September 2015 By Will Bloom, Managing Director As we write this letter, U.S. equities are down subtantially from their peak trading levels in May 2015, driven primarily by global concerns regarding slowing or difficult economics in China, as well as other factors such as instability in Greece. However, the U.S. debt markets remain robust and seem less concerned with equity market volatility as U.S. issuers’ earnings are not expected to be undermined. In fact, the recent volatility has likely delayed the Federal Reserve’s decision to raise underlying interest rates, thus providing borrowers additional opportunities to capture low cost financing for refinancings, acquisitions, recapitalizations, or other purposes. Currently trading at 219 bps, 10-year Treasuries are well below their 10 year average of 323 bps. They reached a high point during mid-1996 at 706 bps and a low of 143 bps on July 5, 2012. Meanwhile, 3-month LIBOR is currently within its historical low range of 23 to 35 bps. 3-month LIBOR has averaged 179 bps over the last decade, reaching a high of 687 bps in June of 2000. The following data points reflect a continuation of low borrowing base rates. INTEREST RATES STILL AT HISTORIC LOWSMIDDLE MARKET LOAN VOLUME HEATING UP AFTER A “COOL” START TO THE YEAR Middle market loan volume stands at $65.5 billion for the first half of 2015; primarily comprised of large middle market issuance ($47 billion) followed by traditional middle market volume ($18 billion). The total issuance lags the same period during 2014, likely driven by less M&A activity in Q1. *Large middle market is defined as deal size ranging from $100 million to $500 million, while the traditional middle market is defined as deal size below $100 million. BEAUTY CONTEST - CREDIT SPREADS COMPRESS, MEZZANINE DEBT PRICING ATTRACTIVE Loan spreads have tightened in each of the last four months, bringing 2Q15 average first-lien institutional contractual spreads down to 447 bps in the middle market. Commercial bank pricing remains attractive, ranging from 100 to 300 bps for strong borrowers with either significant collateral or a lower leverage profile (<2.5x) and 300 to 400 bps for higher leveraged transactions (>2.75x) with limited collateral. Subordinated (or mezzanine) debt has also tightened during the last few years, with cash coupons pricing at 11% fixed on average and paid-in-kind (PIK) rates ranging between 2-3%, for an all-in cost of 13-14%; and, generally without attached equity warrants. MIDDLE MARKET LBO LEVERAGE MULTIPLES KEEP BREATHING AT HIGH ELEVATION Debt to EBITDA levels on sponsor-backed middle market LBO transactions have increased slightly to just above 5.5x through the first half of this year, largely in line with 2014 levels. We believe this trend reiterates our perspective that credit appetite remains strong and there remains a willingness to attractively leverage balance sheets for recapitalizations, refinancings, or acquisitions.When the window begins to close remains unknown, but in the near-term, despite global risks, lenders and investors continue to provide ongoing support that now is the time to consider issuing in the credit markets.