July 2023

“Market At A Glance” www.sppcapital.com

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Changes from Previous Month Noted in Red.

Cash Flow Senior Debt/EBITDA

< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA
July 2023 1.50x - 2.00x 2.00x - 3.00x 2.50x - 4.50x
June 2023 1.50x - 2.00x 2.00x - 3.00x 2.50x - 4.50x
July 2022 1.50x - 2.50x 2.75x - 3.25x 3.50x - 5.50x
Commentary: No changes to Leverage Metrics or Pricing for July; Market in Wait and See mode as Recession Fears Subside

Total Debt/EBITDA
< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA
July 2023 2.50x - 3.50x 3.50x - 4.50x 4.00x - 5.00x
June 2023 2.50x - 3.50x 3.50x - 4.50x 4.00x - 5.00x
July 2022 3.75x - 4.25x 4.00x - 5.00x 5.00x - 7.00x
Commentary: No changes to Leverage Metrics or Pricing for July; Market in Wait and See mode as Recession Fears Subside

Senior Cash Flow Pricing

Bank Non-Bank < $10.0MM EBITDA Non-Bank > $40MM EBITDA
July 2023 S+ 3.75% - 5.00% S+ 6.50% - 8.50% S+ 6.50% - 8.00%
June 2023 S+ 3.75% - 5.00% S+ 6.50% - 8.50% S+ 6.50% - 8.00%
July 2022 S+ 3.00% - 4.50% S+ 6.50% - 8.50% S+ 5.50% - 6.50%
Commentary: No changes to Leverage Metrics or Pricing for July; Market in Wait and See mode as Recession Fears Subside

Unitranche and Second Lien Pricing

< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA
July 2023 S+ 8.50% - 11.00% S+ 6.75% - 8.50% S+ 6.50% - 8.00%
June 2023 S+ 8.50% - 11.00% S+ 6.75% - 8.50% S+ 6.50% - 8.00%
July 2022 S+ 8.00% - 10.50% S+ 7.50% - 8.50% S+ 5.50% - 8.00%
Commentary: No changes to Leverage Metrics or Pricing for July; Market in Wait and See mode as Recession Fears Subside

Sub Debt Pricing (Total Coupon: Cash + PIK)

< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA
July 2023 13.00% - 16.00% 12.50% - 14.00% 11.00% - 14.00%
June 2023 13.00% - 16.00% 12.50% - 14.00% 11.00% - 14.00%
July 2022 12.00% - 14.00% 11.00% - 13.00% 9.50% - 11.50%
Commentary: No changes to Leverage Metrics or Pricing for July; Market in Wait and See mode as Recession Fears Subside

Tone of the Market

Private market liquidity conditions for July remain virtually identical to the prior month. From a purely capital markets
perspective, investors remain solidly in “risk off” mode; leverage multiples are at least one full turn of EBITDA less than
this time last year, and though credit spreads are consistent with where they were a year ago, base rates are up by
approximately 4.3% (SOFR at 7/18/23 is 5.06%, while SOFR at 7/18/22 was 0.75%). The higher cost of capital has
strained fixed charge coverage ratios, resulting in elevated credit downgrades and increased defaults. Commercial
banking activity is particularly sluggish. Commercial Banks, still plagued by deposit migration, capital adequacy
concerns, and increased regulatory oversight, continue their retreat from their historically dominant role in financing
middle-market issuers. The non-bank direct lending market, however, is more difficult to gauge; abundant capital for
deployment is available, but lenders continue to maintain a “wait and see” attitude, remaining selective (i.e., actively
bidding deals across the middle market but holding out for premium pricing), but willing to drop pricing and increase
leverage metrics to garner the most competitive assets. The elephant in the room is the economy; investors have
almost universally based their current underwriting strategy on a presumed 2023 recession, a recession that
increasingly seems less likely with each economic report.
 Minimum Equity Contribution
Cash equity contributions have become the primary focus point for all leveraged buyouts in the private market.
Almost regardless of the enterprise multiple, lenders are focused on a minimum 50% LTV (i.e., equity capitalization
of 50%). More importantly, actual new cash in a deal should also constitute at least 75% of the aggregate equity
account. For the foreseeable future, the days of 20% - 25% equity contributions are over. While lenders will certainly
give credit to seller notes and rollover equity, the new cash equity quantum is the primary metric.

Equity Investment and Co-Investment

Liquidity for both direct equity investments and co-investments continues to be robust in the new year, and in many
cases, more competitive debt terms can be achieved where there is an opportunity for equity co-investment. Interest
in independently sponsored deals continues to be strong as well, but investors will require that the independent
sponsor has real skin in the game (i.e., a significant investment of their own above and beyond a roll-over of deal fees).
Family offices remain the best source of straight common equity, and, continuing the trend established in 2020, credit
opportunity funds, insurance companies, BDCs, and SBICs will actively pursue providing both debt and equity
tranches.

Recapitalization Liquidity
As a general proposition, recapitalization opportunities remain challenging in the private market. Many credit
providers continue to have an outright ban on dividend recaps where (i) the sponsor seeks to take out all or most of
its original equity contribution, (ii) recaps by independent sponsors, (iii) recaps by non-sponsored issuers, and (iv)
recaps in highly cyclical sectors. Nevertheless, recap dollars are available where (i) the loan-to-value ratio (i.e.,
aggregate quantum of debt to enterprise value) is less than 40%, (ii) EBITDA generation is stable and of critical mass
(>$15 million), and (iii) there is a well-regarded sponsor. While these deals will get done, pricing is likely to be at a
50–100 basis point premium to refinancings or accretive uses of capital. In these cases, aggregate leverage, not the
size of the dividend, will be the governor of recapitalization liquidity.

Story Receptivity
Given the recent volatility in the commercial banking sector and a more generalized market recognition that the
current credit “down-cycle” will not be turning positive in the short term, smaller or more marginal issuers will face
increasingly challenging liquidity conditions for new issuance. Historically, these issuers were serviced almost
exclusively by local and regional commercial banks, but given the March banking “crisis,” non-bank lenders may be
the only viable alternative for new capital. However, the non-bank lending community thins out considerably below
the $10 million LTM EBITDA threshold, and pricing by this non-bank lending constituency begins at SOFR + ~7.5%
(~12.40% floating), leaving the lower middle market and storied issuers with diminished liquidity and increased
issuance costs. Similarly, companies that operate in highly cyclical sectors or have a volatile history of earnings will
also encounter markedly more conservative market metrics, i.e., higher issuance costs, limited leverage capacity, and
potentially, equity dilution.

SOFR Floors
While most non-bank direct lenders will indicate SOFR floors of up to 3.0%, 2.0% SOFR floors remain “market” and
most lenders will not lose potential deal opportunities over a SOFR floor. SOFR floors for commercial bank lenders
still range between 1.0% and 2.0%.
“Oh baby, don't it feel like heaven right now? U.S. Monthly Projected Recession Probability 2020-2024
Don't it feel like somethin' from a dream?
Yeah, I've never known nothing quite like this
Don't it feel like tonight might never be again?
Baby, we know better than to try and pretend
Honey, no one could have ever told me 'bout this
I said, yeah, yeah (yeah, yeah)
Yeah, yeah, yeah, yeah

The waiting is the hardest part

Every day you see one more card Source: YGRAPHS
You take it on faith, you take it to the heart
The waiting is the hardest part High-Yield Spreads Continue to Tighten

Well yeah, I might have chased a couple of women around

All it ever got me was down
Yeah, then there were those that made me feel good
But never as good as I feel right now
Baby, you're the only one that's ever known how
To make me wanna live like I wanna live now
I said, yeah, yeah (yeah, yeah)
Yeah, yeah, yeah, yeah

The waiting is the hardest part

Every day you get one more yard
You take it on faith, you take it to the heart
The waiting is the hardest part.”

Source: Bloomberg
“The Waiting” – Tom Petty
Corporate Spreads Continue to Tighten
https://www.youtube.com/watch?v=uMyCa35_mOg

State of the Private Market

The Waiting

A quote often attributed to Mark Twain reads, “The reports of my death are
greatly exaggerated.” The same could be said of the U.S. economy in 2023. In
January, the NY Fed projected a 70% probability of recession for the coming
year. While the potential for a recession still looms ahead (the Statista
Research Department predicts that by June 2024, “there is probability of 67.31
percent that the United States will fall into another economic recession”); the
prediction is predicated on the difference between 10-year and 3-month
treasury rates (currently at -1.65%, i.e., an "inverted” yield curve), which
historically at least has been an exceedingly accurate gauge of recession (an Source: Oxford Economics, Bloomberg

inverted yield curve has preceded every recession for the past half-century).
Like Senior Debt, Junior Debt Yields Are Up, Leverage Down
Increasingly, however, the prospect of a recession this year or in 2024
continues to fade. As Goldman Sachs published earlier this month, “Our
economists say there’s a 25% chance of recession in the next 12 months, down
from their earlier projection of 35% shortly following the failure of Silicon Valley
Bank in March.”

While the publicly traded and 144A markets have already responded to this
perceived uptick in economic optimism (both investment grade and high yield
corporate credit spreads have tightened more than 100 - 150 basis points since
February), the private capital markets move in a much more sluggish fashion;
most lenders remain in “wait and see” mode, with credit spreads and leverage
multiples largely unchanged over the course of the last six months.
Commercial Banks continue to be the most conservative lending constituency Source: Refinitiv LPC
this summer. SPP’s anecdotal experience suggests bank hold levels are roughly
60% of where they were this time last year, with lenders particularly sensitive
to large committed but undrawn credit facilities. As noted in the Fed’s April
Senior Loan Officer Survey on Bank Lending Practices, “Over the first quarter, Small Banks’ Funding Costs Remain Elevated
significant net shares of banks reported having tightened standards on C&I loans
to firms of all sizes. Banks also reported having tightened all queried terms on
C&I loans to firms of all sizes over the first quarter. Tightening was most widely
reported for premiums charged on riskier loans, spreads of loan rates over the
cost of funds, and costs of credit lines. In addition, significant net shares of banks
reported having tightened the maximum size of credit lines, loan covenants, and
collateralization requirements to firms of all sizes.” This trend will likely only
continue through the summer, as commercial banks continue to face many of
the same challenges they did in March after the SVB and Signature Bank
Source: Torsten Slok, Apollo
failures. Specifically, as noted in the Fed Survey, “a less favorable or more
uncertain economic outlook, reduced tolerance for risk, worsening of industry-
U.S. Banks Continue to Tighten Lending Standards
specific problems, and deterioration in their current or expected liquidity
position.”

It is important to note that commercial bank financing still remains a primary

source of liquidity for many middle market issuers; while banks may not be
stretching for cash flow term facilities to the same extent they did in 2021 and
2022, their markedly lower cost of capital (SOFR+3.5% - 4.0%) vs. their non-
bank direct-lending competitors (SOFR+6.5% - 7.5%), still makes bank
financing a preferred source of capital, even when paired with a tranche of
mezzanine financing. To drill down on this analysis, assuming a non-bank
direct lender can provide 4.0x Debt/LTM EBITDA at SOFR+7% (~12% Source: Deutsche Bank Research
floating), a comparable bifurcated senor/sub structure with aggregate
leverage of 4x comprised of senior debt at 2.50x LTM EBITDA at SOFR + 3.5% Bank Credit Conditions Remain Tight
(~8.5%) combined with a 1.5x Sub Debt/LTM EBITDA at 14% (fixed) still
equates to a blended cost of capital of 10.59%, or a discount of ~1.50% to the
non-bank direct lending alternative.

For many middle-market issuers, however, commercial bank financing may

not even be a viable alternative this year; this is especially the case for cash
flow deals (vs. ABL financing), and potential borrowers will have no
alternative except to seek non-bank direct lenders. The good news is that there
is no dearth of non-bank direct lenders capable of providing liquidity. The non-
bank private credit market today stands at ~$1.5 trillion and has grown by
~10% CAGR over the last 10 years. Of that $1.5 trillion, ~$500 billion
constitutes “dry powder” yet to be deployed. Preqin projects private credit will
hit $2.2 trillion by 2027.In short, non-bank direct lending liquidity is abundant.
As noted above, though pricing is still at a significant premium to commercial Source: ANZ Research

bank financing, non-bank lenders can provide markedly lower required

Historical Capital Raised Through Private Debt Funds ($Bn)
amortization for term debt facilities (1% - 5% per annum) than their
commercial banking counterparts (7.5% - 15% per annum), keeping actual
aggregate debt service (principal amortization and cash interest) dollars
consistent with commercial bank lenders. Additionally, because non-bank
lenders often provide unitranche facilities that bridge the gap between senior
and subordinated tranches, covenant structures for non-bank deals are often
significantly less restrictive than comparable commercial bank term debt
facilities.

The Macroeconomic Picture

In its July Federal Open Market Committee (“FOMC”) statement, the Federal
Reserve unanimously decided to raise the federal funds target rate by 25 basis
points to a range of 5.25% - 5.50%, leaving the door open for further rate Source: PDI
increases. Following June’s pause, July’s rate increase marks the eleventh time
the FOMC has raised rates since March 2022 and takes benchmark borrowing
costs to their highest level in more than 22 years. In addition, the Committee
announced the continuation of reducing its holdings of Treasury securities,
agency debt, and agency mortgage-backed securities, as described in its
previously announced plans, in order to bring down inflation. “Inflation has
moderated somewhat since the middle of last year. Nonetheless, the process of
getting inflation back down to 2% has a long way to go,” stated Chairman
Jerome Powell before adding, “I would say it’s certainly possible that we will
raise funds again at the September meeting if the data warranted. And I would
also say it’s possible that we would choose to hold steady, and we’re going to be Unemployment Rate (U-6 & U-3)
making careful assessments, as I said, meeting by meeting.” Heading into July’s
25.0%
decision, investors and economists had anticipated the quarter-point increase.
According to CME Group, financial professionals predicted a 92% chance the 20.0%
U-6
Fed would deliver a quarter of a percentage point rate increase. U-3
15.0%
The decision to halt rate increases last month, ending ten consecutive rate
hikes, was ultimately made to allow Fed officials time to reassess the economy, 10.0%
review incoming data, and monitor the effects of bank stress earlier this spring.
5.0%
Fed officials have repeatedly stated that monetary policy is data-dependent
when it comes to making decisions. “We say this to emphasize that policy is 0.0%
never on a preset course and will change as appropriate in response to incoming
information,” Powell noted in a past press conference. The assessment of “the
totality of the incoming data” as well as the implications for economic activity Source: U.S. Bureau of Labor Statistics
and inflation will remain the FOMC’s main focus in determining future
monetary policy. Before the next FOMC meeting, which is scheduled for GDPNow Data Real GDP Forecast for Q2 2023
September 19th - 20th, Powell explained policymakers will have two more jobs
reports and two more consumer price reports in hand by that gathering, which
will be important regarding the possibility of more rate increases to come this
year.

June job gains released in early July marked the lowest monthly gain since the
decline in December 2020, and, excluding losses realized during year one of
the pandemic, June’s total was the smallest since December 2019. Fed officials
hoped their historic combative rate-hiking campaign would cause a slowdown
in the job market and wage gains, both contributors to inflation. The report
showed average hourly earnings growth was unchanged at 0.4% from the
previous month and unchanged at 4.4% year-over-year. Rucha Vankudre,
senior economist for Lightcast, explained, “The Fed would probably like to see
wage growth come down a little more,” adding, “But it’s so much better than we
were a year ago or even in the past six months.” Source: Atlanta Fed

July’s statement mildly upgraded the assessment of the economy, stating ISM Manufacturing and Non-Manufacturing Indices
activity has been expanding at a “moderate pace,” compared to June’s “modest” 0.75
pace. The Fed staff no longer have a recession in their projections; however, 0.70
Powell insisted there will likely need to be more softness in the labor market 0.65
before inflation comes down. 0.60
0.55

Below is a recap of the most recent key economic releases: 0.50

0.45
0.40
Theme: FIFA Women’s World Cup! Manufacturing
0.35
Non-Manufacturing
0.30
Employment: Non-Farm’s Tie Game – Total nonfarm payroll employment
increased by 209 thousand in June; however, this figure fell roughly 30
thousand below the Dow Jones consensus estimate of 240 thousand. While the Sources: Institute for Supply Management
labor market has now added jobs for 30 consecutive months, June’s figure is
the lowest monthly gain since December 2020. Economists surveyed by University of Michigan Consumer Sentiment Index
Bloomberg had expected that 225 thousand nonfarm payroll jobs would be
added in June, marking the first time in 15 months that nonfarm payrolls have 100.0

come in lower than what Wall Street expected. Wells Fargo senior economists 90.0
Sarah House and Michael Pugliese, regarding June’s report, stated the
80.0
“employment report offered additional evidence that the labor market is slowly 72.6
coming into better balance as job growth slows and labor supply steadily 70.0
expands,” adding, “That said, job growth of +200K is still quite strong even if it is
60.0
directionally slower than the scorching pace seen over the past year.” In June,
notable job growth occurred in government (60 thousand), healthcare (41 50.0
thousand), social assistance (24 thousand), and construction (23 thousand).
Employment showed little change over the month in other major industries,
Source: Surveys of Consumers: University of Michigan
including mining, quarrying, and oil and gas extraction; manufacturing;
wholesale trade; information; financial activities; and other services. The U-3
measure of unemployment (the official unemployment rate, which is the
proportion of the civilian labor force that is unemployed but actively seeking
employment) slightly declined by 0.1 percentage points to 3.6% in June,
compared to May’s reading of 3.7%. Overall, economists agree that the June Core CPI & Core PCE
report shows that labor market conditions are starting to ease, but Andrew
7.0%
Hunter, deputy chief U.S. economist at Capital Economics, noted that “it is Core CPI
unlikely to stop the Fed from hiking rates again later this month, particularly 6.0%

12-Month Percent Change

Core PCE
when the downward trend in wage growth appears to be stalling.” 5.0%

4.0%
GDP: GDP Adjusts the Formation – The Atlanta Fed’s GDPNow estimate for real
GDP growth in the second quarter of 2023 remained at 2.4% as of July 26 th, 3.0%

unchanged from July 19th. Following recent releases from the National 2.0%
Association of Realtors and the U.S. Census Bureau, the nowcast of second 1.0%
quarter real residential investment growth decreased from 0.1 percent to -0.1
0.0%
percent. According to new figures released by the Bureau of Economic
Analysis, the U.S. economy grew at an annual pace of 2.4 percent between April
and June, marking a full year’s worth of economic expansion, reflecting
Source: FRED; U.S. Bureau of Labor Statistics
continued strength despite higher prices. The first GDPNow forecast for the
third quarter will be released on Friday, July 28.

ISM Manufacturing and Services: Manufacturing Called for Offsides – ISM’s

manufacturing index (the “PMI”) registered 46.0% in June, 0.9 percentage
points lower than May’s recording of 46.9%. Regarding the overall economy,
this figure represents the seventh month of contraction following a 30-month
period of expansion. Timothy Fiore, the Chair of the Institute for Supply Chain
Management Manufacturing Business Survey Committee, commented, “The
U.S. manufacturing sector shrank again, with the Manufacturing PMI losing
ground compared to the previous month, indicating a faster rate of contraction.
The June composite index reading reflects companies continuing to manage
outputs down as softness continues and optimism about the second half of 2023
weakens.” The non-manufacturing index (the “NMI” or “Services Index”)
reported a June reading of 53.9%, a 3.6 percent increase from May’s reading of
50.3%. Of the eighteen service industries, fifteen realized growth in June, while
the remaining three reported decreases. 0.1 percent.

Consumer Confidence: Defensive Struggle – The University of Michigan’s

Consumer Sentiment Index increased in July to 72.6%, compared to June’s
reading of 64.4%. July’s reading marks its highest level since September 2021.
Economists polled by Reuters had estimated a preliminary reading of 65.5%.
Joanne Hsu, director of the Surveys of Consumers at the University of Michigan,
noted, “Overall, sentiment climbed for all demographic groups except for lower-
income consumers. The sharp rise in sentiment was largely attributable to the
continued slowdown in inflation along with stability in labor markets.” Year-
ahead inflation expectations were little changed, increasing to 3.4% in July
from June’s 3.3% reading, and down from the April 2022 high point of 5.4%.
Long-run inflation expectations also experienced little change from June’s
reading of 3.0%, inching to 3.1% in July, again remaining within the narrow
2.9% - 3.1% range for twenty-three of the last twenty-four months.

Inflation: Fed Issued a Yellow Card – The Core PCE price index, the Federal
Reserve’s preferred measure of inflation, read 4.6% in May as compared to
April’s reading of 4.7%, while the overall PCE Price Index increased 3.8% year-
on-year in May 2023, the lowest reading since April of 2021. In June, the
Consumer Price Index for All Urban Consumers increased 0.2 percent,
seasonally adjusted, and rose 3.0 percent over the last 12 months, not
seasonally adjusted. The index for all items less food and energy increased 0.2
percent in June (SA); up 4.8 percent over the year.
 Supporting Data

Historical Senior Debt Cash Flow Limit (x EBITDA) Historical Total Debt Limit (x EBITDA)
7.00x 8.00x
6.00x 7.00x

5.00x 6.00x
5.00x
4.00x
4.00x
3.00x
3.00x
2.00x
2.00x
1.00x 1.00x
0.00x 0.00x

< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA < $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA

Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE” Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE”

Historical Senior Cash Flow Pricing (Bank) Historical Senior Cash Flow Pricing (Non-Bank)
7.0% 10.0%
6.0% 8.0%
5.0%
6.0%
4.0%
4.0%
3.0%
2.0% 2.0%

1.0% 0.0%
0.0%

NB Lower Bound (<$7.5) NB Upper Bound (<$10)

Bank Lower Bound Bank Upper Bound NB Lower Bound (>$15) NB Upper Bound (>$40)

Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE” Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE”

Historical Second Lien Pricing Historical Subordinated Debt Pricing

12.0% 15.0%

12.0%
9.0%

9.0%
6.0%
6.0%

3.0%
3.0%

0.0% 0.0%

< $5.0MM EBITDA > $10MM EBITDA > $40MM EBITDA < $5.0MM EBITDA >$10MM EBITDA > $40MM EBITDA

Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE” Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE”

Historical Unitranche Pricing Historical Minimum Equity Contribution

14.0% 70.0%

12.0% 60.0%

10.0% 50.0%

8.0% 40.0%

6.0% 30.0%

4.0% 20.0%

2.0% 10.0%

0.0% 0.0%

< $7.5MM EBITDA > $10MM EBITDA > $40MM EBITDA Lower Bound Upper Bound Minimum New Cash Equity

Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE” Source: SPP’s “MIDDLE MARKET LEVERAGE CASH FLOW MARKET AT A GLANCE”
Stefan Shaffer
Managing Partner
(212) 455-4502

DISCLAIMER: The "SPP Leveraged Cash Flow Market at A Glance" and supporting commentary is derived by the anecdotal experience of
SPP Capital Partners, LLC, its specific transactions, discussion with issuers, lenders, and investors consistent with its standard operating
practices. Any empirical data specifically derived by third parties, or intellectual property or opinions of third parties, are expressly
attributed when utilized. The information provided has been obtained from sources believed to be reliable but is not guaranteed as to
accuracy or completeness. All data, facts, tables, or analyses provided by governmental or other regulatory bodies are deemed to be in
the public domain and not otherwise expressly attributed herein. SPP Capital Partners, LLC is a member of FINRA and SIPC. Thi s
information represents the opinion of SPP Capital and is not intended to be a forecast of future events, a guarantee of future results or
investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest.

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