2Q 2015 2Q Lending Markets Overcome Headwinds; Remain Active and Highly Receptive to Borrowers

Leveraged Finance Market Update

In This Report Highlights from Leveraged Finance survey

Rebound in repricing volume LBO equity contributions continue to grow

William Blair

FRONT LINE INSIGHTS

2Q Lending Markets Overcome Headwinds; Remain Active and Highly Receptive to Borrowers

Lending markets showed impressive resiliency and robust activity in the spring despite economic, political, and regulatory concerns. Leveraged finance markets contended with oil price volatility, Greece’s increasingly tenuous status in the eurozone, and heightened scrutiny from regulators. Despite these headwinds, the lending markets remained very active and highly receptive to borrowers in the second quarter of 2015.

In this issue of Leveraged Finance Market Update, we examine the trends affecting volumes and market-clearing yields across repricing, leveraged buyout, recapitalization, and highyield transactions Repricing Volume Surges as Rates Fall

After an exceptionally quiet first quarter that saw only $1 billion of repricing activity, volumes rebounded sharply in the second quarter to $67 billion as falling interest rates prompted borrowers to pursue opportunistic transactions. A limited supply of new deals coupled with continued strong CLO issuance drove rates down by 50-75 basis points during 2Q 2015. The average LIBOR spread for single B-rated transactions decreased from 461 basis points in 4Q 2014 to 397 basis points in 2Q 2015. 1

Even in the midst of falling rates, covenant packages and other loan terms have remained decidedly borrower-friendly as a result of the supply/demand imbalance. Covenant-lite transactions represented 63% of all institutional loans in 2Q 2015, roughly the same percentage as in 1Q 2015. Nonregulated Arrangers Take Bigger Role

Since the Federal Reserve and Office of the Comptroller of the Currency announced their increased focus on arrangers in 4Q 2014, leveraged loan volume has fallen about 25%. (Part of this decline, however, is attributable

to rate increases during the second half of 2014.) Private-equity-owned companies’ share of leveraged loan volume has reached a six-year low as high valuations and regulatorimposed leverage limits have made it increasingly difficult for sponsors to generate their target returns. Recapitalization volume, a tool that is used heavily by private equity firms, has been similarly sluggish in 2015 as arrangers are less likely to push for additional leverage in the current regulatory environment. While nonregulated arrangers’ share of the syndicated loan market is modest at about 10% of volume, their share has nearly doubled since the end of 2014.

LBO Leverage Multiples Leverage levels are largely consistent with those seen during 2014. Arrangers have been less likely to push leverage higher, even as enterprise values continue to rise

8 7 6 5 4 3 2 1 0

6.2x 5.6x

4.9x

4.5x

4.0x 3.3x

4.7x 4.2x

5.4x 5.3x 4.8x 4.5x 4.3x

5.2x

5.8x 5.8x 5.6x 5.3x 5.2x 4.9x

2007 2008 2009 2010 2011 2012 2013 2014 1Q15 2Q15 Large Corporate Source: S&P LCD

Middle Market

LBO Equity Contributions Reach 2011 Levels The combination of high valuations and heightened pressure from regulators to limit leverage has forced private equity firms to increase their equity contributions in new LBOs. In 2Q 2015, equity contributions for leveraged buyouts increased to 42%, the highest level since 2011. In 2Q 2015, leverage levels for large LBO transactions (EBITDA greater than $50 million) and middle-market transactions (EBITDA less than $50 million) increased by about 0.25x to 5.8x and 5.2x, respectively, compared with 1Q 2015. These levels are in line with 2014 levels. While leverage levels for LBOs have remained largely flat over the last 18 months, the average enterprise value for LBOs tracked by S&P’s LCD has risen about 17%. Confirming this increase in equity contribution does not reflect a change in lenders’ underwriting standards, William Blair’s July 2015 survey of leveraged finance professionals indicated minimum equity contributions are still in the 25-35% range. High-Yield Issuance Hits 10-Year High in First Half of 2015

High-yield issuance in the first half of 2015 was a robust $186 billion, marking the most active first six months of a year in the past decade. This year’s first-half volume

Survey says...

72%

of respondents to William Blair’s quarterly survey of midmarket leveraged finance professionals who indicate that their firms require minimum equity contributions of 25%-35%.

Source: William Blair Leveraged Finance Survey

represents a 3% increase over the first half of 2014.

Dan Hannis, managing director of William Blair’s high-yield-bondtrading group, said that now that recent turmoil involving China, Greece, and oil prices has seemingly been contained, it should set the stage for an active issuance calendar for the next several months, as companies look to lock in high-yield rates that are at an all-time low. In terms of investor demand, Hannis said, “Outflows from ETFs hurt the market in the beginning of June, but flows have reversed; money is coming back in since the aforementioned events seem to be under control.” He said that high-yield bonds remain a preferred asset class for most investors because of the alltime low yields in investment-grade securities and Treasuries, as well as European rate markets.

unsecured bonds and 6.3% for B-rated unsecured bonds. Private-for-life issuances, which allow companies to access the high-yield market without registering with the SEC, comprised 51% of the issuances in the first half of 2015, up from 46% in the first half of 2014. The Rule 144A for-life issuances were more than double the number of registered issuances in the first six months of 2015.

The Merrill Lynch U.S. High-Yield Index was relatively flat for 2Q 2015, registering a total return of -0.1%. New-issue yields for the end of the quarter were 4.8% for BB-rated

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ANALYSIS

LBO Volume ($ Billions)

The volume of loans supporting LBOs through 2Q 2015 is down about 25% compared with 2014. This trend is being driven in part by challenges faced by private equity buyers in competing with strategic buyers in auction processes. $200 $189 $150 $100 $36

$50 $0

$5 '07

'08

'09

$35 '10

$52

$51

'11

'12

$82

'13

$85

'14

$54

$40

YTD YTD Jun-14 Jun-15

Source: S&P LCD

Each quarter we look behind the numbers to examine the market dynamics that are driving trends in pricing and volume in leveraged finance transactions.

B+/B Rated Institutional Spreads (Basis Points)

Following a spike in late 2014, rates through 2Q 2015 have fallen to levels that are consistent with where pricing has been since 2013. Strong interest in the asset class among investors combined with a limited supply of new deals has helped drive rates lower. 600 200

N/A 405 Jul ‘07 Dec ‘07 May ‘08 Oct ‘08 Mar ‘09 Aug ‘09 Jan ‘10 Jun ‘10 Nov ‘10 Apr ‘11 Sep ‘11 Feb ‘12 Jul ‘12 Dec ‘12 May ‘13 Oct ‘13 Mar ‘13 Aug ‘14 Jan ‘15 Jun ‘15

Leveraged Finance Market Analysis

Source: S&P LCD

High-Yield Bond Volume ($ Billions)

High-yield issuance in the first half of 2015 was a robust $186 billion, marking the most active first six months of a year in the past decade. Issuers are taking advantage of the opportunity to lock in long-term fixed rates at attractive yields. $350 $300 $250 $200 $150 $144 $100 $68 $50 $0 '07 '08 Source: S&P LCD 3

$345 $287

$322 $310

$218

$180 $186

$164

'09

'10

'11

'12

'13

'14

YTD YTD Jun-14 Jun-15

Highlights From William Blair Leveraged Finance Survey

Each quarter William Blair surveys midmarket leveraged finance professionals representing leading commercial banks, credit funds, BDCs, commercial finance companies, and other credit providers. This quarter’s survey comprised 20 questions (including the three shown below) to measure the current tone and direction of the midmarket leveraged finance market. Included in the survey is the Market Index Measure asking respondents to rate overall conditions in the leveraged finance market. On a scale of 1 to 5, with 5 being the most borrower-friendly, respondents rated conditions in the market as 4.0. To receive the results of the full 2Q 2015 survey, please contact Mark Birkett at [email protected].

60% 50% 40% 26% 30% 15% 20% 9% 6% 10% 0% Increased 4Q14

1Q15

33%

11% 56%

Pricing Leverage/ Terms

58%

49%

47% 31%

Over the past six months, has pricing for your primary debt offering...

Consistent with broader market data, nearly half of respondents saw a decrease in pricing during 2Q 2015.

Decreased 2Q15

3Q15

Continued impact of Fed/OCC regulation Other Proliferation of new debt funds

70% 68%

What do you consider the most important leveraged finance market development thus far in 2015?

Respondents rated the emergence of multiple new debt funds as the most important development thus far in 2015 in the leveraged finance market. In our conversations with these new credit providers, they see significant opportunity, particularly in the middle market, to fill the void created by the continuing exit of commercial banks from the market.

Percentage of respondents who expect pricing and leverage/terms over the balance of 2015 to remain unchanged from current market conditions.

As we enter the second half of the year, respondents largely expect pricing and leverage/terms to remain consistent with current borrower-friendly market conditions.

0% 10% 20% 30% 40% 50% 60% 70%

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WILLIAM BLAIR LEVERAGED FINANCE INVESTMENT BANKING

William Blair By the Numbers

Drawing on our deep product expertise and the strength of our relationships, William Blair has built a leading leveraged finance franchise. Business owners turn to us for outstanding execution in support of their capital-raising objectives. Recent transactions include:

5

$125,000,000

$150,000,000

Not Disclosed

Unitranche Credit Facility Preferred Equity

Subordinated Notes

Unitranche Credit Facility

July 2015

June 2015

May 2015

$230,000,000

Not Disclosed

$50,000,000

Secured Credit Facilities Equipment Lease

Senior Credit Facility

Senior Credit Facility

March 2015

March 2015

March 2015

95 completed debt transactions since 2008

8.5 billion+

$

arranged financing since 2012

400+ lender and alternative credit provider relationships

William Blair’s Leveraged Finance team structures and arranges debt capital in support of acquisitions, recapitalizations, and growth through its well-established relationships with debt capital providers globally • $4.4 billion of completed/pending financing arranged since 2014

• Specialists who are experts in complex engagements, including those requiring insightful credit positioning and the arrangement of multiple layers of capital

• Robust distribution capabilities providing a 360° view of the market; relationships with over 400 lenders and significant transaction experience with alternative credit providers • Real-time, proprietary view of the leveraged finance market from William Blair’s global M&A and debt advisory practices

• Senior banker attention and unbiased, objective advice; senior bankers average more than 20 years of experience • Thoughtful, customized financing processes that produce outstanding outcomes

Our Debt Capital Markets team provides clients with access to various debt capital markets, including high-yield and investment-grade notes, convertible bonds, syndicated term loans, preferred stock, and other debt securities purchased by institutional investors. • Debt underwriting, placement, and advisory services related to the public and private/144A markets • 40+ institutional sales and trading professionals based in Chicago and New York

• Market maker in 500 high-yield bond and investment-grade issues and 400 preferred issues

• National account coverage of more than 700 tier-1 institutional buyers and regional investors

With more than 150 senior bankers around the world, William Blair has completed more than 800 advisory and financing transactions totaling more than $190 billion in value for our clients* Kelly Martin Managing Director +1 312 364 8832 [email protected] Michael Ward Managing Director +1 312 364 8529 [email protected] Mark Birkett Director +1 312 364 5483 [email protected] Matt Thomas Director +1 312 364 5261 [email protected] Jason Sutherland Vice President +1 312 364 8961 [email protected]

*In the past five years as of July 1, 2015 William Blair

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Disclosure

“William Blair” is a trade name for William Blair & Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair International, Ltd is authorized and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom. William Blair only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated in the United States and are not offered to persons or institutions outside the United States.

This material has been approved for distribution in the United Kingdom by William Blair International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being “Eligible Counterparties” and Professional Clients). This Document is not to be distributed or passed on at any “Retail Clients.” No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision.

About William Blair Investment Banking

William Blair’s investment banking group combines significant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and financing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth financing, financial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From 2010-2014, the investment banking group completed more than 330 merger-and-acquisition transactions worth $73 billion in value, involving parties in 36 countries and five continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised nearly $100 billion in public and private financing.