Navigating Evolving Credit Amidst Tightening Regulations

The Economy

QE3 has enabled the U.S. economy to lead the global economic recovery in 2014 amidst tremendous momentum.

Real GDP growth accelerated in the latter half of the year with 3Q13 at 4.1% and 4Q13 at 3.1%.

Inflation remains benign. Core CPI and core PPI finished the year at 1.2% and 1.3%, respectively, well-below the Fed targets.

Unemployment ended 2013 at 6.7%, but nearly 2/3 of the year's improvement is represented by labor force drop-outs bringing the labor force participation rate down from 63.6% to 62.8%.

While U.S. economic hegemony was restored in 2013, risks remain abroad. Eurozone fiscal policies are hamstrung by the need for increased austerity and both consumer expenditures and business investments are moribund. Compounding the European risks is the dramatic slowdown and imminent credit crisis in China.

The U.S. Credit Markets

New-issue volume tipped the scales at a whopping $605 billion, representing y-o-y growth of 30% and topping the previous annual record of $535 billion set in 2007, by 13%.

Single B credits closed the year with average pro-rata and institutional spreads of 277.5 bps and 362.5 bps, respectively.

Bank regulators issued new leveraged lending guidance, designed to curb risky lending practices. The guidance will force private equity sponsors to seek financing outside of conventional banking sources. According to S&P LCD, 72% of the past year's volume was above either 4.0x senior or 6.0x total leverage and thus considered "leveraged".

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