Index. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now U.S.A. At a Glance

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1 U.S.A. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 3Q16 At a Glance Measure 3Q16 2Q16 3Q15 Senior OC Cushion (%) Junior OC Cushion (%) Net Portfolio Gains/Losses (%) Defaults and Distressed (%) (0.11) (0.20) WA Spread (%) Related Research U.S. CLO Tracker Portfolio Sept. 28, 2016 (October 2016) U.S. CLO Tracker Pre-2015 Vintage Sept. 28, 2016 (October 2016) U.S. CLO Tracker Vintage 2015 and 2016 Sept. 28, 2016 (October 2016) U.S. CLO Index: Improved Market Prices Soften the Haircut Punch (August. 2016) Contacts Alina Pak, CFA alina.pak@fitchratings.com Christine Yoon christine.yoon@fitchratings.com Matthew Hunter, CFA matthew.hunter@fitchratings.com Default Exposure Is Down: The notional amount and the number of defaulted obligors and CLOs reporting defaults all decreased in 3Q16. This is due to a number of defaults emerging from bankruptcy proceedings or completing distressed debt exchanges (DDEs). Despite the recent slowdown in defaults, the pipeline of potential defaults, as represented by the CLO Index Watchlist (detailed on page 5), remains at 6.4%, unchanged from 2Q16, suggesting more losses to come. Par Losses Stabilized: Average CLO portfolio gain/loss at least temporarily reversed its downward trend, with the more beaten down CLO vintages improving the most. This was driven by a combination of increased loan prices and default resolutions. Several defaulted issuers exited bankruptcy and losses were realized, but the par hit may be marginal due to the default haircut applied at the time of default recognition. This report examines the recoveries received by CLOs in more detail on page 3 and their impact on select transactions on pages Senior Overcollateralization Cushions Are up: Overcollateralization (OC) cushions have benefited from the stabilization in portfolio gains/losses and the deleveraging of 11 CLOs. In two of these CLOs, Silver Spring and Silvermore, note amortization was triggered by failing subordinate coverage tests. OC tests were back in compliance for both CLOs in September; however, the interest diversion tests continued to fail. Computers and Electronics and Healthcare Shares Are up in 2016 Vintage CLOs: The dominance of these sectors in 2016 vintage CLOs reflects the sectors leading shares in the institutional loan market issuance, at 30% and 10%, respectively. Chemicals sector has also increased its share in 2016 vintage CLOs.

2 Distressed Steady While Defaults Decline Further There were a total of 16 defaulted issuers in the 3Q16 CLO portfolios, down from 20 in 2Q16. The number of CLOs with exposure to defaults decreased to 110 ($402 million) from 126 ($549 million) at 2Q16. About $307 million of the $402 million total defaulted notional comes from issuers in the energy oil and gas ($105 million) and metals and mining ($202 million) sectors. There were two new defaults in 3Q16, Transtar Holdings and C&J Energy Services. Transtar Holdings is expected to undergo restructuring after it missed the June interest payment on its first and second lien debt and the recent expiration of its forbearance period. Approximately $68.5 million of Transtar Holdings is held across 25 CLOs, which is the second-largest default exposure this quarter. The largest position was held in Halcyon at 2.1% of the portfolio. C&J Energy Services filed for Chapter 11 bankruptcy protection on July 20. Approximately $18.7 million of its term loans are held across 12 CLOs. The largest position was held in West CLO at 0.9% of portfolio par. Peabody Energy composes the largest default exposure at $72.5 million (25 CLOs), down from $83 million in 2Q16, Essar Steel Algoma s exposure reduced to $57 million (15 CLOs) from $72 million, Paragon Offshore marginally reduced to $62.6 million (33 CLOs) from $64 million and Noranda Aluminum Holding Corporation s exposure reduced to $39.8 million (20 CLOs) from $64 million. Fitch considered these issuers as defaulted for all CLOs that reported holding the loans, regardless of whether a CLO reported the loans as defaulted Several of the 2Q16 defaults, Alpha Natural Resources, Foresight Energy, Fairway Group Acquisition Company and Dex Media, have completed restructuring and are no longer considered as defaulted issuers in the index. Sequa Corporation was reported as a default in three transactions since its rating fell below the threshold required to be considered a performing loan as per the transactions documents. However, the issuer was not considered as defaulted in this report. Approximately $81.9 million of the loan is held in 31 CLOs. The maximum count of defaulted issuers was six, with the average count of two across 110 exposed CLOs. Eighteen CLOs (7% of total CLO count in the index) had exposure to at least three defaulted issuers, 41 CLOs (15%) had exposure to at least two defaulted issuers, 69 CLOs (26%) had exposure to one defaulted issuer while 156 CLOs (59%) were not exposed to any defaulted issuers Distressed issuers are classified as issuers rated at a Fitch issuer-default rating (IDR) equivalent of CC or C. The exposure to distressed issuers remained stable since last quarter at 0.6% of the total portfolio balance. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 2

3 Recent Default Considerations and Resolutions Templar Energy LLC s second lien loan, held in 24 CLOs at the end of 2Q16, received approximately 9% recovery, excluding equity component. The company completed an out-of-court restructuring in September, which provided that second lien lenders ($1.45 billion before restructuring) received approximately $133 million of cash payments and 45% of the equity of the reorganized company. The restructuring also amended and extended a reserve based credit facility with a borrowing base of $600 million and included an equity injection of $365 million. The loan had been considered defaulted by CLOs as a result of missed interest payments. Alpha Natural Resources, Inc. s (Alpha) first lien lenders (held in 11 CLOs at the end of 2Q16) that realized approximately 56% recovery, excluding equity component. The company emerged from Chapter 11 in July. Reorganization plans entailed a sale of Alpha s natural gas business for cash proceeds of $339.5 million and a credit bid by first lien lenders of $325 million for the company s core coal assets (forming a new company Contura Energy, Inc., majority-owned by a group of Alpha s first lien lenders). The remaining assets constituted the basis of the go-forward business for the reorganized Alpha debtors. Recoveries for the first lien lenders ($611 million of term loans and $445 million outstanding under the revolving credit facility) included a $300 million senior secured first lien, a 10% note payable by Contura Energy, a cash distribution of up to $300 million, approximately 87.5% equity in Contura Energy and preferred equity in the reorganized Alpha debtors. Dex Media Inc. secured lenders (loans held in two CLOs at the end of 2Q16) received approximately 35% recovery when the company emerged from Chapter 11 in July. The prepackaged plan of reorganization (POR), consistied of a new term loan and a small cash distribution. In exchange for their $967 million prepetition claims, secured lenders under the SuperMedia credit facility (held in CLOs) received approximately $292 million of a $600 million takeback first lien term loan, approximately 45.4% of the common equity of the reorganized Dex Media and a small cash distribution equal to all cash remaining at SuperMedia after certain other distributions were made under the POR. FTS International Inc. s loans, held in 33 CLOs, are back to being treated at par after the company completed repurchase of some of its debt at a significant discount in July. Seventy Seven Energy Inc. s loans, in 34 CLOs at the end of 2Q16, no longer receive default haircuts after the company emerged from Chapter 11 approximately two months after filing in June. The company s prepetition $400 million term loan remained in place, but its maturity was shortened by one year and the loan agreement added an affirmative covenant by the company to use commercially reasonable efforts to maintain credit ratings from for the term loans. Loans of Foresight Energy LP (in 16 CLOs at the end of 2Q16) were no longer haircut after the company completed its out-of-court restructuring in August. Foresight Energy LP exchanged most of its $600 million senior notes for cash and new second lien notes, convertible PIK notes and warrants. The restructuring also included an amendment and restatement of the issuer s senior credit facility, revolver and a term loan, which included, among other things, more limitations on restricted payments and the implementation of the excess cash flow sweep, which could result in early repayments of the senior secured term loan. The restructuring allowed resolving various events of default related to the change of control under the terms of the old notes, triggered by the Murray Energy s acquisition of a share in the company s interest. While CLOs did not have exposure to the notes, the restructuring allowed them to discontinue treating Foresight Energy as a default, see examples of the CLO impact on pages NewPage s (Verso Paper Holdings) senior secured lenders realized zero recovery when the company emerged from bankruptcy in July. Fifteen CLOs held prepetition term loans of the NewPage subsidiary at the end of 2Q16. Several CLOs invested in the new money debtor in possession (DIP) loans and converted their prepetition senior debt into a roll up DIP. Upon exiting bankruptcy, the new money DIP was paid in cash, while the rollup portion of the DIP loan received 47% of the new company s equity. While the final plan tagged equity consideration value at $690 million, based on the company s recent stock price (NYSE: VRS), its market capitalization was just over $200 million, which would imply recovery in low 30% for the rollup DIP and below 10% for the unconverted prepetition term loan based on the equity component. Within the CLO framework, which doesn t give credit to equity, recovery on both rollup DIP and unconverted prepetition loan was zero. An example of how recovery was realized in one CLO that invested in New Page DIP loan is provided on page 11. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 3

4 CLO Index Watchlist and Defaults in U.S. CLOs Decline Fitch s CLO Index Watchlist encompasses the loans of concern (LoC) issuers identified by Fitch s Leveraged Finance group and issuers rated CCC+ and lower held in U.S. CLOs. The notional amount of the Index Watchlist was at the end of 3Q16. See Fitch U.S. Leveraged Loan Default Insight, dated September 2016, available on Fitch s website at for a complete list of LoC issuers. Index Watchlist exposure at the end of 3Q16, $8,660, remained unchanged at 6.4% of the $135.7 billion of the index portfolio from 6.4% of the $129.9 billion index portfolio in 2Q16. Exposure to defaulted loans decreased by 0.1% to 0.3% of the index portfolio. Rating downgrades to CCC+ or lower is driving certain sectors that experienced the largest quarterly increase in their exposure to Index Watchlist. These sectors include buildings and materials (up by 3.6% to 13.6% of the sector), banking and finance (up by 2.6%) and consumer products (up by 2.1%). Examples of such additions include Crosby US Acquisition Corp. (building and materials), Britax Group Plc, Performance Sports Group Ltd., TOMS Shoes LLC (each of the three classified as consumer products), Acrisure LLC and Walter Investment Management Corp. (both in banking and finance). Sectors with the largest quarterly decline in exposure to Index Watchlist and defaulted issuers were: paper and forest products (down by 20.7% to 3.4% of the sector) due to the exit of NewPage from bankruptcy and utilities and power (down by 3.4%) due to Aria Energy Operating LLC moving out of the CCC+ and lower category. Metals and mining ranked second, experiencing a decline of 6.3% to 34.8%, while energy oil and gas ranked sixth with a decline of 1.9%. The decrease in exposure to watchlist and defaulted issuers in commodity-related sectors was largely fueled by the completion of DDEs and bankruptcy resolutions. The table on page 5 provides more detail for the Index Watchlist and defaults. The Index Watchlist exposure at the end of 3Q16 remained unchanged at 6.4% of the $135.7 billion of the index portfolio from 6.4% of the $129.9 billion index portfolio in 2Q16. Exposure to defaulted loans decreased by 0.1% to 0.3% of the index portfolio. Industries with the largest quarterly increase in their respective shares of the Index Watchlist and defaulted volume were business services, up by 2.7% to 14.3%, followed by banking and finance, up by 2.0%. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 4

5 Index Watchlist and Defaults in U.S. CLOs Industry Total Index Watchlist and Defaults by Balance ($ Mil.) Defaulted Issuers Rated CCC+ or Lower a LoC Total Index Watchlist and Defaults by Issuer Count Index Watchlist and Defaults (%) As Industry Share of Defaulted Rated CCC+ As Share of Index Watchlist and Issuers or Lower a LoC Industry Defaults Industry Count and Weight in the Index Portfolio Total Number of Issuers Industry Weight in Portfolio (%) Energy Oil and Gas 1, Business Services 1,299 1, Industrial and Manufacturing Banking and Finance Retail Computer and Electronics Metals and Mining Utilities Power Broadcasting and Media Building and Materials Healthcare Aerospace and Defense Telecommunications Consumer Products Transportation and Distribution Gaming and Leisure and Entertainment Automobiles Chemicals Packaging and Containers Food and Beverage and Tobacco Environmental Services Paper and Forest Products Other Industries Total Portfolio 9, ,621 2, Note: Industry weights are shown as percentage of index portfolio, excluding cash. a CCC+ and lower category includes collateral of obligors rated CCC+ and lower that are not already included in the loans of concern. Source: Fitch. The table above breaks down the Index Watchlist by issuers rated CCC+ and lower, based on Fitch IDR equivalent ratings that are not already included in the LoC, LoC issuers and defaulted issuers. The combined count of watchlist issuers and defaults is virtually unchanged, at 175, compared with 174 in 2Q16. The count of defaulted issuers decreased to 16 from 20, and the count of LoC and CCC+ and lower issuers increased to 159 from 154. Energy oil and gas tops the Index Watchlist and defaults with $1.8 billion, or 20.2% of the aggregate $9.1 billion notional exposure, composed of five defaulted issuers at $105 million, 24 issuers rated CCC+ and lower at $866 million and 12 LoC issuers at $858 million. Approximately 50.2% of energy oil and gas loans in the index are either on the Index Watchlist or defaulted. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 5

6 CLOs with Highest Exposure to the CLO Index Watchlist The 2013 and 2014 vintage CLOs have the largest exposures to the Index Watchlist and defaulted issuers at 9.4% and 8.5%, respectively, as shown in the top chart. The median exposure was 6.2% across all CLOs in the index. The bottom chart shows the top quartile of CLOs with the greatest combined exposure to Index Watchlist and defaulted issuers. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 6

7 Industry Composition Business services, which include technology under Fitch classification, is the largest industry sector, based on total portfolio notional across all CLOs in the index. CLOs of vintages average a higher exposure to retail while vintage CLOs show a higher weight in the commodities sectors, relative to other vintages. Since the end of 2Q16, there has been a marginal increase in the aggregate portfolio s exposure to utilities and power, gaming and leisure and entertainment and consumer products. At the same time, exposure to broadcasting and media, business services and energy oil and gas has declined. Computer and electronics has taken over for business services as the largest industry sector for 2016 vintage CLOs. The 2016 vintage CLOs hold 11.6% computer and electronics versus 9.5% average holdings across all vintages. The comparison of the entire index portfolio s industry breakdown to that from last year is shown in the accompanying Tracker file. The Tracker file also provides industry composition for each individual CLO. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 7

8 Portfolio Par and Senior OC Cushion Quarterly Changes Top 10 U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 8

9 Portfolio Par and Senior OC Cushion Quarterly Changes Top 10 In Ziggurat (target par $500 million), OC cushions received a 51bp lift of target par from declining haircuts from June to September. While the June OC haircut was solely composed of a default haircut, September OC ratios included both default and discount obligation haircuts, although the combined haircut was smaller at the end of 3Q16. The $5.9 million position in Noranda Aluminum, haircut to 37%, was pared down through a $3 million notional sale at an average price of 50.3% and a $1.2 million repayment funded by the company s sale of some assets while it remains in bankruptcy. Ziggurat s remaining exposure in September was $1.7 million, now haircut to 10%. The realized recoveries plus current mark on the remaining position represent a combined 48% recovery, an 11% improvement over June s mark. Another defaulted credit, $4.7 million Hunter Defense Technologies, which was haircut to 80% in June, had a partial paydown of $2.3 million, and the remainder was no longer haircut as a default in September. The par metric, not haircut for discount obligations, gained 81bp. Loans bought at a discount included those of Bauer Performance Sports, ExGen Texas Power and Viva Alamo, all bought at around the 80% mark. Cent 16 (target par $400 million) gained par from the reversal of the $0.7 million default haircut on Fieldwood Energy, which completed a DDE in June (this event was captured in 3Q16 for this CLO in the index). In addition, six of the remaining seven defaults had higher market values, with the most notable improvement on a $4 million position in Samson s second lien loan (to 23.7% from 2%), which alone resulted in a $0.6 million par gain (3Q16 s recovery capped at S&P s rate of 16%). Additional par gain was due to a $0.8 million paydown received on the $1.9 million position in Noranda Aluminum term loan (funded by the company s asset sales), which was previously haircut to 37%. The remaining notional amount of the loan continues to be reported as a default. The restructuring of Alpha Natural (see page 3 for more detail) netted a 46% recovery (excluding equity), close to the 43.5% recovery mark used for the haircut at the end of 2Q16. The combined effect of the described changes added approximately 70bp of target par. OHA X (target par $750 million) is an example of a trend divergence between the OC cushion (improved by 85bp) and par (declined by 39bp). In June, the OC numerator was haircut by $7.6 million of Caa excess obligations (Pacific Drilling at 32.6% and Seadrill at 47%) and approximately $1 million on defaulted Essar Steel Algoma (haircut to 23.6%). However, in 3Q16, the manager sold $11 million of its Caa rated loans (largest sales included Floatel International, Pacific Drilling, Seadrill and C&J Energy Services) and the entire position in Essar Steel Algoma, taking a $7 million loss. Defaulted loans were already haircut in June for both par metric and OC numerator, so the Essar sale, at 29%, resulted in a small benefit. Sales of the Caa obligations had a negative impact on par, but a positive impact on OC cushions, because these loans were sold at a par-weighted average price of 45% versus the 43% weighted average recovery rate used in June s OC haircut. In addition, the sales helped to eliminate the excess Caa haircut: exposure to Caa and lower rated loans dropped to 7.4% in September from 9.3% in June. The par hit from these sales was offset by purchases below par, with the largest contributions coming from a $5.1 million of Weight Watchers International (purchased at 71.4% and not haircut due to the application of swapped non-discount obligation definition), $6.3 million Road Infrastructure Investment revolver (89.5%) and $5.4 million Packers Holdings revolver (92.3%). WhiteHorse X (target par $500 million) benefited from no longer treating a $4 million position in Seventy Seven Operating as defaulted (see page 3 for more detail), which was haircut to 50% in June. An approximate $5 million position in defaulted Noranda Aluminum, haircut to 37% in June, received $2 million repayment (from the company's asset sales), with the remaining $3 million now haircut to 10%, net gain of approximately $0.5 million. The combined impact amounted to 49bp of the target par. WhiteHorse IX (target par $400 million) benefited from the reduction in default haircuts. Foresight Energy and Seventy Seven, a combined notional of $5.6 million haircut to 50% in June, were given full credit in September, resulting in a par gain of $2.8 million. The net effect of the Noranda Aluminum loan repayment and drop in the recovery from June to September was a small gain of $0.1 million. However, these gains were partially offset by the newly reported default of $2.5 million Transtar loan, haircut by 50%. These changes netted a gain of 41bp of target par. A $2 million increase in the Excess Caa/CCC haircut (Foresight Energy and Seventy Seven contributed to the increase in Caa obligations but did not constitute the excess subject to the haircut) offset the par gain for the purpose of the OC numerator, so that the senior OC cushion had a modest increase. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 9

10 Portfolio Par and Senior OC Cushion Quarterly Changes Top 10 In Venture XVIII (target par $600 million), $5 million of defaults reported in June are no longer receiving haircuts, which were based on Moody s recovery rates and ranged between 40% and 50%. Re-performing loans included Millennium Health, Seventy Seven Operating and FTS International (see page 3 for more detail on the latter two). The CLO received approximately 40% of par paydown on a smaller position in Noranda Aluminum in 3Q16 (similar to the CLOs above, the loan was previously haircut to 37%, and the remaining notional continues to receive a default haircut). These reductions in default exposure were partially offset by newly reported defaults, although in a smaller aggregate amount of $1 million: C&J Energy Services, Miller Heiman and Targus International. ICG US (target par $400 million) benefited from the reversal of a default haircut on Seventy Seven, which was marked at Moody s recovery rate of 45% in June while the market price was 86.3%. In September, it was accounted at par which added $1.6 million of par gain. The most par additive trade was a purchase of American Renal Holdings term loan at the average price of 98.9%, which added approximately $0.07 million of par. In Madison Park XI (target par $500 million), the reduction in default haircut was offset by the increase in the Caa/CCC excess haircut to $4.7 million from $3.7 million. The $2 million of FTS International loan (haircut to S&P s recovery rate of 5% in June) moved from defaulted to the Caa/CCC excess bucket in September (haircut to 35.3%). While the loan price was reported as having declined by approximately 3% in 3Q16, the par metric gained 95% and the OC numerator gained 30% of the loan notional. The CLO par also increased due to multiple trades, with each trade contributing a relatively small amount to the overall gain. In Silvermore (target par $500 million), default haircuts on Peabody Energy and Templar Energy were lower in September than in June, due to increases in market prices, with the more dramatic price improvement on the bigger $4.4 million exposure to Peabody Energy. Peabody s price was up by approximately 30% but the par gain was capped by Moody s recovery rate, which was lower than the improved market price 69.7% in September. The lower haircut added approximately $1.1 million of par gain. The OC test in June included a Caa excess haircut (based on Moody s ratings) but became a CCC excess haircut (based on S&P ratings) in September. The size of the excess remained virtually unchanged, at just slightly over $29 million, but the haircut dropped $0.4 million, due to some name reshuffling within the Excess bucket and a slightly higher average market price, averaging 36% at the end of September. The manager also sold $4.5 million of a Sequa Corporation s term loan that was part of Caa/CCC exposure in June, at an average price of 78%. This loss was offset by several purchases below par. The largest gain contributors included purchases of a $2.5 million of Empire Generating s term loans B and C at an average price of 88.6% and a $1.2 million of term loan of Weight Watchers International at 75.5%. At the end of September, $3.6 million of the Weight Watchers term loan, purchased at an average price of 74.2%, was reported as a non-discount obligation and as such was not haircut for the OC purposes. The total non-discount obligation exposure stood at $8.4 million and, in addition to Weight Watchers, included Fieldwood Energy s second lien term loan (average purchase price of 49.7%) and Energy Transfer Equity (78.5%). Jamestown V (target par $400 million) received $0.5 million in cash proceeds, $0.8 million notional amount of note issued by Contura Energy and equity for its $2.9 million position in loan of Alpha Natural Resources. Excluding equity, this represents a recovery of approximately 46%, close to the 45% mark used in June. The remaining three defaulted loans, Paragon Offshore Finance Company, Peabody Energy Corporation and Samson Investment Company, still compose a significant portion of the portfolio at $9.4 million. However, the recovery value used for the OC test improved due to price improvements in Samson (from 1.4% to 25.7%) and Peabody (from 39% to 72.1%, although capped at Moody s recovery rate of 45%). The combined effect of the resolution of Alpha Natural Resources and net improvement in prices on previously haircut positions added 27bp of target par. In Babson 2014-I (target par $500 million), the par change was relatively small, but the OC cushion gained due to the lower Caa Excess haircut, which dropped to close to $5 million from $7.2 million in September. One of the larger sales of CCC rated collateral was a $2 million sale of a second lien loan of Sedgwick Claims Management Services at 99.5% in August. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 10

11 Portfolio Par and Senior OC Cushion Quarterly Changes Top 10 Brookside Mill s (target par $450 million) default exposure, as reported in September, was no more than $0.1 million, a big drop from the $6 million in June. Approximately $3 million of Murray Energy term loan B2 was sold in August at the 80% mark, a significant improvement from 70.3% in June. However, the actual par gain on Murray Energy was even greater than an approximately 10 percentage-price uptick: the loan was treated as default and haircut to the S&P Recovery Rate of 30% in June, resulting in a 50% improvement for the $3 million of sold notional amount. This gain was offset by a realized loss on a term loan of NewPage, which emerged from bankruptcy in July. The size of the CLO holdings in its prepetition debt was $1.9 million. Postpetition, the CLO invested in the $0.4 million new money DIP and converted $0.4 million of the pre-petition term loan in the roll-up DIP. Only unconverted portion of the term loan, at approximately $1.5 million, was reported as defaulted. The $0.4 million new money DIP loan was paid in full in July, while the rest was converted to equity. Market prices, as reported in the July trustee report, several days before the emergence, reflected differences in expected recoveries between the three positions: the new money DIP was shown at 99.3%, the roll-up DIP at 56.7%, and the prepetition loan at 13.7%. Ignoring equity received in restructuring, the entire $1.9 million of the prepetition term loan resulted in a 100% loss; however the loss from June to September was smaller, given that unconverted portion was already haircut to a 12% mark in June. Finally, the $1.5 million term loan of Regent Purchaser (Regent Energy) was no longer haircut to a 5% S&P Recovery Rate as it was no longer considered defaulted in September, resulting in close to $1.5 million par gain. The resolution of these three defaults resulted in a combined par gain, relative to the value assigned to these positions in June. Despite this par gain, the senior OC cushions slightly decreased, due to the $2 million increase in the Caa/CCC excess haircut. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 11

12 Portfolio Par and Senior OC Cushion Quarterly Changes Bottom 10 U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 12

13 Portfolio Par and Senior OC Cushion Quarterly Changes Bottom 10 A newly defaulted issuer, Transtar Holdings, contributed toward much of the top 10 biggest CLO portfolio losses this quarter while the reversal of default haircuts and discount obligation swaps helped several transactions rebuild lost par again this quarter. Halcyon (target par $500 million), Halcyon (target par $500 million) and Halcyon (target par $400 million), each lost approximately 98bp, 70bp and 113bp of target par, respectively, due to the default haircut applied for Transtar Holdings this quarter. Additional par losses were attributable to the sale of some credit risk loans in the mid-30s to high-50s. Halcyon netted a 34bp loss of target par on the sale of Seadrill Partners in the low- to mid-40s and CCS intermediate Holdings in the high-50s. Halcyon lost a net 25bp of target par on the sale of American Energy Marcellus in the mid-40s. Halcyon lost a net 72bp of target par on the sale of Ocean Rig UDW and FTS International, both sold in the mid- 30s. These losses were partially offset with a discount obligation swap purchase of StarWest Generation in the mid-60s. Since the discounted sales prices were lower than the purchase price for StarWest Generation, the net loss is the difference between the notional amount of the sales and corresponding purchases. StarWest Generation did not receive an OC discount obligation haircut due to the use of discount obligation swap. Madison Park XIX (target par $600 million), Carlyle (target par $500 million), Carlyle (target par $400 million) and Avery Point VII (target par $400 million), had target par reductions of approximately 100bp, 90bp, 70bp and 60bp, respectively, from distributions to note holders in the form of interest proceeds (par flush) on their first distribution dates. Carlyle and Carlyle were each able to build some par with purchases slightly above the discount purchase limits, with one of the largest purchases being Veritas Bermuda Ltd. in the mid-80s, while Avery Point VII s largest par build was from the purchase of BMC Software Finance in the low-90s. Post-restructuring of NewPage, Sudbury Mill (target par $400 million) received common shares of Verso Corp, resulting in a target par loss of $3 million (75bp of target par) since equity is excluded from CLO portfolio balance calculations. However, NewPage had received a default haircut in 2Q16 at its then market value of $12.4 resulting in the OC cushion declining by only 9bp this quarter. The default haircut for Sequa Corporation in August reduced 67bp of target par for OC, which was almost offset by a decrease in excess CCC haircut this quarter by 57bp. Pinnacle Park (target par $500 million) had several losses from credit risk sales, amounting to approximately 30bp of target par. The sale of Cumulus Media Holding s loan in the high-60s was the largest contributor of losses at 15bp of target par. The majority of losses in Battalion VIII (target par $500 million) is attributed to the restructuring of Fairway Group. As of 2Q16 the $4.9 million notional Fairway Group loan was being haircut to $2.2 million (45% recovery). The new loans received in restructuring have a notional of $1.5 million and are being treated as defaulted, receiving a haircut of $1.1 million (28% recovery). The total loss in Par and OC cushion from Fairway Group is $1.8 million or 40bp of target par. Battalion VI (target par $450 million) was one of the top 10 transactions with the biggest drop in senior OC cushions last quarter. The OC cushion declined further in 3Q16 by 60bp of target par due to the 30bp increase in the excess CCC/Caa adjustment amount and an additional 30bp loss on Fairway Group Acquisition Company s restructuring, combined with the current default haircut for the restructured balance. Default haircuts for WhiteHorse VII (target par $400 million) increased by 96bp of target par as compared to last quarter. This quarter s default of Transtar Holdings, which contributed to 31bps of target par loss (due to the default haircut), was mitigated by 21bp of target par gains from the reversal of default haircuts on Alpha Natural Resources and Seventy Seven Operating Inc. Since Alpha Natural Resources received a default haircut last quarter at 48.7%, its sale in July at 55% resulted in a minimal gain. The transaction also lost 22bp of target par on the sale of Ocean Rig UDW in July in the low-40s. WhiteHorse VIII (target par $550 million) took a 35bp reduction in target par from the default haircut for Transtar Holdings. Additional excess CCC haircuts led to 45bp of target par loss since last quarter. Since these par losses are associated only with haircuts for overcollateralization tests and not with realized losses, the transaction only appears in the right chart. Aspect Software received a default haircut last quarter that was reversed once it emerged from bankruptcy in May The net impact of the default reversal was a 14bp gain in target par. In addition, the transaction lost a combined 32bps of target par to the sale of Ocean Rig UDW (low-40s) and Valitas Health Services, Inc. (at 60%). Overall, the CLO netted a 95bp loss of target par in 3Q16, of which 55bp was due to the change in applied haircuts (from excess CCC assets and defaults). U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 13

14 CCC and Lower Quality More than Doubled over the Past Year The percentage of issuers rated in the B category (based on Fitch s IDR equivalent rating) decreased again this quarter by 2.2% to 68.9% of the index s aggregate portfolio. Issuers rated in the BB category increased by 4.6% to 19.7% of the index. Loans of issuers rated in the CCC category increased by 0.3% to 5.6%, while issuers rated CC or lower decreased by 0.3% to 0.9%. The CCC and lower rated loans have increased again since last quarter but have slowed in growth when compared with previous quarters. Using Fitch s IDR equivalent rating, the average CCC and lower rated collateral in the 2013 vintage is the highest at 11.35% followed by 9.81% for 2014 as compared with 9.0% for 2012 and 6.3% for 2015 and 3.0% for 2016 CLOs. The bottom chart shows a small increase in the 91% 100% recovery band and a decrease in 51% 70% band. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 14

15 Loan Maturity Wall Continued to Extend Sixteen CLOs of 2016 vintage reached their effective date and were added to the index this quarter. The addition of newer CLOs to the index and continued reinvestment activity has shifted the maturity wall from 2021 in 3Q15 to 2022 and beyond in 3Q16. Loans with maturities in 2022 and beyond increased to 38.4% this quarter from 32.2% in 2Q16. The bottom chart shows rating stratification based on loan maturity year. Loans maturing from have the highest percentage of CCC or lower rated collateral at 24% and the lowest percentage of B rated collateral at 52%. Included in the maturity bucket is Pacific Drilling S.A. rated CC and maturing in U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 15

16 WAL Deal Level Comparison Two CLOs in the index exited its reinvestment period in 3Q16. Cent CLO 16 exited in August 2016 and Magnetite VI exited in September The bottom chart highlights the relationship between the CLO vintage and weighted average life (WAL) cushions. As transactions season, their covenanted WAL steps down, thereby constraining CLO reinvestment options. Mill Creek CLO II, Ltd. (2016 CLO), with the WAL of 4.8 years, has the highest WAL cushion due to a WAL trigger of nine years. See U.S. CLO Tracker Portfolio, dated September 2016, available on Fitch s website, for more detail. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 16

17 WAS Unchanged Average WAS declined by 8bp to 4.15% at the end of 3Q16 from 4.23% at the end of 2Q16. Change in average WAS for all vintages ranged from negative 9bp to negative 4bp. The WAS of the 2012 vintage (12 CLOs) averaged at 3.81%, 2013 (20 CLOs) at 4.15%, 2014 (100 CLOs) at 4.17%, 2015 (114 CLOs) at 4.17%, and 2016 (19) at 4.20%. The sole Fitchrated 2011 vintage CLO is not included in this chart. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 17

18 WAS Cushions Unchanged The average WAS covenant for 2012, 2013, and 2016 vintages was 3.54%, 3.87%, 3.95% 3.92% and 3.93%, respectively. 183 CLOs in the index left WAS covenant unchanged from 2Q CLOs decreased the WAS covenant by an average of 13bp, while 17 CLOs increased the WAS covenant by 3bp. Two CLOs no longer report WAS triggers as they no longer apply after the reinvestment period. On average, WAS covenant decreased over the quarter by 3bp for vintage CLOs. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 18

19 WAS and WARF Deal Comparison The portfolio credit quality in these charts is measured using the Fitch weighted average rating factor (WARF) scale. As shown on the chart to the left, credit quality across all CLOs in the index ranged from 27.9 (B+/B) to 38.4 (B/B ). The average credit quality of CLOs declined this quarter with approximately 36% of the 266 CLOs at an average credit quality of B or better at the end of 3Q16 as compared with 38% (out of 250 CLOs) last quarter. Sound Point XI (2016 vintage) had the highest WAS to WARF ratio with a WAS of 4.45% and WARF of Slater Mill Loan Funding had the lowest ratio again this quarter with a WAS of 3.70%, compared to 3.90% in 2Q16, and WARF of 37.3, compared to 36.5 in 2Q16. The average Fitch WARF for CLOs in the index increased to 32.9 from 32.7 in 2Q16. The 2012 vintage WARF declined to 32.9 from 32.6 over 2Q vintage had the largest decline in credit quality with the average WARF increasing to 34.2 from 33.6 in 2Q16. The 2014 vintage declined to 33.5 from 33.1, and the 2015 vintage declined to 32.5 from The 2016 vintage average improved to 31.4 from The bottom chart plots the WAS to Fitch WARF ratio by CLO managers. The median ratio has remained stable at 0.13 times in the past three quarters. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 19

20 Portfolio Diversification The top chart reports average obligor count per manager based on the manager s CLOs 2.0 tracked in the index. The index currently includes 74 managers. No new managers were added to the index in 3Q16. The bottom chart shows the manager average portfolio weight in the top 10 obligors. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 20

21 U.S. Leveraged Loan CLO Tracker Methodology Fitch s CLO Tracker and all the charts contained in this report reference 266 CLO 2.0 transactions issued by 74 managers. Fitch maintains a list of Loans of Concern in its monitoring process. The list is generated based on a combination of ratings ( CCC+ and lower), market price and negative news that may affect issuers and loan performance. Not all of them are deemed to be at risk for imminent default but rather viewed as candidates for potential credit deterioration. Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: point-in-time coverage, limited information availability and review, an abbreviated surveillance review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions. Transactions are loaded at their effective dates and are updated as monthly reports become available. Model outputs are updated at least weekly. Performance metrics are normalized across transactions; this allows like-for-like comparisons and ensures that the inputs into Fitch s Portfolio Credit Model (PCM) are calculated on a consistent basis. Consequently, the values presented in the Tracker may not match the values used for operational tests. However, they are consistent with the model output (including break-evens) and Fitch s rating analysis. Examples of potential discrepancies with trustee reported values include industry stratification charts (which reflect Fitch s industry classification) and CCC buckets (which reflect Fitch s equivalent ratings). For more detail on Fitch s rating methodology, refer to Global Rating Criteria for CLOs and Corporate CDOs, dated September The Tracker includes the following sections: Rating Transition Matrix: Presents rating transitions of Fitch-rated U.S. CLOs since issuance and over the past 12 months. All percentages are relative to the number of tranches in a given initial rating category. Deal Level Information: Presents a wide range of performance metrics for all transactions. Clicking on the deal name navigates to the individual transaction report. Deal Dashboard: Presents key performance statistics and 12-month trends for all transactions. Deals are sorted by manager. Deal Average Information: Presents a history of net portfolio losses, principal cash, senior/junior OC tests, WAL and WAS since June 2012, as well as current stratifications by ratings, recoveries, issuer size, industry and country. Deal Average Information by Manager: Presents performance statistics aggregated at the manager level. Most Referenced Issuer: Presents the credit profile of the top 20 most referenced issuers among Fitch-rated CLOs. Issuer Overlap Matrix Count: Presents the overlap matrix between Fitch-rated CLOs based on the issuer count. The overlap represents the number of issuers two CLOs have in common and is measured relative to the number of issuers held by the reference CLO. Deals are sorted by manager. Issue Overlap Matrix Amount: Presents the overlap matrix between Fitch-rated CLOs based on the issuer exposure amount. The overlap represents the number of issuers two CLOs have in common and is measured relative to the number of issuers held by the reference CLO. Deals are sorted by manager. Individual Transaction Report: Presents detailed information on a deal-by-deal basis, including transaction characteristics, historical performance data and Fitch PCM model outputs. Please send any feedback, comments or suggestions on the Tracker to clo.research@fitchratings.com. U.S. CLO Index: Pace of Loan Defaults Slows Down for Now 21

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