Strategies for Growth: Access to Capital in
Volatile Capital Markets
Stefan Shaffer, Managing Partner
SPP Capital Partners, LLC
THESIS STATEMENT
Historically, Macroeconomic Conditions Dictate Market
Conditions…..But Not Necessarily in December of 2010.
Accordingly, Unique Borrowing Opportunities of Historic
Proportions Currently Exist, and Most Likely will not
Continue.
2
SPP CAPITAL PARTNERS
•
A private investment bank specializing in the private placement of senior debt, mezzanine debt
and equity capital.
•
Formed in 1989, as SPP Hambro, a subsidiary of Hambros Bank plc.
•
Reconstituted as SPP Capital Partners, LLC through an MBO in 1998.
•
Since the firm’s inception, it has completed more than 400 transactions aggregating in excess of
$18.0 billion.
•
SPP manages the Private Capital Formation operations of 12 major banks and financial
institutions in North America and Europe, through exclusive JV relationships, eight of these
institutions are shareholders of SPP, including CoBank.
•
Has extensive relationships throughout the equity sponsor community.
•
Created SPP Mezzanine Partners in 2004 to make direct mezzanine investments. Currently
approximately $50 million in assets under management through SPP Mezzanine Funding I & II.
3
PRODUCTS AND INDUSTRIES
Industry
Closed Transactions
$7,500,000
Leveraged Finance / Debt Capital Markets
•
•
•
•
CPM Acquisition Corp.
Wells Dairy, Inc.
Basic MaterialsOne of the largest food
Asset-based and cash flow senior debt
Leading producer and
marketer of ice creamDairy
and
cooperative that
fresh fluid dairy products
produces
cheese,
butter and LLC
American-De
Rosa
Lamparts,
brokers in the western U.S.
whey fractions, in addition to
other dairy-based products
One of the largest food
wholesalers in the U.S.
Consumer Goods
Subordinated / mezzanine debt
Financial
Waiver and Amendment Advisory
•
•
•
•
•
$70,000,000
$50,000,000
Kelley-Clarke, Inc.
Acquisitions and recapitalizations
Uni-tranche “one-stop” solutions
$24,500,000
Agricultural /
Food
Dealers’ Financial
Service, LLC
Healthcare
Out-of-court advisory for turn-around situations
Amendments and waivers
Industrials
Jason Incorporated
Hirschfeld Holdings LP
Solvency opinions
Services
Secondary securities sales / repurchases
Credit ratings advisory
Technology
SHL Systemhouse
Utilities and
Energy
Transportation
Retail
4
Tortoise Energy Capital Corp.
ADVISORY: INVESTOR RELATIONSHIPS AND MARKET EXPERTISE
Investor Type
Description
Commercial Banks
ABL and CF debt
Insurance
Companies
Investment grade debt
Hedge Funds /
Non-Bank
Entire capital structure
Mezzanine Funds
Mezzanine debt
Private Equity
Funds
Equity capital
Closed Transactions
5
SELECT AGRICULTURAL TRANSACTIONS
$11,000,000
$15,000,000
$60,000,000
$50,000,000
$50,000,000
$30,000,000
One of the largest food
brokers in the U.S.
Mfg of fertilizer and chemical
spreading machinery used in
agricultural industry
Leading regional grocery
wholesaler and retailer
Leading sugarbeet producer
and sugar processor
Leading Utah retailer-owned
food wholesaler
Leading producer of
dehydrated onions, garlic and
other vegetables
$9,500,000
$225,000,000
$27,000,000
$35,000,000
$95,000,000
$45,000,000
Advantage Mayer,
Inc.
Stokely, USA, Inc.
$
Tw
Gr
CPM Acquisition Corp.
Mfg of palletizing equipment
for the animal feed industry
$7,500,000
Kelley-Clarke, Inc.
Kelley-Clarke,
Inc.
One of the largest
One
largest food
food
brokers in the western
brokers
western U.S.
U.S.
Leading provider of agronomy
and petroleum products and
services in the U.S.
$45,000,000
$45,000,000
$24,500,000
$24,500,000
Stokely,USA,
USA,Inc.
Inc.
Stokely,
Dairy
Dairycooperative
cooperativethat
that
Mfg
canned
vegetables
and
produces
cheese,
and
produces
cheese,butter
butter
and
Mfg
of of
canned
vegetables
and
fruit
and
frozen
food
whey
fractions,
inproducts
whey
fractions,
inaddition
additiontoto
fruit
and
frozen
food
products
other
otherdairy-based
dairy-basedproducts
products
Leading producer of premium
pastas
Leading producer of walnuts
in the U.S.
$17,000,000
$17,000,000
$70,000,000
$20,000,000
$50,000,000
$20,000,000
TwinCountry
Country
Twin
Grocers,Inc.
Inc.
Grocers,
UniversalFoods
Foods
Universal
Corporation
Corporation
Wells Dairy, Inc.
Retailer-owned
wholesaler
Retailer-owned
wholesaler
One of
the
largest
food
engaged
primarily
in
the
engaged
primarily
inthe
the
wholesalers
in
U.S.
grocery
distribution
business
grocery
distribution
business
Leading producer
and of
Manufacturer
ofa avariety
variety
Manufacturer
ofice
of
marketer
ofproducts
cream and
food
food
products
fresh
fluid
dairy products
6
Multi-regional food distributor
$20,000,000
$20,000,000
Mfg of canned vegetables and
fruit and frozen food products
$115,000,000
$115,000,000
WakefernFood
Food
Wakefern
Corporation
Corporation
Leadingproducer
producerofofamateur
amateur
Leading
gardeningseeds
seeds
gardening
Retailer
engag
grocery d
Largestretailer-owned
retailer-ownedfood
food
Largest
cooperativeand
andfifth
fifthlargest
largest
cooperative
foodwholesaler
wholesalerininthe
theU.S.
U.S.
food
W
Wa
S
Se
Marke
Markets
fertili
fertiliz
andre
r
and
w
wh
ag
ag
Effects of a Weak Economy
Effects of a Weak Economy
• Flight to Quality
• Low Treasury Rates
• High Spreads Relative to Treasury Rates
• No Interest in Risk
• High Yield Activity Ceases to Exist
• “Risk Premium” for Leveraged Credits, Smaller Credits Exaggerated
• General “Lack of Access” to Capital Across the Board
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Effects
of a Weak
Economy
U.S. 10-Y
T
Y
G
/C
S
EAR
REASURY
IELD
RAPH
REDIT PREADS FOR U.S.
December 2007 – June 2009
CORPORATES, RATED BBB-A (PREVIOUS TWO RECESSIONS)
March 2001 – November 2001
Source: Bloomberg
9
Effects
of a Weak
Economy
H
Y
P
Y
IGH
IELD
RICES AND
IELDS
10
Current Economic Conditions
Current Economic Conditions
Quarter-to-Quarter Growth in Real GDP Growth
• Continued economic growth
- 2009 Q4 growth in real GDP of 5.0%
- 2010 Q1 growth in real GDP of 3.7%
- 2010 Q2 growth in real GDP of 1.7%
- 2010 Q3 growth in real GDP of 2.0%
- Forecasted growth of 2.0% through 2011 Q4
ISI Forecast
2010
2011
2Q
3Q
4Qe
1Qf
2Qf
3Qf
4Qf
Real GDP*
1.7%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
GDP Price Deflator*
1.9%
2.3%
1.0%
1.0%
1.0%
1.0%
1.0%
Nominal GDP*
3.6%
4.2%
3.0%
3.0%
3.0%
3.0%
3.0%
10-Year Bond Yield**
3.0%
2.5%
2.4%
2.5%
2.7%
2.8%
2.9%
Fed Funds Rate**
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
*Q/Q % A.R. **End of period
Source: U.S. Bureau of Economic Analysis
Source: ISI Weekly Economic Report
12
Current Economic Conditions
Seasonally Adjusted Unemployment Rate
• Unemployment hovering at 9.6%
• Disappointing Private Sector Hiring
Nonfarm Payroll Employment Over-the-Month Change
Seasonally Adjusted
- 64,000 non-farm jobs added in September
- 93,000 non-farm jobs added in August
- 116,000 non-farm jobs added in July
Source: Bureau of Labor Statistics, “Employment Situation – September 2010”
13
Current Economic Conditions
• Fed announces “QE2” on November 3rd
- Outlines plans to purchase $600 billion of Treasuries through June 2011
- Intended to lower interest rates and spur increased lending and investment
- Large Banks, flush with new proceeds from Fed purchases will be anxious to make loans
- Which will spur investment by corporate borrowers
- Which will result in greater production and employment
• Possible
Outcomes
- Increased cash in the system and higher priced bonds with diminished yields could lead to
allies in riskier asset classes and drive up commodity prices
- Corporations could “sit” on cash—not deploy it
- Could lead to increased inflation and a “fixed income bubble”
- Material declines in the dollar
14
Current Economic Conditions
Cash on corporate balance sheets is at an all time high already
Source: BofAML Credit Strategy
15
Current Market Conditions
Current Market Conditions
Generally, when U.S. Treasuries compress to such low levels, investors expand spreads to maintain a
modicum of return.
-
In this market, while the Fed is essentially subsidizing long term treasuries to keep rates artificially low,
investors are compressing spreads to entice borrowers.
-
In fact, for high quality issuers (the “Slam Dunks” - typically larger credits) are getting done across a
wide range of maturities and are well oversubscribed with increasingly liberal covenant
packages. Spreads on some of these deals have been in the mid to low 100’s.
Low US Treasury rates are usually the result of a “flight to quality” with treasuries acting as a hedge
to deteriorating credit conditions.
-
In this market, low US Treasures and potentially deteriorating credit conditions (a potential “double
dip”), have not up-tiered investors portfolio needs.
-
To the contrary, because competition for high quality credits have driven returns to such low levels,
investors are eagerly bidding transactions that have greater risk profiles in an attempt to gain some
modest level of return.
17
Current Market Conditions
U.S. 10-YEAR TREASURY YIELD GRAPH / CREDIT SPREADS FOR U.S. CORPORATES, RATED BBB-A (11/2007 – 11/2010)
Source: Bloomberg
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Current Market Conditions
Investment grade borrowing spreads are already at their lows
Credit Spreads Over U.S. Treasuries for November, 2010
NAIC Rating
5 years
7 years
1
125 – 175
100 – 175
2
175 – 300
140 – 300
3
400+ (if available)
NA
UST
1.14%
1.84%
10 years
100 – 175
140 – 300
NA
2.55%
Credit Spreads Over U.S. Treasuries for January, 2009
NAIC Rating
1
2
3
UST
5 years
245 – 300
290 – 400
395 – 500
1.49%
7 years
245 – 300
300 – 400
420 – 600
1.90%
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10 years
255 – 300
300 – 400
NA
2.51%
Current Market Conditions
HIGH YIELD PRICES AND YIELDS
North American High Yield CDX Index
20
Current Market Conditions
Volume of Institutional Loans and High-Yield Bonds
High Yield Issuance Up Dramatically
- Year to date, high yield bond issuance is
$237,126 million, comprised of 487 issues
- 97.2% increase from 2009
- Year to date, leveraged loan issuance is
$298 billion
-80% increase from 2009
Middle Market Issuance Up dramatically
Source: S&P Loan Stats
Source: Markit.com
21
Middle Market Leveraged Loan Volume
(EBITDA < $50 million)
Current Market Conditions
Investors actively seeking risk
C&I Loan Holdings of Commercial Banks ($ in bil)
Source: Piper Jaffray Debt Capital Markets Update
22
Current Market Conditions
Mezzanine investors are extremely hungry
•Pricing consistently 14%-18% for Subordinated Notes
- <$15MM EBITDA deals pricing 16%-18%
- > $50 MM EBITDA deals pricing at 13%-15%
•Leverage tolerances in excess of 4X for deals commonplace on large end (> $20MM of EBITDA) of the market
- 3.5X for Leveraged Recaps or “Storied” Credits;
- Continued Competitive Landscape
- Credit Opportunity Funds, BDCs all actively bidding deals
- Insurance company participants creating pricing pressure;
•“Coupon only” deals readily available;
•Prepayment provisions highly negotiable, very investor specific.
- Slight tightening of non-call provisions where investors are “cutting book” to attract assets
•Greater scrutiny on retail sector deals in light of potential weak 2010 Christmas expectations.
•Warrants routinely requested for
- Storied credits
- Greater than 4X TD/EBITDA
- Recaps;
•Upfront fees average 1%-2%;
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Current Market Conditions
LEVERAGE CASH FLOW MARKET AT A GLANCE
Deal Component
CF Senior Debt (x EBITDA):
Total Debt Limit (x EBITDA):
Nov-10
Jan-09
<$10MM EBITDA 1.50-2.00x
1.0-2.0x (non-recap)
>$15MM EBITDA 2.00-3.25x
1.0x (recap)
>25MM EBITDA 2..25-3.50x
Less than $7mm: Not Available
<$10MM EBITDA 3.00-3.75x
3.0-4.25x (non-recap)
>$15MM EBITDA 3.500-4.50x
2.75-3.25x (recap)
>25MM EBITDA 3.50-5.00x
Senior CASH Flow Pricing:
L+3.50%-4.50% (bank)
L+5.0%-6.0% (bank)
L+4.50%-6.50% (non-bank)
L+6.0%-7.0% (non-bank)
Second Lien Pricing (Avg):
L+10%-12%, (with 1%-2% floor)
L+13%-15%
Subordinated Debt Pricing:
14%-18%
16%-19%
“One Stop” Pricing
11%-13%
Warrants Feature:
Requested, not Required
Required Most Deals
1-2% Libor floor Requested on
Common, with 3%-4% Floor,
LIBOR Floors:
most CF deals
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Current Market Conditions
TYPICAL SUBORDINATED DEBT TERMSHEET
Security
Senior Subordinated Notes (the “Subordinated Notes”)
Maturity
Five years from Closing
Aggregate Internal Rate of Return (“IRR”) of Approximately 14%-18%
Pricing
Subordination
Terms
Mandatory
Prepayments
Optional
Prepayments
• IRR Components: 12% cash interest, 2% - 6% PIK interest.
The Subordinated Notes will be subordinated to prior payment in full of the principal of, and premium, if any, and interest
on any senior debt, and senior to any subsequently issued subordinated indebtedness, and any convertible indebtedness,
upon any distribution of the assets of the Company upon any dissolution, winding up, total or partial liquidation or
reorganization of the Company.
No amortization; payable in full at maturity.
Pre-payable per the following indicative schedule:
Year 1: No Prepayment
Year 2: 2% of the principal amount outstanding
Year 3: 1% of the principal amount outstanding
Year 4: par
Covenants
Free Cash Flow to Fixed Charge Ratio of 1.05x growing to 1.10x in later years
Total Debt to EBITDA ratio of 4.50x, reducing to 4.00x in later year
Default
Provisions
Cross Acceleration on all senior indebtedness of the Company
25
View of 2011 Market Conditions
View of 2011 Market Conditions
SHORT TERM:
•Weak Growth, but Growth Nonetheless
• Weaker Dollar due to “QE2”
• Short Term: High commodity prices: “Yay For You!”
•Short Term: Continued Aggressive Risk Tolerance: “Yay For Me!”
LONGER TERM:
•Gradual Restoration of a Traditional “Growth” Macroeconomic Conditions
- Upward Sloping Yield Curve with Higher Interest Rates for Longer Maturities
- Increased Employment
- Higher Housing Values
-Restoration of $12 Trillion Lost Value in American Household Wealth in Recession
• Unless, GDP goes negative, then its Run for the Exits For Everyone –
- Flight to quality
- Same market dynamics as December 2008 and 2009 Q1
- Starting Point is a nation that is net loss of $8 Trillion in Household Wealth
27
View of 2011 Market Conditions
FOMC TARGET FEDERAL FUNDS
•
History has shown that the window of opportunity to arrange a financing when rates are favorable is actually
quite narrow.
•
When the FOMC makes a change in the target federal funds rate, there tends to be a series of subsequent changes
that follow, and it happens very quickly
•
In the past decade, the three largest changes have been approximately 500 bps and have occurred in roughly two
years or less
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