The U.S. Secondary Loan Market Ted Basta, LSTA Americo Cascella, Ares Andrew Gordon, Octagon Chris Remington, Eaton Vance Gunther Stein, Symphony Hong Kong June 8, 2017
A Historical Overview
In 1997, S&P and the LSTA Created the S&P/LSTA Leveraged Loan Index The Benchmark $1,000 Total Outstanding ($ billions) $750 $500 $250 $- Jan-97 Oct-00 Aug-02 Jun-04 Apr-06 Feb-08 Dec-09 Oct-11 Aug-13 Jun-15 Apr-17 Source: S&P/LSTA Leverage Loan Index 3
In 1999, The LSTA and Thomson Reuters LPC Launched the First Daily Mark-to-Market Pricing Service 2,500 2,000 Company Coverage Number of Loans Priced 2,300 7,000 6,000 5,000 Number of Individual Quotes Collected From 30 Broker/Dealers 6,545 1,500 1,495 4,000 1,000 3,000 2,000 500 1,000 0 1999 2017 0 1999 2017 Source: LSTA/Thomson Reuters LPC Mark-To-Market Pricing 4
In 2001 The Wall Street Journal Began Coverage on the U.S. Syndicated Leveraged Loan Market Transparency and acceptance of MTM prices were critical in establishing today s secondary market liquidity levels. Source: Wall Street Journal 5
In 2006, The LSTA Board Mandated the Reporting of Over-the-Counter Secondary Loan Transactions to the LSTA $700 Secondary Trade Volume 100 AVG Trade Price $600 $500 90 Billions $400 $300 80 70 $200 $100 60 $- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LTM 50 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: LSTA Trade Data Study 6
The Secondary Market Allows Loan Managers to Build Customized Portfolios by Risk and Return Profile 25% Breakdown by Facility Rating (at MV) L+1000 Discounted Spread (3-Yr) 20% L+800 15% L+600 10% L+400 5% L+200 0% L+ Source: S&P LCD & S&P/LSTA Leveraged Loan Index 7
Loan Managers Can Make Allocation & Selection Decisions Across 40 Sectors Totaling $900 Billion Electronics/Electrical Business Equip. & Services Health Care Retailers (except food & drug) Lodging & Casinos All Telecom Leisure Chemicals & Plastics Cable & Satellite Television Oil & Gas Drugs Building & Development Radio & Television Food Service Insurance Industrial Equipment Food Products Aerospace & Defense Containers & Glass Products Publishing Financial Intermediaries Automotive Food/Drug Retailers Equipment Leasing Surface Transport Other (13 @ <1% each) 0% 2% 4% 6% 8% 10% 12% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 8
Secondary Trading & Liquidity
Almost 450 Individual Loans Are Trading on a Daily Basis, Totaling $3 Billion Per Day Daily Trade Volume (billions) Daily Average $5 $4 $3 $2 $1 $- Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 700 500 Count of Loans Traded Daily Daily Average 300 100 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Source: The LSTA Trade Data Study 10
Secondary Trading Volumes Have Surpassed All Time Highs Over the Last Year ($630B) on a Record $179B 1Q17 $200 $175 $150 Crisis Period Quarterly Secondary Trade Volume Market Expansion New Record $125 $100 $75 $50 $25 $- 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Billions Source: The LSTA Trade Data Study 11
Trading Liquidity Remains Strong During Periods of Market Distress Billions Distressed Trading Volume ($) % of Total Volume 12-Mo Trailing Default Rate $150 30% $125 25% $100 20% $75 15% $50 10% $25 5% $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LTM 0% Source: LSTA Trade Data Study ; S&P / LSTA Leveraged Loan Index 12
1,200 Individual CLOs & Loan Funds Hold a Combined 64% of Institutional Loans Outstanding Number of CLOs 1,400 Number of Loan Funds 60% % of Institutional Loan Ownership 1,200 50% 1,000 40% 800 600 1,110 30% 400 714 20% 200 10% 0 78 95 2013 2014 2015 2016 2017 0% CLOs Loan Funds Other Source: S&P LCD & S&P/LSTA Leveraged Loan Index 13
Monthly Secondary Market Depth (loans traded) & Breadth (trade frequency) Are Trending to All-Time Highs 1,500 Loans Traded Trade Frequency (% of Loans Traded >20x per Mo.) 50% 1,400 40% 1,300 30% 1,200 20% 1,100 10% 1,000 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 0% Source: The LSTA Trade Data Study 14
Loan Returns & Performance
The Loan Asset Class Has Performed Well Given the Historically Low 10-Year Rate Environment 20% Historical Annualized Total Returns (through April 2017) S&P 500 High Yield Bond S&P/LSTA Loan Index High Grade Bond 10yr US Treas. 15% 10% 5% 0% 1 year 3 year 5 year 10 year -5% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 16
Loans Have a History of Strong Performance During Periods of Rising Rates 15% 12% Cumulative Returns 2/94-2/95 Loans: 10.4% Aggregate: 0.01% High Yield: 1.4% 6/99-5/00 Loans: 3.9% Aggregate: 2.1% High Yield: -3.1% 6/04-6/06 Loans: 12.6% Aggregate: 6.5% High Yield: 17.5% Yields 9% 6% Cumulative Returns 3% 0% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 3-Month LIBOR Loan Index Yield Average Loan LIBOR Floor Source: Credit Suisse Leveraged Loan Index 17
Long Term Loan Investors Have Enjoyed an Average Yield of 7.4% Over the Past 20 Years (5.7%- Post Recession) 15% 10% 5% S&P/LSTA Leveraged Loan Index YTM 2008 = 20% 0% 10% Annual Return 6% 2% 2009 = + 52% 2008 = - 28% -2% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: S&P LCD & S&P/LSTA Leveraged Loan Index 18
Post Crisis, Annual Loan Returns Have Averaged 5.4%, While Annual Interest Income has Averaged 4.8% 101 Avg. Trade Price 12% Total Return Interest Return 99 97 95 10% 8% 93 6% 91 89 87 4% 2% 85 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17-2% Source: LSTA Trade Data Study & LSTA/TRLPC MTM & S&P/LSTA LLI 19
Current Market Trends & Portfolio Management
Fixed Income Returns Have Fluctuated From Negative to Positive Over the Last Two-Plus Years 20% Fixed-Income Returns 2015 2016 Jan-Apr 2017 15% Total Return 10% 5% 0% -5% 10YR Treas HG Bonds Lev. Loans HY Bond Source: S&P/LSTA Leveraged Loan Index & LCD 21
Return Volatility Has Trended Lower Over the Past 12 Months (Loans Continued to be Least Volatile) Avg. 12-month Lagging Standard Deviation of Returns 3.0% 2.5% S&P/LSTA Loan Index High Grade Bond High Yield Bond 10yr US Treasury 2.0% 1.5% 1.0% 0.5% 0.42% 0.0% Dec.14 Dec.15 Dec.16 Apr.17 Source: S&P LCD & S&P/LSTA Leveraged Loan Index 22
A Majority of Portfolio Managers Became More Constructive on Credit in 2017 3.5% 3.0% Default Rate ($) Projection (4Q16) Projection (3Q16) Projection (1Q17) 80% 70% 3Q16 Survey 1Q17 Survey When Will Default Rate Exceed Historical AVG of 3.1%? 2.5% 60% 2.0% 50% 1.5% 40% 1.0% 30% 0.5% 20% 0.0% 10% Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 0% 2017 2018 2019 Source: LCD, an offering of S&P Global Market Intelligence 23
Riskier Sectors and Rating Categories Produced Outsized Losses (2015) and Gains (2016) 2015 2016 Jan_Apr 17 ANN 2015 2016 Jan-Apr 2017 Annualized 50% 30% 40% 25% 30% 20% 20% 15% Return 10% Return 10% 0% 5% -10% -20% 0% -5% All Loans _ BBB Index BB Index B Index CCC Index -30% -10% Source: S&P LCD & S&P/LSTA Leveraged Loan Index 24
The Majority of Loans are Back to Trading Above Par in the Secondary Market 100 Median Trade Price AVG Trade Price 70% % of Trading Activity Price Level >100 <90 60% 98 50% 96 40% 94 30% 20% 92 10% 90 0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: The LSTA Trade Data Study 25
As Secondary Prices Rebounded Across the Market, Yield Levels Declined Across Credit Categories Avg. Disct. Spread (3-YR) Feb-16 (market low) Apr.-17 (market high) L+800 20% 18% L+700 16% 14% L+600 Yield 12% 10% L+500 8% 6% L+400 4% L+300 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 2% 0% All Loans _ BBB BB B CCC Source: LCD, an offering of S&P Global Market Intelligence 26
While Investor Demand Has Been Robust Over the Past Year, Loans Outstandings Have Increased Just 3% 1Q17 Non-Bank Lender Share of New Issue $1,000 Institutional Loan Outstandings Fin. & Insur. Co. Loan Mutual Funds Hedge & HY Funds CLO $900 Total Outstanding ($ bil) 8% 9% $800 62% 22% $700 $600 $500 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: S&P LCD & S&P/LSTA Leveraged Loan Index 27
Over the Past Year, Loan Funds Reported Inflows of $31 Billion (HY Bond Funds $11 Billion in Outflows) HY Bond Fund Flows Loan Mutual Fund Flows Loan Mutual Fund AUM $70 $200 $60 $50 $150 Billions $40 $30 $20 $10 $- $100 $50 Billions $(10) $(20) $(30) $- Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Thomson Reuters Loan Pricing Corporation 28
Over the Last Year, CLO Issuance Has Totaled $86 Billion $150 CLO Issuance $500 CLO Aggregate Principal Balance $125 $400 Billions $100 $75 $50 Billions $300 $200 $25 $27.6 $100 $- 2013 2015 LTM Apr.17 Source: Thomson Reuters Loan Pricing Corporation Jan-Apr. 17 $- Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 29
Loan Market Technicals Shifted to Excess Demand Beginning in 2Q16 $50 Change in Loan Outstandings Change in Visable Demand $16 Excess Visable Demand $40 $14 $12 $30 $10 Billions $20 $10 Billions $8 $6 $4 $- $2 $(10) 2Q16 3Q16 4Q16 YTD-Apr. $- Source: Thomson Reuters LPC & S&P/LSTA Leveraged Loan Index 30
A Look Forward & Audience Q and A
Loan Returns Have Been Positive for 14 Months Alongside Rising Interest Rates Interest Return 3-Month LIBOR 3.0% S&P/LSTA Lev. Loan Index Total Return 3.0% Implied 3-Month LIBOR Forward Rates 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: S&P/LSTA LLI & Bloomberg Rates 32