current levels.
bps
I-GRADE SPREADS FIND A LEVEL
300
BBB
250
A
200
Recession
150
100
1Q17
1Q15
1Q13
1Q11
1Q09
1Q07
1Q05
1Q03
1Q01
1Q99
1Q97
1Q95
0
1H92
50
Sources: PNC Capital Markets LLC, Bloomberg, Thomson Reuters LPC, Federal Reserve
Debt Capital Markets
1
2
Debt Capital Markets
From an issuer’s perspective, the steady rise in LIBOR
rates has only compounded the issue and served to
increase corporate borrowing costs overall.
LIBOR ON THE RISE
125
3 Month Libor
1 Month Libor
100
bps
75
50
25
0
Sep-2015
Mar-2016
Sep-2016
Mar-2017
I-GRADE M&A ISSUANCE BY TYPE
$90
Revolver
Term Loan
Perhaps due to this uncertainty, the overall forward loan
calendar is at its lowest level since 2012. So even though
markets are open and banks are anxious to lend money,
volumes are particularly light.
Bridge Loan
$80
$ in billions
$70
$60
$50
$40
Tempered
IG M&A
$30
$20
$10
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
$0
NEUTRAL LENDING STANDARDS
After four periods of net tightening, banks appear
to be in a comfortable place
10%
0%
-10%
-20%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
% of Respondents Reporting
Net Tightening
20%
Sources: PNC Capital Markets LLC, Bloomberg, Thomson Reuters LPC, Federal Reserve
The lack of large corporate M&A was the surprising news
event of the quarter. Large corporations largely sat out the
first three months of 2017, perhaps awaiting clarification
on the ambitious legislative agenda beginning to get
underway in Washington, D.C. The announcement of this
agenda, which almost immediately had a positive impact
on confidence, has steadily evolved into uncertainty around
the form of implementation of any, or all, of the following:
tax reform, regulatory relief, infrastructure spending and
healthcare reform.
Regardless, we’re optimistic that large corporate
borrowers will once again pursue both organic (capital
spending) and strategic growth (M&A) opportunities.
Finally, we saw U.S. investment grade bond volume up
approximately 80% from the fourth quarter, according to
Bloomberg data, as issuers rushed to market ahead of the
Federal Reserve’s March 15 rate hike.
Despite the wide expectation of coming rate hikes, the
buyside is showing strong demand for fixed-income.
Overall, we’re seeing investors oversubscribe new-issue
bond deals (3.1x on average YTD) and buy up assets in the
secondary, tightening bond spreads slightly from Q4.
3
Debt Capital Markets
LEVERAGED/HIGH YIELD
The leveraged/high yield loan market is an issuer-friendly
place to be right now. Thanks to 22 straight weeks of
investor cash inflows into the asset class, where investors
hope to benefit from increasing rates, loan mutual funds
and ETFs are receiving just under $926 million per week
in new capital to invest.
WEEKLY LOAN FLOWS
Weekly Loan Flows
4-wk Avg
$2,500
Volume ($ in millions)
$2,000
Large inflows as investors seek
to benefit from higher rates
$1,500
$1,000
$500
Add in the effects of repayments and collateralized loan
obligation (CLO) issuance, and it’s clear just how wide the
supply/demand imbalance has become. In short, there’s
not enough new issuance (supply) to satiate all the new
capital formation (demand). The imbalance is leading to
$0
-$500
-$1,000
-$1,500
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
-$2,500
Jan-14
-$2,000
INVESTOR DEMAND CONTINUES TO SWAMP SUPPLY
$20
(i) Net new issuance less (ii) New capital
$15
$ in billions
$10
Not enough supply to
overtake new capital
$5
-$5
-$10
-$15
Aug-2016
Mar-2017
$ in billions
INSTITUTIONAL VOLUME BY PURPOSE
$350
Repricing via amendment
$300
Re-syndicated repricing
$250
New-issue
33%
Newissue
Massive
1Q17
increase in
repricings
$200
$150
67%
Repricings
$100
Overall, investors clamored for paper throughout the
quarter as they tried to put cash to work, and a number
of our clients repriced their institutional term loans
and/or refinanced into longer maturities.
In fact, because of the borrower-friendly market, quarterly
institutional new-issue volume set an all-time high,
according to data from S&P Capital IQ LCD. But, repricings/
refinances still accounted for two-thirds of all institutional
volume by purpose.
$0
-$20
Jan-2016
institutional loans repricing at a blistering rate today, but
we’re expecting this will drive new transaction flows over
the coming months.
It’s not a surprise then that we’re seeing significant
oversubscription on new-issue institutional loans, and
it’s not uncommon for loans to trade up to a 101+ market
shortly after breaking for trading. A few other highlights
include:
•T
here are more than 20 issuers with Term Loan B
spreads at L+200, barely on top of the typical L+175
pro rata spread.
•L
oans saw institutional pricing flex down/up at a ratio
of 15:1 in March, making such deals more favorable
to the borrower.
$50
Sources: PNC Capital Markets LLC, Bloomberg, Thomson Reuters LPC, S&P
1Q17
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
$0
•T
he second-lien market picked up steam, with
$7.1 billion of syndicated volume the highest of the
past 10 quarters.
4
Debt Capital Markets
•S
&P Capital IQ survey data show that loan investors don’t
expect defaults to tick above the historical average of
3.1% until 2019.
HIGH YIELD BOND VOLUME & ISSUANCES
$150
HY Volume
250
HY New Issues
200
$100
150
$75
100
$50
50
$25
1Q17
3Q16
1Q16
3Q15
1Q15
3Q14
1Q14
3Q13
1Q13
3Q12
0
1Q12
$0
# of New Issuances
Volume ($ in billions)
$125
• In December, the same investor survey showed investors
expanding their time horizon from 2017 to 2018, meaning
that investors are growing more optimistic in this lowdefault, high-recovery loan environment.
In terms of risk areas, thanks to declining retail traffic
there’s elevated risk in the retail sector, specifically for
more highly leveraged borrowers serving niche customer
segments. A number of them plan to file, or have already
filed, for bankruptcy (examples include Rue21, Payless,
Sports Authority, RadioShack and The Limited).
Finally, we saw massive high yield bond volume in Q1
($95.6 billion, up from $49.4 billion in Q4), bolstered by
strong demand and issuers tapping the markets ahead of
rate increases.
Energy issuance was a bright spot as oil hovered around
or above $50/barrel, and the materials and energy sectors
teamed up to account for approximately $30 billion, nearly
one-third, of Q1 high yield issuance.
Sources: PNC Capital Markets LLC, Bloomberg, S&P Capital IQ LCD
5
Debt Capital Markets
MIDDLE MARKET
$40
$30
$20
$10
$0
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
CAPITAL RAISED FOR MIDDLE MARKET LENDING
$35
$30
Private credit raised significant
capital in Q4 2016, adding even
more capital that must be
deployed
$25
$20
$15
$10
$5
1Q17
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
1Q14
3Q14
$0
Also, private credit funds raised a significant amount of
new capital over the last two quarters, bringing even more
competition to an already crowded marketplace.
NON-SPONSORED MM SPREADS (EXCLUDING M&A)
The landscape is especially competitive in the traditional
middle market segment (deal size below $100 million),
where banks are hunting for new opportunities and
tightening spreads to win deals.
250
Large
Traditional
225
bps
In fact, non-M&A spreads for both traditional middle
market and overall middle market are tightening in the
face of competition.
Middle market volume trended
down since 2013, specifically
non-sponsored
$50
$ in billions
One middle market bank lender commented that there’s
nearly “unlimited appetite” for funded pass credits, as
banks seek new-money opportunities and look to deepen
relationships through ancillary business.
Sponsored
$60
In fact, only 25% of banks and non-bank lenders reported
hitting their lending goals in Q1. According to a Thomson
Reuters survey, they faced robust competition, low pricing,
and being squeezed out by competitors taking larger
hold sizes.
Further, those lenders who reported meeting their goals
attributed it to a backlog of deals from Q4 or more specific
lending strategies.
Non-sponsored
$70
2Q14
Sponsored volume actually propped up middle market
activity — volume was still down 20% from Q4, but above
comparable 2015 and 2016 levels.
TOTAL MIDDLE MARKET VOLUME
$ in billions
“Quiet” is a good way to describe the middle market in
the first three months of 2017. Volume for non-sponsored
companies fell 24% from the fourth quarter, and the
majority of middle market issuers that came to market did
so to opportunistically refinance existing credit facilities.
The less than half remaining was split between new-money
for non-M&A activity and new-money for M&A.
200
175
Large MM - Deal size >$100M to $500M
For all: Borrower sales <$500M
1Q17
2Q16
3Q15
4Q14
1Q14
2Q13
3Q12
4Q11
Notes: Traditional MM – Deal size <=$100M
1Q11
150
Sources: PNC Capital Markets LLC, Thomson Reuters LPC
6
Debt Capital Markets
REAL ESTATE
DRAWN / UNDRAWN BY RATING
200
Drawn
185
Undrawn
The syndicated real estate loan market is seeing little to
no change in structure or pricing, and spreads are virtually
unchanged from last quarter.
180
145
160
bps
140
120
100
With a lack of event- or acquisition-driven volume as a
backdrop, lenders were forced to focus much of their
energy on refinancing activity. At the same time, lenders
are placing greater emphasis on maintaining strong
portfolio quality sector-by-sector.
120
103
95
80
60
40
20
15
20
25
30
BBB+/
Baa1
BBB/
Baa2
BBB-/
Baa3
<BBB-/
Baa3
12.5
0
>= A-/
A3
REAL ESTATE SYNDICATED LOAN VOLUME
$50
Non-REIT
REIT
Total CRE
$ in billions
$40
Banks, and real estate market participants in general,
are examining retail projects with increased scrutiny as
retailers face continued headwinds in today’s environment.
Mall fundamentals, in particular, are burdened by
struggling retail anchor tenants. Traditional department
store anchor tenants, such as Macy’s and Sears, drove
foot traffic for smaller tenants throughout retail projects.
Recently, however, established retailers are evaluating
their physical footprints as e-commerce continues to
capture market share, often leading to certain wellpublicized store closures.
$30
$20
$10
1Q17
1Q16
1Q15
$0
As a result, mall owners are challenged with filling
vacated space and maintaining profitable occupancy
levels amidst these closures. Compounding this problem
is the co-tenancy provision often found in the leases of
smaller tenants that reduces their rental rate or allows
them to vacate their own stores should key tenants leave
the project.
This mall environment exacerbates the performance
difference between “A”-malls and “B”- or “C”-malls.
As retailers strategically optimize their physical and
online presence, the target locations for their smaller
footprint are the highest-quality malls with the most
foot traffic.
Sources: PNC Capital Markets LLC, Thomson Reuters LPC, Green Street Advisors
7
Debt Capital Markets
MALL NON-ANCHOR OCCUPANCY
96%
10 Yr Avg
Mall-Non-Anchor Occupancy
95%
On the other hand, lower productivity malls need to look
for solutions to fill the vacated space, which is becoming
an increasingly expensive endeavor.
Percent
94%
93%
92%
Overall, occupancy is flat to declining, with the lowerquality assets having the most downside risk.
91%
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
90%
89%
The highest performing malls will, consequently,
strengthen their competitive advantage as tenants are
willing to pay a premium for the superior location.
To incentivize prospective tenants and keep occupancy
at a profitable level, these mall owners are paying more
money upfront to build out the retailer’s specific space,
a capital expenditure known as tenant improvements
or tenant allowances.
Furthermore, the landlords of these lower class malls are
seeking more restaurant and entertainment tenants, which
have considerable capital requirements for their spaces,
to help drive foot traffic and sales.
Sources: PNC Capital Markets LLC, Thomson Reuters LPC, Green Street Advisors
8
Debt Capital Markets
ASSET BASED LENDING
Sponsored middle market activity is still strong because
funds have record levels of dry powder for deployment.
Purchase multiples are historically high, and for funds to
be competitive with strategic acquirers they need higher
bid prices and leverage.
Club transactions and unitranche financings generally offer
the entire capital structure in a one-stop solution with the
optionality to stretch leverage beyond the traditional bank
market execution.
Another trend is the supply/demand imbalance. At less
than $5.0 billion, new money ABL made up only 24% of
total issuance, down significantly from the roughly 33%
logged in Q4. As a result of refinancing activity, the maturity
wall for ABL credits is now out to 2022.
Drawn
90
Undrawn
10
0
0
1Q17
50
3Q16
20
1Q16
100
3Q15
30
1Q15
150
3Q14
40
1Q14
50
200
3Q13
250
1Q13
60
3Q12
300
1Q12
70
3Q11
350
1Q11
80
3Q10
400
1Q10
With the issuer-friendly market, sponsors and borrowers
alike have gradually migrated away from the traditional
retail syndication. The club market is growing in popularity
as lenders offer up larger hold sizes, translating to
smaller, relationship-based bank groups for borrowers
to manage. The trend benefits the banks with larger hold
sizes, earning them more ancillary business.
Drawn bps
Even considering the jump in activity, smaller club
transactions are continuing to proliferate, with $940 million
in clubbed issuance completed in Q1, a trend that we saw
throughout most of 2016. The trend is still going strong
into 2017.
450
Overall, technicals in the ABL market are strong, and
the market is seeing fierce competition. Quarter-overquarter pricing is relatively flat, with lenders focused
on relationship plays and ancillary business to bolster
return models.
The outlook continues to be a borrower-friendly
environment in terms of pricing and structure. However,
the general expectation is that pricing and structure have
more or less “topped out.”
With banks slowly understanding and adopting the
regulatory mandates, tougher credits will continue to
experience a limited syndication audience. As such,
the dynamic increasingly paves the way for direct and
alternative lenders to play bigger roles in the changing
landscape.
As a result, we will continue to see more traditional ABL
lenders partnering up with direct and alternative lenders
to deliver financing solutions, and even more so as these
lenders raise more capital.
FOR MORE INFORMATION
Visit pnc.com/dcm.
Sources: PNC Capital Markets LLC, Thomson Reuters LPC
Services such as public finance investment banking, securities underwriting, loan syndication, and securities sales and trading are provided
by PNC Capital Markets LLC (“PNCCM”). PNCCM, member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”)
and affiliate of PNC Bank, National Association (“PNC Bank”).
©2017 The PNC Financial Services Group, Inc. All rights reserved.
Undrawn bps
U.S. syndicated ABL volume for the first quarter of 2017
displayed a meaningful increase over the same time period
last year. At $19.4 billion, first quarter volume increased
approximately 11% year-over-year and saw a 27% increase
compared to Q4.
DRAWN / UNDRAWN SPREADS