1. Investing in U.S. Institutional Corporate Loans
Jeff Bakalar, Voya Michael Friedman, Chapman
Elliot Ganz, LSTA Brian Yorke, Halcyon

2. What are Investments in U. S. Institutional Corporate Loan
What are Investments in U.S. Institutional Corporate Loan? Who are the Borrowers? Who Invests in U.S. Institutional Corporate Loans? Who Underwrites, Distributes and Trades U.S. Institutional Corporate Loans?

3. What are U.S. Institutional Corporate Loans?
Senior
Senior-most debt obligations in capital structure of non-investment grade companies
Repaid before other debt obligations and equity holders upon a credit event
Secured
Secured by collateral, generally all of a company’s assets and/or stock
Higher recoveries
Floating Rate
Pay a base rate (typically higher of LIBOR or a floor) plus an additional spread, typically between basis points
Coupons adjust in conjunction with changes in short-term interest rates
Attractive short-duration yields
Structural Protections
Incurrence and financial covenants superior to high yield bonds
Typically benefit from the protection of maintenance covenants
Independently Rated and Priced
Rated by multiple rating agencies
Priced daily by multiple pricing services
Revolving Credit Facility
Institutional Term Loan
Second Lien Loan
High Yield Bonds / Converts
Equity
Senior Secured
Junior Second Lien
Senior Unsecured/ Subordinated
Source: Credit Suisse

4. Who are the Borrowers of U.S. Institutional Corporate Loans?
Note: The logos on this page are trademarks and service marks belonging to the respective companies shown above

5. U.S. Institutional Corporate Loans are Broadly Syndicated Loans made to Below- Investment-Grade Borrowers
Loans ranging from $500MM to many billions are sold to many different investors, typically in pieces of $5 to $50MM 5

6. Underwriters and Investors in the U. S
Underwriters and Investors in the U.S. Institutional Corporate Loan Market
Underwriters
Bank of America/ML
JPM Morgan
Citibank
Wells Fargo
Goldman Sachs
Deutsche Bank
Credit Suisse
Investors
Mutual Find Investors
Pension Funds
Insurance Companies
Sovereign Wealth Funds
Private Wealth Funds
Family Offices
Trust Companies
Asset Managers
Banks

7. There are Many Ways to Invest in The U. S
There are Many Ways to Invest in The U.S. Institutional Corporate Loan Market
Separately Managed Accounts
Customized
Large Investment
Tailored Liquidity Provisions
Comingled Funds
Medium Investment Size
Periodic Liquidity Provisions
Ease of Administration
Mutual Funds
Retail Funds/ETF
Ease of Investment
Small Investment Size
Daily Liquidity
CLOs
Structured Vehicle
Different Risk Tranches (Rated Floating Rate Notes vs. Equity)
Inherently Less Liquid

8. There Are 300 Active Institutional Loan Investor Groups & Portfolios
TB: Post-financial crisis, the number of active institutional loan investor groups has doubled. Today, there are a record 320 institutions managing US loan assets for investors around the globe.
GUNTHER: Can you comment on this expansion, the diversity of the lender base and how it effects loan market liquidity and volatility levels?
TB: During the past 5-year period of market and investor expansion, secondary trading volumes have increased to record levels.
Source: S&P Capital IQ LCD

9. What Is the Size and Nature of the U. S
What Is the Size and Nature of the U.S. Institutional Corporate Loan Market? 9

10. Institutional Corporate Loans Are an Important Component of the U. S
Institutional Corporate Loans Are an Important Component of the U.S. Debt Markets
US Debt Market Universe
US Corporate Debt
Total Size of the US Debt Market $40.9T
as of 12/31/15
Total Size of US Corporate Debt $9.1T
as of 12/31/16 10
Source: Credit Suisse

11. The U.S. Institutional Corporate Loan Market Provides Substantial Trading Liquidity
Last year, secondary trading volumes fell 6% from their previous record highs and based on annualized first quarter volumes, trade activity is on target to be flat to down slightly.
But over the same time period, we’ve seen the market’s turn-over ratio fall below 75%-its lowest level in 9 years.
Brian: Can you give your thoughts on why the turn-over ratio has trended lower and then comment on current liquidity levels and what it is like to trade in today’s market.
TRANSITION: That all said, trading volumes did improve during the first quarter on the back end of a very strong March. 11
Source: The LSTA Trade Data Study

12. Why is the U.S. Institutional Corporate Loan Market Attractive?

13. Structural Characteristics Provide Unique Benefits
Fundamental Characteristics
Key Benefits
Large mature market; active secondary market
Risk/reward/correlation advantages
Superior structural features compared to other credit assets
Attractive yields on an absolute and relative basis
Favorable credit performance through many cycles
High recovery rates; lower losses upon default
Floating rate coupon, typically between basis points, provides potential income upside in today’s low rate environment
Embedded potential inflation/rising rate hedge
LIBOR Floors provide downside income protection
Downside protection by way of short duration profile 13
Source: Apollo/LSTA

14. U.S. Institutional Corporate Loans Have Relatively Low Losses as Compared to High Yield Bonds
We say this every year, but it bears repeating until everyone in the world knows it
CLOs are not CDOs
AND
CLOs performed spectacularly (assuming you didn’t panic and sell)
We have new data on this every year
In August this year, Moody’s updated their CLO performance data and we made what my boss calls “the Pac man” chart
This shows of the more than 5,000 CLO tranches that Moody’s has rated, which ones performed perfectly well (98.9% of them in green)
And how many were impaired (1.1% - or a bit more than 50) – in the red
Importantly, the highest rated tranche or suffer any impairments was A2…not one AAA or AA note ever suffered an impairment.
That impairment rate is impressive on an absolute basis…and even more impressive on a relative basis
Loans are senior and secured, contributing to a lower loss rate
Loss given default is low for loans - 19% because recovery rates are so high – 80%
Loan repayment rates are high, averaging 2.7% per month since 2001
Loans are floating rate (based over LIBOR), so interest rate risk is minimal 14
Source: S&P Capital IQ/LCD, Moody’s Investors Service, Bloomberg

15. U.S. Institutional Corporate Loans Exhibit Strong Relative Values
Historically competitive yield with virtually no duration risk
Yield and Duration Comparisons
S&P/LSTA Leveraged Loan Index and Various Asset Classes
Data as of January 31, 2017
*Discount Yield to 3 Year Call uses Secondary Spread for the S&P/LSTA Leveraged Loan Index Index plus 3 Month LIBOR at month-end. Three year maturity assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments during the 3 years. Secondary spread is calculated based upon the current bid price, not on par. The Index is not subject to any fees or expenses. Investors cannot invest directly in an index. Past performance does not guarantee future results and there is the possibility of loss. The S&P/LSTA Leveraged Loan Index is an unmanaged total return index that captures accrued interest, repayments, and market value changes. 15
Source: S&P/LCD, BAML and Bloomberg

16. Institutional Corporate Loans have exhibited lower volatility and attractive Sharpe Ratios
Loans have continued to experience less volatility as compared to most traditional income asset classes, particularly high yield bonds
Provides a unique asset allocation tool and has resulted in attractive Sharpe Ratios
Annualized Standard Deviation
Data as of January 31, 2017
Average 12-month Lagging Standard Deviation of Returns
January 2010 to January 2017
Sharpe Ratio
Data as of January 31, 2017
The Indices are not subject to any fees or expenses. An investor cannot invest directly in an index. Past performance does not guarantee future results and there is the possibility of loss. 16
Source: charts clockwise left to right: S&P/LCD, not annualized; S&P/LSTA Leveraged Loan Index; Barclays U.S. Corporate High Yield – 2% Issuer Capped 16

17. Correlations Between Loans and Various Assets17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, Ibbotson Associates

18. U.S. Law Firmly Supports Senior Secured Loans

19. Applicable Law Provides Investors Greater Predictability
New York Law
New York law governs virtually all U.S. institutional corporate loans, offering greater certainty, reliability and precedent. With few exceptions, sophisticated courts honor the terms of the underlying documents such as representations, warranties and covenants negotiated by the parties.

20. Secured Lenders Obtain Security Interests in Virtually All of a Borrower’s Assets
Uniform Commercial Code
The Uniform Commercial Code (“UCC”) governs the creation of security interests and liens in the United States.
As long as the proper process is followed, U.S. courts will respect the underlying lien.
The UCC allows lenders to easily attach a security interest to both the tangible and intangible (intellectual property, etc.) property.
In syndicated institutional corporate loans, the security interest is held by the agent on behalf of all lenders. 20

21. Lenders Have Clear Enforcement Rights
Enforcement of Contractual Remedies
U.S. loan documents generally include clear remedies in the event of a breach by the borrower of provisions in the underlying loan document.
These provisions establish when an “Event of Default” has occurred and provide the available remedies.
Common contractual remedies where an “Event of Default” has occurred include:
Acceleration of the debt
Default interest
Enforcement of remedies under state law or the UCC.
The remedies are generally not exclusive, and an aggrieved lender may pursue more than one remedy. 21

22. U.S. Bankruptcy Law Protects the Rights of Secured Creditors
U.S. bankruptcy law respects the liens and rights of secured lenders granted under state law.
The “Absolute Priority Rule” requires that senior creditors are paid before junior creditors who are paid before equity.
Secured creditors are paid before most employment claims
Secured lenders are protected because:
A debtor may not “prime” a lender’s lien without providing “adequate protection”; and
A debtor may not use a lender’s cash collateral without providing adequate protection. 22

23. Secured Lenders Rights Are Respected in Bankruptcy
Administrative
Expenses
Senior Secured
Second Lien
General Unsecured
Subordinated
Equity
20 day claims, certain taxes, wages, post-petition professional fees
Absolute Priority Rule
First-lien loan, secured swaps
Second-lien loans
Priority claims, bonds, trade claims, non-financial contract claims, financial contract claims
20 day claims, certain taxes, wages, post-petition professional fees
Subordinated Bonds 23

24. The U.S. Bankruptcy Process is Fast and Efficient
Many bankruptcies are resolved very quickly through “prepackaged plans” that are negotiated before a bankruptcy case is filed
Many bankruptcies are resolved through quick “Section 363” sales of substantially all the assets of a debtor
Even bankruptcies that are resolved through the normal “Chapter 11” reorganization plan process are completed quickly, often in less than a year 24

25. Conclusion
U.S. institutional corporate loans are a large and growing asset class. They trade actively in the secondary market and are actively managed by a large group of professional managers. There are many ways to invest in loans based on investors’ risk and return preferences. But, unlike many other debt investments, institutional corporate loans are senior and secured in a company’s capital structure (reducing their credit risk) and floating rate (reducing their interest rate risk). 25

26. Appendix

27. In 1999 The U.S. LSTA/TRLPC Secondary
Mark-to-Market (MTM) Pricing Service Launched
First Created in 1999, today’s Secondary Mark-to-Market Pricing Service pricing provides daily bid and ask prices on more than 3,500 individual loans from 1,800 companies that currently access the corporate loan market.
On a daily basis, the pricing service collects over 7,000 individual quotes from 35 broker/dealers across the United States.
As the loan markets relevancy began to expand in the early 2000’s; the Wall Street Journal began weekly coverage of our asset class. 27
Source: LSTA/Thomson Reuters LPC MTM Pricing

28. In 2001 The Wall Street Journal Began Coverage on The Senior Secured Corporate Loan Market
Transparency and acceptance of MTM prices were critical in establishing today’s secondary market liquidity levels.
Today’s weekly coverage in the Wall Street Journal includes a listing of the market’s biggest movers for the week as well as other market metrics such as average bid levels
In many ways, the corporate loan market went main-stream some 14 years ago.
And since that time, the market and its investor base has grown in size and global relevance. 28
Source: Wall Street Journal

29. Institutional Corporate Loans Have Returned 5
Institutional Corporate Loans Have Returned 5.8% on Average Over 20 Years (only two down years) 29
Source: S&P/LSTA Leveraged Loan Index

30. The Institutional Corporate Loan Market is Less Volatile Than Other Debt Markets30
Source: S&P/LSTA Leveraged Loan Index

31. While Secondary Loan Market Prices Have Fluctuated Over the Past 5 Years, Annual Interest Income has Averaged 5%
TB: While prices and returns have fluctuated over the past 5-plus years, annual interest income has averaged almost 5%.
YTD, loans have delivered a total return of 4.5% and are on target to deliver over 7% in 2016 even if market values remain unchanged.
David: Can you speak to the ability to generate current income in the loan market, and then give your bull and bear case for full year returns.
Trans: Let’s now move onto the next section of our presentation, a review of current market trends. 31
Source: LSTA Trade Data Study & S&P/LSTA LLI

32. The Secondary Loan Market Allows Managers to Create Industry Diversification Through Sector Allocation
TB: Managers can distinguish themselves from the benchmark as well as other managers by making industry allocation and selection decisions. Here again we see the bifurcation of prices and discounted margins we spoke of earlier, this time segmented by sector.
Dave: Can you first describe what’s driving the wide disparities between sectors and then explain how managers build diversity and create alpha.
Trans– Let’s now move onto our last section of the day, a discussion on liquidity. 32
Source: S&P/LSTA Leveraged Loan Index