KPMG Debt Market Snapshot Edition Q1 2021

Debt Market Snapshot Q1 2021

KPMG, Debt Advisory — May 2021

KPMG Debt Market Snapshot – Q1 2021

Executive Summary

leads, among other things, to debt funds being able to secure increasingly higher shares of the overall financing market. This, in turn, is also related to the dry powder among debt funds. Private debt thus offers an opportunity for companies, especially in growth or restructuring situations.

Investment Grade Bonds The Investment Grade Bond market is massively incorporating the effects of fiscal stimulus and positive news related to vaccinations. Meanwhile, to the detriment of investors, spreads are at an all-time low, reflecting the massive liquidity in the market which has also raised fears of a pick-up in inflation.

DEVELOPMENT OF Q1 2021 IN GERMANY & EUROPE – KPMG COMMENTARY

INSIDE THE MARKETS

High-Yield Bonds The high-yield bond market showed a strong start in 2021 with a record issuance volume of €38.3bn. Largely, this is said to be due to the market’s deep investor base and risk appetite and the flexibility to price a wide range of credit stories. The money raised is usually used to refinance existing debt. However, the percentage of proceeds used for the funding of M&A and LBO activities increased significantly in Q1 2021.

Vaccine developments, emergency approvals and finally the vaccination of people all around the globe offer a way to end the Covid-19 era and the associated nationwide lockdowns. However, in the face of uncertainty whether the vaccines prove effective against emerging strains of the coronavirus, the return of society to its pre-pandemic “normality” seem out of reach. Therefore, still standing economies could be with us for yet another while.

Activity is at solid levels and prices are partly back to prepandemic levels. Hopes for a global economic recovery also supported sectors that performed poorly in 2020.

KfW's Emergency Liquidity Program has been extended until June 30th. The program is one of the most important stabilisation measures for the German economy, as companies struggling with shutdown measures will be provided with liquidity to withstand this difficult situation and finally recover thereafter. The ECB's PEPP is another institutional support program to ensure that the European economy can overcome the odyssey caused by Covid-19. All these support programs enabled borrowers to obtain new financing and secure liquidity.

However, further weeks of shutdown and the end of programs will weigh on these companies, leading to the expectation of increased restructuring activity in the coming months.

Despite the ongoing Europe-wide lockdowns and impacts of Covid-19, debt investors (i.e. banks, debt/equity funds and other alternative investors) are still open for business and prepared to invest. However, we continue to observe increased bank credit approval hurdles. This

Leveraged Loans Despite further Europe-wide lockdowns, Q1 2021 marked the highest quarterly new-issuance volume since the global financial crisis. Numerically, the total issuance volume amounted to €41.0bn. Compared to Q1 2020 the volume of new issuances is ahead by 58 %. The high demand also resulted in higher leverage ratios. In fact, transactions were financed with 5.56x debt-to-EBITDA on average.

Sponsored Loans The sponsored lending market has picked up pace in Q1 2021, showing a steady flow of transactions adding up to a volume of €32.0bn. This already represents 72% of the total volume we witnessed for the whole of 2020.

In addition to refinancings and proceeds used for buyouts, many add-on facilities to existing deal structures were concluded. The average leverage for sponsored transactions was 5.52x debt-to-EBITDA. We expect the market to continue at this pace as there are still many potential deals in the market.

Schuldschein Loans The Schuldscheindarlehen (SSD) segment has shown significant demand on the investor side, resulting in many transactions being heavily oversubscribed. In addition to the re-entrance of international issuers into the market, there is an increasing trend towards the issuance of green SSDs. In figures, already over 25% of SSDs have been issued with a sustainable character. All in all, the segment showed a solid performance.

Sustainable Financing An increasing focus on climate change and further society related challenges favour the development of sustainable finance. Including ESG criteria into financing structures is becoming a mainstream trend. This can be observed in the rapidly increasing number of transactions that include ESG criteria. In Q1 2021, 379 such deals were concluded. Most of these issuances can be observed in the investment grade and corporate bond market. However, the volume of ESG related debt instruments also increased in the European leveraged loan market. In addition, first ESG-linked high-yield bonds were issued throughout the last few months.

MOST RECENT DEVELOPMENT IN EARLY Q2 Q2 continues to be a favourable quarter for companies to pick up pens and benefit from an attractive and stable financing environment. Besides the enticing funding window, a slowdown in the sustainable finance trend is not expected in the next quarter either. However, we expect insolvency filing numbers to increase over the next months, as the suspension of the obligation to file for insolvency no longer applies as of May 2021.

Source(s): BNP Paribas, Fidelity, KPMG Research, S&P LCD.

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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KPMG Debt Market Snapshot – Q1 2021

Selected European Financing Markets – Current Situation (1/2) Leveraged Loan Market

Sponsored Loan Market

Schuldschein Loan Market

(in €bn)

(in €bn)

(in €bn)

438

367

389

380

399

385 378

352

373

385

135

32

25

157

141

28

29

126

102

28

35

28

4

5

4

378 (a)

79

50 120

17 97

81

70

2017

2018

2019

65

2020

20 18

11

1Q21

26

41

1Q20 1Q21

Leveraged Loan Volume Avg. Leveraged Spread [bps]

24 2016

306

34

2017

Buyout

38

2018

(a)

53

44 18 9

9 41

2016

33

329

76

13 10

26

21

2019

2020

Other M&A

Wght. Avg. Institutional Spread [bps]

32

26

21

18

18 3 11 1Q21

1Q20 1Q21

Recap/Refi/Other

2016

2017

2018

2019

2020

Schuldschein Loan Volume

1Q21

1Q20 1Q21

Deal Count

Wght. Avg. Pro-Rata Spread [bps]

Leveraged Loans I The leveraged loan market generated record-setting volumes despite further lockdowns. The volume of new issues in Q1 2021 already exceeds the volume of 2020 at this point by 58%. A significant number of transactions happened in the form of refinancings and recapitalisations, ultimately suggesting that less new money is being pushed into the market than it might seem at first sight. The average debt-to-EBITDA ratio for all structures that include leveraged loans is at its highest level since the global financial crisis.

Borrowers are levering up their balance sheets in unsustainable ways. The full impact on such leveraged companies will be seen when debt raised over the past twelve months needs to be refinanced.

Sponsored Loans I So far, 2021 shows high activity in the sponsored market with February being the busiest month since October 2019. Market activity is mainly driven by a remarkable number of buyouts and sponsors that are keen to maximise loan financing. Also envisaged refinancings and recapitalisations resulting from (unsustainable) financings in the last year kept the sponsored loan market busy. The Institutional spread shows that the assessment of risk is higher compared to Q1 2020, the margin has increased year-on-year from 373bps to 385bps, however, it has decreased compared to the previous quarter. Still, the market has dry powder available which might be put in place over the upcoming months.

Schuldschein Loans I Despite the pandemic and attractive alternative financing options, the Schuldschein market recorded a solid performance with a new issue volume of €4.2bn.

Some supporting factors include the comeback of debut and international issuers and the high number of private placements. The market is experiencing strong investor demand as transactions are often oversubscribed. Volatility in spreads can be observed as these are negotiated individually for each transaction and are based on the deal and risk type.

Source(s): Helaba, KPMG Research, LoanConnector, S&P LCD. Note(s): (a) There are no comparable numbers available for the first quarter of 2021.

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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KPMG Debt Market Snapshot – Q1 2021

Selected European Financing Markets – Current Situation (2/2) Investment Grade Bond Market

High-Yield Bond Market

Sustainable Financing Markets

(in €bn)

(in €bn)

(in €bn)

452

452

294

274

277

274

94

168

221

402

624

316

116

316

31-Mar-21 2016

Spread BBB [bps]

2017

Secured

2018

2019

2020

1Q21

Unsecured

Avg. Spread B [bps]

1Q20 1Q21

Subordinated Avg. Spread BB [bps]

84

2017

2018

2019

155

2020

1Q21

1Q20

45

16

155

271

16

68

23

7 13

45

42

38

19

29

29

0,0

23

94

38 38 0,0

34 43

146

43

0,4 36

1,1

85

50

24

Spread A [bps]

63

13

89

31-Mar-20

38

0,2

28

31-Mar-19

63

0,2

59

31-Mar-18

148

4

64 53

31-Mar-17

103

26

74 158

103

21

85

1,2 156

11

378

1Q21

Green Loan Volume

Deal Count

Green/Social/Sustainability Bond Volume

Deal Count

Investment Grade Bonds I The ECB continues to pump money into the financial system to support economies during the lockdown. The investment grade bond market saw solid activity in Q1 2021. From the issuer's perspective, compressed spreads and the historical zero to low interest rate environment may seem advantageous, but for investors it is hardly possible to achieve excess returns, which is causing them to withdraw from the investment grade segment. Furthermore, inflation expectations dominate market sentiment.

High-Yield Bonds I The high-yield market continues to experience high popularity, with the largest quarterly volume and second-largest number of bonds ever. Massive amounts of money are being injected into the market and investors are willing to take on risks. Even the large offering cannot satisfy the substantial demand, which ultimately shows how much liquidity is in the market. The strong demand for high-yield securities is also a result of the low interest rate environment in the investment grade segment. Issuers took advantage of this and used the proceeds from high-yield bond issuance to finance M&A or LBO activity. Surprisingly, the volume used for refinancing purposes was at a remarkably low level.

Sustainable Financing I Sustainable financing instruments recorded the strongest quarter ever and new issue volumes increased substantially across all product categories (ESG performance-linked or use-of-proceeds). The development in the first quarter of the year suggests that 2021 could be a record year for the issuance of sustainable financing instruments.

In Q1 2021, 316 bonds and 63 green loans have already been issued. The financial sector is actively participating in and supporting the transition to a green economy. The financing market is increasingly moving towards sustainable instruments and the level of ESG measures implemented at corporate level are becoming more ambitious.

Source(s): Bloomberg, Fidelity, Helaba, KPMG Research, LoanConnector, S&P LCD.

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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KPMG Debt Market Snapshot – Q1 2021

Alternative Financing Trend: Debt Funds are Reshaping the Financing Landscape Key Aspects of the Current Development Changing Landscape

Covid Impact

Restrictive Banks

—

When it comes to corporate financing and refinancing, a withdrawal of banks, at least from some market segments, can be detected. In parallel, the importance of alternative financing parties is growing

—

Structural changes driven by a multitude of factors including increased regulation occur independently of Covid-19. Corresponding market developments have already been observed well before the pandemic

—

Data confirms the existence of vulnerability in the European credit market, strongly driven by the impact of Covid-19

—

Rating outlooks reveal significant negative developments compared to the 5-year average, especially in sectors that were already structurally distressed before the pandemic

—

Tighter regulatory pressure and poorer corporate ratings lead to higher risk weighted assets for banks. When government aid and support programs expire, some credit institutions fear a rise in defaulting loans as well

— —

As a result of stricter regulation, amplified by the current crisis environment, bank lending continues to become more restrictive In addition to widening interest margins, collateral requirements are also growing. Bank customers are becoming increasingly aware of this development when negotiating loan conditions Obtaining new financing becomes more difficult at all levels of the balance sheet. Ultimately, this requires companies to consider alternative ways of securing liquidity

—

Alternative Financing

Outlook

—

Private debt funds account for a steadily growing share of the total financing volume and score particularly well in terms of flexibility. In doing so, they fill a financing gap left by increasingly restrictive banks, especially in phases of economic downturn

—

In this respect, private debt funds generally act in a more entrepreneurial manner and demonstrate flexibility in terms of maturities, repayment schedules, leverage ratios or loan covenants. Depending on the situation, this is reflected in a premium on the facility pricings

—

Private debt thus offers an opportunity for companies, especially in growth or restructuring situations. In particular, companies that have already faced pre-pandemic structural problems and are now confronted with downgrades and insolvency

—

As lockdowns lasts longer and the negative impact on the economy grows, private debt funds will play an important role in restructurings

Source(s): KPMG Research, Preqin, S&P.

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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KPMG Debt Market Snapshot – Q1 2021

Landmark Deal Matrix | Q1 2021 Jan 22 | €965m facility backs

Feb 3 | Largest-ever single

Feb 19 | CVC buys Danish

Mar 1 | Mayr-Melnhof places

Carlyle‘s carve-out of Flender from Siemens

High-Yield Bond tranche issued for taking ASDA private

building materials distributor Stark from Loan Star

€1bn Schuldscheindarlehen

— Siemens sells Flender to Carlyle for €2bn. The financing of the deal comprises a 7-year €965m term loan that includes an ESG margin ratchet of 5-10 bps linked to the power volume of new gearbox installations in wind turbines. Carlyle will donate half of the possible savings to ESG charities

— ASDA issued the biggest ever high-yield sterling bond. The £2.75bn dual-tranche offering, is split between £2.25bn of fiveyear secured notes and £500m of 5.5-year unsecured notes

— The €1.345 billion term loan backing CVC’s buyout of Stark Group has priced at E+350 with a 0% floor. The term loan has a maturity of 7 years and a 7.5bps margin ratchet linked to ESG factors including the reduction of 4.2% p.a. in greenhouse gas emissions

— The Schuldschein was placed with a diversified international group of institutional investors with the original target volume of €300m being 6x oversubscribed. Proceeds are used to finance M&A activities and growth investments

— A €150m 6.5-year revolver and a €125m 6.5-year guarantee facility complement the financing

— The deal backs the acquisition of ASDA by PE-company TDR Capital and the Issa brothers from Walmart. A €845m ESGlinked term loan and a €300m revolver complement the buyout financing

Mar 8 | First European High-

Yield Bond with pricing linked to sustainability targets

— Leverage starts roughly at 5.3x

— The transaction comprises tranches with both fixed and floating interest rates over maturities of 5 to 15 years and an average interest rate of 1.5%

Mar 9 | Bridgepoint and

Mar 26 | €2.38bn bond and loan

Mar 31 | Casino Guichard-

Macquarie provide Unitranche

refinancing for beauty retailer Douglas

Perrachon allocates €1.525bn term loan and bond financing

— PPC launched a €500m highyield bond offering with a coupon carrying an environmental, social, and governance (ESG) related pricing mechanism

— Providence acquires the French company LaCentrale, which provides an online platform for used cars and commercial vehicles

— The €2.38bn are split into a €600m term loan and €1.305bn secured bonds and a €475m offer of senior PIK notes

— The ESG-linked KPI is targeting a 40% reduction in the firm's CO2 emissions by 12/2022 (2019 as base years). From 2023, the interest rate payable on the notes will step up by 50bps unless the target has been met

— Providence finances part of the deal with a €190m unitranche, 2/3 provided by Macquarie and 1/3 by Bridgepoint

— The term loan is priced at E+550bps and has a 0% floor.

The secured bonds have a maturity of 5 years and pay a 6% coupon whereas he 5.5year PIK notes pay 9% (PIK) or 8.25% (cash)

— The term loan was upsized to €1bn from €800m. The loan was originally talked at E+450475bps before it was tightened and finally completed at E+400bps and a 0% floor

— A €15m revolver supports the acquisition

— A €200m revolver is also part of the deal

— A €525m unsecured bond with a maturity of 6 years pays a coupon of 5.25% and was also increased from an initial volume of €425m

Source(s): KPMG Research, S&P LCD News.

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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Debt Advisory at KPMG – Our Services

Broad Spectrum of Debt Advisory Solutions One-stop shop approach — We act as a sparring partner and support our clients throughout and during the entire financing process — KPMG’s holistic approach with integrated range of services (Advisory, Transaction Services, Law and Tax) Debt Advisory services — We develop solutions tailored to the requirements of our clients including optimisation of the capital structure, recapitalisation, refinancing, capital market issuances, financial restructuring and government-backed financing

International presence — Seamlessly integrated international teams enabling direct access to key decision makers and lenders in all relevant markets around the world

Extensive banking and finance experience — Detailed knowledge of private and public debt capital markets — All senior team members with at least 20 years of experience in banking and finance Independent and objective advise — Development of bespoke financing solutions and products — No conflict of interest in the recommendation and choice of financing products, structures or partners as we do not provide the funding itself

Impressive track record — Successful completion of a multitude of transactions with renowned companies coming from a wide range of industries

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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Debt Advisory at KPMG – Our Team

Debt Advisory Team in the DACH Region Thomas Dorbert

Til Karrer

Debt Advisory Alexander Strolz

Dr. Simon Wahl

Partner, Head of Debt Advisory

Partner

Senior Manager

Senior Manager

‒

More than 25 years of experience in Corporate Finance/Debt Advisory

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More than 20 years of experience in Corporate Finance/Debt Advisory

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More than 20 years of experience in Corporate Finance/Debt Advisory

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More than 20 years of experience in Corporate Finance/Debt Advisory

‒

Prior to joining KPMG in 2011, Thomas was with Mediobanca, BNP Paribas and Dresdner Bank/Dresdner Kleinwort

‒

‒

Long-standing experience in the structuring of acquisition financings, refinancings as well as complex financial restructurings

Prior to joining KPMG in 2015, Alexander worked in the Leveraged/Structured Finance divisions at Mediobanca and Dresdner Bank/Dresdner Kleinwort

‒

‒

Prior to joining KPMG in 2011, Till worked in the Leveraged/Structured Finance divisions at Mediobanca and Dresdner Bank/Dresdner Kleinwort

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Long-standing experience in acquisition finance for corporates and financial sponsors, financial restructurings and corporate lending transactions

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Long-standing experience in the structuring and arrangement of leveraged finance as well as corporate lending transactions

Prior to joining KPMG in 2011, Simon spent several years as Vice President at Mediobanca. Before that, he worked at Dresdner Bank/Dresdner Kleinwort in the Structured/Leveraged Finance divisions

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Long-standing experience within the fields of small-to-large cap buyout financings and financial restructurings in special situations

Matthias Kazmierczak

Svenja Krause

Alexander Pariti

Marija Ljubicic

Manager

Assistant Manager

Assistant Manager

Associate

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Eight years of experience in Corporate Finance/Debt Advisory

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Five years of experience in Corporate Finance/Debt Advisory

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Two years of experience in Corporate Finance/Debt Advisory

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Prior to joining KPMG in 2014, Matthias completed internshipts at Deutsche Bank, UniCredit and Berenberg Bank

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Prior to joining KPMG in 2018, Svenja worked in the Corporate Banking division at ODDO BHF

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Prior to joining KPMG in 2019, Alexander graduated from Frankfurt School of Finance & Management

Profound experience in the arrangement of acquisition financings, refinancings and recapitalisations across many industries

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Accumulated experience in the financing of German mid-cap companies and strategic financing advisory

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Accumulated experience through several Corporate Finance internships and various transactions at KPMG

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Prior to joining KPMG in 2021, Marija graduated from Goethe Universität and University of Dundee

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Accumulated experience through Debt Advisory, M&A and Transaction Services internships at DC Advisory and PwC

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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Debt Advisory at KPMG – Our References

Successfully Completed Deals in 2021

KPMG, Debt Advisory KPMG Debt Advisory acted as advisor to KMG Kliniken SE on the structuring and arranging of the refinancing of the existing financial indebtedness of the group April 2021

KPMG, Debt Advisory KPMG Debt Advisory acted as advisor to Orafol Europe GmbH on the structuring and arranging of credit facilities for the acquisition of US-based NUPRO, Inc. April 2021

Background — KMG Kliniken SE, located in Bad Wilsnack, is a German healthcare company — After the successful acquisition of DRK gemeinnützige Krankenhausgesellschaft Thüringen Brandenburg mbH which was funded by a bridge loan, KMG Kliniken SE intended to refinance the bridge loan and further existing financial liabilities. In addition, KMG Kliniken SE plans further investments during the next years which also should have been considered in the new financing structure Transaction/ process — KPMG Debt Advisory acted as the sole financing advisor to KMG Kliniken SE in arranging the new financing structure and advised on the identification of potential financing options, the selection and approach of potential financing partners as well as on the evaluation of the indicative term sheets in the context of a detailed benchmark analysis — In addition, KPMG Debt Advisory assisted in the preparation and negotiation of term sheets and accompanied the negotiation phase of the loan documentation with comments and guidance on leading market practices and standards KPMG - value added — Even with a tight schedule, especially for the documentation phase within the financing process, KPMG Debt Advisory was able to successfully complete the transaction — Despite the current economic situation in the healthcare sector in fact of Covid-19, terms and conditions of the new financing could be precisely tailored to the requirements and specific wishes of the client and the banking club could be broadened — Close monitoring during the entire financing process by KPMG enabled the client to effectively allocate management time and resources

Background — ORAFOL Europe GmbH (“ORAFOL”), located in Oranienburg, is one of the leading manufacturers of innovative, self-adhesive graphic products, retroreflective materials, adhesive tape systems and high-quality polymer films — ORAFOL considered the acquisition of US-based NUPRO, Inc., a global supplier of advanced aliphatic thermoplastic polyurethane films — KPMG Debt Advisory has advised ORAFOL on various transactions over the last ten years Transaction/ process — KPMG Debt Advisory acted as sole financing adviser to ORAFOL regarding the structuring of credit facilities to finance the acquisition of NUPRO, Inc. — Potential financing parties were approached and alternative financings negotiated; ORAFOL was advised throughout the financing process until closing KPMG - value added — Acquisition financing was secured at attractive terms at the time needed — The additional financing was structured with no further impact on existing credit agreements — Management capacity had been released and allowed ORAFOL to focus on the M&A process

© 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

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Your KPMG Contacts Imprint Publisher: KPMG AG Wirtschaftsprüfungsgesellschaft THE SQUAIRE / Am Flughafen 60549 Frankfurt am Main Germany Authors: Thomas Dorbert Partner, Head of Debt Advisory T +49 69 9587-4606 tdorbert@kpmg.com Till Karrer Partner, Debt Advisory T +49 69 9587-4607 tkarrer@kpmg.com Responsible according to German Law (§ 7 (2) Berliner PresseG): Thomas Dorbert

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2021 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.