2019 Global Credit Market Outlook - January 10, 2019 - CVC Capital Partners
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2019 Global Credit Market Outlook January 10, 2019
2019 GLOBAL CREDIT MARKET OUTLOOK
Disclaimer
This presentation (the "Presentation") shall mean and include the slides that follow, the oral presentation of the slides, the question-and-answer session that follows that oral presentation, hard copies of this
document and any other materials distributed at, or in connection with, that presentation including any supplements subsequently issued updating any information contained herein. This Presentation was
prepared by members of CVC Credit Partners and is provided to a limited number of institutional investors solely as a basis for discussion of the 2019 Outlook for each area described herein. This Presentation
is confidential to the intended recipient and may not be copied or passed on, in whole or in part, or its contents discussed with any person outside the group of affiliates of the intended recipient or their
professional advisors.
This Presentation has not been approved by any supervisory authority and no regulatory approvals have been obtained. This Presentation may not be used for and does not constitute an offer to sell, or a
solicitation of any offer, or an invitation, or a general solicitation to subscribe for or purchase, or to make any commitments for or in respect of any interests or securities or to engage in any other transaction. Any
investor that subsequently acquires any interest may only rely on the terms of and disclosure in a final form offering circular (the “Offering Circular”).
Neither CVC Credit Partners nor any member of CVC undertakes to provide the recipient with access to any additional information or to update this Presentation or to correct any inaccuracies herein which may
become apparent. This Presentation is not to be construed as investment, legal or tax advice and none of the CVC Network nor any of their respective directors, officers, employees, partners, members,
shareholders, advisers, agents or affiliates (together the "CVC Parties") make any representation or warranty, express or implied as to the fairness, correctness, accuracy or completeness of this Presentation,
and nothing contained herein shall be relied upon as a promise or representation whether as to past or future performance or otherwise. To the maximum extent permitted by law, none of the CVC Parties shall
be liable (including in negligence) for any direct, indirect or consequential losses, damages, costs or expenses arising out of or in connection with the use of or reliance on this Presentation.
Prospective investors should have a high level of financial sophistication and the ability to understand and accept investment risks. The market value of any structured instrument, such as the investment, may be
affected by changes in economic, financial, and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality
of any issuer or reference issuer. Prior to making any potential investment, potential investors should, at their own expense, consult with their own legal, investment, accounting, regulatory, tax and other advisors
to determine the consequences of the potential investment opportunity described herein and to arrive at an independent evaluation of such potential investment opportunity.
Target Returns - Target returns are hypothetical in nature and are shown for illustrative, informational purposes only. This presentation is not intended to forecast or predict future events, but rather to indicate the
returns for the asset classes indicated herein that CVC Credit Partners has observed in the market generally over the course of an investment cycle. It does not reflect the actual or expected returns of any
potential investment of any CVC Funds of Products and does not guarantee future results. The target returns are based upon CVC Credit Partners’ view of the potential returns for investments, are not meant to
predict the returns of the investments or CVC Funds of Products and are subject to the following assumptions: CVC Credit Partners considers a number of factors, including, for example, observed and historical
market returns relevant to the applicable investments, projected cash flows, and relevant other market dynamics (including interest rate and currency markets). Certain of the assumptions have been made for
modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been
stated or fully considered. Changes in the assumptions may have a material impact on the projected returns presented. Unless otherwise indicated, all data is shown before management fees, incentive fees,
applicable expenses, taxes and does not account for the effects of inflation. Management fees, incentive fees and potential expenses are not considered and would reduce returns. Actual results experienced by
investors may vary significantly from the target returns shown. Target Returns May Not Materialize.
The presentation contains certain “forward-looking statements” regarding the belief or current expectations of CVC Credit Partners and other members of its senior management. Such forward-looking statements
are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside the control
of the CVC Credit Partners and are difficult to predict, that may cause the actual results, performance, achievements or developments of CVC Credit Partners or the industry in which it operates to differ materially
from any future results, performance, achievements or developments expressed or implied from the forward-looking statements.
The information and opinions contained in the Presentation do not purport to be comprehensive, are provided as at the date of the document and are subject to change without notice. Neither the Sponsors nor
any other person are under any obligation to update or keep current the information contained herein.
2
2019 GLOBAL CREDIT MARKET OUTLOOK
Presenters
Hamish Buckland Andrew Davies Oscar Anderson
Chair, CVC Credit Partners Senior Managing Director Managing Director
Head of Europe Portfolio Manager
Portfolio Manager
40 years experience 17 years experience 27 years experience
(1 year at CVC Credit) (9 years at CVC Credit) (11 years at CVC Credit)
Prior to joining CVC, Hamish was at Triton Andrew has 10 years of experience in Prior to joining CVC, he co-founded Tri-
Partners and previously spent 25 years at leverage finance and corporate finance Mountain Partners, LLC in 2007 – an
JPMorgan, where his most recent role was advisory. Prior to joining CVC, he was at alternative investment management
vice chair of the investment banking Greenwich Street Capital Partners where business focused on hedge fund and direct
business. he was responsible for sourcing, trading, private equity investments. Prior to that he
analysis and portfolio management of spent 12 years in leveraged credit
In addition, from 2010 to 2012, Hamish assets across the capital structure. research and sales roles at CIBC World
acted as an advisor and board director at Markets (Argosy Group) and Wachovia
HM Treasury's Asset Protection Agency Andrew is a graduate from the University Securities.
and was involved in the post-crisis of the Witwatersrand, Johannesburg,
rehabilitation of RBS. South Africa. Oscar is a graduate from Harvard
University.
Hamish is a graduate from the University
of Cambridge.
As at January 2019.
3 Note: There can be no assurance that any particular individual will be involved in the management of any portfolio for any given period of time, if at all.2019 GLOBAL CREDIT MARKET OUTLOOK
What We Said This Time Last Year
In January 2018 CVC Credit Partners believed:
Gradually increasing inflation, rising interest rates and reduced quantitative easing would
occur; the U.S. would lead and Europe would follow at a slower pace
The economic environment would remain benign with growth in most major markets –
supportive of continued low default rates
Continued single name volatility due to digital disruption, regulatory changes, fraud and
structural sector changes
Political backdrop would remain uncertain and potentially volatile – Brexit, Italian Elections,
U.S. Administration
4 The above statements are opinions of CVC Credit Partners and are subject to change at any time. For informational purposes only.2019 GLOBAL CREDIT MARKET OUTLOOK
Market Macro Near-Term Overview
Slowing global growth and central bank policies among other factors are driving near-term volatility…
1 A slowdown, not a recession(1) 2 From quantitative easing to quantitative tightening(1)
Forecasts
3-Mo Net Purchases ($ billions)
3.0% Global DM U.S.
Forecasts
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2017 2018 2019 2020
…however, domestic economies in aggregate look good for now
3 Real economy indicators continue to signal robust growth (2) 4 Manufacturing PMIs continue to remain in expansion territory(3)
58 66
Expansion Expansion
56
61
54
56
52
51
50
Contraction Contraction
48 46
2012 2013 2014 2015 2016 2017 2018 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Dec-18
Global NonMfg PMI DM EM China Mfg PMI France Mfg PMI Japan Mfg PMI Germanay Mfg PMI
1) Source: Wells Fargo Securities “2019 U.S. Leveraged Finance Outlook”. Bloomberg L.P. As at 6 December 2018.
2) Source: Citi. “Review of 2018…Navigating 2019…”. As at 6 January 2019.
5 3) Source: Credit Suisse. “US Credit Strategy: 2019 Outlook – A Soft Landing”. As at 18 December 2018.2019 GLOBAL CREDIT MARKET OUTLOOK
Credit Market Overview
5 “As the CLO market goes, so does the loan market”(1) 6 Leveraged loan market remains structurally sound(2)
$600B USD CLO Size 55% $800B
$500B U.S. Europe
CLO % of Loan Market 50%
$400B $600B
45%
$300B
40% $400B
$200B
$100B 35% $200B
$0B 30%
$0B
Private debt middle market spreads widened
7 8 Lower U.S. HY volume supportive of secondary levels(4)
in sympathy with liquid markets(3)
10% $30B
Spread 3-Month LIBOR
8% 7.3%
6.2% 6.6%
6.0% 6.1% $20B
6% 2.3%
1.3% 1.4% 2.0% 2.3%
4%
$10B
4.6% 4.6% 4.2% 4.3% 5.0%
2%
0% $0B
Q3'17 Q4'17 Q1'18 Q2'18 Q3'18
1) Source: Credit Suisse. “US Credit Strategy: 2019 Outlook – A Soft Landing”. As at 18 December 2018.
2) Source: S&P Global Market Intelligence. “LCD Global Review – US/Europe (3Q 2018)”. Reflects leveraged loan issuance.
3) Source: Lincoln International and Thomson Reuters LPC. As at 19 December 2018.
6 4) Source: S&P Global Market Intelligence. “U.S. High-Yield Stats and Trends Data”. Reflects U.S. high yield new issuance.2019 GLOBAL CREDIT MARKET OUTLOOK
Are the Fundamentals in Credit in this Current Environment Priced Correctly?
Fundamentals remain stable and are supported by continued although slower economic growth…
9 Total debt/EBITDA(1) 10 Interest coverage ratio(2)
Europe U.S. Europe U.S.
6.0x 5.4x 5.2x
5.0x 4.9x 5.0x 5.1x 5.0x 5.0x 4.6x
4.7x 4.7x 4.7x 4.9x 5.0x 4.2x 4.1x 4.3x 4.2x
5.0x 4.0x 4.1x 3.9x 3.9x 3.9x 4.1x
4.0x 3.7x
4.0x
3.0x
3.0x
2.0x
2.0x
1.0x 1.0x
0.0x 0.0x
2013 2014 2015 2016 2017 Q3'18 2013 2014 2015 2016 2017 Q3'18
…however, we believe the market is already pricing in a recession
11 Average loan bid(3) 12 Leveraged loan spreads(4)
475
101 Europe U.S. Europe (E+) U.S. (L+)
100 450
99 425
98
400
97
375
96
95 350
1) Source: S&P Global Market Intelligence. “LCD Global Review – US/Europe (3Q 2018)”. Reflects European and U.S. leveraged loans (total debt/EBITDA).
2) Source: S&P Global Market Intelligence. “LCD Global Review – US/Europe (3Q 2018)”. Reflects European and U.S. leveraged loans (EBITDA/cash interest).
3) Source: S&P Global Market Intelligence. As at 5 January 2018. Reflects average loan bid for the S&P U.S. Leveraged Loan Index and S&P European Leveraged Loan Index respectively.
7 4) Source: S&P Global Market Intelligence. As at 5 January 2018. Reflects spread to maturity for the S&P U.S. Leveraged Loan Index and S&P European Leveraged Loan Index respectively.2019 GLOBAL CREDIT MARKET OUTLOOK
Outlook Across the CVC Credit Platform
Performing Credit Credit Opportunities & Special Situations Private Debt
($15 billion AUM)(1) ($3 billion AUM)(1) ($2 billion AUM)(1)
• Supportive fundamentals, attractive current • Q4’18 repricing has expanded opportunity • Price / spread volatility observed in liquid
income, and low default rates bode well for markets during Q4’18 did not extend to
• Proliferation of automated passive funds
senior secured loans in 2019 Private Debt
expected to continue to drive inefficiencies in
• Technical market pullback in late 2018 driven single name idiosyncratic credits • Volatility in liquid markets will increase
by negative sentiment presents compelling attractiveness of privately-placed deals
• Slower growth outlook provides opportunity
entry points
to pursue credits experiencing a meaningful • Expect increases in deal flow and market
• Defaults likely to be driven more by issuer discount to intrinsic value share for direct lenders
specific challenges than by systemic or
• Capital disruptions in alternatives creating • Private Debt should deliver a 200 – 300 bps
sector related weakness
select liquidity gaps premium to liquid loan markets
• Interest rate increases will benefit floating
coupons supporting price stability compared
to fixed rate assets
Gross Return Target(2) Gross Return Target(2) Gross Return Target(2)
0% 4 – 7% 20% 0% 8 – 20%+ 20% 0% 9 – 13% 20%
Liquidity Liquidity Liquidity
Daily 90 days + Daily 90 days + Daily 90 days +
Risk Profile(2) Risk Profile(2) Risk Profile(2)
Lower Higher Lower Higher Lower Higher
The above statements are opinions of CVC Credit Partners and are subject to change at any time. For informational purposes only.
1) AUM as at 30 September 2018.
2) Target returns and risk profiles are hypothetical in nature and are shown for illustrative, informational purposes only. This summary is not intended to forecast or predict future events, but rather to indicate the returns and
risk profiles for the strategies the asset classes indicated herein that CVC Credit has observed in the market generally over the course of an investment cycle. Note: The summary included herein is not all encompassing
and is not representative of all funds and vehicles managed by CVC Credit Partners. Unless otherwise indicated, all data is shown before management fees, incentive fees, applicable expenses, taxes and does not
8 account for the effects of inflation. Management fees, incentive fees and potential expenses are not considered and would reduce returns. Actual results experienced by investors may vary significantly from the target return
and volatility ranges shown. Past performance is not indicative of future results, which may vary and there can be no assurance that such returns and volatility ranges will be achieved.2019 GLOBAL CREDIT MARKET OUTLOOK
Summary
2019 will bring volatility; credit selection and price discipline will remain paramount
Tightening monetary conditions and technicals will favor loans over bonds
New issue market will continue to be robust across large and mid caps with improved terms
and returns available for discerning investors
Default rates will tick up and event risk will need to be managed
Environment that favors experienced, broadly based managers with clear information
advantage
9 The above statements are opinions of CVC Credit Partners and are subject to change at any time. For informational purposes only.2019 GLOBAL CREDIT MARKET OUTLOOK
Q&A
If you have any questions, please feel free to ask on the call, or
alternatively, contact your relationship manager.
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