Senior Loans: Potential to provide stable returns in uncertain markets Graham Rainbow

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1 Senior Loans: Potential to provide stable returns in uncertain markets Graham Rainbow Alcentra Limited is the investment manager of the Clareant European Loan Fund (the Fund ) and is part of the BNY Mellon organisation. See information that follows for more detail. Any losses in the Fund will be borne solely by investors in the Fund and not by BNY Mellon (including its affiliates); therefore BNY Mellon s losses in the Fund will be limited to losses attributable to the ownership interests in the Fund held by BNY Mellon and any affiliate in its capacity as an investor in the Fund or as beneficiary of a restricted profit interest held by BNY Mellon or any affiliate. Ownership interests in the Fund are not insured by the FDIC, and are not deposits, obligations of, or endorsed or guaranteed in any way, directly or indirectly, by BNY Mellon or any of its affiliates. The investor should read the Fund s offering documents before investing, which includes information about the role of BNY Mellon, its affiliates and their employees in sponsoring or providing services to the Fund. For Professional Clients and, in Switzerland, for Qualified Investors only. Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds. Any views and opinions are those of the investment BNY manager, MELLON unlessinvestment otherwise noted CONFERENCE 2017 THE CERTAINTY OF UNCERTAINTY

2 Investment Themes for 2017 Senior Secured Loans Default and Recovery Experience Global Investment Opportunity

3 Investment Themes for 2017 Capital markets are likely to be characterised by a number of key themes Rising inflation and the threat of higher interest rates Volatility for fixed rate bonds Positive for equity markets Floating rate assets provide some protection Election uncertainty Have markets become more complacent? Sovereign credit pressures Euro zone debt issues have not gone away Removal of government stimulus packages and tightening in monetary policy could become more prevalent Volatility in equity markets Removal of government stimulus may challenge corporate earnings Emerging Markets Concerns over the impact of a strengthening US Dollar Conclusions for asset allocation: Investors seek absolute returns and downside protection from negative impact of inflation 3

4 Annualized Return Relative Performance of Different Asset Classes Risk/Return Characteristics of Various European Assets ,2, % 8.00% DE 10yr+ Govt Bond Gold Eurozone REITS UK 10yr+ Govt Bond 6.00% 4.00% ML Euro Corp ML ABS & MBS CS West Euro Leveraged Loan ML Euro HY DAX 2.00% Eurostat Eurozone Inflation FTSE All-share CAC 40 DJ Eurostoxx % 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Annualized Return Volatility 1. Bloomberg as of 28 February Bank of America Merrill Lynch Global Index System as of 28 February Credit Suisse Plus as of 28 February

5 Investment Themes for 2017 Senior Secured Loans Default and Recovery Experience Global Investment Opportunity

6 Senior Secured Loans Key attractions of loans Floating-rate, low duration instruments complement fixed rate bonds and serve as excellent portfolio diversifiers Senior secured, so lower risk of loss in the event of default than unsecured asset classes Covenants provide an additional level of control for the borrower Low volatility Significant capacity in the secondary market and growing supply of new issues in primary Risks to achieving the target return Will the borrower default? If the borrower does default, how much could I lose? 6

7 High Yield Bonds versus Secured Loans High Yield Bonds Secured Loans Issued by Holding company Operating company Security Mostly unsecured Secured Term 5 to 10 years 5 to 8 years Interest Usually Fixed Rate Floating Rate, EURIBOR + Margin Duration Medium/Long (3 to 8 years) Low (3 to 6 months) Covenants Incurrence covenants Some Maintenance covenants Information Public quarterly reporting Private and Public monthly reporting Yield % E+4.67% 1. Credit Suisse Western European Leveraged Loan Index & Credit Suisse Western European High Yield Index, excel data, Yield-to-Worst for HY Bonds versus discount margin 3-year life for loans, 28 February

8 Senior Loans Global Market Characteristics The Global Loan market has grown to over $1.0 trillion in outstandings stemming from over 1,100 issuers and 1,500 facilities today 1,2 Alcentra is positioned to find value in both the US and Europe as one of the largest specialist global, sub-investment grade corporate debt managers US Leveraged Loan Index European Leveraged Loan Index Institutional Market Size: $880.5bn 1 Institutional Market Size: $168.8bn 2 No of Issuers: No of Issuers: No of Facilities: 1,185 1 No of Facilities: Market Transparency Public Market Transparency More private deals Long Term Default Rate 3.09% 3 Long Term Default Rate 3.41% 3 Bankruptcy Process Well defined, Chapter 11 Bankruptcy Process Differs by region, generally favours borrowers US High Yield European High Yield Institutional Market Size: $1,311.7bn 4 Institutional Market Size: $387.1bn 8 No of Issuers: 1,933 5 No of Issuers: No of Facilities: No of Facilities: Market Transparency Public Market Transparency Public Long Term Default Rate 4.78% 7 Long Term Default Rate 3.40% 11 Bankruptcy Process Well defined, Chapter 11 Bankruptcy Process Differs by region, generally favours borrowers For illustrative purposes only 1. S&P/LSTA Leveraged Loan Index as of 30 December 2016, 2. Credit Suisse Western European Leveraged Loan Index as of 30 December Average of LTM Default Rate by Principal Amount monthly observations since Jan for US, Average of S&P European Trailing-12 month Corporate Default Rate By Issuers since Jan for Europe. 4. BoA Merrill Lynch US High Yield Constrained Index as at 23 March Bank of America Merrill Lynch benchmark data USD HY 1949 as of 30 December Bank of America Merrill Lynch Benchmark Data USD HY 998 as of 30 December JP Morgan and Moodys as of 30 December The BofA Merrill Lynch European Currency High Yield Index as of 30 December Bank of America Merrill Lynch benchmark data EUR HY 620 as of 30 December Bank of America Merrill Lynch Benchmark Data EUR HY 376 as of 30 December S&P Capital LCD 30 December

9 Investment Themes for 2017 Senior Secured Loans Default and Recovery Experience Global Investment Opportunity

10 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Historical Defaults and Outlook Expected defaults are more easily identified now in Europe than in the past In the US, defaults have remained relatively low since the crisis 12% 10% Lagging 12-Month Default Rate 1 US (S&P/LSTA Leveraged Loan Index) Europe (S&P European Leveraged Loan Index) 8% 6% 4% 2% 0% 1. S&P Global Market Intelligence Default Rates, defaults as a % principal value. Data as of 28 February

11 Investment Themes for 2017 Senior Secured Loans Default and Recovery Experience Global Investment Opportunity

12 Geographic Preferences Bankruptcy regimes vary by country resulting in differing treatment of financial creditors Alcentra prefers to focus on investments in more creditor-friendly jurisdictions (i.e. Northern and Western Europe, the US) NO SW FI US IR UK NE DE BE LU CZ PL FR CH AT HU ES IT Core Opportunistic Selective Source: Alcentra as of 31 December 2016, for illustrative purposes only and should not be construed as investment recommendations. 12

13 Current Industry Preference Sector View Comment Business Equipment and Services Overweight Established market leaders and/or backed by long term contracts Cable Television Overweight Preference for market leaders with established networks Food Products Overweight Preference for strong brand names Healthcare Overweight Focus on essential products and services Telecommunications Overweight Stable sector, with good defensive characteristics Broadcast Radio and Television Neutral Long term contracts are key, avoid content providers Drugs Neutral Preference for stable, lower leverage Publishing Neutral Avoid publishing linked to advertising revenues Retailers (other than food/drugs) Neutral Only the most defensive retailers will be considered Chemicals Underweight Avoid commodity chemicals as sector Containers and glass products Underweight Cyclical sector that can be capex intensive Hotels/Motels/Inns/Casinos Underweight Hotels remain high risk Automotive Avoid Construction Avoid 13

14 Europe versus US Contributed equity 1 Total Debt/EBITDA multiples 2 60% 7.0x 50% Europe US 6.0x Europe US 40% 5.0x 30% 4.0x 3.0x 20% 2.0x 10% 1.0x 0% 0.0x 1. Standard & Poor s LCD Global Leveraged Lending Review 4Q2016; 2. Standard & Poor s LCD Global Leveraged Lending Review 4Q2016, EBITDA of Euro/$50million or more. For illustrative purposes only 14

15 Superior Credit Selection Leads to Lower Losses Realised losses can be minimised through skilled credit selection and an experienced team managing workouts Through skilled initial credit selection, an individual manager can achieve default rates lower than the market Upon default, decisions as to whether to sell or to hold an asset to workout can have a material impact on ultimate recoveries 15

16 Senior Secured Loans A Global Investment Opportunity Generate attractive risk adjusted returns through investments in a diversified portfolio of US and European senior loans Deliver benefits of senior loans with enhanced upside potential through active management over global market cycles Focused on capital preservation and minimizing default loss not tracking a benchmark Focus on senior secured debt (minimum 85%) Maximise benefit of a global approach to seek the most attractive relative value among geographies (US vs. Europe), industries and credits Mitigate risk through asset selection, geographic and asset diversification and currency hedging 16

17 Borrowers Profile in the Clareant European Loan Fund ( the Fund ) The Fund focuses on companies with strong and resilient fundamentals, held by top-pier Private Equity Sponsors Strong Credit Quality of Obligors Mid to large caps (Enterprise Value > 200m) Highly cash-generative companies Market leaders Average EBITDA Margin 1 Clareant European Loan Fund Portfolio Companies 28.9% 27.2% 26.0% 25.0% Strong management teams Alternative recoveries through asset sale or business sale Case Study: Springer Nature (Academic Publisher) 1 25 million invested as of February 2017 Sponsor: BC Partners Alcentra s Investment Thesis Robust demand from academic institutions Proven performance under many PE owners since 2003 Potential synergies following recent combination with Nature Group 4.9%: Targeted 3-year yield at issuance based on an upfront fee of 50bps, 3.75% cash spread and 1.0% floor over Euribor Jan-13 Jan-14 Jan-15 Jan-16 Top 10 Sponsors of Assets in Portfolio Source: Alcentra, March For Illustrative purposes only 17

18 Conclusions The secured loan market represents a compelling investment opportunity in today s market Low duration asset class, so secondary market values will not be reduced by a shift higher in the yield curve Returns will increase as Libor or Euribor rises Low projected defaults and high recoveries Low secondary market volatility Returns can be augmented through the use of a manager skilled in initial credit selection and post default workout who can minimise loss rates 18

19 Important Information Past performance is not a guide to future performance. The value of investments can fall. Investors may not get back the amount invested. For Professional Clients and, in Switzerland, for Qualified Investors only. This is a financial promotion and is not investment advice. For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents. Portfolio holdings are subject to change, for information only and are not investment recommendations. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Alcentra Fund S.C.A SICAV-SIF (the Fund ) is an investment company with variable share capital (société d investissement à capital variable SICAV) organized as an umbrella specialized investment fund (fonds d investissement spécialisé FIS) in the form of a corporate partnership limited by shares (société en commandite par actions SCA) under the laws of the Grand Duchy of Luxembourg. The Fund is registered with the Luxembourg Trade and Companies Registry under number B and is regulated by the Commission de Surveillance du Secteur Financier (CSSF) and is compliant with Swiss law for distribution to qualified investors in or from Switzerland. The Swiss representative is Carnegie Fund Services S.A., 11, rue du Général-Dufour, 1204 Geneva, Switzerland. The Swiss paying agent is Banque Cantonale de Genève, 17, quai de l Île, 1204 Geneva, Switzerland. Investors in Switzerland can obtain the documents of the Fund, such as its articles of incorporation, the private placement memorandum, the key investors information documents (KIIDs; if produced), the semi-annual and annual reports free of charge from the Swiss representative. This document may only be issued, circulated or distributed so as not to constitute an offering to the general public in Switzerland. Without limiting any other confidentiality obligations set forth in this document or as otherwise agreed to by the recipient of this document, by accepting this document in Switzerland, the recipient hereof agrees that it shall not pass it on to anyone without first consulting the recipient s legal or other appropriate professional adviser, or the Swiss representative. The Fund has not been and will not be registered by the Swiss Financial Market Supervisory Authority FINMA as a foreign collective investment scheme pursuant to Article 120 of the Swiss Collective Investment Schemes Act of 23 June 2006, as amended from time to time, (the CISA ) and its implementing ordinance. Accordingly, the distribution of Shares in Switzerland will be exclusively made to, and directed at, qualified investors as defined in the CISA and its implementing ordinance (the "Qualified Investors"). This Prospectus and/or any other offering materials relating to the shares may be made available in Switzerland solely to Qualified Investors. As at the date of this document, the Fund has been registered or notified in accordance with the local law/regulations implementing the Alternative Investment Fund Managers Directive (Directive (2011/61/EU)) for marketing into certain Member States of the EEA. Accordingly, this document should not be made available in any Member State where the Fund has not been notified or registered. BNY Mellon Investment Management EMEA Limited, and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. Issued in UK and Europe (excluding Switzerland) by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. Issued in Switzerland by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA. PRE Exp 13 July