Slide 1

Report
Credit Markets:
Turmoil and Opportunity
Stressed and Distressed Debt
April 4, 2008
Background – Roger Wittlin
Graduated 1978
2
Background – Roger Wittlin
FRMAC CMO Securitization
RTC First CMBS Securitization
Sutter Credit Strategies
$3.5 billion top quartile manager
3
• Large-scale technology /
tech-enabled investments.
$15 bn AUM.
• Mid-sized technology / techenabled companies. $1 bn
AUM.
• 39 investment professionals.
Menlo Park, New York,
London, Shanghai, Beijing
and Tokyo.
• Primarily control investments
• Dedicated Value Creation
team with extensive techrelated operating experience
from around the world
• Credit-focused business:
leveraged loans, high yield
bonds, structured debt
products, stressed/distressed
• 12 investment professionals
• Launched January 2008 with
$270 mm equity
• Headquarters in Menlo Park
• 14 investment professionals
• Headquarters in San
Francisco
4
Silver Lake Partners Selected Companies
Silver Lake invests in dynamic market leaders operating at scale in critical sectors of the technology economy
• IP Telephony, unified communications applications & traditional voice communications
• Travel services to suppliers, travel agencies, and consumers
• Supplier of silicon system solutions for communications and consumer devices
• Software, services and processing solutions for financial institutions and corporations
• Supplier of advanced semiconductor components
• Disc drives and storage systems
• Change management software
• Electronic trading solutions and execution services
• U.S. electronic stock exchange
• Online brokerage
• Fixed satellite services
5
Silver Lake Partners Global Activities
~$90 billion revenues, ~300,000 employees in 100+ countries
Silver Lake Offices
Sliver Lake Office to open in 2008
(a) Seagate is legally domiciled in Grand Cayman, but the majority of operations are in Thailand, Singapore, China, and Malaysia.
(b) Flextronics is legally domiciled in Singapore, and the majority of the companies operations take place in China, Malaysia, and Singapore.
6
Credit Markets: What Happened?
"The private equity world is in its golden era right now. Stars are aligned, there is
plenty of capital on one side, and you have a very receptive community of
companies.“
Henry Kravis, Co-Founder, Kohlberg Kravis Roberts & Co.
April 2007
“We are close to a time when we'll look back and say we did some stupid things. We
need a little more sanity in a period when everyone feels invincible and thinks this is
different.”
Kenneth D. Lewis, Chairman and Chief Executive Officer, Bank of America
May 9, 2007
7
Credit Spread Tightening
HY Bond Spreads* - October 2002 through June 2007
1,250
Merrill Lynch Index*
750
500
Ja
n06
Ja
n05
Ja
n04
250
Ja
n03
bps
1,000
* Data through June 30, 2007
8
2007 High Yield
1,000 bps Distressed = 0.005%
Average Bond Price = 101.20
9
June 2007–2008: $125 Billion Lost
“Prince Out At Citigroup; Writeoff Figures Climb”
– CNBC, November 5, 2007
Citigroup Inc.* - Last 12 Months
60
Citigroup Inc.*
50
40
30
ar
-0
8
M
Ja
n08
7
N
ov
-0
Se
p07
Ju
l07
M
ay
-0
7
M
ar
-0
7
20
* Data through March 28, 2008
10
Merrill Lynch: ($40 billion)
“Risk-Taker’s Reign at Merrill End With Swift Fall”
– New York Times, October 29, 2007
Merrill Lynch & Co.* - Last 12 Months
95
Merrill Lynch & Co.*
85
75
65
55
45
ar
-0
8
M
Ja
n08
7
N
ov
-0
Se
p07
Ju
l07
M
ay
-0
7
M
ar
-0
7
35
* Data through March 28, 2008
11
Countrywide: Largest Home Lender
“Countrywide Said to Be Subject of Federal Criminal
Inquiry”
- New York Times, March 9, 2008
Countrywide Financial Corp.* - Last 12 Months
40
Countrywide Financial Corp.*
35
30
25
20
15
10
ar
-0
8
* Data through March 28, 2008
M
Ja
n08
7
N
ov
-0
Se
p07
Ju
l07
M
ay
-0
7
M
ar
-0
7
5
12
JPMorgan Chase Announces Bear Stearns Acquisition
Bear Stearns Cos.* - Last 12 Months
200
Bear Stearns Cos.*
180
160
140
120
100
80
60
40
20
ar
-0
8
M
Ja
n08
7
N
ov
-0
Se
p07
Ju
l07
M
ay
-0
7
M
ar
-0
7
0
* Data through March 28, 2008
13
Fallen Hedge Funds
Sowood Capital
Management
$3 billion AUM
$35 billion mortgages
Peloton Partners LLP
+80% = 2007
14
Bond Spreads: June 2007 versus Today
June 1, 2007
March 28, 2008
240 OAS
789 OAS
June 1, 2007
March 28, 2008
Price
Yield
Price
Yield
Freescale (FSL)
8.875% due 2014
100.125
10.09%
79
13.77%
Charter (CHTR)
11% due 2015
109.063
9.4%
70.5
18.41%
99.25
11.51%
79
15.94%
Hawaiian Telcom (HWTEL)
9.75% due 2013
107
8.23%
77.5
16.43%
Idearc (IAR)
8% due 2016
104
7.4%
65.125
15.44%
Michael’s Stores (MIK)
11.375% due 2016
* Price as of September 18, 2007
15
LBO Transactions versus Incidence of Distress
Issuer
Year
Total
Distressed*
Percent Distressed
2004
41
15
36.6%
2005
31
13
41.9%
2006
33
17
51.5%
2007
37
25
67.6%
2008
4
3
75.0%
146
73
50.0%
* Issuer has at least 1 bond outstanding with an option-adjusted spread greater than +1,000 bps vs Treasuries on March 5, 2008
* Source: Distressed Debt Investor, FridsonVision LLC, March 19, 2008
16
Securitization: 2002 through 2008 – Massive Liquidity
8,000
CDO^2
CMBS
Volume ($ billion)
7,000
Mezz SF CDO
6,371
HG SF CDO
6,000
HY Bonds
EM
5,000
Other
HY Loans
4,000
IG Debt
3,691
3,000
2,454
2,000
1,564
1,000
0
566
113
2002
4
2003
2004
2005
2006
2007
2008 YTD
Source: JPMorgan CDO Data as of January 25, 2008
17
The Housing Market
18
Consumer Retail
19
Autos
20
Corporate Debt
21
Securitization – Leverage
Equity
Debt
Mortgages
50x
2%
98%
Credit Cards
50x
2%
98%
Corporate Debt
12x
8%
92%
22
Assets / Mortgages
Mortgage
Broker
Mortgage
Wholesaler
1%
1%
Consumer /
Homeowner
Investor
Ratings
Agencies
Investment
Bank
L+25
0.25%
1.5%
23
What Happened?
24
Bond Insurers
25
CLO – Residential Securitization
AAA
Assets:
LIBOR +15
LIBOR +150
Liabilities:
LIBOR +45
AA-BBB
LIBOR +50
Equity = 15% IRR
26
Subprime Mortgage Market
“Subprime mortgage writedowns could hit $285 billion: S&P”
– Reuters, March 13, 2008
10% Cash
90% Debt
THE FOUNDATION
4% Teaser Rate
27
Assets / Mortgages
Delinquencies
1% - 10%
Foreclosures
0.5% - 7%
Home Prices
(25%)
28
Interrelated Asset Classes
HY Bond Spreads* – Since Jan 2000
AAA Mortgages* - Last 12 Months
400
AAA Mortgages*
+350 bps
1,200
Merrill Lynch Index*
1,000
300
789 bps
bps
bps
800
200
600
100
400
200
ar
-0
8
M
Ja
n08
7
N
ov
-0
Se
p07
Ju
l07
0
M
ay
-0
7
Average = 559
0
1
2
3
4
5
6
7
8
-0
-0
-0
-0
-0
-0
-0
-0
-0
n
n
n
n
n
n
n
n
n
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
* Merrill Lynch Master II Constrained Index, options adjusted spread over U.S. Treasuries. Data through March 28, 2008
29
Massive Loan Growth in the Credit Markets – $2.3 Trillion Issued in the Last 5 Years
Massive demand for loans driven by highly leveraged structured vehicles (CLOs) drove up demand.
Purchases of loans were decided by ratings, not fundamental credit analysis
Volume ($ in billions)
$600
581
Loans
Bonds
464
510
488
400
307
265
216
200
130
80
0
2001
2003
139
93
59
2002
142
134
2004
2005
2006
2007
Source: Merrill Lynch, Lehman Brothers, and Morgan Stanley.
30
Equity Like Returns
Leverage
L+300
$100 Price
4x
6x
8x
12x
8.9%
11.5%
13.8%
18.1%
31
Freescale Semiconductor
Global leader in the design and manufacturer of embedded semiconductors for the automotive, consumer,
industrial, networking and wireless markets
Close
Dec 2006
Today
Bank Debt
$3.525 billion
1.9x leverage
$79
LIBOR +550
Bonds
$7.913 billion
4.4x leverage
$80
14.17%
EBITDA
$1.817 billion
$1.2 billion
Equity
$7.1 billion led by Blackstone ? ? ?
Enterprise Value Multiple
9.1x = $18.6 billion
Bank Debt:
L+175 at 82 = 7.7% IRR
3x leverage = 15.7% IRR
Bonds:
Yield = 14.17%
32
Equity Like Returns
– Asset Rich - Secured
– Stable Second Lien Debt
– Restructured Companies
33
Credit Opportunities
34
Selected Loans
Credit
Rating
Description
Coupon /
Spread
Price
Leverage
IRR
Unlevered
IRR
Freescale Semiconductor
1st Lien TL
B3/B-
Embedded processing and
connectivity products
L+175
$ 85.25
5x
16.80%
7.00%
Charter Communications
New 1st Lien TL
B1/B+
Cable television operator
L+500
$ 98.00
5x
16.40%
6.90%
Reynolds & Reynolds
2nd Lien TL
B3/B
Provides IT solutions to the auto
retailing marketplace
L+550
$ 92.00
5x
21.80%
8.60%
Kronos
2nd Lien TL
CCC+
Develops and markets computer
software
L+550
$ 75.00
5x
26.40%
11.00%
B2
Provides e-commerce solutions
L+275
$ 90.50
5x
14.60%
6.40%
13% fixed
$ 101.00
5x
26.90%
10.20%
First Data Corp
1st Lien TL B2
Capella Healthcare
2nd Lien TL
B1/BB-
Hospital operator
Porfolio
Avg Price
Avg Swap Adj. Effective
LIBOR Spread
Levered Return
Unlevered Return
*Assumed financing of Libor + 110 bps
*IRR to maturity
$ 90.29
456bps
20.48%
8.35%
35
Selected Bonds
Credit
Adesa
10% Note due 5/1/15
Rating
Description
Caa1/CCC+ Provider of used car auctions
Coupon /
Spread
Price
YTW
Leverage
IRR
Unlevered
IRR
10%
$ 88.50
12.49%
3x
18.80%
12.49%
Rite Aid
8.125% Note due 5/1/10
B3/BB-
Third largest U.S. drugstore chain
8.125%
$ 98.625
8.85%
3x
18.00%
8.85%
Multiplan
10.375% Note due 4/15/16
Caa1/B-
Provider of health plans
10.375%
$ 93.00
11.74%
3x
16.90%
11.74%
7.625%
$ 75.50
16.10%
1x
16.10%
16.10%
11.25%
$ 98.75
11.46%
4x
17.30%
11.46%
Intelsat
7.625% Note due 4/15/12
TXU
11.25% Note due 11/1/17
Caa3/CCC+ Global communications operator
B3/B-
Independent power producer in
Texas
Porfolio
$ 90.77
Avg Price
11.9%
Avg YTW
17.6%
Levered Return
11.9%
Unlevered Return
*Assumed financing for TXU of LIBOR + 110bps, all others of FF + 40bps
*IRR to maturity
36
Realogy Corporation – Century 21, Coldwell Banker, Sotheby’s, etc.
Global provider of real estate and relocation services including real estate franchising, brokerage, and title
services
At Deal Close
Today
Bank Debt
$3.1 billion
3.7x
82
Bonds
$3.1 billion
7.5x
$3.1 billion
65
EBITDA
$919 million
Equity
$2 billion by Apollo
Enterprise Value
9.3x = $8.1 billion
Bank Debt:
L+275 at 83 = 8.3% IRR
5x leverage = 23.4% IRR
$4.4 billion
Bonds:
Yield = 19.42%
37
Credit Markets: What’s Next?
• Volatile and opportunistic
• Spike up in default rates
• Polarization of credit
• Challenging equity environment
38
Disclaimer
Information contained herein may be non-public and obtained by Silver Lake Financial Management (SLF) under
the condition that it remain confidential. Accordingly, by accepting and using this material, the user will be deemed
to agree not to disclose further any of this information except for such as is or becomes public, or is acquired from
another source without knowing violation of any confidentiality agreement, or as may be required by
law. Furthermore, certain information contained herein is proprietary information to SLF and is not to be shared
with or copied without prior written approval from SLF.
This is not a solicitation of an investment in interests in any fund advised by Silver Lake Financial or Silver Lake
Partners. Any such investment would involve a number of significant risk and other factors. For additional
information about risk factors and the structure and investment objectives of a particular fund, please refer to its
Private Placement Memo.
39

similar documents