2019 antares compass mid-year check in · results. favorable unfavorable performance indicator....

Middle Market Continues to Perform Well but Macro-Economic Indicators Flash Yellow

The Fed “Put” to the Test

2019 ANTARES COMPASS MID-YEAR CHECK IN

July 2019

TABLE OF CONTENTS

Macro Indicators .................3-6

M&A Activity Trends ............... 7

Key Loan Market Metrics ....... 8

Portfolio Industry Trends ...9-10

July 2019

As we look at the current state of the middle market, companies within the sector continue to perform well. In analyzing the Antares portfolio, one of the largest and most diverse in the middle market, our borrowers forecast healthy revenue and adjusted EBITDA growth as well as stable margins for 2019. This performance data appears consistent with mean bottoms-up analyst forecasts for comparable public companies in the Russell 2000. Relatedly, Antares portfolio credit metrics including default and loss rates also remain favorable. Likewise for the markets, with the S&P/LSTA leveraged loan TTM default rate of 1% in May at a 7-year low. As the growth engine for the broader U.S. economy, we’re pleased to see this steady level of performance within the middle market.

That said, certain flagging macroeconomic indicators, including ongoing trade tensions, suggest growing reason for concern about the prospects for economic growth over the next 18 months. Loan markets appear to reflect this skittishness with sponsored middle market M&A related loan volume down significantly YTD.

Fortunately, recent warning signs have not been lost on the Fed which has pivoted from planned interest rate hikes to talk of interest rate cuts. The stock market has cheered this potential fed “put,” and we’ve also seen a healthy pickup recently in our pipeline and in the number of M&A transactions reviewed by our team for potential investment (see p5). Nevertheless, it remains to be seen if lower rates will be enough to prevent a slowdown or recession.

As a credit manager, selectivity and credit discipline remain as critical – and differentiating – as ever.

— Dave Brackett, CEO

2

This information in this report is for informational purposes only, is current as of the date noted and should not be used or taken as finance, legal or other advice. The information presented should not be deemed as a recommendation to purchase or sell any securities or investments mentioned. Although Antares Capital LP believes that the information contained herein has been obtained from sources believed to be reliable, Antares Capital LP does not guarantee its accuracy and it may be incomplete or condensed. Nothing within this publication should be deemed to be a research report. Past performance is not indicative of future results.

FAVORABLE

UNFAVORABLE

PERFORMANCE INDICATOR

Macro Indicators

3

RecessionGlobal and U.S. Leading IndicatorsU.S. leading indicator off modestly but holding up; however, global OECD CLI has been losing momentum.

U.S. GDP vs. 10 Year minus 2 Year T-Note SpreadQuarterly average yet to invert, but coming close. However, 10 year to 3-month T-Bill spread has inverted of late.

-3.0

-2.3

-1.5

-0.8

0.0

0.8

1.5

2.3

3.0

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Global Composite LeadingIndicator Index (OECD+6 NMEs)Federal Reserve Leading Indexfor the U.S. (%, right scale)

Source: OECD; Federal Reserve Bank of Philadelphia

-10

-8

-6

-4

-2

0

2

4

6

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3Q04

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4Q17

2Q18

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2Q19

%

U.S. GDP2-10yr Spread

2-10 Yr spreadcontraction

foretold recession 2-10 Yr Spread

Source: Federal Reserve Bank of St. Louis

Macro Indicators

4

Monthly U.S. Housing Starts & Light Vehicle Sales (SAAR)After climbing slightly in 2018, housing starts and auto sales are down 2% and 6%, respectively, YTD-May 19.

Recession

Monthly Non-Farm Payroll & Unemployment RateJob creation healthy with unemployment at a 50-year low.

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% Thou

sand

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Non-Farm Payroll MoMChange (Right Scale)Unemployment Rate(Left Scale)

Source: Bureau of Labor Statistics

0246810121416182022

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0.5

1.0

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2.0

2.5

Jan-

04Au

g-04

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-19

Milli

ons

Milli

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Light Vehicle SalesHousing Starts


VIX Index Daily Closing ValueVolatility usually rises ahead of a downturn. Volatility spiked at year end 2018, but has calmed more recently.

Net % Banks Tightening Lending Standards For C&I LoansLending standard typically tighten ahead of a downturn. Recent readings remain benign.

Macro Indicators

5

Recession

-40

-20

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4Q

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Q11

9

%

To large and middle-market firmsTo small firms

Source: Federal Reserve (Senior Loan Officer Opinion Survey )

Large and middle market f irmsSmall f irms

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19

Source: CBOE

Macro Indicators

U.S. Real Interest Rate*Rising real rates often precede a recession. Rates are up though still well below prior pre-recession levels with Fed now entertaining cuts.

S&P 500 vs. B+/B Spread (Inverted Scale)Late cycle stock market rallies in the face of widening credit spreads can spell trouble ahead. However, spreads have tightened since year end.

Recession

6

0%

1%

2%

3%

4%

5%

6%

7%

Jan-

04Au

g-04

Mar

-05

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May

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7Fe

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Sep-

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r-09

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p-15

Apr-1

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ov-1

6Ju

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Jan-

18Au

g-18

Mar

-19

* Defined here as Bank Prime Loan Rate less CPI less Food & Energy


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100

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Mar

-19

S&P500 Index (Left Scale)B+/B Spread (Right Scale)

Basis Points

S&P 500 Index (Left Scale)

Source: LCD, S&P

M&A Activity Trends

7

Antares Sponsored Middle Market M&A Deal Seen IndexM&A activity weakened in 4Q18 and into 1Q19 but picked up in 2Q19. We continue to expect M&A activity to be down modestly in 2019 vs. 2018.

M&A Heatmap1

Among the larger segments, Tech and Healthcare M&A related “deals seen” activity has heated up over the trailing 4 months through June 2019 vs. previous 4 months.

1Based on Moodys industry categories. Compares deals seen deal counts in 4 month period of March-June 2019 vs. November 2018-February 2019 with red/orange indicating warning/hotter activity and blue shades indicating cooling/cold activity. Box size indicates relative share of total deal count

“At Antares, we estimate we see nearly a quarter trillion dollars worth of deal volume annually, allowing us to be selective.

While industry wide M&A activity is down some year to date, Antares M&A closed deal dollar volume and deal counts are

actually up reflecting strong “add-on” acquisition activity – an advantage that comes with having one of the largest

sponsored middle market portfolios in the industry.”

— Tim Lyne, Senior Managing Director

50

70

90

110

130

150

170

190

INDEX3MMA M&AMonthly M&A deals seen Index3 month moving average

Jan 2017 = 100; Based on Antares M&A related seen deal count (i.e. won, lost, or passed on). Near term f orecast based on pipeline activ ity.

Key Loan Market Metrics

8

U.S. Sponsored Middle Market Loan Volume by Purpose1

Volume fell 33% in H1 2019, primarily reflecting a drop in reprice/refi activity; however, M&A volume also fell (down 12%).

Purchase Price Multiples & Leverage Components2

PPMs have risen in both the Large Corporate and Middle Market, but remain lower in the MM, with higher prices supported primarily by bigger equity checks.

Middle Market Yield Premium3

The MM yield premium shrank following a spike in Large Corporate spreads at year end 2018, but has since recovered back to near long term average levels.

1Includes both league table and private/club deals across all debt types. Middle market defined as deal and/or revenue <$500MM. 2Middle Market = Institutional + Private combined. Institutional MM LBOs are typically rated, TLBs with an average EBITDA around $50M ($40-$80M EBITDA range); Private/Club MM LBOs are typically unrated with an average EBITDA of around $25M ($0-$60M EBITDA range). 3Spread premium of average middle market yield vs. large corporate issuers.Yield = LIBOR + Spread + OID (amortized over 3-years).

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Vol

ume

($B.

)

M&A RelatedOtherTotal Deal Count (Right Scale)

Source: Ref initiv LPC

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

1Q13

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Yiel

d di

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entia

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pri

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ultip

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1st Lien D/EBITDA Jr. D/EBITDA Equity Multiple

Large Corporate Middle Market1,2


16%

17%

18%

19%

20%

21%

0%

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25%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

Portfolio Industry Trends

23%

24%

25%

26%

27%

2%

5%

8%

11%

14%

17%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

9

HealthcareBusiness Services

28%

30%

32%

34%

36%

38%

4%

8%

12%

16%

20%

24%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

Source: Population based on approximately one-third of Antares 420+ portfolio companies which had comparative quarterly historical and forward looking financial data available from 2016 through the end of 2019. Note that company financials shown may cover time periods when company was not in Antares portfolio. Also reflects removal of a limited number of outliers including 3 in “Healthcare” and 1 in “Consumer goods: Durable” industry segments due to transformative M&A activity; however, M&A activity (e.g. add-ons) is still a significant driver of revenue growth in many case across industries shown.Companies categorized by Moodys’ industry codes. CAPITAL INDUSTRIES includes Aerospace & Defense, Automotive, Capital Equipment, Chemicals Plastics & Rubber, Construction & Building, and Containers, Packaging & Glass; CONSUMER INDUSTRIES includes Food & Beverage, Durable and Non Durable Consumer Goods, Hotel, Gaming and Leisure, and Consumer Services; MEDIA & PUBLISHING includes Advertising, Printing & Publishing, Broadcast & Subscription and Diversified & Production; TECHNOLOGY includes High Tech Industries and Telecommunications.

12%

14%

16%

18%

20%

22%

-10%

-5%

0%

5%

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20%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

Financial ServicesCapital Industries

TechnologyConsumer Industries

Revenue Growth (left scale) Adj. EBITDA Margin (right scale)

12%

14%

16%

18%

20%

22%

2%

5%

8%

11%

14%

17%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

14%

15%

16%

17%

18%

3%

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15%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2019F

Portfolio Industry Trends

10

Revenue, EBITDA Growth and Margin Trends by Industry Sub-Segment

1Source: Population based on approximately one-third of Antares 420+ portfolio companies which had comparative quarterly historical and forward looking financial data available from 2016 through the end of 2019. Note that company financials shown may cover time periods when company was not in Antares portfolio. Also reflects exclusion of some Moodys industry segments where there are less than four companies and removal of a limited number of outliers including 3 in “Healthcare” and 1 in “Consumer goods: Durable” industry segments due to transformative M&A activity; however, M&A activity (e.g. add-ons) is still a significant driver of revenue growth in many case across industries shown. 2Russell 2000 subset company financial data and forecasts are sourced from Capital IQ and reflects mean analyst forecasts (where available) across industry groups shown as of early June 2019.

“Antares’ portfolio companies continue to perform well. While there is always variance among companies and

segments, in aggregate, our borrowers continue to forecast healthy revenue growth and high, stable margins in 2019.”

— Tyler Lindblad, Chief Credit Officer

REVENUES Adj EBITDA MARGINYoY % Chg 2019

Moody’s Industry 2018 2019 2017 2018 2019 Pt Chg

Aerospace and Defense 15% 11% 16% 18% 18% 0.7%Automotive 11% 12% 19% 18% 17% -0.5%Financial Services 4% 5% 16% 18% 18% 0.0%Beverage, Food & Tobacco 5% 10% 15% 14% 14% 0.4%Capital Equipment 9% 10% 17% 17% 18% 0.7%Chemicals, Plastics & Rubber 3% 6% 18% 16% 17% 0.4%Construction & Building 9% 10% 18% 15% 16% 0.6%Consumer goods: Durable 7% 10% 17% 16% 16% 0.1%Consumer goods: Non-durable 2% 1% 18% 19% 19% 0.2%Containers, Packaging & Glass 19% 1% 23% 19% 19% 0.6%Healthcare & Pharmaceuticals 10% 11% 18% 17% 17% 0.0%High Tech Industries 5% 9% 31% 35% 34% -0.3%Hotel, Gaming & Leisure 3% 1% 12% 10% 11% 0.8%Media: Advertising, Printing & Publ 3% 8% 21% 19% 20% 0.5%Services: Business 10% 11% 24% 25% 25% 0.0%Telecommunications 17% 7% 35% 29% 27% -2.1%Transportation: Cargo 22% 18% 11% 9% 9% 0.0%

ANTARES PORTFOLIO SAMPLE TOTAL1 9% 9% 19% 19% 19% 0.1%

RUSSELL 2000 SUBSET TOTAL2 10% 7% 10% 10% 11% 1.2%

© 2019 Antares Capital LP All Rights Reserved

Chicago500 West Monroe StreetChicago, IL 60661

Atlanta7000 Central Parkway, Suite 450Sandy Springs, GA 30328

Los Angeles2301 Rosecrans Avenue, Suite 3100Los Angeles, CA 90245

New York280 Park AvenueNew York, NY 10017

Toronto100 King Street West, Suite 4710Toronto, ONT M5X 1E3

Antares.com

@antarescapital

linkedin.com/company/antares-capital-lp

For more information about this report or our financing solutions and investment opportunities, you can reach us at [email protected].

2019 antares compass mid-year check in · results. favorable unfavorable performance indicator....

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