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Leveraged Finance Leveraged Finance Leveraged Finance / U.S. U.S. Leveraged Finance Multiple EV-aluator Special Report Table of Contents Redesigned Report Format: In this revamped fourth edition of its special report, Fitch has Aerospace and Defense.....................4 Auto and Related ...............................6 enhanced its analysis and presentation of market multiples (enterprise value [EV]/EBITDA). In Chemicals ..........................................8 addition to tracking market multiples on an aggregated sector basis, the report now provides a Consumer ........................................ 10 Diverersified Manufacturing and more granular view of the more than 400 high-yield candidates comprising the report on both Capital Goods ............................... 12 Energy ............................................. 14 an issuer-specific and subsector basis. The detailed breakdown by subsector helps Food, Beverage, Tobacco and demonstrate the considerable divergence in market multiples within each broad sector. Restaurants................................... 17 Gaming, Lodging and Leisure .......... 19 Market Multiples Reverse Course: Current market valuation multiples (enterprise value Healthcare........................................ 21 Homebuilding, Building Materials [EV]/EBITDA) across 12 of the 18 U.S. sectors dipped below 2010 levels after having trended and Construction............................ 24 Media and Entertainment ................. 26 upward for several consecutive quarters. The aggregate market multiple for all companies for Natural Resources ........................... 29 the most recent LTM is down to 7.9x, from 8.6x at the end of 2010. The recent selloff fueled by Retail................................................ 32 Technology ...................................... 35 the European sovereign debt crisis and the debt ceiling debate in the U.S. was the fundamental Telecom and Cable .......................... 37 Transportation.................................. 40 driver of this reversal in trend. Elevated volatility coupled with the compression in valuation Utilities ............................................. 42 multiples also resulted in perceptible contraction in equity cushions for most sectors (see sector Diversified Services.......................... 44 Multiples for Recovery Analysis........ 46 charts). Leveraged Finance Coverage .......... 47 Transaction Multiples Remain Strong: Year-to-date transaction multiples for 2011 declined Related Research only marginally from their 2010 levels. The median Fitch-estimated transaction multiple for For more information, visit: www.fitchratings.com/usleveragedfinance 2011 declined to 10.1x from 10.2x during 2010. That said, LTM transaction multiples as of Fitch 50 Structural Profiles of 50 Aug. 11, 2011 were slightly higher than full-year 2010 numbers, despite weaker activity during Leveraged Credits, July 20, 2011 U.S. Leveraged Market Quarterly: the first quarter of 2011. First-Quarter 2011, July 20, 2011 Liquidity and Covenant Analysis for Notable Deals: Some notable M&A deals this quarter include the announced $34 billion Large U.S. Leveraged Issuers, purchase of Medco Health Solutions Inc. by Express Scripts, Inc. at a Fitch-estimated 11.4x June 23, 2011 EBITDA multiple; and the announced $4.4 billion acquisition of Graham Packaging Company U.S. Leveraged Finance Stats Quarterly, First-Quarter 2011, Inc. by Reynolds Group Holdings Limited at a Fitch-estimated 9.1x EBITDA. As evident from June 7, 2011 the sector charts on pages 448, current transaction multiples for an overwhelming majority of Bridging the Refinancing Cliff, Volume III, April 20, 2011 the sectors are still below their 20062007 peaks. U.S. Media and Entertainment Sector Recovery and Notching Review Fitch-Employed Multiples Remain Low: The Enterprise Value table on page 2 contrasts the 2011, April 15, 2011 market and transaction multiples against the distressed multiple (going-concern valuation) that 2011 Outlook: U.S. Leveraged Finance Sector Profiles, Feb. 9, 2011 Fitch employs for purposes of its recovery analysis. Fitch-employed multiples continued to 2011 Outlook: U.S. Corporate Credit, hover either below or in the lowest quartile of 10-year historical public market multiples. Jan. 4, 2011 Assumptions: The distressed multiple is estimated by discounting historical acquisition multiples Analysts (see Select Transaction multiples tables below), evaluating market-trading multiples, and Greg Fodell +1 312 368-3117 reviewing private transactions rated by Fitch. These stressed multiples continue to incorporate the [email protected] secular issues affecting each industry. Averages are presented on page 2, although the Fitch- Ruchira Dabas applied stressed multiples may range considerably to reflect nuances specific to a subsector as +1 212 908-0244 [email protected] well as idiosyncratic factors (refer to the table on page 49). Moreover, for sectors that are subject Adam Dolkart to considerable cyclicality or price volatility, the selected multiple would also reflect mid-cycle +1 312 368-2095 industry-average assumptions. These ranges will continue to be evaluated to ensure that they [email protected] appropriately reflect Fitch’s estimates of valuation under a stress scenario. Mike Simonton, CFA +1 312 368-3138 [email protected] After publication on Sept. 8, 2011, the table on page 2 was amended to correct the Transaction/Takeout Low column. www.fitchratings.com September 8, 2011 Leveraged Finance Enterprise Value (LTM EBITDA Multiplesa, As of Aug. 16, 2011) 10-Year Historical Fitch- Public Marketc Transaction/Takeoutd Employed Multiple for Recovery Analysis Sectorb Low High Average Current Low High Average Averagee 1 Aerospace and Defense 6.79 11.37 9.14 6.93 5.88 17.99 11.68 7.0 2 Auto and Related 5.02 10.70 6.73 4.38 2.37 9.13 6.19 4.8 3 Chemicals 6.26 11.68 8.49 7.04 6.24 13.72 9.46 5.2 4 Consumer (Durables and Non-Durables) 7.81 10.40 8.99 7.40 4.32 9.70 7.61 5 Diversified Manufacturing and Capital Goods 6.42 10.49 9.13 8.22 4.14 12.56 8.99 4.8 6 Energy 4.48 10.98 7.13 8.48 4.69 8.82 6.86 5.6f 7 Food, Beverage, Tobacco, and Restaurants 6.19 10.66 8.16 8.06 6.16 13.18 8.92 7.0 8 Gaming, Lodging, and Leisure 7.73 12.54 10.07 8.02 5.54 15.27 10.31 7.3 9 Healthcare 6.92 11.15 9.45 7.96 9.58 21.54 14.34 7.0 10 Homebuilding, Building Materials, and Construction 5.61 22.83 11.58 27.25 5.49 12.17 8.57 LAO 11 Media and Entertainment 5.99 13.90 10.08 6.73 2.86 17.88 11.33 5.5 12 Natural Resources 6.05 10.62 8.71 8.02 6.05 17.67 9.93 6.5 13 Retail 5.90 8.28 7.28 6.18 4.38 10.27 7.76 6.6 14 Technology 8.26 14.88 10.48 6.58 9.42 16.89 14.19 5.4 15 Telecommunications and Cable 7.20 14.54 9.54 7.60 7.42 14.05 9.88 7.3 16 Transportation 6.23 12.83 9.17 11.07 1.85 8.89 6.15 4.3 17 Utilities 8.16 15.14 11.10 12.25 3.23 11.88 7.95 5.2g 18 Diversified Services 7.40 13.57 9.64 10.19 5.53 12.68 8.64 aLTM EBITDA refers to last 12 months of EBITDA. Multiples represent Fitch estimates. bIn some instances, sector definitions may not map exactly across the different categories of EV multiples. cMarket multiples are assessed specifically for speculative-grade publicly traded U.S. companies with non-negative LTM EBITDA. Current values are based on market capitalization as of Aug. 16, 2011. dTransaction multiples cover M&A transactions across the rating spectrum. eRepresents the mean distressed multiple assumed by Fitch for purposes of its recovery analysis based on relatively small sample sizes of fewer than five companies per sector (with the exception of technology, media and entertainment, chemicals, and auto and related sectors). The range of multiples assumed by Fitch within each sector is determined by subsector classifications as well as issuer-specific idiosyncratic factors. It should be noted that since the Fitch-employed multiple is applied to a distressed EBITDA value, it generates a lower enterprise value than would otherwise have been obtained in a non-distressed scenario. For two companies where the recovery value is maximized under a liquidation scenario, the implied multiple has been imputed based on liquidation value and distressed EBITDA. fRefers to an implied EBITDA multiple derived from Fitch’s assumed distressed valuation metric of $10/boe (enterprise value per barrel of oil equivalent) used in recovery analysis. gRefers to an implied EBITDA multiple derived from Fitch’s discounted cash flow valuation of assets of competitive power generation companies. The implied multiple shown is based on a sample of five competitive power generation companies. No regulated utilities are rated in the low speculative grade at this time. LAO Liquidation analysis only. Source: Worldscope Fundamentals (Thomson Reuters), Bloomberg, Fitch. Methodology Fitch analyzed the data relating to market multiples, transaction multiples, and leverage ratios for issuers in each sector using all three measures (the mean, median, and weighted average). The results presented in this report are based on median values that were considered the most robust given relatively large sample sizes and the presence of outlier values that tended to skew the mean. “Low” and “High” in this report refer to the lowest and highest median values per annum (during the preceding 10-year period) for the related sector. “Average” refers to the 10-year mean value of the annual median multiples (or ratios) for that sector. In contrast, for the Fitch-employed distressed multiples, given
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