Are We Nearing the End of
the Benign Credit Cycle & Is
a Bubble Building In Credit?
Dr. Edward Altman
NYU Stern School of Business
CIFR Seminar
MacQuarie University
Sydney, Australia
November 19, 2015
1
1
Is It a Bubble?
• Or, Just Opportunistic Debt Financing?
• Focus on Default Rates in Credit Markets
• Length of Benign Credit Cycles
• Coincidence with Recessions: U.S. & European Scenarios
• Comparative Health of High-Yield Firms (2007 vs. 2012/2014)
• High-Yield and CCC New Issuance
• LBO Statistics and Trends
• Liquidity Concerns (Markets & Dealers)
• Maturity Schedule of Leveraged Debt (Impact?)
• Large Increase in the Distress Ratio
• Possible Timing of the Bubble Burst
2
Historical H.Y. Bond Default Rates
Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions), 1971 – 2015 (10/15))
Year
2015 (10/15)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
a
Par Value
Outstandinga
($)
Par Value
Defaults
($)
Default
Rates
(%)
1,595,839
35,414
2.219
1,496,814
1,392,212
1,212,362
1,354,649
1,221,569
1,152,952
1,091,000
1,075,400
993,600
1,073,000
933,100
825,000
757,000
649,000
597,200
567,400
465,500
335,400
271,000
240,000
235,000
206,907
163,000
183,600
181,000
189,258
148,187
31,589
14,539
19,647
17,963
13,809
123,878
50,763
5,473
7,559
36,209
11,657
38,451
96,855
63,609
30,295
23,532
7,464
4,200
3,336
4,551
3,418
2,287
5,545
18,862
18,354
8,110
3,944
2.110
1.044
1.621
1.326
1.130
10.744
4.653
0.509
0.761
3.375
1.249
4.661
12.795
9.801
5.073
4.147
1.603
1.252
1.231
1.896
1.454
1.105
3.402
10.273
10.140
4.285
2.662
Weighted by par value of amount outstanding for each year.
Year
Par Value
Outstanding*
($)
Par
Value
Defaults
($)
Default
Rates
(%)
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
129,557
90.243
58,088
40,939
27,492
18,109
17,115
14,935
10,356
8,946
8,157
7,735
7,471
10,894
7,824
6,928
6,602
7,486
3,156
992
344
301
577
27
224
20
119
381
30
204
123
49
193
82
5.778
3.497
1.708
0.840
1.095
3.186
0.158
1.500
0.193
1.330
4.671
0.388
2.731
1.129
0.626
2.786
1.242
Standard
Deviation
(%)
Arithmetic Average Default Rate (%)
1971 to 2014
3.117
3.097
1978 to 2014
3.340
3.273
1985 to 2014
3.843
3.416
Weighted Average Default Rate (%)*
1971 to 2014
3.491
1978 to 2014
3.496
1985 to 2014
3.513
Median Annual Default Rate (%)
1971 to 2014
1.664
Source: Author’s compilation and Citigroup/Credit
Suisse estimates
3
Default Rates on High-Yield Bonds
Quarterly Default Rate and Four-Quarter Moving Average
1989 – 2015 (3Q - Preliminary)
6.0%
16.0%
14.0%
5.0%
Quarterly Default Rate
4.0%
10.0%
3.0%
8.0%
6.0%
2.0%
4.0%
1.0%
4 - Quarter Moving Average
12.0%
2.0%
0.0%
0.0%
(
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
)
3Q
Quarterly
Moving
Source: Author’s Compilations
4
Filings for Chapter 11
Number of Filings and Pre-petition Liabilities of Filing Companies
1989 – 2015 (10/09)
Pre- Petition Liabilities, in $ billions (left axis)
Median Liabilities
Number of Filings (right axis)
Median No. of Filings.
$800
280
$700
240
2014 (10/09)
$ Billion
$600
200
$500
160
48 filings and
liabilities of $88.3
billion
120
2015 (10/09)
80
51 filings and
liabilities of $69.1
billion
$400
$300
$200
40
Note: Minimum $100 million in liabilities
Source: NYU Salomon Center Bankruptcy Filings Database
2015 (10/09)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
$0
1989
$100
0
Mean 1989-2014: 74 filings
Median 1989-2014: 54 filings
5
Energy/Mining Company Chapter 11 Filings*
January – October 09, 2015
Company
Allied Nevada Gold Corp.
Alpha Natural Resources, Inc.
American Eagle Energy Corp.
Black Elk Energy Offshore Operations, LLC
BPZ Resources, Inc.
Cal Dive International, Inc.
Dune Energy, Inc.
ERG Intermediate Holdings, LLC
Hercules Offshore, Inc.
Hovensa, LLC
Magnetation, Inc.
Milagro Oil & Gas, Inc.
Miller Energy Resources, Inc.
Molycorp., Inc.
Patriot Coal Corp.
Quicksilver Resources, Inc.
Sabine Oil & Gas Corp.
Samson Resources Corp.
Saratoga Resources, Inc.
Walter Energy, Inc.
Xinergy Ltd.
Liabilities ($MM)
Date
664
7,100
215
432
275
411
144
250
1,307
1,000
750
468
337
1,786
1,000
2,352
2,906
5,369
219
5,005
250
3/10/2015
8/3/2015
5/8/2015
9/1/2015
3/9/2015
3/3/2015
3/8/2015
4/30/2015
8/13/2015
9/15/2015
5/5/2015
7/15/2015
10/1/2015
6/25/2015
5/12/2015
3/17/2015
7/15/2015
9/16/2015
6/18/2015
7/15/2015
4/6/2015
Number of Energy/Mining Companies
21
Total Number of Filings (1/1 – 10/09)
51
Percent Energy/Mining Companies
41%
Total Energy/Mining Company Liabilities ($MM)
$32,242
*Liabilities of $100mm or more at time of filing.
Source: NYU Salomon Center Bankruptcy Filings Database
SIC
1040
1221
1311
1311
1311
1389
1389
1311
1381
1382
1011
1311
1311
1081
1221
1311
1311
1311
1382
1221
1221
6
Energy/Mining Company Bond Defaults
January – October 09, 2015
Company
Liabilities ($MM)
Alpha Natural Resources, Inc.
Alpha Natural Resources, Inc.
American Eagle Energy Corp.
American Energy-Woodford, LLC
Black Elk Energy Offshore Operations, LLC
Cliffs Natural Resources
Connacher Oil and Gas Ltd.
Dune Energy, Inc.
Goodrich Petroleum Corp.
Gran Colombia Gold Corp.
Halcon Resources Corp.
Halcon Resources Corp.
Hercules Offshore, Inc.
Lightstream Resources Ltd.
Magnetation, Inc.
Midstates Petroleum Co., Inc.
Molycorp, Inc.
Patriot Coal Corp.
Quicksilver Resources, Inc.
RAAM Global Energy Co.
Sabine Oil & Gas Corp.
SandRidge Energy, Inc.
SandRidge Energy, Inc.
SAExploration Holdings, Inc.
Samson Resources Corp.
Saratoga Resources, Inc.
Venoco, Inc.
Walter Energy, Inc.
Warren Resources, Inc.
Xinergy Corp.
443
2,268
175
340
139
675
550
68
158
79
252
1,566
1,204
464
425
628
650
282
1,173
238
1,150
49
525
10
2,250
180
192
2,102
70
195
Total of Energy/Mining Company Defaults $
18,497
Total Defaults (1/1 – 10/09) $
35,011
Percent Energy/Mining Companies
53%
Default Rate
5.54%
Source: NYU Salomon Center Master Default Database
Date
4/1/15
8/3/15
5/8/15
6/22/15
9/1/2015
3/30/15
3/4/15
3/8/15
10/1/15
1/10/15
4/14/15
9/10/15
8/13/15
7/2/15
5/5/15
5/21/15
6/25/15
5/12/15
3/17/15
5/1/15
7/15/15
5/19/15
8/19/15
8/26/15
9/16/15
6/12/15
4/10/15
7/15/15
5/26/15
4/6/15
SIC
1221
1221
1311
1311
1311
1000
1311
1389
1311
1221
1311
1311
1381
1311
1011
1311
1081
1221
1311
1311
1311
1311
1311
1382
1311
1382
1311
1221
1311
1221
7
Historical Annual European High-Yield Default
Rates
20%
18%
33.91%
17.28%
16%
14%
Default Rate
12.43%
12%
10%
8%
6.56%
6%
3Q15
2014
2013
0.97% 0.70% 1.02% 0.69%
2011
2010
1.06%
2012
1.60%
2009
1.00%
2007
0.53%
2006
2004
2003
2002
2001
1999
1998
0.97%
2008
1.97%
1.20%
2005
2%
0%
3.20%
2.35% 2.60%
2000
4%
Note: 3Q15 is LTM
Source: Credit Suisse
8
Historical Default Rates and Recession
Periods in the U.S.
High-Yield Bond Market (1972 – 2015 (3Q - Preliminary))
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
14
12
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
0.0%
72
2.0%
Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 – 12/01, 12/07 - 6/09
*All rates annual, except 3Q 2015 which is the LTM.
Source: E. Altman (NYU Salomon Center) & National Bureau of Economic Research
9
6/1/2007
7/27/2007
9/21/2007
11/16/2007
1/15/2008
3/11/2008
5/6/2008
7/1/2008
8/26/2008
10/21/2008
12/16/2008
2/12/2009
4/9/2009
6/4/2009
7/30/2009
9/24/2009
11/19/2009
1/18/2010
3/15/2010
5/10/2010
7/5/2010
8/30/2010
10/25/2010
12/20/2010
2/14/2011
4/11/2011
6/6/2011
8/1/2011
9/26/2011
11/21/2011
1/18/2012
3/14/2012
5/9/2012
7/4/2012
8/29/2012
10/24/2012
12/19/2012
2/15/2013
4/12/2013
6/7/2013
8/2/2013
9/27/2013
11/22/2013
1/21/2014
3/18/2014
5/13/2014
7/8/2014
9/2/2014
10/28/2014
12/23/2014
2/19/2015
4/16/2015
6/11/2015
8/6/2015
10/1/2015
YTM & Option-Adjusted Spreads Between High
Yield Markets & U.S. Treasury Notes
June 01, 2007 – October 13, 2015
Yield Spread (YTMS)
600
OAS
Sources: Citigroup Yieldbook Index Data and Bank of America Merrill Lynch.
Average YTMS (1981-2014)
Average OAS (1981-2014)
2,200
12/16/08 (YTMS = 2,046bp, OAS = 2,144bp)
2,000
1,800
1,600
1,400
1,200
1,000
800
10/13/15 (YTMS = 603bp, OAS = 624bp)
YTMS = 540bp,
OAS = 545bp
400
200
6/12/07 (YTMS = 260bp, OAS = 249bp)
10
Comparative Health of High-Yield Firms
(2007 vs. 2012/2014)
11
Z-Score Component Definitions and Weightings
Variable
X1
Definition Weighting Factor
Working Capital
1.2
Total Assets
X2
Retained Earnings
1.4
Total Assets
X3
EBIT
3.3
Total Assets
X4
Market Value of Equity
0.6
Book Value of Total Liabilities
X5
Sales
1.0
Total Assets
12
Z” Score Model for Manufacturers, Non-Manufacturer
Industrials; Developed and Emerging Market Credits
Z” = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 +3.25
X1 = Current Assets - Current Liabilities
Total Assets
X2 =
Retained Earnings
Total Assets
X3 = Earnings Before Interest and Taxes
Total Assets
X4 =
Book Value of Equity
Total Liabilities
13
Median Z-Score by S&P Bond Rating for U.S.
Manufacturing Firms: 1992 - 2013
Rating
2013 (No.)
2004-2010
1996-2001
1992-1995
AAA/AA
4.13 (15)
4.18
6.20*
4.80*
A
4.00 (64)
3.71
4.22
3.87
BBB
3.01 (131)
3.26
3.74
2.75
BB
2.69 (119)
2.48
2.81
2.25
B
1.66 (80)
1.74
1.80
1.87
CCC/CC
0.23 (3)
0.46
0.33
0.40
D
0.01 (33)
-0.04
-0.20
0.05
*AAA Only.
Sources: Compustat Database, mainly S&P 500 firms, compilation by NYU Salomon Center, Stern School of Business.
14
Comparing Financial Strength of High-Yield Bond
Issuers in 2007& 2012/2014
Number of Firms
Z-Score
Z”-Score
2007
277
383
2012
404
488
2014
558
760
Year
Average Z-Score/
(BRE)*
Median Z-Score/
(BRE)*
Average Z”-Score/
(BRE)*
Median Z”-Score/
(BRE)*
2007
1.89 (B+)
1.81 (B)
4.58 (B+)
4.61 (B+)
2012
1.66 (B)
1.59 (B)
4.60 (B+)
4.60 (B+)
2014
2.03 (B+)
1.80 (B)
4.67 (B+)
4.56 (B+)
Difference in Means Test (2007 vs. 2012/2014)
Model
Average
Difference
(2012/2014)
t-test
(2012/2014)
Significance
Level
(2012/2014)
Significant at
.05?
(2012/2014)
Standard Deviation
(2007/2012/2014)
Z-Score
-0.23/+0.14
1.29 / 1.15/1.78
-2.38/+1.30
0.88%/9.70%
Yes /No
Z”-Score
+0.02/+0.09
2.50 / 2.07/2.65
+0.13/+0.56
44.68%/28.78%
No/No
*Bond Rating Equivalent
Source: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ.
15
Debt/EBITDA & Net Debt/EBITDA: U.S. High-Yield (HY) and
Investment Grade (IG), (Median Levels, 2004-2014*)
Debt/EBITDA HY
Debt/EBITDA IG
Net Debt/EBITDA HY
5.00
4.00
BB-
B+
4.50
4.00
(781 obs.)
BB-
Net Debt/EBITDA IG
(796 obs.)
3.50
BB+
(1,126 obs.)
(1,086 obs.)
3.00
3.50
2.50
3.00
2.50
2.00
BBB
BBB-
(837 obs.)
(872 obs.)
BBB
2.00
BBB+
1.50
(876 obs.)
(860 obs.)
1.50
1.00
1.00
0.50
0.50
0.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
*Bond Rating Equivalents (BRE) based on Aggregate S&P Statistics
Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.
16
Debt/Debt + Equity & Debt/MV Equity : U.S. High-Yield
(HY) and Investment Grade (IG), (Median Levels, 2004-2014)
Debt/Debt + Equity HY
Debt/Debt + Equity IG
0.70
0.60
Debt/MV Equity HY
Debt/MV Equity IG
1.20
BB
(1,280 obs.)
BB(875 obs.)
1.00
0.50
0.80
0.40
BBB
(978 obs.)
BBB(711 obs.)
(1,001 obs.)
0.60
0.30
(878 obs.)
0.40
0.20
0.10
0.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.20
(705 obs.)
(747 obs.)
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.
17
EBITDA/Interest Expense : U.S. High-Yield (HY) and
Investment Grade (IG), (Median Levels, 2004-2014)
EBITDA/Int. Expense HY
EBITDA/Int. Expense IG
10.00
9.00
BBB
8.00
(863 obs.)
7.00
BBB(841 obs.)
6.00
5.00
4.00
BB(821 obs.)
3.00
B+
(1,196 obs.)
2.00
1.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.
18
Distribution of Credit Ratios for U.S. High-Yield
Bonds, (2007 vs. 2014)
Decile
Debt/EBITDA
EBITDA/Interest Expense
2014
BRE
2007
BRE
2014
BRE
2007
BRE
10%
1.36x
A+
0.87x
AA+
1.03x
CCC
0.91x
CCC
20%
2.23x
BBB
1.75x
A-
1.93x
B-
1.59x
CCC+
30%
2.90x
BB+
2.40x
BBB
2.55x
B
2.05x
B-
40%
3.56x
BB
3.07x
BB
3.36x
B+
2.57x
B
50%
4.43x
B+
3.84x
BB-
4.14x
BB-
3.24x
B+
60%
5.05x
B+
4.70x
B+
5.23x
BB
4.21x
BB-
70%
5.94x
B
5.70x
B
6.64x
BBB-
6.06x
BB+
80%
7.08x
CCC+
7.01x
B-
9.84x
BBB+
9.07x
BBB
90%
10.16x
CCC-
9.38x
CCC-
17.86x
AA-
19.35x
AA
Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.
19
New Issuance: U.S. High-Yield Bond Market
2005 – 2015 (3Q)
Annual
Ratings
Total
BB
B
CCC
2005
81,541.8
18,615.0
45,941.2
15,750.9
(19.3%)
1,234.7
2006
131,915.9
37,761.2
67,377.3
25,319.2
(19.2%)
1,458.2
2007
132,689.1
23,713.2
55,830.8
49,627.6
(37.4%)
3,517.5
2008
50,747.2
12,165.0
25,093.1
11,034.4
(21.7%)
2,454.6
2009
127,419.3
54,273.5
62,277.4
10,248.4
(8.0%)
620.0
2010
229,307.4
74,189.9
116,854.7
35,046.8
(15.3%)
3,216.1
2011
184,571.0
54,533.8
105,640.4
21,375.0
(11.6%)
3,021.8
2012
280,450.3
71,852.1
153,611.1
48,690.2
(17.4%)
6,297.0
2013 (1Q)
73,492.3
31,953.1
29,534.2
11,480.0
(15.6%)
525.0
(2Q)
62,135.0
24,380.0
23,665.0
13,790.0
(22.2%)
300.0
(3Q)
73,770.8
22,964.2
32,610.0
18,196.6
(24.7%)
0.0
(4Q)
60,936.8
24,050.0
22,686.8
14,175.0
(23.3%)
25.0
270,334.8
103,347.3
108,495.9
57,641.6
(21.3%)
850.0
2014 (1Q)
51,634.7
17,585.0
25,792.2
7,842.5
(15.2%)
415.0
(2Q)
74,629.6
23,893.7
30,852.3
19,363.6
(25.9%)
520.0
(3Q)
59,777.3
25,537.3
22,550.0
10,875.0
(18.2%)
815.0
(4Q)
52,721.1
21,975.0
28,906.1
1,840.0
(3.5%)
0.0
238,762.7
88,991.0
108,100.6
39,921.1
(16.7%)
1,750.0
2015 (1Q)
76,059.5
23,184.2
44,785.3
8,090.0
(10.6%)
0.0
(2Q)
74,048.0
21,219.0
40,656.8
12,052.1
(16.3%)
120.0
(3Q)
31,740.0
14,770.0
12,675.0
4,295.0
(13.5%)
0.0
ytd Totals
181,847.5
59,173.3
98,117.1
24,437.1
(13.4%)
120.0
2013 Totals
2014 Totals
Source: Bank
of America
Merrill Lynch
($ millions)
(CCC % H.Y.)
NR
20
New Issuance: European High-Yield Bond Market
Face Values (US$)
2005 – 2015 (3Q)
Annual
Currency
Total
BB
B
CCC
(CCC % HY)
NR
USD
EUR
GBP
2005
19,935.6
1,563.3
11,901.0
5,936.6
(29.8%)
534.8
2,861.0
15,080.3
1,668.3
2006
27,714.6
5,696.2
16,292.1
5,020.5
(18.1%)
705.9
7,657.8
19,935.7
121.1
2007
18,796.7
5,935.3
11,378.5
562.0
(3.0%)
920.9
4,785.5
12,120.9
1,890.3
2008
1,250.0
1,250.0
25,093.1
2009
41,510.3
18,489.4
16,697.4
4,771.3
(11.5%)
1,552.2
12,315.0
28,696.9
498.3
2010
57,636.5
22,751.3
29,050.5
2,170.7
(3.8%)
3,663.9
12,775.0
43,147.7
1,403.3
2011
60,435.8
24,728.9
29,919.7
4,108.7
(6.8%)
1,678.6
16,720.0
33,758.0
8,842.4
2012
65,516.1
27,001.7
29,013.0
7,186.7
(11.0%)
2,314.6
28,198.0
32,270.4
2,929.3
2013 (1Q)
27,954.5
6,783.8
15,008.4
5,160.6
1,001.7
10,050.0
12,380.7
4,837.4
(2Q)
30,335.3
6,860.2
19,295.1
3,724.1
455.9
9,913.0
14,149.9
6,074.0
(3Q)
16,558.4
3,375.3
9,609.6
2,721.8
851.7
5,310.0
8,644.0
2,604.4
(4Q)
16,655.9
2,588.0
10,657.6
2,366.4
1,043.9
5,210.0
9,086.5
2,359.4
2013 Totals
91,504.1
19,607.3
54,435.2
13,972.9
(15.3%)
3,353.2
30,483.0
44,125.6
15,875.3
2014 (1Q)
27,169.2
12,565.7
11,685.2
1,230.0
(4.5%)
1,688.3
7,315.0
16,352.8
3,501.4
(2Q)
65,671.4
13,730.1
45,808.3
4,111.1
(6.2%)
2,021.9
23,150.0
36,009.0
6,096.7
(3Q)
15,980.5
3,586.3
10,593.2
1,241.3
(7.8%)
559.7
2,750.0
8,216.2
4,744.6
(4Q)
10,646.9
3,893.7
4,288.8
654.5
(6.1%)
1,810.0
6,305.0
4,341.9
119,468.0
33,775.8
72,375.4
7,236.9
(5.1%)
6,080.0
39,520.0
64,919.9
14,342.7
2015 (1Q)
30,535.5
15,387.8
10,054.6
938.7
(3.1%)
4,154.3
10,225.0
17,149.0
2,622.0
(2Q)
25,838.7
11,282.6
11,633.7
2,334.6
(9.0%)
587.8
12,465.0
11,124.8
1,782.2
(3Q)
12,605.5
2,068.1
10,125.9
411.5
(3.2%)
5,850.0
5,170.1
1,585.4
ytd Totals
68,979.8
28,738.6
31,814.2
3,684.8
(5.3%)
28,540.0
33,443.9
21
5,989.6
2014 Totals
Source:
BoAML
Ratings
1,250.0
4,742.1
High-Yield Bond Market Proportional
Outstandings by Seniority
1998 – 2014
Senior Secured
Senior Unsecured
Subordinated
90%
75%
60%
45%
30%
15%
Sources: S&P Capital IQ LCD and NYU Salomon Center calculations.
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0%
22
Default Rates by Seniority: 1998-2014
Default Rate (%)
Year
All Seniorities (%)
Senior Secured (%)
Senior Unsecured (%)
Subordinated (%)
1998
1999
1.60
3.15
1.67
1.02
4.15
15.60
2.61
5.62
2000
5.07
18.82
2.47
7.41
2001
9.80
43.43
9.29
5.77
2002
12.79
50.68
12.74
1.87
2003
4.66
14.30
4.13
2.20
2004
1.25
4.44
0.78
0.16
2005
3.37
13.46
2.20
0.49
2006
0.76
1.35
0.69
0.55
2007
0.51
2.10
0.27
0.63
2008
4.65
12.14
3.87
4.61
2009
10.74
12.10
10.74
8.77
2010
1.13
2.29
0.79
1.48
2011
1.33
3.22
0.83
0.53
2012
1.62
3.11
1.17
1.51
2013
1.04
2.64
0.63
0.60
2014
2.11
5.51
1.37
0.74
Arithmetic Average Annual Default Rate (%)
3.92
12.26
3.31
2.59
Standard Deviation (%)
3.66
13.88
3.73
2.66
Weighted Average Annual Default Rate *(%)
3.52
6.70
2.97
2.56
Median Annual Default Rate (%)
2.11
5.51
1.67
1.48
Excluding Outlier Years of 2001 and 2002
Arithmetic Average Annual Default Rate (%)
2.93
7.62
2.28
2.42
Standard Deviation (%)
2.58
5.81
2.53
2.70
Weighted Average Annual Default Rate *(%)
2.80
5.44
2.26
2.40
Median Annual Default Rate (%)
1.62
4.44
1.37
1.02
*Weighted by par value amount outstanding in each seniority category, for each year.
Sources: S&P Capital IQ LCD and NYU Salomon Center calculations.
23
U.S. & European High-Yield Bond Market:
New Issuance ($ millions)
2005 – 2015 (3Q)
300,000
280,450.3
270,334.8
250,000
238,762.7
200,000
184,571.0
150,000
100,000
131,915.9 132,689.1
127,419.3
119,468.0
91,504.1
81,541.8
57,636.5 60,435.8
50,747.2
76,059.5 74,048.0
65,516.1
41,510.3
50,000
19,935.6
27,714.6
30,535.5 25,838.731,740.0
12,605.5
18,796.7
1,250.0
U.S.
Source: Bank of America Merrill Lynch
3Q15
2Q15
1Q15
2014
2013
2012
2011
2010
2009
2008
2007
2006
0
2005
New Issuance ($ millions)
229,307.4
Europe
24
U.S. & European High-Yield Bond Market:
CCC Rated New Issuance (%)
2005 – 2015 (3Q)
40%
30%
29.8%
25.9%
21.7%
20%
21.3%
19.3% 19.2%
18.1%
17.4%
15.3%
18.2%
16.3%
16.7%
15.3%
15.2%
13.5%
13.4%
11.6%
11.5%
10%
8.0%
3.0%
11.0%
10.6%
6.8%
5.1% 4.5%
3.8%
n/a
9.0%
7.8%
6.2%
6.1%
5.3%
3.5%
3.2%
3.1%
U.S.
Source: Bank of America Merrill Lynch
3Q15
2Q15
1Q15
1Q-3Q15
4Q14
3Q14
2Q14
1Q14
2014
2013
2012
2011
2010
2009
2008
2007
2006
0%
2005
New Issuance Rated CCC (%)
37.4%
Europe
25
New Issues Rated B- or Below, Based on the
Dollar Amount of Issuance
(1993 – 2015 (3Q))
70.00%
60.00%
51.25%
50.00%
40.75%
39.06%
40.00%
33.57%
32.97%
33.00%
30.41%
27.27%
30.00%
23.35%
20.00%
31.95%
31.56%
29.22%
29.62%
29.19%
27.04%
26.73%
26.13%
29.55%
18.16%
21.48%
21.38%
19.40%
23.44%
26.34%
24.34%
20.71%
14.02%
13.73%
14.16%
12.13%
10.00%
0.00%
9
19
3
94 995 996 997 998 999 000 001 002 003 004 005 006 007 008 009 010 011 012 013 014
14
14 Q14
14 3Q) Q15 Q15 Q15
2
19
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
3
1
2
3
1Q 2Q
4 Q 15 (
20
Source: S&P Capital IQ LCD
26
Mortality Rates by Original Rating
All Rated Corporate Bonds*
1971-2014
Years After Issuance
1
2
3
4
5
6
7
8
9
10
AAA Marginal
Cumulative
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.01%
0.01%
0.02%
0.03%
0.01%
0.04%
0.00%
0.04%
0.00%
0.04%
0.00%
0.04%
AA
Marginal
Cumulative
0.00%
0.00%
0.00%
0.00%
0.22%
0.22%
0.08%
0.30%
0.02%
0.32%
0.01%
0.33%
0.01%
0.34%
0.01%
0.35%
0.02%
0.37%
0.01%
0.38%
A
Marginal
Cumulative
0.01%
0.01%
0.03%
0.04%
0.13%
0.17%
0.14%
0.31%
0.11%
0.42%
0.07%
0.49%
0.02%
0.51%
0.26%
0.77%
0.08%
0.85%
0.05%
0.90%
BBB Marginal
Cumulative
0.34%
0.34%
2.38%
2.71%
1.28%
3.96%
1.01%
4.93%
0.51%
5.41%
0.23%
5.63%
0.27%
5.88%
0.15%
6.03%
0.15%
6.17%
0.35%
6.50%
BB
Marginal
Cumulative
0.95%
0.95%
2.03%
2.96%
3.90%
6.75%
1.97%
8.58%
2.35%
10.73%
1.53%
12.10%
1.47%
13.39%
1.13%
14.37%
1.45%
15.61%
3.15%
18.27%
B
Marginal
Cumulative
2.86%
2.86%
7.74%
10.38%
7.86%
17.42%
7.81%
23.87%
5.71%
28.22%
4.46%
31.42%
3.56%
33.86%
2.09%
35.24%
1.77%
36.39%
0.76%
36.87%
CCC Marginal
Cumulative
8.15%
8.15%
12.44%
19.58%
17.92%
33.99%
16.35%
44.78%
4.68%
47.37%
11.53%
53.43%
5.45%
55.97%
4.86%
58.11%
0.69%
58.40%
4.30%
60.19%
*Rated by S&P at Issuance
Based on 2,847 issues
Source: Standard & Poor's (New York) and Author's Compilation
27
CCC New Bond Issuance by Purpose
2015 (3Q)
U.S.
Europe (2Q)*
Refinancing
40.62%
51%
M&A
29.65%
37%
LBO
26.51%
Recap/Dividends
3.23%
Corporate Purpose
0.00%
Project Financing
0.00%
Total
*All High-yield
Source: Standard & Poor’s LCD & Credit Suisse
100%
12%
100%
28
Maturity Profile of Leveraged Debt – As of
12/31/14
250
228
228
200
200
184
$ (Billions)
171
156 155
150
106
100
98
84
72
59
50
35
22
18
0
58
19
1
13
0
0
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Bonds
Source: S&P Capital IQ LCD
Institutional Loans
29
Distribution of Years to Default from Original
Issuance Date: 1991 – 3Q 15
20%
18%
% of All Defaulted Issues
16%
14%
12%
10%
8%
6%
4%
2%
0%
1
2
Source: NYU Salomon Center
3
4
5
6
# of Years to Default Since Issued
7
8
9
10+
30
Purchase Price Multiples
Purchase Price Multiple excluding Fees for LBO Transactions
14x
11.6
12x
9.9
10x
9.8
9.7
9.1
8.4
8x
8.3
8.1
7.4
7.4
7.5
6.9 6.7
6.7
6x
6.2
6.7
6.3
7.0
8.1
8.8
8.7
8.9
8.8
7.8
8.0
8.2
8.5
8.7
10.1
9.7
9.0
8.8
7.3
6.8
5.2
4x
2x
N/A
0x
1998
(# obs.) (90)
1999
(133)
2000
(116)
2001
(51)
2002
(40)
2003
(66)
2004
(127)
2005
(134)
2006
(178)
2007
(207)
2008
(69)
Public-to-Private
Source: S&P Capital IQ LCD
2009
(23)
N/A
2010
(78)
2011
(87)
2012
(97)
2013
(95)
2014
(136)
1Q3Q15
(101)
3Q15
(35)
All Other
31
Average Total Debt Leverage Ratio for LBO’s:
Europe and US with EBITDA of €/$50M or More
7.0x
6.6
6.2
5.8
5.8
6.0x
5.5
5.0x
4.5
4.4
4.7
4.8
5.4
5.5
5.3
4.9
4.9
4.6
4.5
4.1
4.7
5.4
5.3
5.2
5.3
5.0
4.9
4.8
5.7
4.5
4.0
4.0x
3.0x
2.0x
1.0x
0.0x
2002
2003
2004
2005
2006
2007
Europe
Source: S&P Capital IQ LCD
2008
2009
2010
2011
2012
2013
2014
JanSep 15
US
32
LBO Statistics & Ratios: 2007 vs. 2014 (update
3Q 15)
2007
2014
1Q-3Q15
62%
47%
56%
9.1-9.9x
9.7-9.8x
9.7-11.6x
Debt to EBITDA @ Inception
6.2x
5.8x
5.7x
EBITDA to Cash Interest
2.1x
3.4x
3.0x
Equity Contribution
31%
37%
41%
M&A/LBO as a % of Total Issuance
Purchase Multiple
Source: Guggenheim Investments and S&P Capital IQ
33
Share of Large LBOs with Leverage More than
7x*
2004 – 3Q 2015
35%
30%
25%
20%
15%
10%
5%
* Issuers with EBITDA >$50mm.
Source: S&P Capital I.Q.
1Q-3Q15
2014
2013
2012
2011
N/A
2009
2008
2007
2006
2005
2004
N/A
2010
0%
34
Lenders Leave the Lite On
2003 – 2Q 2014
35