Winter 2015

Kelly Martin [email protected] +1 312 364 8832

Leveraged Finance Kent Brown [email protected] Market Update +1 312 364 8952 Michael Ward [email protected] +1 312 364 8529

Mark Birkett [email protected] +1 312 364 5483

Matt Thomas [email protected] +1 312 364 5261 William Blair & Company

Spotlight on the Leveraged Finance Market

This issue of Leveraged Finance Market Update recaps 2014 market-wide leveraged financing activity and provides our initial outlook for 2015. The leveraged loan market recorded its second best year since 2007 with $528 billion in 2014 (behind record issuance in 2013 of $607 billion), while the high yield market turned in another solid year of activity with $314 billion of total issuance (just 9% below its all-time record in 2013). Middle market borrowers (companies with less than $50 mm of EBITDA) raised $15 billion in leveraged loans in 2014, up 11% from $13.5 billion in 2013.

Financing conditions, especially for strong borrowers with recurring revenue business models, scale and diversification, are robust. We are seeing leveraged mid-market software and other recurring revenue models routinely breach 6x and even 7x leverage. However we may be nearing peak conditions as less strong credits are seeing still good, but a more measured response from the leveraged lending market. And despite near record volume for 2014, conditions in the leveraged finance market became more volatile as the year progressed with borrowers facing increased financing costs and choppier markets by year end.

For example while 75% of leveraged lenders responding to the William Blair Leveraged Finance Survey in Q3 2014 said that they were seeing looser deal terms and higher leverage over the prior six months, only 48% of respondents currently have this view. Lenders reporting tighter terms and leverage increased from 7% in Q3 to 13% most recently. Going forward, 29% of respondents expect terms and leverage to tighten over the next 12 months (up from 22% last quarter).

Loan pricing appears more stable. Lenders reporting lower pricing declined slightly to 49% of respondents from 58%. Only 15% report realizing higher pricing in the most recent six month period (up from 9% in Q3).

More generally respondents to the survey rated conditions in the leveraged finance market at 3.9 in terms of borrower favorability (on a scale of 1.0 to 5.0, with 5.0 being most borrower-friendly) down from 4.3 at Q3. One possible take-away from these results is that borrowers considering a leveraged financing in 2015 may want to accelerate their financing plans and plan to pursue a broad- based marketing effort to achieve optimum leverage, terms and pricing.

These survey results are consistent with the experience of our arrangement practice and our view of the LBO financing market from our M&A advisory business. Our mid-market debt arrangement clients benefited from generally strong markets during the year as well as broad market-clearing financing processes, but the variability in lender response and level of aggressiveness widened as the year progressed.

William Blair advised on a record level of M&A transaction volume in 2014. We completed or announced 90 transactions in 2014; including 35 LBOs aggregating more than $20 billion in transaction value. On average, sponsors leveraged these acquisitions to approximately 4.9x.

We hope you find the Winter Issue of the Leveraged Finance Market Update informative.

Regards,

Kelly Martin Managing Director Group Head Capital Advisory Group/Leveraged Finance Team 312.364.8832 [email protected]

Leveraged Finance Market Update Spotlight on the Leveraged Finance Market 1

William Blair & Company

William Blair Leveraged Finance Survey

The survey reflects the views of mid-market leveraged finance professionals representing leading commercial banks, credit funds, BDCs, commercial finance companies and other credit providers. The Market Index is a measure of both the current tone and direction of the mid-market leveraged finance market.

Highlights of the survey include:

 85% of lenders responded that over the past 6 months their pricing has declined (49%) or remained constant (36%)  Going forward, 29% of lenders expect pricing to increase vs. 24% who responded this way last quarter  On a scale of 1 to 5, with 5 being the most issuer/borrower friendly conceivable, respondents rated conditions in the credit markets as 3.9  Suggesting we may have reached a ceiling to leverage level and loosening of terms; 48% of respondents indicated seeing looser leverage and terms (versus 75% in Q3) while 29% expect leverage to lessen and terms to tighten

How has the Comptroller of the Currency and Fed guidance If rates rise in 2015, how would you expect

on leveraged lending impacted your financing business? leverage multiples to react?

60% 40% 42% 60% 46% 53% 40% 18% 40% 20% 20% 1% 0% 0% Not at all Negatively Positively Increase Decrease No material change

Does your organization prefer to finance For transactions involving a sponsor, what is

transactions that: the minimum equity contribution you require?

60% 49% 40% 40% 36% 40% 28% 26% 20% 11% 20% 10% 0% Involve a private Do not involve Equally focused 0% equity sponsor a private on sponsored and non- Less than 25% 25-30% 30-35% Greater than equity sponsor sponsored transactions 35%

Leveraged Finance Market Update 2 William Blair Leveraged Finance Survey

William Blair & Company

Leveraged Loan Deal Volume

 Leveraged loan volume in 2014 was $528 billion marking the second best year since 2007. However, volume did decline 13% when compared to 2013’s all-time high issuance of $607 billion. - Despite the YoY decline, 2014 was a robust year led by increased M&A activity. The volume of LBO and other acquisition related financings was the highest since the financial crisis, which partially offset the significant decline in repricing volume.  A strong first half of the year supported nearly two thirds of 2014 issuance, while fourth quarter volume came in at $69 billion, a three-year low and down from $127 billion during the prior year period due to market volatility.  The weakness experienced during the fourth quarter is perhaps best illustrated through repricing activity, which was virtually non-existent in 4Q14. CY 2014 reported $114 billion of repricing volume, of which nearly 80% occurred during the first quarter. Only $1.5 billion of repricing volume was recorded in the 4th quarter, representing a 98% decline YoY.  Increased market volatility in 4Q14 also impacted the volume of covenant-lite activity during the quarter. Issuance of cov-lite loans in 4Q14 dropped to a 1.5-year low at 57% of total institutional volume, a decline from 70% in the 1H2014 and 62% during 2013.  Demonstrating lenders continued receptivity to dividend transactions, dividend volume during 2014 was $53 billion, which nearly matches the four-year average of $54 billion. The 2014 volume is down slightly all-time high issuance levels seen in 2012 and 2013.  2014 was a record year for second issuance at almost $36 billion, an increase of 23% over 2013 volume. However, this was largely supporting by record issuance in 1H14. Second lien volume declined to just $4.2 billion in 4Q14, the lowest quarterly total since 3Q12.

Middle Market Leveraged Loan Volume Large Corporate Leveraged Loan Volume

($ in billions) ($ in billions)

$29 $592 $506 $455 $512 $362 $14 $15 $12 $13 $222 $8 $10 $149 $5 $71

2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 Institutional Pro Rata Institutional Pro Rata Source: S&P LCD.

Loan Repricing Volume Recapitalization Loan Volume

($ in billions) ($ in billions)

$282 $70 $56 $49 $53 $140 $114 $38 $36 $74 $72

$0 $0 $4 $3 $1

2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 Institutional Pro Rata Source: S&P LCD.

Leveraged Finance Market Update Leveraged Loan Deal Volume 3

William Blair & Company

Leverage Multiples and Equity Contribution

 The average large corporate LBO leverage for 2014 was 5.8x, the highest level since 2007 when LBOs averaged 6.2x. 2014 LBO leverage was supported by a strong second and third quarter as average leverage reached 5.9x and 6.3x, respectively. Weaker market conditions in the fourth quarter pulled down the full-year average as 4Q14 leverage came in at just over 5.6x.  Debt multiples for middle market LBOs have followed a similar trend, averaging 5.3x in 2014 compared to 4.8x in 2013 and a recession low of 3.3x in 2009.  Lenders remain receptive to more highly leveraged transactions with 74% and 52% of the transactions being completed above 4x and 5x leverage, respectively. For transactions with at least 5x leverage, this represents a 13% increase over 2013 and is indicative of lenders continued willingness to push total debt multiples, though this somewhat slowed during 4Q14.  Equity contribution levels have increased slightly to 39% during 2014 from 37% in 2013. However, when looking at the largest 10 LBOs completed in 2014, equity contribution accounted for just 34% of the purchase price. In Blair’s experience, the contribution level across the entire market should not be viewed as a minimum as it is likely inflated by high purchase multiples coupled with absolute caps on leverage levels.  Lender’s appetite for dividend recap transactions remained robust in 2014 as pre- and post-dividend leverage were near all- time highs at 3.5x and 4.9x, respectively. This is nearly on par with 2007 which saw the all-time high for post-dividend leverage at 5.0x. Strong enterprise valuations have resulted in higher implied equity values and in turn supported the increased leverage for dividend transactions.  Despite leverage trending toward historical peaks, cash flow coverage levels remain robust given historically low borrowing costs. Average interest coverage (Adjusted EBITDA / Cash Interest) measured at an all-time high of 3.5x for large corporate LBOs in 2014 compared to 2.1x in 2007, providing more cushion for borrowers to maintain liquidity in the face of unforeseen negative performance. Middle market LBO interest coverage has a similar comfortable cushion at 3.4x for 2014.  While the Fed/OCC guidelines seeking to govern highly leveraged transactions have been known since 2013, Blair’s direct experience suggests an increasing number of banks and other institutions are taking the guidelines to heart. In our conversations with lenders, we have seen the guidelines’ 3x/4x threshold and 6x threshold more frequently referenced by lenders when they comment on leverage guidance for a transaction.

LBO Leverage Multiples Average Equity Contributions to Leveraged

51% 6.2x 5.8x 44% 5.3x 5.4x 43% 42% 39% 39% 5.6x 4.9x 5.2x 5.3x 33% 37% 4.5x 4.0x 4.7x 4.3x 4.5x 4.8x 3.3x 4.2x

2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 Large Corporate Middle Market Source: S&P LCD.

Percentage of Large Corporate Volume with Leveraged Loan Multiples Debt/EBITDA of 4x or Higher

77% 74% 4.9x 63% 67% 73% 4.9x 4.1x 3.9x 4.4x 4.6x 4.7x 57% 52% 3.7x 4.8x 5.0x 50% 51% 4.8x 4.3x 3.4x 3.7x 4.2x 4.3x 35% 45% 46% 32% 31% 38% 20%

2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 Large Corporate Middle Market 4x or Higher 5x or Higher Source: S&P LCD.

Leveraged Finance Market Update 4 Leverage Multiples and Equity Contribution

William Blair & Company

Loan Pricing

 Pricing for newly-issued middle market first-lien institutional leveraged loans (borrowers with less than $50 million of EBITDA) during 4Q 2014 averaged approximately L+510 bps, compared to L+477 and L+476 bps for 2014 and 2013, respectively. The slight spike in pricing in the last quarter reflects a more volatile market. The premium for middle market loans compared to large institutional loans fell during 2014 from 98 bps in 2013 to 77 bps in 2014.  Pricing spreads for institutional single-B first-lien leveraged loans largely remained in the L+425 bps to L+500 bps range during 4Q14. This is up from the end of 2013 by approximately 75 bps.  LIBOR floors remain a common feature on both large and middle market leveraged loans. For single B rated institutional loans, LIBOR floors have averaged 74 bps for 2014, down about 3 bps from 2013. The average LIBOR floor for middle market loans for 2014 was 105 bps. For unrated first-lien loans, a LIBOR floor of 100 bps continues to be highly common.  LIBOR spreads on large institutional sized ($50+ million of EBITDA) second-lien loan tranches averaged approximately 840 bps for 4Q 2014, above 2014 and 2013 average of 775 bps and 800 bps, respectively. The spread between first lien and second lien pricing compressed further during 2014 to approximately 350 bps compared to 390 bps in 2013.  Institutional second-lien deals for middle market transactions during 4Q 2014 saw an average LIBOR spread of approximately 840 bps, above the 2014 full year average of 809 bps but below 2013 level of 857 bps.  While taking longer to reflect recent yield levels in the broader market, unitranche facilities are now frequently being priced in L+650 bps to L+775 bps range, although, in some cases, the strongest top-tier sponsored credits and those with outsized equity contributions can secure even tighter pricing. LIBOR floors for unitranche loans remain mixed between 100 and 125 bps, largely dependent on the type of lender.  Pricing in the asset based loan market reflects the value of coverage and robust lender competition on most transactions. Recent pricing has been in the range of L+150 bps to L+200 bps range, depending on deal size, asset quality, and liquidity.

Middle Market Loan LIBOR Spreads B+/B Rated Institutional Loan LIBOR Spreads

(bps) (bps)

389 465 NA NA 550

Jul-09 Jul-14

Jul-09 Jul-14

Jan-07 Jan-12

Jun-07 Jun-12

Oct-10

Jan-07 Jan-12

Sep-08 Sep-13

Feb-09 Feb-14

Dec-09 Dec-14

Jun-07 Jun-12

Apr-08 Apr-13

Oct-10

Aug-11

Sep-08 Sep-13

Nov-07 Mar-11 Nov-12

Feb-09 Feb-14

Dec-09 Dec-14

Apr-08 Apr-13

May-10

Aug-11

Nov-12 Nov-07

Mar-11 May-10 Pro Rata Institutional Source: S&P LCD.

Leveraged Finance Market Update Loan Pricing 5

William Blair & Company

High-Yield Offerings

 The high-yield new issue market was strong in 2014, with $314 billion in new high-yield issuance. This represented a 2.6% decline from 2013 new issuance volume, but 2014 still boasted the 3rd largest volume in the last 10 years.  Historically low treasury rates continued to buoy the high-yield market throughout 2014, with companies looking to lock in low- cost debt financing before conditions change. According to Dan Hannis, Managing Director of William Blair’s High Yield Bond Trading Division, “much of the market is expecting a similar level of issuance in 2015 as M&A will likely play a large part of new issuance in 2015.” - At the end of 2014, the forward calendar stood at $12.3 billion, a 20% decline from forward levels at the end of 2013.  Hannis describes 4Q2014 as a choppy quarter for the High Yield market, “due to larger than expected High Yield outflows, generally due to declining bond prices in the Energy sector (16% of the HY Index).” - In 4Q, the Merrill Lynch High Yield Index was down 1.4% on a total return basis, with CCC rated bonds feeling the brunt of the sell-off, declining 4.9%. - Year-end 2014 new-issue yields were 5.2% for BB rated unsecured bonds and 7.4% for B rated unsecured bonds, respectively. - The Merrill Lynch High Yield Index returned 2.5% for 2014, down from calendar year 2013 returns of 7.4%.  Refinancings represented a large portion of high yield issuances for 2014, accounting for approximately 48% of dollar volume (down 2% as a percentage compared to calendar year 2013). Even with the marginal decline, this continues the trend seen in 2013 of borrowers seeking to refinance more expensive debt with less expensive, fixed-rate notes. Approximately 34% of dollar volume in 2014 was for M&A-related activity, versus 23% in 2013.  Issuance of PIK notes (including PIK toggle) was $9.5 billion in 2014, down from 2013 volume of $12 billion. The volume of PIK notes today remains well below levels seen during 2007 when PIK note volume totaled more than $19 billion for the full year.  2014 was another strong year for 144A “private-for-life” issues, which allow companies to access the high-yield market without undergoing SEC registration. These transactions comprised 35.2% of the total high-yield issuances in 2013 and have risen to 43.5% of 2014 issuances—more than double the number of registered issuances.

High-Yield Bond Volume Yields of New-Issue Senior Unsecured Bonds

($ in billions) (bps)

$345 $322 $314 $287 7.38% $218 NA $144 $164

$68 5.23% Jul-14

2007 2008 2009 2010 2011 2012 2013 2014 Jul-09

Jan-07 Jan-12

Jun-07 Jun-12

Oct-10

Sep-08 Sep-13

Feb-09 Feb-14

Dec-09 Dec-14 Apr-08 Apr-13

Aug-11

Nov-07 Mar-11 Nov-12 May-10 BB B Source: S&P LCD.

Leveraged Finance Market Update 6 High-Yield Bond Offerings

William Blair & Company

Recent Market Activity

Select Leveraged Loan Transactions

Amount ($MM) LIBOR Spread Senior / Corp. 1st Lien 2nd Lien 1st Lien 2nd Lien Total Company Sponsor(s) Sector Purpose Month Rating Total Revolver TL TL TL TL Leverage

LBO Transactions Eyemart Express Friedman Fleischer & Retail LBO Dec. B/B1 $300 $30 $300 -- 400 -- 4.4x/4.4x Lowe Dealogic Carlyle Group Computers & LBO Dec. B/B1 $385 $50 $335 -- 375 -- 4.6x/4.6x Electronics PhyMED Healthcare Group Teachers’ Private Capital Healthcare LBO Nov. --/-- $230 $30 $135 $65 425 -- 4.0x/6.0x Abaco Energy Technology Riverstone Services & Leasing LBO Nov. B-/B3 $200 $25 $175 -- 700 -- 4.3x/4.3x TOMS Shoes Bain Capital Textile & Apparel LBO Oct. B/B2 $360 $60 $300 -- 550 -- 4.2x/4.2x Access Information Berkshire Partners Computers & LBO Oct. B/B2 $534 $40 $342 $152 500 875 4.0x/6.2x Management Electronics BBB Industries Pamplona Capital Manufacturing & LBO Oct. B/B2 $465 $70 $295 $100 500 875 4.3x/5.7x Machinery Dividend Cengage Learning Apax Partners Printing & Recap Dec. B/B2 $300 -- $300 -- 600 -- 4.3x/4.3x Publishing /Dividend Sonneborn One Equity Partners Chemicals Recap Nov. B/B1 $300 $20 $280 -- 450 -- --/-- /Dividend Sutherland Global Services Texas Pacific Group Computers & Recap Oct. --/-- $340 -- $340 -- 500 -- 3.0x/3.0x Electronics /Dividend Henry Company Graham Partners Building Materials Recap Oct. B/B3 $235 $20 $165 $50 425 900 4.0x/5.5x /Dividend Central Group Summit Partners Services & Leasing Recap Oct. B-/B3 $325 $50 $225 $50 525 900 --/-- /Dividend Other Transactions Accuvant -- Computers & Merger Dec. B/B2 $510 $85 $300 $125 525 900 3.8x/5.4x Electronics TierPoint RedBird Capital Computers & Acquisition Dec. B/B3 $460 $40 $330 $90 425 775 4.5x/5.8x Electroncs Pabst Brewing Company TSG Consumer Food & Beverage Acquisition Nov. B/B2 $600 $75 $395 $130 475 825 4.5x/6.0x U.S. TelePacific Corp. Investcorp Telecom Refinancing Nov. B-/B3 $520 $25 $505 -- 500 -- 3.2x/3.2x Creganna-Tactx Medical Permira Healthcare Acquisition Nov. B/B2 $300 $25 $185 $90 425 800 3.4x/5.1x Novetta Solutions Arlington Capital Computers & Acquisition Nov. --/-- $165 $25 $140 -- 500 -- 3.8x/3.8x Electronics Citadel Plastics Holdings Huntsman Gay Capital Chemicals Acquisition Nov. B/B2 $430 $30 $320 $80 425 800 4.0x/5.0x Mattress Firm J.W. Childs Home Furnishings Acquisition Oct. B/B2 $845 $125 $720 -- 425 -- 3.3x/3.3x Flavors Holdings MacAndrews & Forbes Food & Beverage Acquisition Oct. B/B2 $450 $50 $350 $50 575 1000 3.8x/4.3x Source: S&P LCD.

Select High-Yield Note Offerings (Less than $300 million)

Issue Size Tenor Company Sponsor(s) Sector Purpose Type Month Rating ($MM) Coupon Yield (Yrs.)

NCI Building Systems Inc Clayton, Dubilier & Rice Computers & Electronics Acquisition 144a life Jan. BB/Ba2 $250 8.250% 8.250% 8 ADT Corporation -- Services & Leasing Refinancing Public Dec. BB-/Ba2 $300 5.250% 5.250% 6 HUB International Ltd Hellman & Friedman Insurance Acquisition 144a life Dec. CCC+/Caa1 $280 7.875% 7.494% 7 Tenneco Inc -- Automotive Refinancing Public Dec. BB/Ba3 $225 5.375% 5.375% 10 Spectrum Brands Inc Harbinger Capital Partners Computers & Electronics Acquisition 144a Dec. B/B3 $250 6.125% 6.125% 10 Mercer International Inc -- Forest Product Refinancing 144a Nov. B+/B2 $250 7.000% 7.000% 5 Moog Inc. -- Aerospace & Defense Refinancing 144a life Nov. BB/Ba3 $300 5.250% 5.250% 8 Canbriam Energy Inc Warburg Pincus Oil & Gas Refinancing 144a life Nov. CCC+/Caa1 $250 9.750% 11.355% 5 Eco Services Inc CCMP Capital Advisors LLC Chemicals LBO 144a life Oct. CCC+/Caa1 $200 8.500% 8.500% 8 Source: S&P LCD.

Leveraged Finance Market Update Recent Market Activity 7

William Blair & Company

Selected Transactions

$30,000,000 $67,500,000 $172,500,000 $245,000,000

Unitranche and Revolving Mezzanine Debt Unitranche Credit Facility Offering Credit Facilities December 2014 December 2014 December 2014 November 2014

$47,000,000 Not Disclosed $85,000,000 $180,000,000

Senior and Junior Senior Credit Facility Credit Facilities Senior Credit Facility Preferred November 2014 October 2014 September 2014 Sept. 2014 / Jun. 2014

$130,000,000 $100,000,000 $207,500,000 $75,000,000

a portfolio company of Wynnchurch Capital

Senior Notes Senior Unsecured Notes Unitranche Credit Facility Senior Credit Facilities Aug. 2014 / Apr. 2014 July 2014 June 2014 June 2014

Leveraged Finance and Debt Capital Markets

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.  85 transactions closed since 2008, with over $7.0 billion arranged since 2012  Specialists who are experts in complex engagements, including those requiring insightful credit positioning and the arrangement of multiple layers of capital  Extensive experience in arranging and negotiating terms for a broad range of senior, junior and structured debt products  Real-time, proprietary view of the leveraged finance market from 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 notes, convertible bonds, syndicated term loans, investment grade notes, and other debt securities purchased by institutional investors.  Debt , placement and advisory services related to the public and private/144A markets  40+ institutional professionals based in Chicago and New York  Market maker in 500 high yield bond and investment grade issues; 400 preferred issues  National account coverage of more than 700 tier one institutional buyers and regional investors

Leveraged Finance Market Update 8 Selected Transactions

William Blair & Company

William Blair is a trade name for William Blair & Company, L.L.C. and William Blair International, Limited. William Blair & Company, L.L.C., is a Delaware company and is regulated by the Securities and Exchange Commission, The Financial Industry Regulatory Authority, and other principal exchanges. William Blair International Limited is authorised and regulated by the Financial Conduct Authority ("FCA") in the United Kingdom. William Blair & Company® 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 within the United States and are not offered to persons or institutions outside of the United States. This material has been approved for distribution in the United Kingdom by William Blair International Limited, 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 to 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. William Blair & Company | 222 West Adams Street | Chicago, Illinois 60606 | +1 312 236 1600 | williamblair.com February 2, 2015 Leveraged Finance Market Update 9

William Blair’s group combines signiicant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and inancing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing , growth inancing, inancial , 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 About William Blair ive continents, was an underwriter on more than 20% of all U.S. initial public offerings, Investment Banking and raised nearly $100 billion in public and private inancing.