1 111 Dr. Edward Altman NYU Stern School of Business Are We Nearing the End of the Benign Credit Cycle & Is a Bubble Building In Credit? CIFR Seminar MacQuarie University Sydney, Australia November 19, 2015

Is It a Bubble? 2 Or, Just Opportunistic Debt Financing? Focus on Default Rates in Credit Markets Length of Benign Credit Cycles Coincidence with Recessions: U.S. & European Scenarios Comparative Health of High-Yield Firms (2007 vs. 2012/2014) High-Yield and CCC New Issuance LBO Statistics and Trends Liquidity Concerns (Markets & Dealers) Maturity Schedule of Leveraged Debt (Impact?) Large Increase in the Distress Ratio Possible Timing of the Bubble Burst

Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions), 1971 – 2015 (10/15)) Historical H.Y. Bond Default Rates 3 Year Par Value Outstanding a ($) Par Value Defaults ($) Default Rates (%) 20141,496,81431, ,392,21214, ,212,36219, ,354,64917, ,221,56913, ,152,952123, ,091,00050, ,075,4005, ,6007, ,073,00036, ,10011, ,00038, ,00096, ,00063, ,20030, ,40023, ,5007, ,4004, ,0003, ,0004, ,0003, ,9072, ,0005, ,60018, ,00018, ,2588, ,1873, a Weighted by par value of amount outstanding for each year. Year Par Value Outstanding* ($) Par Value Defaults ($) Default Rates (%) ,5577, , , , , , , , , , , , , , , , , Standard Deviation (%) Arithmetic Average Default Rate (%) 1971 to to to Weighted Average Default Rate (%)* 1971 to to to Median Annual Default Rate (%) 1971 to Source: Author’s compilation and Citigroup/Credit Suisse estimates 2015 (10/15)1,595,83935,

Quarterly Default Rate and Four-Quarter Moving Average 1989 – 2015 (3Q - Preliminary) Source: Author’s Compilations Default Rates on High-Yield Bonds 4

Filings for Chapter 11 5 Number of Filings and Pre-petition Liabilities of Filing Companies 1989 – 2015 (10/09) Note: Minimum $100 million in liabilities Source: NYU Salomon Center Bankruptcy Filings Database Mean : 74 filings Median : 54 filings

Energy/Mining Company Chapter 11 Filings* 6 January – October 09, 2015 CompanyLiabilities ($MM)DateSIC Allied Nevada Gold Corp.6643/10/ Alpha Natural Resources, Inc.7,1008/3/ American Eagle Energy Corp.2155/8/ Black Elk Energy Offshore Operations, LLC4329/1/ BPZ Resources, Inc.2753/9/ Cal Dive International, Inc.4113/3/ Dune Energy, Inc.1443/8/ ERG Intermediate Holdings, LLC2504/30/ Hercules Offshore, Inc.1,3078/13/ Hovensa, LLC1,0009/15/ Magnetation, Inc.7505/5/ Milagro Oil & Gas, Inc.4687/15/ Miller Energy Resources, Inc.33710/1/ Molycorp., Inc.1,7866/25/ Patriot Coal Corp.1,0005/12/ Quicksilver Resources, Inc.2,3523/17/ Sabine Oil & Gas Corp.2,9067/15/ Samson Resources Corp.5,3699/16/ Saratoga Resources, Inc.2196/18/ Walter Energy, Inc.5,0057/15/ Xinergy Ltd.2504/6/ Number of Energy/Mining Companies21 Total Number of Filings (1/1 – 10/09)51 Percent Energy/Mining Companies41% Total Energy/Mining Company Liabilities ($MM)$32,242 *Liabilities of $100mm or more at time of filing. Source: NYU Salomon Center Bankruptcy Filings Database

Energy/Mining Company Bond Defaults 7 January – October 09, 2015 CompanyLiabilities ($MM)DateSIC Alpha Natural Resources, Inc.4434/1/ Alpha Natural Resources, Inc.2,2688/3/ American Eagle Energy Corp.1755/8/ American Energy-Woodford, LLC3406/22/ Black Elk Energy Offshore Operations, LLC1399/1/ Cliffs Natural Resources6753/30/ Connacher Oil and Gas Ltd.5503/4/ Dune Energy, Inc.683/8/ Goodrich Petroleum Corp.15810/1/ Gran Colombia Gold Corp.791/10/ Halcon Resources Corp.2524/14/ Halcon Resources Corp.1,5669/10/ Hercules Offshore, Inc.1,2048/13/ Lightstream Resources Ltd.4647/2/ Magnetation, Inc.4255/5/ Midstates Petroleum Co., Inc.6285/21/ Molycorp, Inc.6506/25/ Patriot Coal Corp.2825/12/ Quicksilver Resources, Inc.1,1733/17/ RAAM Global Energy Co.2385/1/ Sabine Oil & Gas Corp.1,1507/15/ SandRidge Energy, Inc.495/19/ SandRidge Energy, Inc.5258/19/ SAExploration Holdings, Inc.108/26/ Samson Resources Corp.2,2509/16/ Saratoga Resources, Inc.1806/12/ Venoco, Inc.1924/10/ Walter Energy, Inc.2,1027/15/ Warren Resources, Inc.705/26/ Xinergy Corp.1954/6/ Total of Energy/Mining Company Defaults $18,497 Total Defaults (1/1 – 10/09) $35,011 Percent Energy/Mining Companies53% Default Rate5.54% Source: NYU Salomon Center Master Default Database

Note: 3Q15 is LTM Source: Credit Suisse Historical Annual European High-Yield Default Rates %

Historical Default Rates and Recession Periods in the U.S. 9 Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/ /82, 7/90 - 3/91, 4/01 – 12/01, 12/07 - 6/09 *All rates annual, except 3Q 2015 which is the LTM. Source: E. Altman (NYU Salomon Center) & National Bureau of Economic Research High-Yield Bond Market (1972 – 2015 (3Q - Preliminary))

June 01, 2007 – October 13, 2015 Sources: Citigroup Yieldbook Index Data and Bank of America Merrill Lynch. 10 YTM & Option-Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes 12/16/08 (YTMS = 2,046bp, OAS = 2,144bp) 10/13/15 (YTMS = 603bp, OAS = 624bp) YTMS = 540bp, OAS = 545bp 6/12/07 (YTMS = 260bp, OAS = 249bp)

11 Comparative Health of High-Yield Firms (2007 vs. 2012/2014)

12 Z-Score Component Definitions and Weightings Variable DefinitionWeighting Factor X 1 Working Capital1.2 Total Assets X 2 Retained Earnings1.4 Total Assets X 3 EBIT3.3 Total Assets X 4 Market Value of Equity0.6 Book Value of Total Liabilities X 5 Sales1.0 Total Assets

13 Z” Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market Credits Z” = 6.56X X X X X 1 = Current Assets - Current Liabilities Total Assets X 2 = Retained Earnings Total Assets X 3 = Earnings Before Interest and Taxes Total Assets X 4 = Book Value of Equity Total Liabilities

14 Median Z-Score by S&P Bond Rating for U.S. Manufacturing Firms: Sources: Compustat Database, mainly S&P 500 firms, compilation by NYU Salomon Center, Stern School of Business. Rating2013 (No.) AAA/AA4.13 (15) *4.80* A4.00 (64) BBB3.01 (131) BB2.69 (119) B1.66 (80) CCC/CC0.23 (3) D0.01 (33) *AAA Only.

Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012/ Year Average Z-Score/ (BRE)* Median Z-Score/ (BRE)* Average Z”-Score/ (BRE)* Median Z”-Score/ (BRE)* (B+)1.81 (B)4.58 (B+)4.61 (B+) (B)1.59 (B)4.60 (B+) (B+)1.80 (B)4.67 (B+)4.56 (B+) Difference in Means Test (2007 vs. 2012/2014) Model Average Difference (2012/2014) Standard Deviation (2007/2012/2014) t-test (2012/2014) Significance Level (2012/2014) Significant at.05? (2012/2014) Z-Score-0.23/ / 1.15/ / %/9.70%Yes /No Z”-Score+0.02/ / 2.07/ / %/28.78%No/No *Bond Rating Equivalent Source: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ. Number of Firms Z-ScoreZ”-Score

Debt/EBITDA & Net Debt/EBITDA: U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, *) 16 Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations. *Bond Rating Equivalents (BRE) based on Aggregate S&P Statistics

Debt/Debt + Equity & Debt/MV Equity : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, ) 17 Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.

EBITDA/Interest Expense : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, ) 18 Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.

Distribution of Credit Ratios for U.S. High-Yield Bonds, (2007 vs. 2014) 19 Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations. Debt/EBITDAEBITDA/Interest Expense 2014BRE2007BRE2014BRE2007BRE Decile 10%1.36xA+0.87xAA+1.03xCCC0.91xCCC 20%2.23xBBB1.75xA-1.93xB-1.59xCCC+ 30%2.90xBB+2.40xBBB2.55xB2.05xB- 40%3.56xBB3.07xBB3.36xB+2.57xB 50%4.43xB+3.84xBB-4.14xBB-3.24xB+ 60%5.05xB+4.70xB+5.23xBB4.21xBB- 70%5.94xB5.70xB6.64xBBB-6.06xBB+ 80%7.08xCCC+7.01xB-9.84xBBB+9.07xBBB 90%10.16xCCC-9.38xCCC-17.86xAA-19.35xAA

Source: Bank of America Merrill Lynch 2005 – 2015 (3Q) New Issuance: U.S. High-Yield Bond Market ($ millions) Ratings AnnualTotalBBBCCC(CCC % H.Y.)NR , , , ,750.9(19.3%)1, , , , ,319.2(19.2%)1, , , , ,627.6(37.4%)3, , , , ,034.4(21.7%)2, , , , ,248.4(8.0%) , , , ,046.8(15.3%)3, , , , ,375.0(11.6%)3, , , , ,690.2(17.4%)6, (1Q)73, , , ,480.0(15.6%)525.0 (2Q)62, , , ,790.0(22.2%)300.0 (3Q)73, , , ,196.6(24.7%)0.0 (4Q)60, , , ,175.0(23.3%) Totals270, , , ,641.6(21.3%) (1Q)51, , ,792.27,842.5(15.2%)415.0 (2Q)74, , , ,363.6(25.9%)520.0 (3Q)59, , , ,875.0(18.2%)815.0 (4Q)52, , ,906.11,840.0(3.5%) Totals238, , , ,921.1(16.7%)1, (1Q)76, , ,785.38,090.0(10.6%)0.0 (2Q)74, , , ,052.1(16.3%)120.0 (3Q)31, , ,675.04,295.0(13.5%)0.0 ytd Totals181, , , ,437.1(13.4%)

New Issuance: European High-Yield Bond Market Face Values (US$) 21 RatingsCurrency AnnualTotalBBBCCC(CCC % HY)NRUSDEURGBP ,935.61, ,901.05,936.6(29.8%)534.82, ,080.31, ,714.65, ,292.15,020.5(18.1%)705.97, , ,796.75, , (3.0%)920.94, ,120.91, , ,093.11, , , ,697.44,771.3(11.5%)1, , , , , ,050.52,170.7(3.8%)3, , ,147.71, , , ,919.74,108.7(6.8%)1, , ,758.08, , , ,013.07,186.7(11.0%)2, , ,270.42, (1Q)27,954.56, ,008.45,160.61, , ,380.74,837.4 (2Q)30,335.36, ,295.13, , ,149.96,074.0 (3Q)16,558.43,375.39,609.62, ,310.08,644.02,604.4 (4Q)16,655.92, ,657.62,366.41,043.95,210.09,086.52, Totals91, , , ,972.9(15.3%)3, , , , (1Q)27, , ,685.21,230.0(4.5%)1,688.37, ,352.83,501.4 (2Q)65, , ,808.34,111.1(6.2%)2, , ,009.06,096.7 (3Q)15,980.53, ,593.21,241.3(7.8%)559.72,750.08,216.24,744.6 (4Q)10,646.93,893.74, (6.1%)1,810.06,305.04, Totals119, , ,375.47,236.9(5.1%)6, , , , (1Q)30, , , (3.1%)4, , ,149.02,622.0 (2Q)25, , ,633.72,334.6(9.0%) , ,124.81,782.2 (3Q)12,605.52, , (3.2%)5,850.05,170.11,585.4 ytd Totals68, , ,814.23,684.8(5.3%)4, , ,443.95,989.6 Source: BoAML 2005 – 2015 (3Q)

Sources: S&P Capital IQ LCD and NYU Salomon Center calculations – 2014 High-Yield Bond Market Proportional Outstandings by Seniority 22

*Weighted by par value amount outstanding in each seniority category, for each year. Sources: S&P Capital IQ LCD and NYU Salomon Center calculations. Default Rates by Seniority: Default Rate (%) YearAll Seniorities (%)Senior Secured (%)Senior Unsecured (%)Subordinated (%) Arithmetic Average Annual Default Rate (%) Standard Deviation (%) Weighted Average Annual Default Rate *(%) Median Annual Default Rate (%) Excluding Outlier Years of 2001 and 2002 Arithmetic Average Annual Default Rate (%) Standard Deviation (%) Weighted Average Annual Default Rate *(%) Median Annual Default Rate (%)

Source: Bank of America Merrill Lynch 2005 – 2015 (3Q) U.S. & European High-Yield Bond Market: New Issuance ($ millions) 24

Source: Bank of America Merrill Lynch 2005 – 2015 (3Q) U.S. & European High-Yield Bond Market: CCC Rated New Issuance (%) 25 n/a

New Issues Rated B- or Below, Based on the Dollar Amount of Issuance (1993 – 2015 (3Q)) Source: S&P Capital IQ LCD 26

27 All Rated Corporate Bonds* Mortality Rates by Original Rating *Rated by S&P at Issuance Based on 2,847 issues Source: Standard & Poor's (New York) and Author's Compilation Years After Issuance

28 *All High-yield Source: Standard & Poor’s LCD & Credit Suisse CCC New Bond Issuance by Purpose 2015 (3Q) U.S.Europe (2Q)* Refinancing40.62%51% M&A29.65% 37% LBO26.51% Recap/Dividends3.23% 12% Corporate Purpose0.00% Project Financing0.00% Total100%

29 Maturity Profile of Leveraged Debt – As of 12/31/14 Source: S&P Capital IQ LCD

Distribution of Years to Default from Original Issuance Date: 1991 – 3Q Source: NYU Salomon Center

31 Source: S&P Capital IQ LCD Purchase Price Multiple excluding Fees for LBO Transactions Purchase Price Multiples N/A (# obs.) N/A

32 Average Total Debt Leverage Ratio for LBO’s: Europe and US with EBITDA of €/$50M or More Source: S&P Capital IQ LCD

LBO Statistics & Ratios: 2007 vs (update 3Q 15) Q-3Q15 M&A/LBO as a % of Total Issuance 62%47%56% Purchase Multiple x x x Debt to Inception 6.2x5.8x5.7x EBITDA to Cash Interest 2.1x3.4x3.0x Equity Contribution 31%37%41% Source: Guggenheim Investments and S&P Capital IQ 33

Share of Large LBOs with Leverage More than 7x* 2004 – 3Q * Issuers with EBITDA >$50mm. Source: S&P Capital I.Q. N/A

Lenders Leave the Lite On 2003 – 2Q