STATE OF THE MARKET TODAY AND WHAT TO EXPECT TOMORROW

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1 STATE OF THE MARKET TODAY AND WHAT TO EXPECT TOMORROW Thomson Reuters LPC s Second Annual Middle Market Loan Conference Ioana Barza Director of Analysis ioana.barza@thomsonreuters.com

2 OVERVIEW From 40,000 feet 3 Global volumes are steady as refinancing activity dominates M&A-related lending picks up; U.S. market drives jump in activity U.S. Leveraged lending: supply/demand re-balance 7 Supply of new issue loans picks up Demand from loan mutual funds slows, yields tick up, CLO issuance roars on! U.S. Middle Market 27 Banks navigate through Leveraged Lending Guidance Lenders voice concerns over convergence with BSL: Cov-lite for smaller companies; narrowing middle market yield premium But, do divergence and diversity reign? No shortage of debt providers Leverage is more conservative, smaller companies see higher yields No shortage of debt offerings from first-lien to unitranche 2

3 2013 GLOBAL LOAN ISSUANCE HITS $4T RECORD, BUT GLOBAL LOAN ISSUANCE GLOBAL 4,50 Americas EMEA Asia, ex Japan Japan LPC Survey 2013 Estimate 4,00 3,50 3,00 2,50 2,00 1,50 1, Forecast 2013 Actual 2014 Issuance ($Bils.) 3

4 GLOBAL M&A LOAN ISSUANCE IS A FRACTION OF PRE- CRISIS LEVELS AS EUROPEAN MARKET LAGS, WHILE... GLOBAL M&A LENDING GLOBAL 1,60 Americas EMEA Asia-Pacific (excl. Japan) Japan (beg. '06) 1,40 1,20 1, Issuance ($Bils.) 4

5 U.S. M&A LENDING PICKS UP, APPROACHING $200B SO FAR IN U.S. M&A LOAN ISSUANCE Non-Lev. Lev. (excl. LBOs) LBOs In Market U.S. OVERALL Issuance ($Bils.) U.S. M&A loan issuance: 2007 record: $471B 2013: $360B 5

6 NEW MONEY REPRESENTS 40% OF U.S. LENDING FOR THE FIRST TIME IN SIX YEARS 80% U.S. NEW MONEY % SHARE OF LENDING U.S. OVERALL 70% 60% 50% 40% 30% 20% 10% 0% 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 New money % of U.S. lending 6

7 OVERVIEW From 40,000 feet 3 Global volumes are steady as refinancing activity dominates M&A-related lending picks up; U.S. market drives jump in activity U.S. Leveraged lending: supply/demand re-balance 7 Supply of new issue loans picks up Demand from loan mutual funds slows, yields tick up, CLO issuance roars on! U.S. Middle Market 27 Banks navigate through Leveraged Lending Guidance Lenders voice concerns over convergence with BSL: Cov-lite for smaller companies; narrowing middle market yield premium But, do divergence and diversity reign? No shortage of debt providers Leverage is more conservative, smaller companies see higher yields No shortage of debt offerings from first-lien to unitranche 7

8 SOME WISHES DO FINALLY COME TRUE! M&A-RELATED FINANCINGS ARE ON THE RISE 12 LEVERAGED M&A LOAN ISSUANCE LEVERAGED Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Lev. M&A loan issuance ($Bils.) 8

9 REFINANCINGS DOMINATED LENDING ACTIVITY U.S. LEVERAGED LOANS: U.S. LEV. INSTITUTIONAL LOANS: 1Q14 IS 3 RD BUSIEST ON RECORD 1Q14 IS 3 RD BUSIEST ON RECORD REFIS ARE 3 RD HIGHEST AT $180B REFIS ARE 3 RD HIGHEST AT $112B LEVERAGED Issuance ($Bils.) Refinancing New Money-M&A New Money-Other In Market Issuance ($Bils.) Refinancing New Money In Market 5 2 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 9

10 Share of lev. loan issuance IT S ALL ABOUT THE INVESTORS PRO RATA VS. INSTITUTIONAL MARKET SHARE 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Lev. Pro Rata Lev. Institutional ($Bils.) CLO ISSUANCE & RETAIL FUND FLOWS 2001 CLO Issuance Retail Fund Flows LEVERAGED 10

11 REFI SURGE DEFIED 2013 FORECASTS; LEVERAGED FINANCE REACHED RECORD $1.47T 1,60 LEVERAGED LOAN AND HIGH YIELD BOND ISSUANCE HY Bonds Leveraged loans Lev. Loans Refi Lev. Loans New Money LEVERAGED 1,40 1,20 1, Forecast 2013 Actual 2014 Forecast Issuance ($Bils.) 11

12 WILL 2014 BE A REPEAT? NEW MONEY EXPECTED UP MODERATELY; REFI S EXPECTED DOWN Issuance ($Bils.) LEVERAGED LENDING: NEW MONEY Lev. New Money LPC Survey Estimate Issuance ($Bils.) LEVERAGED LENDING: REFINANCINGS Lev. Refinancings LPC Survey Estimate LEVERAGED Forecast 2013 Actual 2014 Forecast Forecast 2013 Actual 2014 Forecast 12

13 2014 OUTLOOK: LEV. PRO RATA DOWN TO $450B, INSTITUTIONAL DOWN TO $565B AS REFIS SLOW 60 LEVERAGED LENDING: PRO RATA 45 INSTITUTIONAL LOAN ISSUANCE Refinancing New Money LEVERAGED Issuance ($Bils.) Issuance ($Bils.) Forecast Forecast 13

14 1Q14 LEV. PRO RATA WAS 5 TH HIGHEST ON RECORD; INSTITUTIONAL WAS 3 RD HIGHEST 25 LEV. PRO RATA VS. INSTITUTIONAL Leveraged Pro Rata Lev. Institutional LEVERAGED Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 Lev. loan issuance ($Bils.) 14

15 LOAN ASSETS MANAGED BY CLOS & LOAN MUTUAL FUNDS REACH RECORD LEVELS CLO Aggregate Principal Balance ($Bils.) CLO ASSETS UNDER MANAGEMENT Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Loan mutual fund & ETF AUM ($ Bils.) LOAN MUTUAL FUNDS ASSETS UNDER MANAGEMENT Jan 2007 Aug 2007 Mar 2008 Oct 2008 May 2009 Dec 2009 Jul 2010 Feb 2011 Sep 2011 Apr 2012 Nov 2012 Jun 2013 Jan 2014 LEVERAGED 15

16 BUT, DEMAND SHIFTS WITH LOAN MUTUAL FUND OUTFLOWS BEGINNING IN MID-APRIL Weekly flows ($Mils.) 2,50 2,00 1,50 1, ,00-1,50-2,00-2,50 WEEKLY SINCE /5/ /19/2005 8/2/2006 5/16/2007 2/27/ /10/2008 9/23/2009 7/7/2010 4/20/2011 2/1/ /14/2012 8/28/2013 Weekly flows ($Mils.) 2,50 2,00 1,50 1, ,00-1,50-2,00-2,50 WEEKLY 2011/12/13/14 COMPARISON Jan Feb Mar Apr May Jun Jul Aug Sep Oct Dec LEVERAGED 16

17 LOAN FUNDS DO NOT DOMINATE DEMAND BUT THEY DO DOMINATE SENTIMENT; INST. ACCOUNTS PAUSE SHARE OF INDEX OUTSTANDINGS* 41% CLOs* 22% Loan Funds 36% Other *Based on: - a universe of 779 U.S. CLOs - S&P/LSTA Leveraged Loan Index outstandings - the most recent data available Investor share of institutional loan outstandings (%) LOAN OUTSTANDINGS BY INVESTOR TYPE 60% 50% 40% 30% 20% 10% Aug-12 Oct-12 CLOs Loan Funds (mutual funds & ETFs) Other Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 LEVERAGED 17

18 DEMAND SLOWS WHILE SUPPLY GROWS: M&A EMERGES IN APRIL/MAY & PIPELINE PICKS UP ($Bils.) MONTHLY LEVERAGED M&A LENDING Non-LBO LBO Institutional loan pipeline ($ Bils.) WEEKLY U.S. INSTITUTIONAL LOAN PIPELINE LEVERAGED Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jan Jan Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar Apr Apr Apr Apr May May 18

19 AS SUPPLY/DEMAND RE-BALANCE, PAR-PLUS SHARE DROPS IN SECONDARY 90% DAILY PAR-PLUS SHARE IN U.S. SECONDARY MARKET LEVERAGED 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Share of loan bids => par 19

20 PRIMARY MARKET LOAN SPREADS TICK UP; SECONDARY LOAN PRICES SOFTEN Contractual spread (bps) U.S. INSTITUTIONAL TERM LOAN SPREADS Share of loans held by U.S. CLOs 7% 6% 5% 4% 3% 2% 1% CLO LOAN HOLDINGS: AVG. LOAN BIDS Mar-14 Apr-14 LEVERAGED Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q Q10 2Q11 2Q12 2Q13 2Q14 % <90 90 to <91 91 to <92 92 to <93 93 to <94 94 to <95 95 to <96 96 to <97 97 to <98 98 to <99 99 to <100 >=100 Avg. loan bid (% of par) 20

21 THE AVERAGE YIELD ON INSTITUTIONAL TERM LOANS TICKS UP IN 2Q14 12% U.S. INSTITUTIONAL TERM LOAN YIELDS (QUARTERLY) LIB/LIB floor LIB spread OID LEVERAGED 10% 8% 6% 4% 2% 0% 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 Yield (3-year term) 21

22 Yield (3 years) EXPECT THE UNEXPECTED? WILL PRIMARY MARKET YIELDS STAY UP? Yield (3-year term) 9% 8% 7% 6% 5% 4% 10% 8% 6% 4% 2% 0% INSTITUTIONAL TERM LOAN YIELDS Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 B, BB YIELDS Dec-12 Monthly Quarterly May-13 Oct-13 Mar-14 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 B BB # of flexes FLEX ACTIVITY # of flexes up/down Avg. yield adjustment up/down Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May % 1.0% 0.5% % -0.5% -1.0% -1.5% Avg. yield adjustment LEVERAGED 22

23 MEANWHILE, DEMAND REMAINS STRONG FROM CLOS: ISSUANCE EXPECTATIONS MOVE UP FOR 2014 Issuance ($B.) ANNUAL CLO ISSUANCE CLO ISSUANCE ESTIMATES FOR 2014 CLO issuance LPC Survey Estimate % of survey respondents 45% 40% 35% 30% 25% 20% 15% LEVERAGED 10% 2 5% % < $60 $60 - $70 $70 - $80 $80 - $90 $90 - $ CLO issuance estimates ($B.) 23

24 AS MANAGERS ISSUE VOLCKER-COMPLIANT CLOS CLO ISSUANCE AND AAA NEW ISSUE SPREADS 12.0 Issuance 18 Average AAA spread (excl. MM) 1 17 LEVERAGED Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 CLO Issuance ($B.) Average AAA spread (bps) 24

25 MIDDLE MARKET CLOS HOLD LOANS WITH HIGHER CONTRACTUAL SPREADS Share of CLO loan assets 25.0% 2% 15.0% 1% 5.0% CONTRACTUAL LOAN SPREADS ALL U.S. CLOS VS. MIDDLE MARKET CLOS All U.S. CLOs U.S. Middle Market CLOs LEVERAGED % < to < to < to < to < to < to <500 Contractual spread (bps) 500 to < to < to < to <700 >=700 U.S. Middle Market CLOs have a higher share (47%) of loans with contractual spreads in the 400-plus bps range. The corresponding share for all U.S. CLOs is 28%. 25

26 $3.3B OF COMPLETED MM CLO ISSUANCE IS AHEAD OF LENDERS EXPECTATION OF $4.0B IN MIDDLE MARKET CLO VOLUME 40% 35% 2014 CLO ISSUANCE EXPECTATIONS LEVERAGED MM CLO Issuance ($B.) % of respondents 30% 25% 20% 15% 10% 5% E 0% < $2.0 $2-3 $3-4 $4-5 > $ CLO issuance estimates ($B) 26

27 OVERVIEW From 40,000 feet 3 Global volumes are steady as refinancing activity dominates M&A-related lending picks up; U.S. market drives jump in activity U.S. Leveraged lending: supply/demand re-balance 7 Supply of new issue loans picks up Demand from loan mutual funds slows, yields tick up, CLO issuance roars on! U.S. Middle Market 27 Banks navigate through Leveraged Lending Guidance Lenders voice concerns over convergence with BSL: Cov-lite for smaller companies; narrowing middle market yield premium But, do divergence and diversity reign? No shortage of debt providers Leverage is more conservative, smaller companies see higher yields No shortage of debt offerings from first-lien to unitranche 27

28 LENDER SURVEY: WHAT WAS THE BIGGEST CHANGE IN THE MM IN 1Q14? WHAT WAS THE BIGGEST CHANGE IN 1Q14? Leveraged lending guidance is front & center! Dealflow controversy: Some say increased level of activity Pick up in new money M&A But most say dealflow remained weak Not enough M&A Lower pricing / yield compression More aggressive leverage and terms Difficult to find quality deals at low leverage Continued use of covenant-lite structure Fewer covenants on weaker borrowers More TLB activity in leveraged middle market MM deals becoming more broadly syndicated More clubs, less underwrites Still too much liquidity I-banks continue to move down market Prevalence of stretch senior deals LEVERAGED LENDING GUIDANCE SUMMARY Deals treated as leveraged include: Proceeds used for buyouts, dividends, etc. Senior debt/ebitda > 3x Total debt/ebitda > 4x Loans to vehicles that engage in leveraged finance (CLOs, BDCs, etc.) Fallen angels* (included only upon modification or waiver) ABL* (incl. only if part of entire debt structure of a leveraged borrower) Deals treated as criticized include: If a company cannot show the ability to amortize 100% of its senior debt or 50% of its total debt within 5 to 7 years Issuers with leverage in excess of 6x debt/ebitda after asset sales MIDDLE MARKET 28

29 HOW WILL LEVERAGED LENDING GUIDANCE IMPACT BANKS ABILITY TO INVEST IN LEVERAGED LOANS? % of respondents 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Banks 2013 Banks 2013 Banks 2014 Non-banks 2013 Non-banks 2014 Banks 2014 Nonbanks 2013 Nonbanks 2014 No impact - banks will continue to buy HLT deals LPC SURVEY: IMPACT OF LEVERAGED LENDING GUIDANCE SURVEY Modest impact - banks will be more selective in buying HLT deals Significant impact - a noticeable drop off in banks purchasing HLT deals MIDDLE MARKET 29

30 BANKS LOWER THEIR LEVERAGE TOLERANCE FOR MIDDLE MARKET DEALS AS LLG IS FRONT AND CENTER SPONSORED: SENIOR DEBT TO EBITDA 70% 60% 4Q13 Survey 1Q14 Survey 2Q14 Survey 45% 40% SPONSORED: TOTAL DEBT TO EBITDA 4Q13 Survey 1Q14 Survey 2Q14 Survey MIDDLE MARKET % of bank respondents 50% 40% 30% 20% % of bank respondents 35% 30% 25% 20% 15% 10% 10% 5% 0% < 3x 3x - 3.5x 3.5-4x > 4x 0% < 4x 4x - 4.5x 4.5-5x 5-5.5x > 5.5x 1st lien debt to EBITDA Total debt to EBITDA 30

31 BUT, NON-BANK LENDERS CONTINUE TO EXHIBIT HIGHER TOLERANCE FOR LEVERAGE IN MM % of non-bank respondents 60% 50% 40% 30% 20% 10% SPONSORED: SENIOR DEBT TO EBITDA 4Q13 Survey 1Q14 Survey 2Q14 Survey % of non-bank respondents 70% 60% 50% 40% 30% 20% 10% SPONSORED: TOTAL DEBT TO EBITDA 4Q13 Survey 1Q14 Survey 2Q14 Survey MIDDLE MARKET 0% < 3x 3x - 3.5x 3.5-4x > 4x 1 st lien debt to EBITDA 0% < 4x 4x - 4.5x 4.5-5x 5-5.5x > 5.5x Total debt to EBITDA 31

32 WILL SMALLER DEALS GO COV-LITE THIS YEAR? COVENANT-LITE VOLUME LARGE CORPORATE VS. MIDDLE MARKET Large Corporate Middle market MIDDLE MARKET COVENANT LITE EXPECTATIONS FOR 2014 Volume will grow but only at upper end of MM ($40- $50M+ EBITDA) MIDDLE MARKET LC volume ($B.) MM volume ($B.) Volume will grow and move down market (<$40M EBITDA) Remain the same Volume will decline % 10% 20% 30% 40% 50% 60% % of survey respondents 32

33 WHAT STRUCTURE/TERM LOOSENING CONCERNS YOU MOST IN THE MIDDLE MARKET? 60% 50% BANKS VERSUS NON-BANKS Banks Non-Banks MIDDLE MARKET % of respondents 40% 30% 20% 10% 0% Covenant-lite term loans Higher leverage levels Lower pricing/yields Wide covenant cushions Second-lien loans Builder baskets 33

34 MOUNTING PRESSURE? MORE CAPITAL, BIGGER HOLDS IN 2014 % of respondents HOW MUCH CAPITAL ARE YOU ALLOCATING TO LEND IN THE MM IN 2014? 60% 50% 40% 30% 20% 10% Banks Non Banks % of respondents HOW ARE YOUR HOLD LEVELS CHANGING VS. LAST YEAR? 70% 60% 50% 40% 30% 20% 10% Banks Non Banks MIDDLE MARKET 0% ->30% % % 0-10% +0-10% % % YOY Percentage change +>30% 0% < - 30% % % -0-10% +0-10% % % YOY Percentage change Market players reported allocating more capital to lend in the MM and higher hold levels year over year +> 30% 34

35 SURVEY: WILL YOU HIT BUDGETS THIS YEAR? % of respondents % of respondents YOY EXPECTED CHANGE IN VOLUME 80% 60% 40% 20% 0% 80% 60% 40% 20% 0% ->30% % Banks Yes % 0-10% Non-banks +0-10% % Banks Non Banks No % +>30% DO YOU EXPECT TO HIT YOUR LENDING GOAL? YES! NO! WHY OR WHY NOT? Seeing (hoping for) better volume More M&A discussions Built out origination platform Taking bigger hold sizes Strong technicals More focused on lower middle market Bigger product offering Lack of M&A Too much competition High credit hurdles Leveraged Lending Guidance Structures are too weak Covenant lite pushing down market Pass rate is high Portfolio churn is a big issue MIDDLE MARKET 35

36 1Q14 VOLUME WAS LACKLUSTER SPONSORED VS. NON-SPONSORED MM VOLUME Non-sponsored Sponsored 7 6 MM LOAN ISSUANCE Refinancing New money (beg. 1Q03) MIDDLE MARKET Issuance ($B.) MM Loan issuance ($B.) Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 1Q00 2Q01 3Q02 4Q03 1Q05 2Q06 3Q07 4Q08 1Q10 2Q11 3Q12 4Q13 36

37 75% OF RESPONDENTS SAID THEY WERE UNABLE TO LEND AS MUCH AS THEY DESIRED IN 1Q14 % of respondents DID YOU REACH YOUR 1Q14 LENDING GOAL? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No WHAT FACTORS CONTRIBUTED TO THIS? Bank Non Bank Those who fell below goals attributed to: Few deals fit Leveraged Lending Guidance Too much competition Lack of supply / limited M&A Too much refinancing activity Uncertainty caused by govt. dysfunction Acquisitions fell through Insufficient yields Poor allocations Low quality deals Weak covenants/structures Those who met goals attributed to: Existing portfolio company activity Moved up market, moved down market Higher holds Lower budget Direct origination Saw more M&A than in prior quarters Strong pipeline carried over from 4Q13 Did deals overseas / global capability MIDDLE MARKET 37

38 AND HOPED FOR A PICK-UP IN M&A LENDING 60% 50% 2Q14 ISSUANCE GROWTH EXPECTATIONS WHAT WILL DRIVE BULK OF ACTIVITY IN 2Q14? Non-Sponsored Sponsored Refi's / Amends and extends Other MIDDLE MARKET % of respondents 40% 30% 20% 10% 0% (>15%) (5-15%) Flat +5-15% >+15% M&A/LBO Dividend recaps Capex spending / Working capital Amendments 0% 10% 20% 30% 40% 50% % of respondents 38

39 WHAT WAS THE BIGGEST CHANGE IN 1Q14? Leveraged lending guidance is front & center! Dealflow controversy: Some say increased level of activity Pick up in new money M&A But most say dealflow remained weak Not enough M&A Lower pricing / yield compression More aggressive leverage and terms Difficult to find quality deals at low leverage Continued use of covenant-lite structure Fewer covenants on weaker borrowers More TLB activity in leveraged middle market MM deals becoming more broadly syndicated More clubs, less underwrites Still too much liquidity I-banks continue to move down market Prevalence of stretch senior deals LENDER SURVEY: WHAT WILL BE MOST IMPORTANT ISSUE IN 2Q14? MOST IMPORTANT ISSUE IN 2Q14? Leveraged lending guidance will we see an impact on banks? Feedback from initial SNC reviews Educating sponsors on banks limitations Large cap structures seeping into MM Avoid doing covenant-lite deals Pricing/spreads LBO volume / pick up in M&A activity Structural weakness in credit agreements Issuer supply Leverage levels Economic backdrop Too much liquidity MIDDLE MARKET 39

40 MM PRIVATE LBO, LARGE MM INSTITUTIONAL LBO, AND BROADLY SYNDICATED LBO COMPARISON IN 1Q14 Debt to EBITDA 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x x DEBT TO EBITDA FOR LBO DEALS 1H13 2H13 1Q14 Private MM 1st lien leverage 1H13 2H13 1Q14 Inst. MM Total leverage 1H13 2H13 1Q14 Large Corp. Avg. PP ($Mils.) Q14 AVG. PURCHASE PRICE & MULTIPLE PP PP Multiple Private MM Institutional MM Large Corp. 1x 9.5x 9.0x 8.5x 8.0x 7.5x 7.0x PP multiple MIDDLE MARKET AVG. EBITDA AVG. EQUITY CONTRIBUTION Avg. EBITDA H13 2H13 1Q14 Avg. equity check 60% 40% 20% 1H13 2H13 1Q14 0 Private MM Institutional MM Large Corp. 0% Private MM Institutional MM Large Corp. 40

41 Yield (3-years) WILL MM YIELDS CONVERGE? YIELD PREMIUMS UPWARD FLEXES DOMINATE IN MM 15% LC 1st lien 14% LC 2nd lien 13% MM 1st lien 12% MM 2nd lien 11% 10% 9% 8% 7% 6% 5% MM institutional flex volume ($M.) 6,000 Down Up 4,000 2, ,000-4,000 MIDDLE MARKET 4% Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14-6,000 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 41

42 AND EVEN SO, DO DIVERSITY AND DIVERGENCE REIGN IN THE MIDDLE MARKET? 13.0% 12.0% LC Institutional All-in Yield MM Private Deal TLA Unitranche QUARTERLY MIDDLE MARKET TERM LOAN YIELDS (3-YEAR) MM Institutional Term Loan All-in Yield MM Private TLB Second Lien MIDDLE MARKET All-in-yield (3-year term) 11.0% 1% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1H08 2H08 1H09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 42

43 RISK/RETURN: SMALLER BORROWERS PRODUCE MORE ENTICING YIELDS AND LESS LEVERAGE Total leverage (x:1) AVERAGE YIELD BY EBITDA RANGE *Leverage on Institutional MM Deals Leverage on Private MM Deals *Institutional MM TL Yield Private MM Deals TL A&B Yield 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% Yield (3-year) 1 st Lien TL Yield 7.0% 6.5% 6.0% 5.5% 5.0% AVG. YIELD & LEVERAGE BY EBITDA <$5M >$5-15M >$15-25M >$25-40M >$50M >$45-50M MIDDLE MARKET % 4.5% 1Q13 2Q13 3Q13 4Q13 1Q Debt to EBITDA 43

44 LEVERAGE CREEPS UP FOR SMALLER ISSUERS IN 1Q14 (EXCEPT FOR UNITRANCHE) 6.0x 5.0x 1Q14 AVERAGE VS Avg. Senior Leverage Avg. Junior Leverage Average EBITDA MIDDLE MARKET Debt to EBITDA 4.0x 3.0x 2.0x Avg. EBITDA ($Mils.) 1.0x 10 x Q Q Q Q14 All Senior First Lien / Mezz Unitranche 1st Lien / 2nd Lien 0 44

45 MM ISSUERS GET THEIR PICK OF PRODUCTS SECOND LIENS ARE IN VOGUE WHAT STRUCTURE WILL SPONSORS FAVOR? 1st / 2nd lien Stretch senior 1st lien / mezz 2014 Outlook Survey 2013 Outlook Survey MM second lien issuance ($B.) MM SECOND LIEN VOLUME Completed In Market MIDDLE MARKET Unitranche 0.5 0% 10% 20% 30% 40% 50% 60% % of survey respondents 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 45

46 IT S NOT JUST ABOUT BANKS ANYMORE Traditional Banks Finance Companies SOURCES AND TYPES OF AVAILABLE DEBT CAPITAL CLOs BDCs Hedge Funds / Credit Opportunity Funds Insurance Companies Mezzanine Funds Private Equity Funds MIDDLE MARKET Revolver Term Loans Last Out Senior Tranche B Unitranche Second Lien Loans Rate Only Sub Debt Traditional Sub Debt Preferred Stock Common Equity Libor Libor Libor % 15-17% 20-25% 25% +

47 Issuance ($Bils.) GAME CHANGERS TODAY! SNC REVIEWS/VOLCKER/RISK-RETENTION/ M&A PICK-UP LEVERAGED BUYOUT FINANCINGS Large Corporate Middle Market ($Bils.) QTRLY: BIGGEST LBO LOAN FINANCING MIDDLE MARKET 1 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 47

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