Opportunities in the US Loan Market Today. Chris D Auria, LCM Dan McMullen, GSO Steven Oh, Pinebridge John Popp, Credit Suisse Asset Management

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1 Opportunities in the US Loan Market Today Moderator: Panelists: Bram Smith, LSTA Scott Baskind, Invesco Chris D Auria, LCM Dan McMullen, GSO Steven Oh, Pinebridge John Popp, Credit Suisse Asset Management Tokyo - June 6, 2017

2 Agenda 1. How to Invest in Loans 2. Compelling Relative Value Returns Yield Spread Price 3. Loans as a Permanent Part of a Fixed Income Portfolio 4. A Look Forward 2

3 Breakdown of US Fixed Income Asset Class (as of 12/31/16) US Fixed Income Universe ($40.3 Trillion) US Corp. Debt Universe ($9.5 Trillion) Muncipal $3,834B 10% Fed Agencies $1,972B 5% Money Market $885B 2% Asset-Backed $1,330B 3% Inst. Lev. Loans $962B 2% Inst. Lev. Loans $962B Mortgage Related $8,916B 22% HY Bonds $1,565B 4% HG Bonds $6,952B 17% HG Bonds $6,952B HY Bonds $1,565B Treasury $13,908B 35% Source: Credit Suisse 3

4 Institutions in 59 Countries and Regions Worldwide Invest in the Corporate Loan Market 4

5 How to Invest in Loans

6 How to Invest in the Loan Market Separately Managed Accounts Customized Large Investment Liquidity Comingled Current Income Medium Investment Size Liquidity CLO s Structured Vehicle Different Risk Tranches Floating Rate Notes vs. Equity Primary vs. Secondary Loan Mutual Funds Retail Funds/ETF Small Investment Size Small Institutions/Pensions Insurance Companies High Current Income Capital Preservation Daily Liquidity 6

7 Comparison of Various Ways to Invest in Loans Retail Comingled Separate Managed Accounts CLO Note CLO Equity Return vs. Index Peer Comp Bench Marked Bench Marked Coupon Mark to Model Redemption Features High Medium Portfolio Liquidation Secondary Market Sale Secondary Market Sale Risk Profile Moderate Moderate Moderate Full Range Aggressive Capital Protection No No No Yes 1 st Loss Tenor Daily 3 months to 1 year Investor Option years 12 years Customization None Limited High None Limited Investment Features $ $$ $$$ $$ $$ Leverage Limited Up to 3X Investor Option Yes Yes Hedged Available Available Available No No Mark-to-Market Accounting NAV NAV Varies Market Value Market Value Expense Load High Modest Low Modest High Communication with Managers Quarterly Quarterly Active Limited Monthly 7

8 Compelling Relative Value to Other Fixed Income Assets

9 Returns for Selected Debt and Equity Assets Over the Last 10 Years* 20% 15% 10% 5% 0% S&P/LSTA Index ML US High Yield ML US Corp ML 10yr US Treasury S&P 500-5% -10% 1 year 3 year 5 year 10 year Source: S&P Capital IQ 9 * As of March 2017

10 Loans and High Yield Bonds: Distribution of Quarterly Total Returns: Q # of Quarters Observed High Yield Returns have been negative for 24% of quarters since Loan Returns have been positive in 86% of quarters since < -5% -5 to -4% -4 to -3% -3 to -2% -2 to -1% -1 to 0% 0 to 1% 1% to 2%2% to 3%3% to 4%4% to 5% >5% Loans High Yield Source: Zephyr, 3/31/17. Data provided is for informational use only. Loan performance is represented by the Credit Suisse Leveraged Loan Index.

11 Comparison of Loans, High Yield Bonds and Investment Grade Bond Credit Spreads High Yield Corporate Loans Investment Grade Corporate 1000 Current 1-Mo. ago 12-Mo. ago Median HY Corporate Loans IG Corporate Basis Points '10 '11 '12 '13 '14 '15 '16 '17 Source: Bloomberg Barclays, BofA/Merrill Lynch, LCD as of 4/30/17. Data provided is for informational use only. Past performance is no guarantee of future results. See end of report for important additional information. Corporate spreads are in basis points and measure optionadjusted yield spread relative to comparable maturity U.S. Treasuries. Loan Index spread represents the three-year discounted spread over LIBOR.

12 Position in the Capital Structure Generates Better Credit Outcomes for Leveraged Loans Seniority and security offer meaningful downside protection. Average annual default rates Average recovery rates Average annual principal loss rates % 80% 3% 3.34% 3.29% 65.70% 3% 60% 2.12% 98 bps 2% 2% 40% 39.65% 1.14% 1% 1% 20% 0% Leveraged Loans High Yield Bonds 0% Leveraged Loans High Yield Bonds 0% Leveraged Loans High Yield Bonds 1.JP Morgan par-weighted high yield bond default rates and S&P/LCD par-weighted loan default rates. 2.JP Morgan Default Monitor, 4Q Average issue-weighted recovery rates based on price 30 days after default date Adjusted recoveries are based on year-end prices. 3.Calculated by multiplying Average Annual Default Rate by 1 minus Average Recovery Rate. Source: JPMorgan 12

13 Relative Attractiveness of Senior Secured Loans Market yields (%) and duration (years) Y Treasury 10Y Treasury Barclays IG S&P/LSTA Leveraged Yield Duration Loan Index Relative yield JPM US HY $ Price Yield to Worst Spread to Worst At Forward Libor Duration (Years) 5 Year Treasuries % Year Treasuries % 8.69 Bloomberg Barclays US Agg % T Bloomberg Barclays IG % T JPM US HY Index % T S&P LSTA Lev Loan Index L+4.20% T % 90 Days Source: 1 Bloomberg LP, as of 4/30/17. 2 S&P s LCD, Bloomberg LP and Bloomberg Barclays 4/30/17. 13

14 Comparison of the 10 Year Treasury Yields and 3-Month LIBOR for the Past 20 Years 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 10-Year Treas. 3-Mo.LIBOR Source: Federal Reserve 14

15 Loans are a Permanent Part of a Fixed Income Portfolio

16 Loans vs. Common Fixed Income Investments 8% Short Duration Long Duration Yield to Maturity 7% 6% 5% 4% 3% 2% Floating Rate Loans 3-month US Treasury Bill Bellwether Barclays High Yield Bonds Index Barclays US Aggregated Index Barclays Investment Grade Bonds Index Barclays Government Bonds Barclays Muni Bond Index 1% Duration in Years Source: Barclays 16

17 Asset Class Correlations January 1997 March 2017 Leveraged Loans High Yield Bonds 10-Year Treasury S&P 500 High Grade Corporate Leveraged Loans 1.00 High Yield Bonds Year Treasury S&P High Grade Corporate Source: S&P LCD, Bloomberg, Bank of America Merrill Lynch, Credit Suisse Data from Jan to April

18 Loans Have Exhibited Higher Risk Adjusted Returns Volatility of monthly returns for loans has been more muted than other fixed rate asset classes over the previous 5 years. Loans have outperformed high yield bonds on a risk adjusted basis over that time but absolute returns have trailed. The average annual volatility for the JPM Leveraged Loan Index over the last 5 years (2.5%) has been significantly less than the JPM High Yield Bond index (5.6%) and the JPM US Aggregate Bond Index (3.4%). Annualized 5Yr Returns, Volatility, and Sharpe Ratio Annualized Data 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 7.6% % 5.6% % 2.5% 2.8% 0.8 JPM Leveraged Loans JPM US HY Bonds JPM US Aggregate Bonds Sharpe Ratio 5yr Annualized Return 5yr Annualized Volatility 5yr Sharpe Ratio Source: JPM Leveraged loan Index, JPM US HY Bond Index & JPM US Aggregate Bond Index as of 03/31/17. Past performance is not a guarantee of future results. An investment cannot be made in an index. Updated quarterly. 18

19 A Look Forward

20 The Implied Forward Markets Are Predicting Several More Rate Hikes in the Immediate Future Historical Rates & Implied Forward Rates 800% 700% 600% 500% 400% 300% 200% 100% 3-Mo.LIBOR 3-MO LIBOR Forward Rates 10-Year Treas. 10YR Treas. Forward Rates 0% May-97 May-99 May-01 May-03 May-05 May-07 May-09 May-11 May-13 May-15 May-17 May-19 May-21 Source: Federal Reserve 20

21 Senior Loans Have Outperformed Bonds in Flat and Rising Rate Periods 98 Rising Rate Periods 99 Falling Rate Periods Bonds Outperformed Senior Loans Outperformed Average 1-Yr Returns: Loans: 6.7% Bonds: 4.0% Average 1-Yr Returns: Loans: 2.8% Bonds: 7.7% 91 Flat Rate Periods Average 1-Yr Returns: Loans: 8.4% Bonds: 5.4% Source: Credit Suisse. Barclays. Data as of 12/31/16. Analysis includes all rolling one-year periods since inception of the Credit Suisse Leveraged Loan Index in Feb Historical performance indications and financial market scenarios are no reliable indicators of future performance.

22 Impact of Duration on Fixed Income Asset Returns During a Rapid Rate Increase CS Lev. Loan Index Barclays Intermediate Term Treasury Barclays High Yield Barclays US Agg Barclays Global Agg Barclays Corp Barclays EM Debt USD Barclays Long Term Treasury Return -0.25% Duration 0.25 Return -2.46% Duration 3.65 Return -3.23% Duration 4.28 Return -4.30% Duration 5.63 Return -5.26% Duration 6.25 Return -5.90% Duration 6.74 Return -7.10% Duration 5.69 Return % Duration % 2.8% 2.5% 2.3% 2.0% 1.8% 1.5% 1.3% 1.0% 10-Year Treasury May 1, 2013 May 6, 2013 May 11, 2013 May 16, 2013 May 21, 2013 May 26, 2013 May 31, 2013 June 5, 2013 June 10, 2013 June 15, 2013 June 20, 2013 June 25, 2013 June 30, 2013 July 5, 2013 July 10, 2013 July 15, 2013 July 20, 2013 July 25, 2013 July 30, 2013 Source: Federal Reserve/Credit Suisse 22

23 Summary Why Loans and Why Now? Good Economy Mediocre Economy Recessionary Economy 23