Eaton Vance — AGF Investments Due Diligence Conference 2012
25 slides from Eaton Vance's conference presentation, Sep 1, 2012
Slide 1: Eaton Vance Floating-Rate Loan Strategy
EATON VANCE FLOATING-RATE LOAN STRATEGY
Slide 2: Agenda
AGENDA 1. Floating-Rate Loan Primer 2. Market Update 3. Why Eaton Vance for Bank Loans? 4. How do we manage Bank Loans? 5. Why Bank Loans today? 2
Slide 3: Floating-Rate Loan Primer
Recharge. Rethink. Refocus. oe : 2012 | AGF INVESTMENTS DUE DILIGENCE CONFERENCE FLOATING-RATE LOAN PRIMER
Slide 4: Floating-Rate Loan Features
FLOATING-RATE LOAN FEATURES PRIORITIES AS INDICATED WITHIN THE • Senior PYRAMID ARE IN THE CONTEXT OF A TYPICAL • Most Senior Element of BANKRUPTCY PROCEDURE. Borrower’s Capitalization • Secured Senior Secured Debt • Typically Collateralized by: • Accounts Receivable Senior • Inventory Unsecured Deb
Slide 5: Higher Recoveries Than Unsecured Debt
HIGHER RECOVERIES THAN UNSECURED DEBT AVERAGE RECOVERY RATE ON DEFAULTS Floating-Rate Loans 70% High-Yield Bonds 39% Source: Moody’s Investors Service, 3/31/2011 5
Slide 6: Investment Universe Profile
INVESTMENT UNIVERSE PROFILE Senior secured lending to significant corporate issuers • Floating-rate loans represent Weighted Average Company Capital Structure*: a well-protected senior layer $4.8B Revenue & $775M EBITDA of issuer capital structure $6.8 Billion Enterprise Value • Significant junior c
Slide 7: Sample Floating-Rate Loan Issuers
SAMPLE FLOATING-RATE LOAN ISSUERS Moodys First Lien Total Loan Facility Debt to Debt to Yield to Issuer (EV) Mark Spread Rating Revenue EBITDA EBITDA EBITDA Maturity 3YR Moody's Industry Healthcare, Education and Community Health Systems, Inc. 98.63 3.50% Ba3 13,717.70 1,834.90 3.26 4.82 4.51% Child
Slide 8: Enterprise Value as a Multiple of EBITDA
4/30/2007 5/31/2007 6/30/2007 7/31/2007 8/31/2007 9/30/2007 10/31/2007 11/30/2007 12/31/2007 1/31/2008 2/29/2008 3/31/2008 4/30/2008 5/31/2008 6/30/2008 7/31/2008 8/31/2008 9/30/2008 10/31/2008 11/30/2008 12/31/2008 Sources: S&P 1500, Bloomberg, as of 4/5/2012. 1/31/2009 2/28/2009 3/31/2009 4/30/200
Slide 9: Market Update
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Slide 10: $500B+ Market Size
$B $100B $200B $300B $400B $500B $600B $700B Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Market Value Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Par Amount Outstanding Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Source: Standard & Poor’s and S&P/LSTA Lever
Slide 11: Floating-Rate Loan Market Update
FLOATING-RATE LOAN MARKET UPDATE Spreads and Prices Annual Default Rate 2000 $125 12% Price 10% 1500 $100 8% bps 1000 6% Spread 4% $75 500 2% 0 $50 0% '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Avg. Spread Avg. Price (bps) ($) Default Rate Current 568 95.1 Current 0.2% Average 482 94.2 Average 2.9% Med
Slide 12: Why Eaton Vance for Bank Loans?
WHY EATON VANCE FOR BANK LOANS?
Slide 13: The Advantage of Eaton Vance Experience
THE ADVANTAGE OF EATON VANCE EXPERIENCE A pioneer in floating-rate loan investment management Years Experience Managing Floating-Rate Loans • Measurable track record since 1989 0 5 10 15 20 25 Eaton Vance • Significant floating-rate loan (Since 1989) investment resources and specialization • Extensi
Slide 14: Top 10 Floating-Rate Loan Managers as of 3/31/2012
TOP 10 FLOATING-RATE LOAN MANAGERS AS OF 3/31/2012 Top 10 Floating-rate loan Managers by AUM (Currency US$) Firm Name Product Name Product AUM ($ Millions) Eaton Vance Management Senior Floating-Rate Bank Loans 25,736.69 Invesco Ltd. Bank Loans - Constrained 16,526.00 Babson Capital Management LLC U
Slide 15: Summary
SUMMARY Why Eaton Vance for Floating-Rate Loans • Market leader and pioneer in the management of floating-rate loans • Large and experienced investment team with extensive contiguous experience • Significant floating-rate loan investment resources and specialization • Focus on delivering incremental
Slide 16: How Eaton Vance Manages Bank Loans?
HOW EATON VANCE MANAGES BANK LOANS?
Slide 17: Two Guiding Principles
TWO GUIDING PRINCIPLES 1. Performance composition skewed toward income return • Asset class return composition predominantly comprised of income • In limited years led by price gains, returns driven by mean reversion rather than net capital appreciation 50% 40% Total Returns 30% 20% 10% 0% -10% -20%
Slide 18: Two Guiding Principles
TWO GUIDING PRINCIPLES 2. Risk escalates asymmetrically with return potential • Risk of default and investment loss increase significantly in lower-rated credit tiers • Commensurate return potential is often incongruent with increased risk Spreads & Default Risk 15% 5% -5% -15% -25% -35% Return Pote
Slide 19: Philosophy
PHILOSOPHY Seek to outperform through research and risk-weighted portfolio optimization • Characteristics of floating-rate loans limit upside price return. • Outperformance generated through a focus on limiting downside and sound credit selection. • Income orientation, diversification and systematic
Slide 20: Investment Process
INVESTMENT PROCESS INVESTABLE SELECT PORTFOLIO • Industry outlook • Operating performance & financials UNIVERSE UNIVERSE • Market position • Leverage 1100 Loans • Scale • Free cash flows • Management • Ability to repay debt • Sensitivity analysis Qualitative Quantitative Analysis Analysis 350-450 80
Slide 21: Target Portfolio Construction
TARGET PORTFOLIO CONSTRUCTION Optimizing risk and return Relative Risk Ranking 1 Relative Risk Ranking 2 Position Size: 0.8%-1.2% Position Size: 0.6%-0.8% • Relative risk rankings are # of Loan Holdings: 20% # of Loan Holdings: 20% assigned to each loan % of Market Value (target): 30% % of Market Va
Slide 22: Quantitative Assessment
QUANTITATIVE ASSESSMENT Mapping risk/return metrics Sample Company • Measure key credit (Surface Transport Industry) Risk Rank by Factor factors against Eaton Model 1 2 3 4 5 Value Vance floating-rate Weight (Strong) (Weak) loan universe Revenue $3,253M 17.5% x x EBITDA $525M 7.5% x x • Compare quan
Slide 23: Investment Team
INVESTMENT TEAM Scott Page, CFA Craig Russ John Redding Director of Floating-Rate Loans, PM Director of Credit Analysis, PM Portfolio Manager Floating-Rate Loan Team 31 Yrs Experience (23 Yrs with EV) 26 Yrs Experience (15 Yrs with EV) 28 Yrs Experience (14 Yrs with EV) CREDIT RESEARCH Ralph Hinkley
Slide 24: Investment Team Leadership
INVESTMENT TEAM LEADERSHIP SCOTT PAGE, CFA • Director of Floating-Rate Loans, Portfolio Manager • 31 years of investment experience • 23-year tenure at Eaton Vance • BA from Williams College; MBA from Amos Tuck School of Dartmouth College CRAIG RUSS • Director of Credit Analysis, Portfolio Manager •
Slide 25: The Time for Floating-Rate Loans May Be Now
THE TIME FOR FLOATING-RATE LOANS MAY BE NOW • Interest rates are near all time lows • Virtually zero duration • Good inflation hedge • Low correlation to traditional investable asset classes • Loan spreads wide • Issuer fundamentals are strong • Defaults are below historical averages Source: Eaton V
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