1. 1 111 Dr. Edward Altman NYU Stern School of Business Corporate & Sovereign Credit Market Outlook 2014 Luncheon Conference TMA, NY Chapter New York January 27, 2014

2. Summary of Recent High-Yield Bond Activity & Outlook 2 Continued Low Default Rates and Bankruptcies (Chapter 11 Filings) and High Recovery Rates Since 2010 - Outlook is for Default Rates in the U.S. H.Y. Market to Remain Below Average, but for European Default Rates to Increase - Decreasing Chapter 11 Filings and Time to Emergences since 2009 - Current Levels of Filings about Equal to Historic Median Record New Issuance of H.Y. Bonds in the U.S. and Europe Since 2010 - Outlook is for Record or Near-Record Continued New Issuance as Interest Rates Remain at Near Record Low Levels - Increase in High-Yield New Issues at CCC Level Implying Higher Risk of Future Defaults - Asian High-Yield Bond Market Size about 1/3 of Europe and Less than 1/10 of U.S. (but Growing) Credit Quality of U.S. H.Y. and I.G. Market Now No Better than, and Probably Worse than, Prior to the Financial Crisis (2007) - Z-Score Model Results - Liquidity/Debt Comparisons Moderate Risk-Adjusted Returns for High-Yield and Distressed Debt Markets, Despite Elevated Price Levels - Outlook is for Mid-High Single-Digit Returns in 2014 Quality Junk Strategy - Buy Quality Junk and Sell Junk Quality A Novel Approach To Assessing Sovereign Debt Default Risk - Bottom-Up Approach for Private Firms and Banks in Europe and Asia

3. June 01, 2007 – January 15, 2014 Sources: Citigroup Yieldbook Index Data and Bank of America Merrill Lynch. 3 YTM & Option-Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes 6/12/07 (YTMS = 260bp, OAS = 249bp) YTMS = 540bp, OAS = 545bp 1/15/14 (YTMS = 346bp, OAS = 387bp) 12/16/08 (YTMS = 2,046bp, OAS = 2,144bp)

4. High Yield Bonds - Yield to Maturity vs. Yield to Worst June 01, 2007 – January 15, 2014 Sources: Citigroup Yieldbook Index Data 4 High 12/12/08 (YTM = 23.03%) 12/15/08 (YTW = 22.65%) Low 5/09/13 (YTM = 6.03%) 5/09/13 (YTW = 4.99%) 1/15/14 (YTM = 6.34%) 1/15/14 (YTW = 5.44%)

5. 5 Major Risks Going Forward (For 2014) Global Economy Slowdown – Primarily U.S. (Double-Dip?): Impact on Default & Recovery Rates, Credit Availability & Credit Quality –China –Europe Sovereign Debt Crisis – Europe (Asia?) –Calm in Late 2012-2013 –Looming Corporate Defaults Despite Low (2012) Default Rate? –Survival of the Euro? –Problems in India and Indonesia, Brazil? Fed Balance Sheet, Money Supply and Inflation LBO and Covenant-Lite Risk Role of Collateral in the Global Financial System Contagion Between Markets – Debt and Equity Increased Investor Leverage in Stock Markets Similar to 2007 Political Paralysis – Deficit/Debt Levels U.S. Municipal Bond & Federal Government Default Risk Uncertainties (non-quantifiable)

6. 6 Historical Default Rates and Recession Periods in the U.S. Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 – 12/01, 12/07 - 6/09 *All rates annual Source: E. Altman (NYU Salomon Center) & National Bureau of Economic Research HIGH YIELD BOND MARKET (1972 – 2013 (Preliminary))*

7. Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions) 1971 – 2013 (Preliminary) Historical Default Rates 7 Year Par Value Outstanding a ($) Par Value Defaults ($) Default Rates (%) 20121,212,36219,6471.621 20111,354,64917,9631.326 20101,221,56913,8091.130 20091,152,952123,87810.744 20081,091,00050,7634.653 20071,075,4005,4730.509 2006993,6007,5590.761 20051,073,00036,2093.375 2004933,10011,6571.249 2003825,00038,4514.661 2002757,00096,85512.795 2001649,00063,6099.801 2000597,20030,2955.073 1999567,40023,5324.147 1998465,5007,4641.603 1997335,4004,2001.252 1996271,0003,3361.231 1995240,0004,5511.896 1994235,0003,4181.454 1993206,9072,2871.105 1992163,0005,5453.402 1991183,60018,86210.273 1990181,00018,35410.140 1989189,2588,1104.285 1988148,1873,9442.662 1987129,5577,4865.778 198690,2433,1563.497 a Weighted by par value of amount outstanding for each year. Year Par Value Outstanding* ($) Par Value Defaults ($) Default Rates (%) 198558,0889921.708 198440,9390.840 198327,4921.095 198218,1093.186 198117,1150.158 198014,9351.500 197910,3560.193 19788,9461.330 19778,1574.671 19767,7350.388 19757,4712.731 197410,8941.129 19737,8240.626 19726,9282.786 19716,6021.242 Standard Deviation (%) Arithmetic Average Default Rate (%) 1971 to 20133.1413.129 1978 to 20133.3743.312 1985 to 20133.9033.459 Weighted Average Default Rate (%)* 1971 to 20133.606 1978 to 20133.612 1985 to 20133.631 Median Annual Default Rate (%) 1971 to 20131.621 20131,392,21214,5391.044 Source: Author’s compilation and Citigroup/Credit Suisse estimates

8. QUARTERLY DEFAULT RATE AND FOUR QUARTER MOVING AVERAGE 1989 – 2013 (Preliminary) Source: Author’s Compilations Default Rates on High-Yield Bonds 8

9. Trends in Bankruptcy Filings Source: Edward I. Altman, “The Role of Distressed Debt Markets, Hedge Funds and Recent Trends in Bankruptcy on the Outcomes of Chapter 11 Reorganizations”, ABI Law Review forthcoming December 2013 9

10. 10 Filings for Chapter 11 Number of Filings and Pre-petition Liabilities of Filing Companies 1989 – 2013 (Preliminary) Note: Minimum $100 million in liabilities Source: NYU Salomon Center Bankruptcy Filings Database Mean 1989-2013: 75 filings Median 1989-2013: 51 filings

11. 11 Chapter 11 Filing Statistics Note: Minimum $100 million in liabilities. Source: NYU Salomon Center Bankruptcy Filings Database Year Number of Filings Pre-Petition Liabilities ($ billions) Number of Filings ≥ $1B ≥$1B/Total Filings (%) 19892233,5391045 19903541,1151029 19915181,1581122 19923764,2241438 19933717,701411 1994248,39614 19953227,153722 19963211,68700 19973618,866514 19985632,038611 199910970,9571917 200013698,8962317 2001169228,6043822 2002135336,6124130 2003102115,1722625 20044439,5501125 200535142,6251131 20063222,322413 20073872,646821 2008145724,0102417 2009234603,9925021 201011456,9811412 201184109,11978 20126971,6131420 2013 (Prelim)6438,1571016 Mean No. of Filings, 1989-2013751520% Median No. of Filings, 1989-2013511120% Median No. of Filings, 1998-20139314 Mean Liabilities, 1989-2013122,685 Median Liabilities, 1989-201364,224

12. Chapter 11 Filings-Sample Characteristics 1981-2013 (6/30) 12

13. Successful Chapter 11 –Emergence from Chapter 11 –Acquired in Chapter 11 Unsuccessful Chapter 11 –Conversion into Chapter 7 –Liquidated under Chapter 11 Adjustments made for Chapter 22,33,44 13 Successful vs Unsuccessful Chapter 11s

14. Success vs. Nonsuccess in Chapter 11 Reorganizations (Based on known outcomes) Adjustment For Recidivism (Chapter 22, 33, 44) All Filings (3013) Assets > $100 million (1575) Assets > $500 million (613)

15. Success vs. Nonsuccess in Chapter 11 Reorganizations (Based on known outcomes, no adjustments for recidivism) 2006-2010 All Filings Assets > $100 million Assets > $500 million 1981-2013 (3013)(592) (1575)(361) (613)(154)

16. Prepacks/Prearranged vs Non-Prepacks among Non-Dismissed Filings All Filings Assets > $100 million Assets > $500 million 2006-20131981-2013

17. 17

18. 18

19. 19

20. 20

21. 21

22. 22

23. Source: Bank of America Merrill Lynch 2005 – 2013 New Issuance: U.S. High Yield Bond Market ($ millions) Ratings AnnualTotalBBBCCC(% H.Y.)NR 200581,541.818,615.045,941.215,750.9(19.3%)1,234.7 2006131,915.937,761.267,377.325,319.2(19.2%)1,458.2 2007132,689.123,713.255,830.849,627.6(37.4%)3,517.5 200850,747.212,165.025,093.111,034.4(21.7%)2,454.6 2009127,419.354,273.562,277.410,248.4(8.0%)620.0 2010229,307.474,189.9116,854.735,046.8(15.3%)3,216.1 2011 (1Q)68,600.310,266.045,342.510,145.0(14.8%)2,846.8 (2Q)62,846.716,492.738,849.07,505.0(11.9%)0.0 (3Q)22,853.910,650.09,568.92,460.0(10.8%)175.0 (4Q)30,270.017,125.011,880.01,265.0(4.2%)0.0 2011 Totals184,571.054,533.8105,640.421,375.0(11.6%)3,021.8 2012 (1Q)75,462.026,071.136,003.011,362.9(15.1%)2,025.0 (2Q)40,748.99,589.221,724.56,583.1(16.2%)2,852.0 (3Q)86,806.523,529.146,640.016,092.4(18.5%)545.0 (4Q)77,432.912,662.749,243.514,651.7(18.9%)875.0 2012 Totals280,450.371,852.1153,611.148,690.2(17.4%)6,297.0 2013 (1Q)73,492.331,953.129,534.211,480.0(15.6%)525.0 (2Q)62,135.024,380.023,665.013,790.0(22.2%)300.0 (3Q)73,770.822,964.232,610.018,196.6(24.7%)0.0 (4Q)60,936.824,050.022,686.814,175.0(23.3%)25.0 2013 Totals270,334.8103,347.3108,495.957,641.6(21.3%)850.0 23

24. 24 New Issuance: European High Yield Bond Market Face Values (US$) Ratings AnnualTotalBBBCCCNRUSDEURGBP 200519,935.61,563.311,901.05,936.6534.82,861.015,080.31,668.3 200627,714.65,696.216,292.15,020.5705.97,657.819,935.7121.1 200718,796.75,935.311,378.5562.0920.94,785.512,120.91,890.3 20081,250.0 25,093.11,250.0 200941,510.318,489.416,697.44,771.31,552.212,315.028,696.9498.3 201057,636.522,751.329,050.52,170.73,663.912,775.043,147.71,403.3 2011 (1Q)25,750.69,272.614,610.61,867.57,775.014,215.03,191.3 (2Q)27,636.19,682.614,516.61,845.31,591.57,645.014,045.75,651.1 (3Q)4,211.23,418.7792.54,211.2 (4Q)2,838.02,355.0395.987.01,300.01,286.1 2011 Totals60,435.824,728.929,919.74,108.71,678.616,720.033,758.08,842.4 2012 (1Q)21,788.38,904.111,003.01,734.6146.68,945.010,783.01,108.2 (2Q)9,075.82,086.46,296.0693.44,080.04,179.3816.5 (3Q)17,733.29,138.44,122.42,652.51,820.06,350.010,399.2241.2 (4Q)16,918.86,872.97,591.72,106.2348.08,823.06,908.8763.5 2012 Totals65,516.127,001.729,013.07,186.72,314.628,198.032,270.42,929.3 2013 (1Q)27,954.56,783.815,008.45,160.61,001.710,050.012,380.74,837.4 (2Q)30,335.36,860.219,295.13,724.1455.99,913.014,149.96,074.0 (3Q)16,558.43,375.39,609.62,721.8851.75,310.08,644.02,604.4 (4Q)16,520.42,588.010,522.12,366.41,043.95,210.08,951.02,359.4 2013 Totals91,368.619,607.354,435.213,972.93,353.230,483.044,125.615,875.3 Source: BoAML 2005 – 2013

25. 25 1978 – 2013 (Mid-year US$ billions) Size of the US High-Yield Bond Market $1,392

26. Size of Western European HY Market (€ Billions) 26 Includes non-investment grade straight corporate debt of issuers with assets located in or revenues derived from Western Europe, or the bond is denominated in a Western European currency. Floating-rate and convertible bonds and preferred stock are not included. Source: Credit Suisse

27. Size of Corporate HY Bond Market: U.S., Europe, Latin America & Asia (ex. Japan) ($ Billions) 27 Source: NYU Salomon Center, Credit Suisse, LIM Advisors Ltd. 2013

28. Stronger Investment Grade and/or High-Yield Firm Balance Sheets? 28

29. 29 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

30. 30 Z” Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market Credits Z” = 6.56X 1 + 3.26X 2 + 6.72X 3 + 1.05X 4 +3.25 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

31. Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012 31 YearAverage Z-Score/ (BRE)* Median Z-Score/ (BRE)* Average Z”-Score/ (BRE)* Median Z”-Score/ (BRE)* 20071.89 (B)1.81 (B) 4.58 (B+)4.61 (B+) 20121.66 (B)1.59 (B) 4.60 (B+) Difference in Means Test (2007 vs 2012) ModelAverage Difference Standard Deviation (2007/2012) t-testSignificance Level Significant at.05? Z-Score-0.231.29 / 1.15-2.380.88%Yes Z”-Score+0.022.50 / 2.07+0.1344.68%No *Bond Rating Equivalent Source: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ. Number of Firms Z-ScoreZ”-Score 2007277383 2012404488

32. Comparing Financial Strength of Investment Grade Bond Issuers in 2007& 2012 32 YearAverage Z-Score/ (BRE)* Median Z-Score/ (BRE)* Average Z”-Score/ (BRE)* Median Z”-Score/ (BRE)* 20072.84 (BBB)2.59 (BB+) 5.60 (BBB-)5.56 (BBB-) 20122.60 (BB+)2.36 (BB) 5.64 (BBB-)5.65 (BBB-) Difference in Means Test (2007 vs 2012) ModelAverage Difference Standard Deviation (2007/2012) t-testSignificance Level Significant at.05? Z-Score-0.241.86 / 1.61-1.803.59%Yes Z”-Score+0.042.51 / 2.17+0.2241.43%No *Bond Rating Equivalent Source: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ. Number of Firms Z-ScoreZ”-Score 2007324349 2012432457

33. Average Z-Score by S&P Bond Rating 33 Source: E. Altman and E. Hotchkiss (2006), Corporate Financial Distress and Bankruptcy, John Wiley & Sons, pp.247/248. RatingAverage Z-ScoreStandard Deviation AAA6.22.1 AA4.72.4 A3.72.3 BBB2.81.5 BB2.41.9 B1.81.9 CCC0.31.2 D-0.22.5

34. Average Z”-Score by S&P Bond Rating 34 Source: E. Altman and E. Hotchkiss (2006), Corporate Financial Distress and Bankruptcy, John Wiley & Sons, pp.247/248. RatingAverage Z”-ScoreRatingAverage Z”-Score AAA8.15BB+5.25 AA+7.60BB4.95 AA7.30BB-4.75 AA-7.00B+4.50 A+6.85B4.15 A6.65B-3.75 A-6.40CCC+3.20 BBB+6.25CCC2.50 BBB5.85CCC-1.75 BBB-5.65D0.00

35. Comparing Measures of Liquidity, Solvency, Profitability and Leverage of High-Yield Bond Firms, 2007 versus 2012 35 Source: Authors’ calculations, data from S&P Capital IQ. RatioAverage 2007Average 2012ChangeSignificant at.05 Current Assets – Current Liabilities Total Assets 0.100.11+0.01No Cash & Equivalents Total Debt 0.21 -0.00No Cash & Equiv & S.T. Inv. Total Debt 0.240.25+0.01No Retained Earnings Total Assets -0.08-0.10-0.02No EBIT Total Assets 0.07 +0.00No EBIT Cash Interest 2.682.94+0.25No Market Value Equity Total Liabilities 1.161.00-0.16Yes Book Value Equity Total Liabilities 0.47 +0.00No

36. Comparing Measures of Liquidity, Solvency, Profitability and Leverage of Investment Grade Bond Firms, 2007 versus 2012 36 Source: Authors’ calculations, data from S&P Capital IQ. RatioAverage 2007Average 2012Average ChangeSignificant at.05 Current Assets – Current Liabilities Total Assets 0.050.07+0.02Yes Cash & Equivalents Total Debt 0.300.36+0.06Yes Cash & Equiv & S.T. Inv. Total Debt 0.120.19+0.07Yes Retained Earnings Total Assets 0.160.12-0.04Yes EBIT Total Assets 0.110.10-0.01No EBIT Cash Interest 6.336.73+0.40No Market Value Equity Total Liabilities 2.232.00-0.23No Book Value Equity Total Liabilities 0.740.81+0.07No

37. 37 Major Risks Going Forward (For 2014) Global Economy Slowdown – Primarily U.S. (Double-Dip?): Impact on Default & Recovery Rates, Credit Availability & Credit Quality –China –Europe Sovereign Debt Crisis – Europe (Asia?) –Calm in Late 2012-2013 –Looming Corporate Defaults Despite Low (2012) Default Rate? –Survival of the Euro? –Problems in India and Indonesia, Brazil? Fed Balance Sheet, Money Supply and Inflation LBO and Covenant-Lite Risk Role of Collateral in the Global Financial System Contagion Between Markets – Debt and Equity Increased Investor Leverage in Stock Markets Similar to 2007 Political Paralysis – Deficit/Debt Levels U.S. Municipal Bond & Federal Government Default Risk Uncertainties (non-quantifiable)

38. A Novel Approach to Assessing Sovereign Debt Default Risk

39. Euro High-Yield Option-Adjusted Spreads June 01, 2007 – January 15, 2014 Sources: Bank of America Merrill Lynch Index Data. 39 12/18/08 (OAS = 2,326bp) 6/05/07 (OAS = 182bp) Average OAS = 711bp 1/15/14 (OAS = 350bp)

40. Jan. 2009 – January 15, 2014 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg 40 Five Year Implied Probabilities of Default (PD) From Capital Market CDS Spreads* Greece (9/16/11) 94.75 Portugal 20.58 Ireland 8.65 Italy 11.57 Spain 9.92

41. January 15, 2014 Country 5-Year Price 5-Year Yield % 5-Year Spread to Germany 10-Year Price 10-Year Yield % 10-Year Spread to Germany Germany100.390.92n/a101.531.82n/a Greecen/a 70.947.675.85 Ireland112.111.810.8999.143.501.68 Italy104.972.421.50105.633.86*2.04 Portugal101.994.323.40102.725.303.48 Spain106.662.261.34105.163.76*1.94 *10-Year Yield as of July 16, 2012 was 6.10% for Italy and 6.77% for Spain. Source: Bloomberg 41 European (PIIGS) Government Benchmark Yields and Spreads

42. Sovereign Ratings Actions (Moody’s) 2009 - Present Greece 42 Downgraded to SD by S&P, Dec. 2012

43. Portugal Sovereign Ratings Actions (Moody’s) 2009 - Present 43

44. Ireland Sovereign Ratings Actions (Moody’s) 2009 - Present 44

45. Spain Sovereign Ratings Actions (Moody’s) 2009 - Present 45

46. Italy Sovereign Ratings Actions (Moody’s) 2009 - Present 46

47. (Z-Metrics PD Estimates – 75 th Percentile) * Since the Z-Metrics Model is not practically available for most analysts, we could substitute the Z”-Score method (available from ). **Sales > € 50mm Sources: RiskMetrics Group (MSCI), Markit, Compustat. Z-Metrics PD Estimates * : Five-Year Public Model Country Listed Companies (2013)** 75th Percentile PD 6/30/13Y/E 2012Y/E 2011Y/E 2010Y/E 2009Y/E 2008 Sweden17211.5%7.4%9.6%6.8%8.0%13.5% Netherlands789.7%5.7%8.7%5.7%6.7%15.7% U.K.5156.0%5.9%9.7%5.7%9.3%16.6% Spain9227.0%21.7%20.1%13.2%12.7%18.4% France35311.1%9.6%14.8%8.5%10.3%19.2% Germany37014.5%10.1%11.2%9.7%11.9%22.2% Portugal3441.6%38.8%24.9%20.1%12.3%26.6% Italy16822.3% 26.4%14.1%18.1%27.1% Ireland243.9%3.5%6.3%8.6%11.0%27.5% Greece9764.0%59.0%50.5%40.1%27.6%31.0% Australia35910.7%10.6%11.0%6.2%7.8%16.3% U.S.A.2,4504.0%4.6%11.7%8.0%11.5%19.5% Financial Health of the Corporate, Non-Financial Sector: Selected European Countries and Australia/U.S.A.in 2008-2013 (6/30) 47

48. Weighted Average Median 5-Year PD for Listed Non-Financial 1 and Banking Firms 2 (Europe & US): 2010 1 Based on Z-Metrics Default Probability Model. 2 Based on Altman-Rijken Model (Preliminary) Non-Financial FirmsBanking Firms CountryPD (%)WeightPD (%)Weight Weighted Average (%) Rank CDS Spread PD (%) Rank Netherlands2.50.97711.10.0232.7012.031 Sweden2.60.98417.30.0162.8422.252 U.K.3.70.97715.50.0233.9734.736 Germany3.90.98313.10.0174.0642.503 France4.00.98614.00.0144.1454.515 U.S.A.3.80.83713.80.1635.4363.794 Spain7.10.94810.90.0527.30725.278 Italy7.70.90620.00.0948.86818.027 Portugal9.90.97112.10.0299.96934.059 Greece18.70.92130.10.07919.601059.1410 48

49. Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD Greece, 2008 – 2013 (1H) 49 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

50. Portugal, 2008 – 2013 Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 50 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

51. Italy, 2008 – 2013 Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 51 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

52. Spain, 2008 – 2013 Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 52 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

53. Ireland, 2008 – 2013 Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 53 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

54. France, 2008 – 2013 (1H) Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 54 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

55. Germany, 2008 – 2013 (1H) Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 55 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

56. ASIA ANALYSIS

57. (Z-Metrics PD Estimates – 75 th Percentile) * Since the Z-Metrics Model is not practically available for most analysts, we could substitute the Z”-Score method (available from ). **Sales > € 50mm Sources: RiskMetrics Group (MSCI), Markit, Compustat. Z-Metrics PD Estimates * : Five-Year Public Model Country Listed Companies (2013)** 75th Percentile PD 1H 2013RankY/E 20121H 2012Late 1990’sRank Japan2,4627.5%17.0%8.7%5.8%2 Malaysia3679.4%29.6%9.3%4.0%1 Russia12610.2%39.6%9.5%26.6%9 Hong Kong24111.1%411.6%12.8%8.5%5 China1,72812.2%512.0%9.7%10.6%6 Singapore32313.1%610.7%11.2%7.7%4 Indonesia21114.3%712.8%8.8%18.5%7 India52214.9%816.6%10.6%20.3%8 South Korea86918.1%915.6%19.0%29.0%10 Brazil20023.5%1017.3%20.0%7.6%3 Financial Health of the Corporate, Non-Financial Sector: Selected Asian & BRIC Countries 57

58. Measures of Sovereign Financial Health: Selected Asian Countries 75 th Percentile 5-Year PD* Source: Compustat (S&P), * Based on Z-Metrics Model Calculation Financial Crisis of the late 1990’s to 2013 (1H) 58 KOR IDN

59. Measures of Sovereign Financial Health: BIRCHS Countries 75 th Percentile 5-Year PD* Financial Crisis of the late 1990’s to 2013 (1H) 59 Source: Compustat (S&P), * Based on Z-Metrics Model Calculation BRA IND

60. India, 2008 – 2013 (10/25) Five Year Implied Probabilities of Default (PD) From CDS* Spreads vs 75 th Percentile Corporate PD 60 * State Bank of India. Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

61. Indonesia, 2008 – 2013 (10/25) Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 61 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

62. S. Korea, 2008 – 2013 (10/25) Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 62 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

63. China, 2008 – 2013 (10/25) Five Year Implied Probabilities of Default (PD) From Sovereign CDS* Spreads vs 75 th Percentile Corporate PD 63 * Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e (-5*s/(1-R)). Source: Bloomberg

64. 64 Major Risks Going Forward (For 2014) Global Economy Slowdown – Primarily U.S. (Double-Dip?): Impact on Default & Recovery Rates, Credit Availability & Credit Quality –China –Europe Sovereign Debt Crisis – Europe (Asia?) –Calm in Late 2012-2013 –Looming Corporate Defaults Despite Low (2012) Default Rate? –Survival of the Euro? –Problems in India and Indonesia, Brazil? Fed Balance Sheet, Money Supply and Inflation LBO and Covenant-Lite Risk Role of Collateral in the Global Financial System Contagion Between Markets – Debt and Equity Increased Investor Leverage in Stock Markets Similar to 2007 Political Paralysis – Deficit/Debt Levels U.S. Municipal Bond & Federal Government Default Risk Uncertainties (non-quantifiable)

65. 65 Source: S&P Capital IQ LCD Purchase Price Multiple excluding Fees for LBO Transactions Purchase Price Multiples N/A (# obs.)

66. 66 Average Total Debt Leverage Ratio for LBO’s: Europe and US with EBITDA of €/$50M or More Source: S&P Capital IQ LCD

67. Default Rate Forecasting 67

68. Method 1: Mortality Approach 68

69. New Issues Rated B- or Below, Based on the Dollar Amount of Issuance (1993 – 2013) Source: S&P Capital IQ LCD 69

70. 70 Marginal and Cumulative Mortality Rate Equation One can measure the cumulative mortality rate (CMR) over a specific time period (1,2,…, T years) by subtracting the product of the surviving populations of each of the previous years from one (1.0), that is, MMR (t) = Total value of defaulting debt in year (t) total value of the population at the start of the year (t) MMR = Marginal Mortality Rate CMR (t) = 1 -  SR (t), t = 1 hereCMR (t) = Cumulative Mortality Rate in (t), SR (t) = Survival Rate in (t), 1 - MMR (t)

71. 71 Source: Altman Mortality Tables (1971-2012) Default Lag After Issuance: ‘B’ & ‘CCC’ Rated Corporate Bonds Default Lag after Issuance for ‘B’ Ratings Default Lag after Issuance for ‘CCC’ Ratings

72. 72 All Rated Corporate Bonds* 1971-2013 (Preliminary) Mortality Rates by Original Rating *Rated by S&P at Issuance Based on 2,779 issues Source: Standard & Poor's (New York) and Author's Compilation Years After Issuance

73. 73 All Rated Corporate Bonds* 1971-2013 (Preliminary) Mortality Losses by Original Rating *Rated by S&P at Issuance Based on 2,290 issues Source: Standard & Poor's (New York) and Author's Compilation Years After Issuance

74. Methods 2 & 3: Market-Based Measures 74

75. 75 The regression equation is Default Rate = - 3.27 + 1.33 * Spread Predictor Coef SE Coef T P Constant -3.2748 0.9693 -3.3782 0.0019 Spread 1.3274 0.1853 7.1642 0.0000 S = 2.0064 R-Sq = 61.6% R-Sq(adj) = 60.4% Application Yield spread (12/30/2011) of 654bp, forecast P D for 2012 = 4.80% vs. actual of 1.62% Yield spread (12/31/2012) of 506bp, forecast P D for 12/31/2013 = 3.32% vs. actual of 1.04% Yield spread (12/31/2013) of 345bp, forecast P D for 12/31/2014 = 1.30% Yield spread (01/15/2014) of 346bp, forecast PD for 01/15/2015 = 1.32% Updated Market-Based Annual Default Rate Forecast Annual Default Rate (t+1) versus High-Yield Spreads (t) Sources: Slides 3 & 8 and authors’ compilations

76. Distress Ratio History 2000 – 2013 (Preliminary) DateDistress Ratio Annual Default Rate (t+1) Default Rate (t+1) /Distress Ratio (t) (%) 12/31/200037.339.8026.25 12/31/200124.3612.7952.52 12/31/200231.214.6614.93 12/31/20038.401.2514.86 12/31/20044.963.3768.05 12/31/20055.470.7613.92 12/31/20061.620.5131.44 12/31/200710.354.6544.97 12/31/200881.2910.7413.22 12/31/200914.531.137.78 12/31/20107.191.3318.43 12/31/201117.881.629.06 12/31/20129.881.0410.57 12/31/20135.29n/a Average19.584.1321.09 Median10.351.6214.93 Sources: Bank of America Merrill Lynch & NYU Salomon Center 76

77. Distress Ratio History 2000 – 2013 (Preliminary) Source: Bank of America Merrill Lynch 77

78. Estimated Size of the Distressed Bond Market Based on Distress Ratio Sources: Distress Ratio used in calculations from BofAML. HY Bond Market size from NYU Salomon Center estimates. 78

79. 79 Updated Market-Based Annual Default Rate Forecast Annual Default Rate (t+1) versus Distressed Ratio (t) Application Distress ratio (12/30/2011) of 17.88%, forecast P D for 2012 = 3.93%vs. actual of 1.62% Distress ratio (12/31/2012) of 9.88%, forecast P D for 12/31/2013 = 2.65% vs. actual of 1.04% Distress ratio (12/31/2013) of 5.29%, forecast P D for 12/31/2014 = 1.61% The regression equation is Default Rate = 0.86 + 0.14 * Distress Ratio Predictor Coef SE Coef T P Constant 0.8634 0.4504 1.9170 0.0696 Spread 0.1412 0.0175 8.0626 0.0000 S = 1.5731 R-Sq = 76.5% R-Sq(adj) = 75.3% Sources: Slide 6, Bank of America Securities and authors’ compilations

80. Default and Recovery Forecasts: Summary of Forecast Models Source: All Corporate Bond Issuance and Authors’ Estimates of Market Size in 2013 & 2014. Model 2013 (12/31) Default Rate Forecast as of 12/31/2012 2014 (12/31) Default Rate Forecast as of 12/31/2013 2015 (01/15) Default Rate Forecast as of 01/15/2014 Mortality Rate3.73%3.25% Yield-Spread3.32% a 1.30% c 1.32% e Distress Ratio2.65% b 1.61% d 1.61% f Average of Models Recovery Rates* 3.23% 39.7% 2.05% 44.5% 2.06% 44.5% * Recovery rate based on the log Linear equation between default and recovery rates, see Altman, et al (2005) Journal of Business, November and Slide 80. a Based on Dec. 31, 2012 yield-spread of 505.8bp. b Based on Dec. 31, 2011 Distress Ratio of 9.88%. e Based on Dec.31, 2013 yield- spread of 344.6bp. d Based on Dec. 31, 2013 Distress Ratio of 5.29%. e Based on Jan. 15, 2014 yield-spread of 346.0bp. f Based on Dec. 31, 2013 Distress Ratio of 5.29%. 80

81. Recovery Rate Analysis 81

82. 82 Default Rates and Losses a 1978 – 2013 (Preliminary) Year Par Value Outstanding ($MM) Par Value Defaults ($MM) Default Rate (%) Weighted Price After Default ($) Weighted Coupon (%) Default Loss (%) 20131,392,21214,5391.0453.610.040.54 20121,212,36219,6471.6257.88.970.76 20111,354,64917,9631.3360.39.100.59 20101,221,56913,8091.1346.610.590.66 20091,152,952123,87810.7436.18.167.30 20081,091,00050,7634.6542.58.232.83 20071,075,4005,4730.5166.69.640.19 2006993,6007,5590.7665.39.330.30 20051,073,00036,2093.3761.18.611.46 2004933,10011,6571.2557.710.300.61 2003825,00038,4514.6645.59.552.76 2002757,00096,85812.7925.39.3710.15 2001649,00063,6099.8025.59.187.76 2000597,20030,2485.0626.48.543.94 1999567,40023,5324.1527.910.553.21 1998465,5007,4641.6035.99.461.10 1997335,4004,2001.2554.211.870.65 1996271,0003,3361.2351.98.920.65 1995240,000,4,5511.9040.611.831.24 1994235,0003,4181.4539.410.250.96 1993206,9072,2871.1156.612.980.56 1992163,0005,5453.4050.112.321.91 1991183,60018,86210.2736.011.597.16 1990181,00018,35410.1423.412.948.42 1989189,2588,1104.2938.313.402.93 1988148,1873,9442.6643.611.911.66 1987129,5577,4865.7875.912.071.74 198690,2433,1563.5034.510.612.48 198558,0889921.7145.913.691.04 198440,9393440.8448.612.230.48 198327,4923011.0955.710.110.54 198218,1095773.1938.69.612.11 198117,115270.1612.015.750.15 198014,9352241.5021.18.431.25 197910,356200.1931.010.630.14 19788,9461191.3360.08.380.59 Arithmetic Average 1978 – 20133.3745.8710.532.24 Weighted Average 1978 - 20133.532.34 a Excludes defaulted issues.. Source: Authors’ compilations and various dealer price quotes. 82

83. 83 Note: 2013 Default Rate is Annualized Source: E. Altman, et. al., “The Link Between Default and Recovery Rates”, NYU Salomon Center, S-03-4.

84. 84 Annual Returns (1978 – 2014 (1/15)) Yields and Spreads on 10-Year Treasury (Treas) and High Yield (HY) Bonds a End-of-year yields. b Lowest yield in time series. Source: Citigroup’s High Yield Composite Index Return (%)Promised Yield (%) YearHYTreasSpreadHYTreasSpread 2014 (1/15)0.891.17(0.28)6.342.883.46 20137.22(7.85)15.066.453.013.45 201215.174.2310.956.801.745.06 20115.5216.99(11.47)8.411.886.54 201014.328.106.227.873.294.58 200955.19(9.92)65.118.973.845.14 2008(25.91)20.30(46.21)19.532.2217.31 20071.839.77(7.95)9.694.035.66 200611.851.3710.477.824.703.11 20052.082.040.048.444.394.05 200410.794.875.927.354.213.14 200330.621.2529.378.004.263.74 2002(1.53)14.66(16.19)12.383.828.56 20015.444.011.4312.315.047.27 2000(5.68)14.45(20.13)14.565.129.44 19991.73(8.41)10.1411.416.444.97 19984.0412.77(8.73)10.044.655.39 199714.2711.163.119.205.753.45 199611.240.0411.209.586.423.16 199522.4023.58(1.18)9.765.584.18 1994(2.55)(8.29)5.7411.507.833.67 199318.3312.086.259.085.803.28 199218.296.5011.7910.446.693.75 199143.2317.1826.0512.566.705.86 1990(8.46)6.88(15.34)18.578.0710.50 19891.9816.72(14.74)15.177.937.24 198815.256.348.9113.709.154.55 19874.57(2.67)7.2413.898.835.06 198616.5024.08(7.58)12.677.215.46 198526.0831.54(5.46)13.508.994.51 19848.5014.82(6.32)14.9711.873.10 198321.802.2319.5715.7410.705.04 198232.4542.08(9.63)17.8413.863.98 19817.560.487.0815.9712.083.89 1980(1.00)(2.96)1.9613.4610.233.23 19793.69(0.86)4.5512.079.132.94 1978 7.57(1.11)8.6810.928.112.81 Arithmetic Annual Average 1978-2013 10.958.012.9411.686.495.20 Compound Annual Average 1978-2013 10.037.442.58

85. Historic H.Y. Bond Return Estimation 85 Historic Yield-Spread5.20% Less: Historic Annual Loss from Defaults(2.24) Historic Expected Return Spread2.96% Historic Actual Return Spread2.94% Source: Ed Altman Calculations

86. Expected H.Y. Bond Return in 2014 86 Current Yield-Spread3.46 Less: Expected Loss from Defaults(1.15) Expected Return Spread2.31% Plus: Current Yield 10 Yr T-Bonds2.88 Estimated Return in 2014 on H.Y. Bonds5.19% Source: Ed Altman Calculations

87. Size of Distressed Debt Market 87

88. 88 Estimated Face And Market Values Of Defaulted And Distressed Debt ($ Billions) 2011 – 2013 (Preliminary) 1 Calculated using: (2012 defaulted population) + (2013 Defaults) - (2013 Emergences) - (2013 Distressed Exchanges). 2 Based on 5.29% of the high-yield bond market ($1.437 trillion) as of 31 Dec. 13. 3 Based on a private/public ratio of 2.0. Source: NYU Salomon Center and estimates by Professor Edward I. Altman.

89. 89 Size Of The US Defaulted And Distressed Debt Market ($ Billions) 1990 – 2013 (Preliminary) Source: Author’s Compilations