The Annual Manual U.S. Leveraged Finance Primer · Annual CLO Issuance Reached Record High in 2014...

May 2017

The Annual ManualU.S. Leveraged Finance Primer

The Annual Manual (U.S. Leveraged Finance Primer) May 31, 2017

Executive Summary

This is the sixth edition of our U.S. leveraged finance primer. It reflects Fitch Ratings’ coordinated effort across several U.S. rating groups, including Corporates, Financial Institutions and Structured Credit.

The Annual Manual seeks to quantify and summarize the major factors driving risk and opportunity for the various players in the space, including corporate bond and loan investors, CLO investors, corporate debt issuers, private equity sponsors and regulators.

This piece emphasizes the continuous evolution of the market. New players are entering and transaction characteristics are changing as the landscape adapts to the needs of different capital providers and regulatory requirements. For context, we provide a historical perspective on structures, volume and performance for different industries and instruments.

If you have suggestions for further content enhancements, please do not hesitate to contact us.

Mike Simonton, CFA Michael Paladino, CFAHead of U.S. Corporate Ratings Head of U.S. Leveraged Finance+1 312 368-3138 + 1 212 [email protected] [email protected]


Key Contacts

U.S. Leveraged Finance

Mike Simonton, CFA Michael Paladino, CFAHead of U.S. Corporate Ratings Head of U.S. Leveraged Finance+1 312 368-3138 + 1 212 [email protected] [email protected]

Sharon Bonelli Eric RosenthalSenior Director Senior Director+1 212 908-0581 + 1 212 [email protected] [email protected]

Ronald Nirenberg Lyuba PetrovaDirector Director+ 1 212 612-7747 +1 646 [email protected] [email protected]

John Kempf, CFASenior Director+1 646 [email protected]

Trevor LeeAssociate Director+ 1 212 [email protected]

U.S. Structured Credit

Kevin Kendra Derek Miller Alina Pak, CFAManaging Director Managing Director Senior Director+1 212 908-0760 + 1 312 368-2076 + 1 312 [email protected] [email protected] [email protected]

Financial Institutions

Joo-Yung Lee Nathan FlandersManaging Director Managing Director+1 212 908-0560 + 1 212 [email protected] [email protected]

Meghan Neenan, CFAManaging Director+ 1 212 [email protected]

Business and Relationship Management

Jill ZelterManaging Director+1 212 [email protected]

Winnie Fong, CFA Managing Director + 1 212 [email protected]

David KreidlerSenior Director +1 646 [email protected]

mailto:[email protected]




The Annual Manual U.S. Leveraged Finance Primer

IntroductionLooking Ahead 1

Leveraged Finance Market Statistical Comparison 3

Leveraged LoansLeveraged Loan Basics 4[Credit 101] What Is the U.S. Leveraged Loan Market? 4

Defining the Markets 4 Defining the Loan Markets 4Market History 5

Leveraged Loan Market History 5Loan Retail Funds — Assets Under Management Increased Significantly Since Credit Crisis 6Annual CLO Issuance Reached Record High in 2014 6Institutional Leveraged Loan Market Profile 6

[Credit 101] What Are the Key Characteristics of Leveraged Loans? 6 Seniority 6

Leveraged Capital Structure — Seniority 7Security 7Pricing 7

Loan Pricing Components 7Covenants 7

Common Loan Covenants 8 Callability 8[Credit 101] What Are the Different Types of Leveraged Loans? 8

Pro Rata Tranches 8 Pro Rata Leveraged Loan Issuance 8Institutional Tranches 9 Institutional Leveraged Loan Issuance 9Credit Facility Summary 9

Facility Types Comparison 9Covenant-Lite Loans 10[Credit 101] What Is a Covenant-Lite Loan? 10What Is the Size of the Covenant-Lite Market? 10

Covenant-Lite Composes 58% of Outstanding Volume in the Institutional Leveraged Loan Market 10How Did Covenant-Lite Become the New Market Standard? 11What Considerations Does Fitch Give to Covenant-Lite Issuers? 11Are Recovery Prospects Different for Covenant-Lite Loans? 11Second-Lien Loans 12[Credit 101] What Is Second-Lien Debt? 12[Credit 101] Why Issue Second-Lien Debt? 12Strengthening Loan Volumes 13

U.S. Second-Lien Institutional Term Loan Issuance Volumes 13

Continued on next page


Leveraged Loans (Continued)Regulatory Environment 14What Regulations Will Have the Most Impact on the Leveraged Loan Market? 14

Regulatory Overview 14Guidance on Leveraged Lending 14

Select Leveraged Lending Issues 14Impact 15

LBO Leverage Multiples 15Focus on Exploration and Production (E&P) Companies 16 OCC Ratio Metrics and Thresholds 16

Risk Retention 16Background 16Majority-Owned Affiliate (MOA 17Capitalized Majority-Owned Affiliate (C-MOA) 17Capitalized Management Vehicle (CMV) 17Impact 17

Volcker Rule 18Background 18

Impact 18Foreign Account Tax Compliance Act (FATCA) 18

Background 18Impact 18

Chapter 11 Reform 18Background 18

Impact 18Potential Regulatory Reform in 2017 19Middle Market 19[Credit 101] What Is the Middle Market? 19Middle Market Players 19

Players in the Middle Market 19How Do Issuers’ Structures in the Middle Market Compare with the Broadly Syndicated Market? 19What You Need to Know: Sponsored Versus Nonsponsored Deals 20What You Need to Know: Unitranche Facility 20Direct Lending 20[Credit 101] What Is Direct Lending? 20How Has Direct Lending Gained Traction? 20

Tightening Regulatory Environment 20Record Fundraising 20 Direct Lending as an Alternative to Traditional Bank Lending 21

Why Is Direct Lending Attractive to Companies and Investors? 21Middle-Market Yield Premium Averages 117 bps 22

Private Equity and LBO Market 22[Credit 101] What Is the U.S. Private Equity (PE) Market? 22

Private Equity Fund Structure 22 Example Strategies of Private Equity Funds 23

How Does Fitch Ratings Analyze Private Equity Companies? 24Fitch’s Private Equity Firm Credit Rating Considerations 24

[Credit 101] What Is an LBO? 24 Example of Recent LBO Structure: Buyout of RackSpace Hosting, Inc. by Apollo 25

What Is the Trend in the LBO Market? 25U.S. Private Equity Market History 25Annual LBO Loan Issuance 26Primary Factors Affecting LBO Volume 27

[Credit 101] What Are BDCs? 28What Does the Regulatory Environment Look Like for BDCs? 28



Leveraged Loans (Continued)How Have BDCs Performed Lately 28 Operating Performance 28 Yields Versus Stock Performance 29 Funding Flexibility 29 NAV Premium/Discount 29 Aggregate Originations and Repayments by Year 30Defaults 30[Credit 101] What Happens in an Event of Default? 30 Default Types 30 Default Remedies 30[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law? 30 Bankruptcy Types 30 United States Flow Chart 31 Claim Types 31 U.S. Bankruptcy Code — Pre- and Post-Petition Claims 32What Are the Historical Default Rates for Leveraged Loans? 32 2007–2016 32 Industry Defaults 32 U.S. Institutional Leveraged Loan Default Rate 33 U.S. Institutional Leveraged Loan Default Volume 33 U.S. Institutional Leveraged Loan Default Rate — Default Source 33What Is the Current Default Environment for Leveraged Loans? 33 Overall Defaults 33 Default Rates by Industry — 2007–2016 Average 34 Top 10 Defaulting Sectors (2007–2016) by Volume and Number of Issuers 34 Institutional Leveraged Loan Default Profile — 2009 Versus Now 34 Energy, Metals/Mining Defaults 34 Energy and Metals/Mining Exposure Limited in Institutional Leveraged Loan Market 35 Sector Fundamentals 35 Maturities 35 Leveraged Loan Maturity Schedule 35Recovery 36[Credit 101] What Is Recovery? 36 Debtor-in-Possession 36 Absolute Priority 36 Enterprise Valuation 36 U.S. Bankruptcy Code — Priority Rules 37 Creditor Negotiations 37[Credit 101] What Is DIP Financing? 38 DIP Loan Summary 38[Credit 101] How Does Fitch Estimate Recovery? 38 Recovery Ratings 38 Fundamental Drivers of Recovery Ratings (RR) 39 Recovery Ratings (RR) Scale 39 Bankruptcy Case Studies 40 Published Bankruptcy Case Study Reports 40 Comparison of Fitch Multiple Assumptions with Court Valuation Multiples 40 Majority of Bankrupt Companies Reorganized as Going Concern 41 Bankruptcy Case Study — Dex Media et al 42 Recovery Rating Backtesting 44 Forecast Delta Default +30-Day Issue Price-Implied RR Versus Fitch RR Estimate 44How Do Leveraged Loans Perform in Fitch’s Recovery Analyses? 44 Overall Distributions 44 Recovery Rating Distribution — First-Lien Debt 2016 45



Leveraged Loans (Continued) Capital Structure Influences 45 First-Lien Loans and Bonds RR Distribution by First-Lien Leverage Ratio 45What Are the Historical Post-Default Prices for Leveraged Loans? 45 First-Lien Institutional Leveraged Loan 30-Day Post-Default Prices 46What Are the Historical Emergence Prices for Leveraged Loans? 46 First-Lien Institutional Loan Emergence Prices 46CLOs 46[Credit 101] What Is a CLO? 46 CLO Life Stages 47 CLO Types 47 CLO Types and Characteristics (Post Credit Crisis) 47[Credit 101] What Are the Mechanics of an Arbitrage CLO? 48 Arbitrage CLO Transaction 48 Arbitrage CLO Interest/Principal Waterfall 49[Credit 101] Who Are CLO Market Participants? 50 CLO Managers 50 CLO Manager Ranking by Principal Liabilities (Debt Plus Equity) 50 Investors 50 CLO Investor Base 50 CLO Holdings 51 Top 50 Holdings in U.S. CLO Portfolios 51How Does Fitch Ratings Analyze CLOs? 52 CLO Rating Criteria 52What Is the Level of Recent CLO Issuance? 52 Annual CLO Issuance 52How Has the Commodity Cycle Downturn Affected CLOs? 53 Default Exposure 53 Defaulted Obligors and CLO Exposure 53 Distressed and Defaulted Issuers Exposure 53 Restructuring Dents Metrics 54 Examples of Recovery Rates Used in OC Calculations 54 Risk Retention Implications 2017 54

Leveraged Loan DataIssuance 55 Leveraged Loan Issuance 55 Institutional Leveraged Loan Issuance 55 Pro Rata Leveraged Loan Issuance 55 Covenant-Lite Loan Issuance 56 Monthly Covenant-Lite Loan Issuance — 2016 56 Second-Lien Loan Issuance 56 ABL Issuance 57 Middle-Market Loan Issuance 57 Middle-Market Institutional Loan Issuance 57 DIP Loan Issuance 58 Sponsored Versus Nonsponsored Covenant-Lite 58 Sponsored Versus Nonsponsored Middle-Market Loan 58 Covenant Versus Covenant-Lite Second-Lien Issuance 59 Canadian Syndicated Loan Issuance 59 Latin American Loan Issuance 59 Latin American Loan Issuance by Country 60 Largest Leveraged Loan Deals — 2016 60 Largest Covenant-Lite Deals — 2016 61 Largest Second-Lien Deals — 2016 61 Largest ABL Deals — 2016 62



Largest Middle-Market Deals — 2016 62 Largest DIP Loan Deals — 2016 63Issuance by Industry 64 Leveraged Loan Issuance by Industry — 2016 64 Covenant-Lite Loan Issuance by Industry — 2016 64 Second-Lien Loan Issuance by Industry — 2016 64 ABL Issuance by Industry — 2016 65 DIP Loan Issuance by Industry 65 Latin American Loan Issuance by Industry — 2016 65 Canadian Loan Issuance by Industry 66Issuance by Purpose 67 Leveraged Loan Use of Proceeds — General Corporate Purposes 67 Leveraged Loan Use of Proceeds — Refinancing 67 Leveraged Loan Use of Proceeds — M&A/LBO 67 Leveraged Loan Use of Proceeds — Dividends 68 Second-Lien Issuance by Purpose 68 ABL Use of Proceeds 68 Middle Market Loan Use of Proceeds 69 Latin American Loan Use of Proceeds 69Pricing 70 Institutional Loan Spreads by Rating 70 Institutional Term Loan Yield Components 70 Pro Rata Loan Spreads by Rating 70 Covenant-Lite Loan Pricing 71 Second-Lien Loan Pricing — First Lien Versus Second 71 ABL Pricing 71 Middle-Market Loan Pricing (Revolver/Term Loan) 72 Middle-Market Yield Components 72 DIP Loan Pricing 72Maturities 73 Institutional Leveraged Loan Maturity Schedule 73 Institutional Leveraged Loan Maturity Schedule by Industry 73 ABL Maturity Schedule 74 Middle-Market Loan Maturity Schedule 74 Average DIP Loan Tenor 74Secondary Bids 75 Leveraged Loan Secondary Bids 75 Covenant-Lite Loan Secondary Bids 75 Second-Lien Loan Secondary Bids 75 Middle-Market Loan Secondary Bids 76 Loan Trading Volumes 76Retail Funds 77 Loan Retail Funds — Assets Under Management 77 Loan Retail Fund Flows 77 Monthly Loan Retail Fund Flows — 2016 77 Top10 Largest Outflows/Inflows — 2016 78 Top10 Largest Outflows/Inflows — All Time 78Default Rates 79 U.S. Institutional Leveraged Loan Default Rate 79 U.S. Institutional Leveraged Loan Default Rate — BSL 79 U.S. Institutional Leveraged Loan Cumulative Default Rates by Vintage 79 Default Rates by Industry — 2007–2016 Average 80 Institutional Leveraged Loan Industry Default Rates 80 2016 U.S. Institutional Leveraged Loan Defaults 81



Post-Default Prices 82 Institutional Leveraged Loan 30-Day Post-Default Prices 82 Institutional Leveraged Loan 30-Day Post-Default Prices by Industry 82 30-Day Post-Default Prices and Distribution 83Emergence Prices 86 Institutional Leveraged Loan Emergence Prices 86 Emergence Prices and Distribution 86Private Equity and Leveraged Buyout 89 Private Equity Investments and Exits 89 Private Equity Investments by Industry 89 Median Transaction Multiples 89 All Private Equity — Median Net IRRs by Vintage Year 90 Private Equity Dry Powder by Fund Type 90 Largest Private Equity Sponsors by Deal Count 90 Common Private Equity Fund Investors 90 Select Private Equity Transactions by Firm 91 Annual LBO Loan Issuance 93 Largest LBOs — 2016 93 Private Equity Purchase Price Multiples 94 Equity Contribution Percentage 94 Largest LBO Deals of All Time 95 20 Largest Buyout/LBO Deals Post Credit Crisis 96 Median Holding Period 96 Exits by Deal Type 97 Median Corporate Acquisition Valuation/EBITDA Exit Multiples 97 Select Exits — 2016 97 Private Equity-Based IPO Volume 98 Select Private Equity-Backed IPOs 98 Middle-Market Private Equity Activity 99 Middle-Market Private Equity Deal Count by Industry 99 Share of Middle-Market Private Equity Activity 99 Middle-Market Exit by Type 100 Annual Fundraising Volumes 100 U.S. Private Equity Energy Fundraising by Year 100 Average Fund Closing Time 101 Annual Canadian Private Equity Deal Flow 101 Top Canadian PE Deals — 2016 101 Private Equity Exit Activity 102 Private Equity Fundraising — Capital Raised 102 Private Equity Buyout Investment in Canadian Companies 102 Private Equity Buyout Investment by Deal Size Range — 2016 103Collateralized Loan Obligations 104 CLO Assets Under Management 104 Annual CLO Issuance 104 Annual Middle-Market CLO Issuance 104 Monthly CLO Issuance — 2016 105 Average Bid of U.S. CLO Portfolios 105 2016 U.S. CLO Refinancings and Resets 105 CLO Size Distribution 106 CLO Holdings by Industry — 2016 106 U.S. CLO AAA Spreads — 2016 106 Post-2002 CLO Minimum OC Cushion 107 Percentage of CLOs Failing OC Test 107 CLO Transactions — 2016 108 Precrisis Versus Post-Crisis Arbitrage CLO Terms 111 Abritrage CLO Structural Protections 111



Middle Market Versus Broadly Syndicated CLO Comparison 112 Middle-Market CLO Deals — 2016 112

High-Yield BondsHigh-Yield Bond Basics 113[Credit 101] What Is the U.S. High-Yield Bond Market? 113 Defining the Markets 113 High-Yield Bond Types 113 High-Yield Bond Characteristics 113 High-Yield Bond Versus Leveraged Loan Comparison 114 Market History 114 Key Events in the High-Yield Bond Market 114Second-Lien Bonds 115[Credit 101] What Are Second-Lien Bonds? 115What Is the Current Appetite for Second-Lien Bonds? 115 U.S. Second-Lien Bond Issuance Volumes 115PIK Bonds 115[Credit 101] What Are PIK Bonds? 115 Defining the PIK Market 115 Deferred Payment (PIK) Bond Issuance 116Why Do Issuers Choose PIK Bonds? 116How Is PIK Accounting Different? 116Defaults 116[Credit 101] What Happens in an Event of Default? 116[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law? 117What Are the Historical Default Rates for High-Yield Bonds? 117 2001–2016 117 Industry Defaults 117What Is the Current Default Environment for High-Yield Bonds? 117 Overall Defaults 117 Energy, Metals/Mining Defaults 117What Is a Distressed Debt Exchange? 117 Distressed Debt Exchanges with Subsequent Default Events: 2008–2016 118Recovery 119[Credit 101] What Is Recovery? 119[Credit 101] How Does Fitch Estimate Recovery? 119How Do High-Yield Bonds Perform in Fitch’s Recovery Analyses? 119 Recovery Rating Distributions — Senior Unsecured Debt 2016 119What Are the Historical Post-Default Prices for High-Yield Bonds? 119

High-Yield Bond Data Option-Adjusted Spread Comparison — Investment Grade Versus High Yield 120 Option-Adjusted Spreads by Rating 120 Option-Adjusted Spreads by Industry (Top/Bottom Six) — 2016 120 Monthly High-Yield Bond Issuance — 2016 121 Cumulative High-Yield Bond Returns — 2016 121 2016 Risk-Adjusted Returns 121 Annual High-Yield Bond Returns by Rating Category 122 Top 10 Largest Outflows/Inflows — 2016 122 Top 10 Largest Outflows/Inflows of All Time 122 Average Par Value of Defaults Per Issuer 123 Top 10 Largest High-Yield Defaults 2000–2016 123 Recovery Rates by Seniority — Bonds 124 2016 U.S. High-Yield Bond Defaults 126



AppendixSector Outlooks 128HIstorical Rating Actions 129 2016 Upgrades (IDR) 129 2016 Downgrades (IDR) 130 2016 Speculative-Grade Upgrades/Downgrades by Industry 131 Historical Speculative-Grade Upgrades/Downgrades 131 Historical Rising Stars and Fallen Angels 132Bankruptcy Case Studies 133Revolving Credit Utilization in Bankruptcy 133Substantial CF Revolver Utilization 133Outcomes Support CF Approach 133ABL Utilization 133 Cash Flow Revolving Facility Utilization 133 ABL Revolving Facility Utilization 133Lower Retail Median Usage 134Outstanding Revolver Recoveries 134 PIK Debt Recoveries in Bankruptcy 135 Companies Featured in Bankruptcy Case Study Reports 137 Criteria Overview 141Corporate Rating Methodology 142 Corporate Rating Methodology 142 Rating Definition Summary 143Parent and Subsidiary Rating Linkage 143 LCF Decision Matrix 144 LCF Flow Chart 145 Rating Subsidiary Debt without Stand-Alone Financial Information or a Parent Guarantee 146Recovery Rating Methodology 147 Recovery Analysis Methodology 147 Recovery Ratings (RR) Scale 147 B+ and Below IDR/Debt Instrument Mapping 148 Typical BB Rating Category Recovery Rating Assignment and Notching 148 Enterprise Value — Fitch-Employed Multiple for Recovery Analysis 149ABL Recovery Analysis 149 ABL Recovery Analysis Methodology 150Pension Recovery Analysis 150 Fitch’s Recovery Considerations — U.S. Defined Benefit Pension Plans 151 U.S. Pensions — Illustrative Application of Recovery Methodology 151Research Portfolio 152 Sector Handbooks 152 Recent U.S. Leveraged Finance Research 153 Additional Research by Sector 154Rating Coverage List 158 Rating Coverage by Sector 158U.S. Leveraged Finance Contact List 172

1The Annual Manual (U.S. Leveraged Finance Primer) — Introduction May 31, 2017

Introduction

Looking AheadSkewed Technicals Weaken Terms: Fitch Ratings expects the aggressive transaction terms that emerged over the course of 2016 to persevere as long as investor demand continues to exceed supply. Terms could deteriorate further if the new administration delivers on promises to scale back some of the more restrictive financial regulations that have made it difficult for investment banks to compete with nontraditional lenders for underwriting business with highly levered issuers.

Uncertainty Shrouds Tax Reform: Fitch expects tax reform, in particular, will affect new issuance. Uncertainty around the direction of the reform is causing companies to carefully consider their options for financing M&A transactions. For instance, taking away the tax deductibility of interest expense will have an adverse effect on the economics of leveraged buyouts. Highly levered issuers will be hit hardest, especially when removal of interest expense tax deductibility is accompanied by a target interest rate increase.

Rising Rates Expose Challenged Businesses: The risk of rising rates is most evident for leveraged issuers with little flexibility to endure volatility in any element of their credit profiles. These issuers seized favorable market conditions to issue large amounts of floating-rate debt, but saw their credit profiles subsequently deteriorate amid secular challenges or idiosyncratic issues, resulting in higher leverage, depressed cash flows and limited liquidity. Retail companies, for example, with high floating-rate debt exposure could be particularly exposed to rising rates if secular challenges offset the benefits from an accelerating economy. See Pockets of Interest Rate Risk (Select U.S. Leveraged Issuers and Their Exposure to Rising Rates).

High-Yield Default Risk Shifts Sectors: Default rates in Energy reached a record high, but Fitch expects they will taper off. Default concerns are shifting to the Retail space, which has faced serious challenges and appears positioned to be the main contributor to the U.S. default rate in 2017. Fitch anticipates a 9% year-end Retail high-yield default rate. See Fitch U.S. High Yield Default Insight (2017 High Yield Default Forecast Remains at 3%; Rue21 First 2017 Retail Bond Default) and 2017 Outlook: U.S. Retail and Restaurants (Sector Challenges Force Business Model Transformations).

Limited Liquidity Concerns in 2017: Fitch does not expect liquidity to be a major concern in 2017. Thanks to an issuer-friendly and active primary market, there has been a substantial amount of refinancing and repricing. Thus, there are no imminent concerns with respect to handling upcoming maturities in the near term. See Bridging the Refinancing Cliff Update (Funding Gap Minimal; Refinancings Push Maturities to 2020 and Beyond).

New Administration Plays Key Role: Fitch expects fiscal and regulatory actions will play a major role in leveraged companies’ corporate performance, with varied effects across different sectors. Certain areas are poised to benefit, while others will be disadvantaged.

For instance, changes to Affordable Care Act (ACA) heighten uncertainty about top-line growth and profitability in the healthcare industry, which could have negative implications for access to and cost of capital, as highlighted in Fitch’s comment on the American Health Care Act (AHCA), the Republicans’ first attempt to repeal and replace ACA. Hospital companies and other healthcare providers will not face higher levels of uninsured patients in 2017, because those who bought coverage in the ACA marketplaces will keep it through the year. The AHCA is

Introduction

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Introduction

now being debated by the Senate; whether and in what form it moves forward is uncertain. It is possible the ACA marketplaces will remain operational in 2018, but hospitals could face higher levels of uncompensated care regardless, as fewer individuals enroll in marketplace plans. This could be helped by the administration taking steps to stabilize the marketplaces, like committing funding for the cost-sharing reduction subsidies that about 60% of marketplace enrollees receive to defray deductibles and co-payments. See What Investors Want to Know: U.S. Healthcare (Regulatory and Political Update).

Policy Changes Have Varied Impact: Protectionist measures, such as import tariffs/quotas and renegotiation of NAFTA, would result in a rise in product prices, which will have to be borne by either consumers or the retailers, who would in turn have to struggle with dwindling gross margins. The promise for increases in infrastructure spending will boost the backlog for Engineering & Construction (See Fitch: Trump Infrastructure Plan May Boost US E&C Backlogs).

GDP Growth Optimism in 2017: Fitch revised its 2017 U.S. growth forecast up to 2.3% due to anticipation of fiscal stimulus (See Global Economic Outlook — March 2017). The new administration’s agenda of tax reform, deregulation and infrastructure spending aims to accelerate currently sluggish U.S. growth and push the economy closer to the peak of the business cycle. Fitch also points out that a policy of anti-globalization and trade protectionism will ultimately have a negative effect on U.S. imports, and the value of the U.S. dollar if a trade conflict with China develops.



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Introduction

Leveraged Finance Market Statistical Comparison2007 2015 2016 Comment

Market Rates (%)10-Year Treasury Rate 4.1 2.3 2.5 Peak: 6.6% (2000), Trough: 1.6% (2012)LIBOR (90 Days) 4.7 0.6 1.0 Peak: 7.10% (2000), Trough: 0.25% (2013)Federal Funds Rate 4.3 0.5 0.6 Peak: 6.50% (2000), Trough: 0.00%–0.25% (2010–2013)

Transaction Multiples (x)Median Market Multiple (BB+ and Below) 9.6 9.5 10 Peak: 10.0x (2016), Trough: 6.2x (2008)Median Enterprise Value Transaction Multiple (All Rating Categories) 11.7 11.4 11.9 Peak: 12.2x (2015), Trough: 8.8x (2009)

Rating ActionsNo. of IDR Upgrades 66 30 57 —No. of IDR Downgrades 40 27 35 —Upgrades-to-Downgrades Ratio (x) 1.7 1.1 1.6 —Fallen Angels: Rising Stars 4:7 9:5 10:11 —

High-Yield Bond Market StatisticsHigh-Yield Bond Issuance ($ Bil.) 144 251 205 Peak: $281 Bil. (2012), Trough: $48 Bil. (2008)Number of High-Yield Bond Issues 313 371 321 Peak: 589 (2004), Trough: 93 (2008)PIK Toggle Issuance ($ Bil.) 16 1 3 Peak: $16 Bil. (2007), Trough: $0 Bil. (2004)Use of Proceeds: Refinance (%) 33 43 48 —Use of Proceeds: GCP/Capex (%) 17 18 31 —Use of Proceeds: M&A/LBO (%) 49 38 13 —BofAML BB Rated OAS (bps) 459 424 271 Peak: 1,468 bps (December 2008), Trough: 171 bps (May 2007)BofAML B Rated OAS (bps) 571 715 410 Peak: 2,084 bps (November 2008), Trough: 236 bps (May 2007)BofAML BB Rated Yield-to-Worst (%) 8.3 6.1 4.7 Peak: 16.4% (December 2009), Trough: 4.0% (April 2013)BofAML B Rated Yield-to-Worst (%) 9.4 9.0 6.0 Peak: 23.1% (November 2008), Trough: 4.8% (June 2014)BofAML US HY Index Return (%) 2.2 (4.6) 17.5 High: 57.5% (2009), Low: (26.4%) (2008)LTM High-Yield Default Rate (Based on Par Amount, %) 0.5 3.4 4.7 Peak: 19.3% (October 2002), Trough: 0.4% (April 2007)Defaulted Issuers 15 74 107 Peak: 151 (2009), Trough: 15 (2007)

Leveraged Loan Market StatisticsLeveraged Loan Issuance ($ Bil.) 688 783 875 Peak: $1,135 Bil. (2013), Trough: $218 Bil. (2001)Number of Leveraged Loan Deals 1,718 1,821 1,867 Peak: 2,548 (2013), Trough: 906 (2009)Institutional Loan Issuance ($ Bil.) 426 289 415 Peak: $625 Bil. (2013), Trough: $32 Bil.(2001)LBO Issuance ($ Bil.) 210 73 88 Peak: $210 Bil. (2007), Trough: $8 Bil. (2009)Covenant-Lite Issuance ($ Bil.) 108 228 335 Peak: $381 Bil. (2013), Trough: $1 Bil. (2009)Dividend Recap Issuance ($ Bil.) 21 20 24 Peak: $50 Bil. (2013), Trough: $1 Bil. (2001)Second-Lien Issuance ($ Bil.) 39 17 22 Peak: $39 Bil. (2007), Trough: $2 Bil. (2009)Use of Proceeds: Refinance/Reprice (%) 32 48 53 —Use of Proceeds: M&A/LBO (%) 52 42 31 —BB Rated Institutional Spreads (bps) 251 334 338 Peak: 760 bps (2008), Trough: 179 bps (2006)B Rated Institutional Spreads (bps) 304 448 484 Peak: 1,076 bps (2008), Trough: 253 bps (2006) Overall Secondary Market Bid 93.2 95.2 97.1 Peak: 99.3 (July 2014), Trough: 60.2 (December 2008)SMi 100 Average Bid 94.9 96.6 99.0 Peak: 101 (February 2007), Trough: 62.8 (December 2008)LTM Loan Default Rate (Based on Par Amount, %) 0.2 1.7 1.8 Peak: 10.5% (2009), Trough: 0.2% (2007)Number of Defaults 3 27 34 Peak: 93 (2009), Trough: 3 (2007)

Structured Credit Market StatisticsCLO Issuance ($ Bil.) 101 99 72 Peak: $124 Bil. (2014), Trough: $0.5 Bil. (2009)Number of CLOs Issued N.A. 190 157 —Average Deal Size ($ Mil.) 500 527 467 —Average AAA Spreads (bps) 25 169 150 —Average AA Spreads (bps) 50 257 208 —Average A Spreads (bps) 120 360 289 —Average BBB Spreads (bps) 275 548 460 —Average BB Spreads (bps) 525 919 806 —

IDR – Issuer Default Rating. PIK – Payment-in-kind. GCP – General corporate purposes. OAS – Option-adjusted spread. N.A. – Not available. Source: Fitch U.S. High-Yield Default Index, Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Advantage Data, BofA Merrill Lynch, Bloomberg, ©2017 Wells Fargo Securities, LLC. All rights reserved. Used with permission, Fitch Ratings.


Leveraged Loans

Leveraged Loan Basics 4[Credit 101] What Is the U.S. Leveraged Loan Market? 4[Credit 101] What Are the Key Characteristics of Leveraged Loans? 6[Credit 101] What Are the Different Types of Leveraged Loans? 8

Covenant-Lite Loans 10[Credit 101] What Is a Covenant-Lite Loan? 10What Is the Size of the Covenant-Lite Market? 10How Did Covenant-Lite Become the New Market Standard? 11What Considerations Does Fitch Give to Covenant-Lite Issuers? 11Are Recovery Prospects Different for Covenant-Lite Loans? 11

Second-Lien Loans 12[Credit 101] What Is Second-Lien Debt? 12[Credit 101] Why Issue Second-Lien Debt? 12Strengthening Loan Volumes 13

Regulatory Environment 14What Regulations Will Have the Most Impact on the Leveraged Loan Market? 14Risk Retention 16Volcker Rule 18Foreign Account Tax Compliance Act (FATCA) 18Chapter 11 Reform 18Potential Regulatory Reform in 2017 19

Middle Market 19[Credit 101] What Is the Middle Market? 19Middle Market Players 19How Do Issuers’ Structures in the Middle Market Compare with the Broadly Syndicated Market? 19What You Need to Know: Sponsored Versus Nonsponsored Deals 20What You Need to Know: Unitranche Facility 20

Direct Lending 20[Credit 101] What Is Direct Lending? 20How Has Direct Lending Gained Traction? 20Why Is Direct Lending Attractive to Companies and Investors? 21

Private Equity and LBO Market 22[Credit 101] What Is the U.S. Private Equity (PE) Market? 22How Does Fitch Ratings Analyze Private Equity Companies? 24[Credit 101] What Is an LBO? 24



Leveraged Loans

What Is the Trend in the LBO Market? 25[Credit 101] What Are BDCs? 28What Does the Regulatory Environment Look Like for BDCs? 28How Have BDCs Performed Lately? 28

Defaults 30[Credit 101] What Happens in an Event of Default? 30[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law? 30What Are the Historical Default Rates for Leveraged Loans? 32What Is the Current Default Environment for Leveraged Loans? 33

Recovery 36[Credit 101] What Is Recovery? 36[Credit 101] What Is DIP Financing? 38[Credit 101] How Does Fitch Estimate Recovery? 38How Do Leveraged Loans Perform in Fitch’s Recovery Analyses? 44What Are the Historical Post-Default Prices for Leveraged Loans? 45What Are the Historical Emergence Prices for Leveraged Loans? 46

CLOs 46[Credit 101] What Is a CLO? 46[Credit 101] What Are the Mechanics of an Arbitrage CLO? 48[Credit 101] Who Are CLO Market Participants? 50How Does Fitch Ratings Analyze CLOs? 52What Is the Level of Recent CLO Issuance? 52How Has the Commodity Cycle Downturn Affected CLOs? 53

Leveraged Loan Data 55Issuance 55Issuance by Industry 64Issuance by Purpose 67Pricing 70Maturities 73Secondary Bids 75Retail Funds 77Default Rates 79Post-Default Prices 82Emergence Prices 86Private Equity and Leveraged Buyout 89Collateralized Loan Obligations 104

4The Annual Manual (U.S. Leveraged Finance Primer) — Leveraged Loans May 31, 2017

Leveraged Loans

Leveraged Loan Basics[Credit 101] What Is the U.S. Leveraged Loan Market?

Defining the MarketsA leveraged loan is a commercial loan to a high-yield company provided by a group of lenders. The process of issuing a leveraged loan was traditionally arranged and administered by investment or commercial banks. With the changing landscape of the leveraged loan market brought about by increased regulatory oversight for systemically important institutions, the share of leveraged loans arranged by nontraditional lenders (nonbank providers of capital, such as KKR Capital, Macquarie Capital, Jefferies Capital Partners) unencumbered by conservative underwriting requirements has increased.

A borrower can negotiate to obtain financing on a committed or best-efforts basis. In a committed transaction, the lead lender will commit to underwrite a pre-agreed amount of financing, thus taking on the entire risk. It will subsequently proceed to spread the risk to other institutions via syndication. Regardless of appetite for the credit in the market, the borrower is guaranteed to receive its target amount of financing, because the underwriter has agreed to use its balance sheet to provide it. By contrast, in a best-efforts arrangement, the final amount of the loan is not guaranteed and is subject to the market’s appetite for credit.

Outside these two general categories, a well-banked borrower could also obtain financing from relationship lenders in a club deal. Club deals were more common for smaller financings in the past. However, today they could be as large as regular syndications in terms of size. In a club deal, each lender provides an equal amount of financing and receives more or less an equal share of the associated fees.

Within the capital structure of a company, a leveraged loan typically ranks at the top, right below trade claims. It is generally secured and guaranteed, but there can be exceptions. Pricing is set as a spread over a base rate, such as LIBOR or the Fed Funds Rate, sometimes with a floor (often 1%, 0.75%, and most recently 0%), such that the base rate is the greater of the benchmark and the predetermined floor. With interest rates set to rise, loans have become especially appealing to investors due to their floating-rate nature.

Defining the Loan MarketsLeveraged Loans

Investment GradeBroadly Syndicated/Large Corporate Middle Market Direct Lending

Sales Size $7 Bil. + $500 Mil.–$7 Bil. < $500 Mil. Varies widelyEBITDA Size $2 Bil. + $100 Mil.–$2 Bil. < $100 Mil. Varies widelyRatings > BBB– < BB+ < BB+, unrated < B+, Unrated

Average Deal Size > $1 Bil. $500 Mil.–$1 Bil. Traditional: <= $100 Mil.; Large: > $100 Mil.–$500 Mil. Varies Widely

Structure RCFs, TLs RCFs, TLs RCFs, TLs, unitranche TLs, unitrancheSecurity Unsecured Secured Secured SecuredAverage Tenor 1–5 years Five years 4–6 years 3–7 yearsSecondary Liquidity Yes Yes Limited Limited

Syndication Method Broad Broad Club, syndication or single investor

Club, no syndication

Lenders Banks Banks Banks, specialty finance Specialty finance

Main InvestorsRetails funds, insurance companies, pension funds

Banks, retail funds, CLOs

Specialty finance, CLOs, private equity

Specialty finance, private equity

RCF – Revolving credit facility. TL – Term loan. Note: Figures based on Fitch estimates. Source: Thomson Reuters LPC, Fitch Ratings.


Leveraged Loans

Broadly syndicated loans (BSLs) represent the largest segment of the leveraged loan market. These are loans made to large corporations and syndicated by banks to investors. BSLs represented 60% of the institutional loan market in 2017. Compared with BSLs, the Middle Market comprises loans issued by companies with up to $100 million EBITDA.

The broadly syndicated leveraged loan market can be split into two distinct categories: pro rata loans (Revolving Credit facility and Term Loan A) and institutional loans (B, C, D-term loans, and, generally, second lien). Relationship banks invest in pro rata loans, which are typically lower priced and have meaningful amortization throughout the tenor of the loan. Banks are incentivized to participate in the lower yielding pro rata portion by the need to maintain business relationships with clients and the potential for profitable banking business in other areas (e.g. IPO, advisory, Treasury services, etc.). In contrast, institutional investors, such as CLOs and mutual funds, are motivated by search for yield. They invest in institutional loans, which bear a higher spread and amortize minimally during the tenor of the security, with the majority of the principal due at maturity. Institutional loans in particular experienced record growth in the years following the financial crisis.

Market History

Several factors have contributed to the record growth in the U.S. institutional leveraged loan market in recent years, including growing investor demand, which has played a major role. As interest rates reached historic lows in the years following the financial crisis, the search for yield attracted new investors into the high-yield bond and leveraged loan markets. CLOs and retail funds are among the most active buyers of leveraged loans.

The U.S. institutional leveraged loan market totaled over $973 billion in amount outstanding and comprised nearly 1,400 issuers at the end of 2016.

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Leveraged Loan Market History

($ Bil., Institutional Leveraged Loan Market Size)

KKR – Kohlberg Kravis Roberts. TXU – TXU Corporation. Note: Gray section represents a recessionary period as defined by the National Bureau of Economic Research. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Fitch Ratings.

Credit Crisis

Dodd-Frank Bill Proposed

KKR Purchases TXU, Largest LBO in U.S. History

Lehman Brothers Files for Bankruptcy

Secondary Loan Prices Plunge to 60

Institutional Loan Issuance surges, reaching $639 Bil.

CLO Issuance HitsAll-Time High of $124 Bil.

Oil Falls Below $40/Barrel; Default Count Highest

Since 2012

Issuers flock the market for refinancings and repricings in

search of more favorable terms


Leveraged Loans

[Credit 101] What Are the Key Characteristics of Leveraged Loans?

Seniority Leveraged loans are generally senior secured and sit at the top of the borrower’s capital structure. Senior secured and unsecured creditors would typically be first in line to receive payments from a debtor. In a bankruptcy situation, secured lenders will move to the front of the line, followed by senior unsecured creditors, senior subordinated bondholders, preferreds holders, and equityholders.

Institutional Leveraged Loan Market Profile (Institutional Leveraged Loan Industry Composition)

AverageAmount Issue % of Industry

Outstanding No. Size First SecondIndustry ($ Bil.) Issuers ($ Mil.) Lien Lien Sponsored Cov-LiteAutomotive 20.08 33 427.18 95 5 60 47Banking & Finance 41.02 78 347.62 93 7 70 64Broadcasting & Media 50.31 59 613.52 96 4 59 62Building & Materials 21.05 33 421.03 96 4 61 68Cable 13.39 14 535.57 99 1 27 2Chemicals 34.56 57 421.50 95 5 43 63Computers & Electronics 135.90 155 543.60 93 7 73 68Consumer Products 10.12 27 259.54 95 5 53 44Energy 39.86 66 438.01 85 15 41 43Food, Beverage & Tobacco 19.76 37 379.98 95 5 68 47Gaming, Lodging & Restaurants 35.00 48 593.25 98 2 39 59Healthcare & Pharmaceutical 103.28 136 511.30 96 4 56 41Industrial & Manufacturing 32.43 62 352.54 93 7 80 75Insurance 21.95 23 457.38 81 19 87 76Leisure & Entertainment 26.67 41 430.23 94 6 54 60Metals & Mining 11.86 23 382.63 92 8 33 60Paper & Containers 14.79 21 528.27 97 3 80 59Real Estate 12.70 14 604.66 99 1 50 83Retail 62.31 68 605.00 94 6 66 82Services & Miscellaneous 123.82 220 342.98 90 10 77 63Supermarkets & Drug Stores 11.83 13 622.39 90 10 73 83Telecommunications 49.89 50 615.91 90 10 45 33Textiles & Furniture 7.61 19 330.79 86 14 85 49Transportation 41.55 62 461.67 98 2 52 49Utilities, Power & Gas 31.33 34 764.11 100 0 47 45Total 973.08 1,393 464.03 93 7 61 58

Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

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Loan Retail Funds — Assets Under Management Increased Significantly Since Credit Crisis($ Bil.)

Note: Assets under management include both exchange-traded funds (ETFs) and managed funds. Source: Thomson Reuters LPC.

$174 Bil.

$24 Bil.

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Annual CLO Issuance Reached Record High in 2014

($ Bil.)

Source: Thomson Reuters LPC.


Leveraged Loans

SecurityLeveraged loans are usually secured. However, the quality of the security package can vary from one deal to another. Collateral composed of the physical assets of the borrower and its operation subsidiaries is preferable to a stock pledge.

PricingLeveraged loan pricing is typically floating rate and a function of the reference rate and the spread. In today’s market, a transaction will launch with guidance on pricing (i.e. a range for the spread over the base rate, rather than a predefined level). Based on investor response and market conditions, pricing will settle at the lower, middle or higher end of the guidance. LIBOR floors, which are especially relevant in a period of historically low interest rates, have been set lower than the traditional 1%, or even to 0%. Original issue discount (OID), where lenders can purchase issuer debt at a discount (e.g. 99 cents on the dollar), has also been tightening as a result of market technicals skewed in favor of issuers.

CovenantsCovenants represent a set of restrictions that detail what the borrower can and cannot do during the life of the loan. There are three main types of covenants:

● Affirmative covenants state what a borrower must do to be in compliance during the life of the loan (e.g. provide financial statements and maintain insurance).

Senior Secured Credit Facility:• Asset-Based Revolver

• Revolver and/or Term Loan

Leveraged Capital Structure — Seniority

Source: Fitch Ratings.

Seni

ority

Second-Lien Loan or Secured Bond

Senior Unsecured Bonds

Senior Subordinated Bonds

Subordinated Junior Bonds

Equity

Hybrid Equity/Convertible Bonds

Loan Pricing ComponentsComponent/Fee DetailReference Rate Overall pricing on a loan is based on a spread over a reference rate. The reference rate is typically

reset daily and is based on the bank’s prime lending rate. Common reference rates include LIBOR or prime.

Spread The rate added to the reference rate to determine the overall rate on the loan. The spread is based on the credit quality of the borrower and can change based on changes in the borrower’s performance. For example, the lower the credit quality of a borrower, the higher the probability of default. Due to this higher probability, investors will demand higher spreads to compensate for the higher probability of default.

LIBOR Floor A LIBOR floor sets a minimum reference rate (i.e. LIBOR) on which the loan pricing is based. If the market LIBOR rate falls below the LIBOR floor rate, pricing will be based upon the LIBOR floor rate rather than the current market LIBOR rate.

Original Issue Discount (OID)

A discount to par (100). The OID is offered in the primary market during the syndication process to enhance investors’ yield on the loan.

Commitment Fee Paid to lenders on the undrawn portion of the revolving credit facility. Also called a ticking fee.Usage Fee Paid to lenders on the drawn portion of the revolving credit facility if utilization falls below a certain

minimum threshold.Facility Fee Fee paid on the entire commitment amount, regardless of usage.Administrative Fee Fee paid to the administrative agent for administrative tasks performed in conjunction with the

loan, such as distribution of payments.Source: Fitch Ratings.


Leveraged Loans

● Negative covenants limit what the borrower can do during the life of the loan (e.g. limits on additional incurrence of debt or limits on dividend amounts).

● Financial (maintenance) covenants require the borrower to maintain certain financial performance measures during the life of the loan. These are typically measured on a quarterly basis (e.g. leverage ratio tests and coverage ratio tests).

CallabilityCall protection for institutional leveraged loans has become widespread. It takes the form of soft call provisions and is intended to protect investors’ income streams by including a prepayment premium. This is especially relevant in today’s market, where opportunities to reprice at a lower rate are in abundance. Typical soft call provisions are 101% for a length of time following the issuance — anywhere from six months to two years (i.e. an issuer would have to pay a 1% premium if the issuer decides to refinance within this period). There were several instances over the past 12 months when borrowers chose to pay the premium in exchange for the chance to get a better spread. In today’s issuer-friendly market, borrowers are finding ways around callability by including stepdowns in the interest margin prior to the call date.

[Credit 101] What Are the Different Types of Leveraged Loans?

Pro Rata TranchesPro rata tranches refer to the types of leveraged loans invested in by banks and other financing companies.

● A revolving credit facility is similar to a credit card, in that it allows a company to draw down debt, repay and then draw back down. The drawn amount is subject to an allowable drawdown tenor, which could be set to anything between one month to a year through negotiations

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Pro Rata Leveraged Loan Issuance($ Bil.)


Statistics:High: $510 Bil. (2013)Low: $165 Bil. (2002)Avg.: $297 Bil.

Common Loan CovenantsNegative Covenants Affirmative Covenants Financial Covenants• Incur Debt • Payment of Taxes • Maximum Senior Debt-to-EBITDA Ratio• Grant Liens or Pledge Assets • Maintain Insurance • Maximum Total Debt-to-EBITDA Ratio• Sell or Dispose of Assets • Access to Information • Minimum EBITDA-to-Total Interest Ratio• Make Investments and Loans • Books and Records • Mimimum Fixed-Charge Coverage Ratio• Make Acquisitions • Maintain Condition of Assets • Maximum Capex Limit• Merge or Consolidate with any Other Entity • Additional Collateral • Minimum Tangible Net Worth Ratio• Make Dividends or DistributionsSource: Fitch Ratings.


Leveraged Loans

between the lender and the borrower. The facility may contain borrowing base restrictions or sublimits. The revolver can be multicurrency and allow for multiple borrowers.

● A term loan A (amortizing loan) is an installment loan that is typically fully drawn at close, and has meaningful amortization throughout the tenor of the loan, with the remaining balance due at maturity. The required amortization percentage typically increases over time.

● The pro rata portion is traditionally syndicated to and held by relationship banks.

Institutional TranchesInstitutional tranches refer to the types of leveraged loans invested in by institutional investors, such as CLO managers, loan mutual funds and pension funds, amongst others.

● A term loan B is similar to a term loan A in operational mechanics, but with minimal amortization through the life of the loan (e.g. 1% per annum), with the bulk of the balance due at maturity. The facility may contain a delayed-draw component or a separate delayed-draw term loan. Delayed-draw term loans are not drawn at close, and are used to fund an event, such as an acquisition or large capex, only if the company meets certain conditions.

● A second-lien term loan is similar to a term loan B in structure and mechanics, except for priority, security and pricing. The priority is second to first-lien facilities, the security is generally a second lien on the first assets and the pricing is wider by 200 bps–400 bps.

Credit Facility Summary

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Institutional Leveraged Loan Issuance($ Bil.)



Facility Types Comparison

DescriptionRevolving Credit Facility Term Loan A Term Loan B Second Lien

Security Senior secured — generally a first lien on all assets and pledge of stock.

Senior secured — generally a first lien on all assets and pledge of stock.

Senior secured — generally a first lien on all assets and pledge of stock.

Senior, second to first-lien facilities, secured — generally a second lien on the first-lien assets and a first lien on other certain assets.

Structurea

Average Facility Size $100 Mil.–$400 Mil. $100 Mil.–$750 Mil. $250 Mil.–$1,500 Mil. $100 Mil.–$350 Mil.aFitch estimates as of Dec. 31, 2016. Continued on next page. Source: Fitch Ratings, Thomson Reuters LPC.


Leveraged Loans

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Pre-2012 2012 2013 2014 2015 2016 Overall Market

(%)Cov-Lite Covenants

Note: Covenant-lite percentages shown. Years reflect outstanding institutional leveraged loan market profile at end of December. Overall Market reflects the vintage of current loans outstanding and not total issuance. Covenant-lite is defined as deals that do not have maintenance covenants.Source: Fitch Ratings, Thomson Reuters LPC, Bloomberg.

Covenant-Lite Composes 58% of Outstanding Volume in the Institutional Leveraged Loan Market

Issuance Year

Covenant-Lite Loans[Credit 101] What Is a Covenant-Lite Loan?

Covenant-lite generally refers to a loan with no financial maintenance covenants. Instead, covenant-lite loans only have high-yield-bond-like incurrence covenants.

Variations of covenant-lite loans include “covenant-loose” and “springing covenant-lite.” A covenant-loose loan is a loan with one or more maintenance covenants, but the covenant breach level is set so loosely it would permit deviations of up to 50% from the issuer’s projections, versus a normal covenant cushion of approximately 15%–20%. A springing covenant-lite loan is a loan that contains a maintenance covenant on the revolver but no maintenance covenants on the term loan. The covenant applies or springs into effect on the term loan once the revolver is drawn or when drawings exceed a certain threshold.

What Is the Size of the Covenant-Lite Market?

Covenant-lite loans have become the norm in the institutional leveraged market. Forty-seven percent of the currently outstanding covenant-lite loans were issued over the course of 2016.

Facility Types Comparison (Continued)

DescriptionRevolving Credit Facility Term Loan A Term Loan B Second Lien

Funded/Unfunded, Unfunded, Partially Funded or Fully Funded Funded or unfunded Funded Funded FundedTenor Approximately

3–5 yearsApproximately five years

Approximately 5–7 years

Approximately 5–7 years

Repayments Amortizing Amortizing (gradual) Limited (bullet payment structure)

Limited (bullet payment structure)

Pricinga

Spread/Margin Floating Floating Floating FloatingAverage Spread/ Margin (bps) 315 320 435 768Commitment Fee (bps) 25–50 — — —

MarketsMarket Private Private Private PrivateInvestors Retail banks Retail banks Institutional investors Institutional investors

aFitch estimates as of Dec. 31, 2016. Source: Fitch Ratings, Thomson Reuters LPC.


Leveraged Loans

How Did Covenant-Lite Become the New Market Standard?

The rise in covenant-lite loan issuance since fourth-quarter 2012 reflects the market’s long-term structural evolution as the buyer base has evolved from banks to institutional investors. The pace of the shift has accelerated in the past several years and is supported by record low interest rates, an improved economy, a mostly benign default rate environment, stable corporate credit profiles, meaningful inflows and record CLO issuance.

For lenders, maintenance covenants provide an early warning mechanism and a means to intervene in a deteriorating credit situation, possibly preserving value for lenders. In most cases, a technical violation of a maintenance covenant rebalances the risk and return, thereby allowing a group of lenders to negotiate a higher spread and extract a fee from the issuer, constrained by the struggling company’s ability to pay the fee. Covenants also preserve certain rights that allow lenders to initiate changes they may want, or to call the loan in the most extreme cases.

For issuers, covenants are often a time-consuming and expensive hurdle. Most BSLs can frequently have dozens of different lenders in one single loan, making any type of amendment process cumbersome and time consuming. Conversely, a covenant-lite loan affords the issuer greater financial flexibility and allows the business managers to focus on running the business rather than managing around a financial covenant.

The transformation of the BSL market to a more covenant-lite market has been supported by the growth of secondary loan trading through the standardization of transactions, documents and practices. These changes have helped accelerate the convergence of terms between the leveraged loan and high-yield bond markets.

What Considerations Does Fitch Give to Covenant-Lite Issuers?

Fitch does not treat covenant-lite and covenanted loans differently in its distressed enterprise valuation or recovery rating analyses. Our assumptions for a reorganization multiple, sustainable post-default EBITDA and liquidation values do not change based on the presence or absence of financial maintenance covenants.

However, we do believe covenant-lite loans are generally reserved for issuers of higher credit quality, but quantifying this view remains a challenge given a large percentage of the market is privately sponsored. Fitch has computed and segmented the historical performance of covenanted and covenant-lite issuers, and we are cautious not to over-interpret the data.

Fitch emphasizes credit analysis involves thorough evaluation of a range of factors. For example, credit metrics alone do not provide a holistic view of a company’s credit quality. Leverage and coverage metrics remain relative measures and must be considered in context with other factors, such as business risk. Similarly, covenant-lite status alone does not equate to riskier lending practices.

In a market where covenant-lite status has become the norm, Fitch notes in certain cases, fully covenanted issuers may actually represent the riskier borrowers. In this environment, the presence of a financial maintenance covenant may be a red flag compensating for some other source of weakness in the credit profile.

Are Recovery Prospects Different for Covenant-Lite Loans?

The averages, medians and ranges taken from these small, heterogeneous data sets can be misleading, as the circumstances around each company’s bankruptcy are unique and their credit stories often involve issues unrelated to covenant status. The exact driver of bankruptcy is typically a mix of factors, and it is challenging to pinpoint the exact cause to be used for analysis


Leveraged Loans

in a dataset. However, most participants in the U.S. agree that an inability to refinance is the primary contributor to defaults.

We do not perceive the presence or absence of financial maintenance covenants to be a key driver of recovery values because refinancing risk can arise for companies that are still within their covenant parameters, covenants are often waived, and companies and their bankers can set wide covenant thresholds at the outset.

Fitch does not currently adjust recovery assumptions based on the presence or absence of financial maintenance covenants for several reasons. Issuers of BSLs in the U.S. that encounter distress almost always restructure and emerge from bankruptcy with less debt. Restructuring maximizes distressed enterprise value in these circumstances. Conversely, liquidations tend to destroy enterprise value, as the whole is typically worth more than the sum of the parts. In those jurisdictions and products where liquidation is more prevalent, Fitch may already be using a lower reorganization multiple assumption that is appropriate for that market or product.

For more information on covenant-lite issuance, defaults, and recovery, please see our Leveraged Loan Data section.

Second-Lien Loans[Credit 101] What Is Second-Lien Debt?

Second lien debt generally places debtholders second in line for recovery in the case of bankruptcy or default.

There is no consistent market definition of what constitutes a second-lien facility and nomenclature can be misleading. Sometimes the second lien is in a position that is not actually the second most-senior position, and sometimes the debt that does have the second most-senior position is not called the second lien.

Some issuers can have a first-lien ABL facility (priority to working capital assets) and several other first-lien facilities ahead of second-lien debt. Along the same lines, term loans with a second lien on working capital and a first lien on real estate, equipment and intangible assets are sometimes referred to as second-lien debt, particularly among retailers and in the middle market, even though the term loan lenders have a first lien on hard assets and intangibles.

[Credit 101] Why Issue Second Lien Debt?

Second-lien issuers tend to be highly leveraged with low ‘B’ or ‘CCC’ category Issuer Default Rating (IDR) credit profiles. Investors are attracted to second lien for the higher yields relative to first-lien debt while still maintaining a claim on the collateral. Second-lien loan premiums over first-lien facilities averaged 3.59% based on data available for 2003–2016.

Funding of opportunistic debt exchanges and distressed debt exchanges (DDEs) of unsecured debt for second-lien debt are common uses of second-lien debt. Companies can often push out the near-year maturities of unsecured debt by offering to swap the maturing unsecured note for new second-lien debt. Unsecured holders that agree to accept the exchange offer avoid becoming subordinated to the new second-lien debt that will be slotted above them.

Second lien is attractive to both lenders and investors. Issuers benefit from the additional source of financing that comes at a lower price compared with mezzanine and other subordinated debt


Leveraged Loans

thanks to its secured nature. By the same token, lenders are drawn to second-lien debt by its lucrative rates and protection provided by the collateral.

Strengthening Loan Volumes

Fitch expects a healthy 2017 second-lien term loan volume that could approach the peak issuance years of nearly $40 billion in 2007, 2013 and 2014. Volumes rose to $22.1 billion in 2016, a significant bump from the $16.8 billion in 2015, but were still much lower than the 2007 peak of $39.2 billion. YTD volumes have accelerated to $9.4 billion through April 14, 2017. Despite the higher issuance, second lien is still a relatively small 6.6% slice of the overallinstitutional term loan market.

Volumes increased in sequential quarters of 2016, reaching $9.9 billion by the fourth quarter. YTD, 2017 has started on a moderately stronger pace than 2016, with $8.2 billion of first-quarter volume translating to $33.0 billion on an annualized basis. The overall loan market has significant liquidity, with demand for loans out-stripping supply.

Much of YTD 2017 issuance was earmarked for LBOs (40%), with general corporate purposes (22%) another common use of proceeds. Fitch anticipates that leveraged buyouts will continue to be primary market volume drivers for the balance of this year.

Many of the bankruptcy exit funding-related second-lien issues that are provided to pre-petition creditors in distributions are not listed in issuance league tables, and terms remain private. Market sources for data on volumes also typically exclude unitranche structures in which a first-lien lender carves out a second-out loan based on a first-out/second-out agreement between the two lenders. These second-out facilities create, for practical purposes, a second-lien position, but activity in this market is opaque.

Services, technology, and healthcare and pharmaceuticals were the largest sectors in terms of the share of second-lien new issues over the nearly 16 months ending April 17, 2017. However, issuance was not heavily concentrated within these sectors. Services accounted for 34 of 174 facilities (20%), and technology, and healthcare and pharmaceuticals for 30 and 19 loans, respectively, according to Thomson Reuters LPC market data.

For a more detailed update on the second-lien market for the period from Jan. 1, 2016 through April 17, 2017, please see Second-Lien Debt Analysis (Rising U.S. Loan Volumes, Highly Leveraged Issuers).

6.7

19.9 19.926.3

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7.52.0

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U.S. Second-Lien Institutional Term Loan Issuance Volumes 1Q16 2Q16 3Q16 4Q16

($ Bil.)

Source: Thomson Reuters LPC, Fitch Ratings, Bloomberg.




Leveraged Loans

Regulatory EnvironmentWhat Regulations Will Have the Most Impact on the Leveraged Loan Market?

Guidance on Leveraged LendingIn 2013 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company (the regulators) released the Interagency Guidance on Leveraged Lending to assist financial institutions in providing leveraged lending to creditworthy borrowers in a safe-and-sound manner. This replaced the 2001 interagency guidance regarding sound practices for leveraged finance companies. The tremendous growth in leveraged lending combined with the weakening of lender protections in credit agreements were the primary drivers behind the new guidance.

As financial institutions began their practical applications of the guidance, it became clear it was not specific enough, or tailored to the various situations in which financing is provided. Thus, in November 2014, the regulators issued the FAQ for implementing the March 2013 guidelines after a Shared National Credit exam suggested underwriting standards were not being met

Regulatory Overview

Regulation EffectImpact on Loan Market Current Impact on Market

Leveraged Lending Guidance

Could cause banks to pull back from leveraged loan underwriting, leaving nonbank originators to come in to replace bank underwriters. Nonbank originators are presumably not subject to the guidance, as they are not regulated by the banking agencies.

Moderate Evidence suggests market share of top leveraged lenders in 2013 has declined since guidelines were implemented, with nonbank originators — who are not subject to direct regulation by the Fed, FDIC or OCC — picking up share. No material impact on overall leverage ratios.

Risk Retention (Dodd-Frank Act)

Could cause CLO and loan markets to shrink and cost of financing to rise for speculative-grade borrowers, as requirement to retain 5% of fair value of CLO may crimp new CLO origination.

High In the second quarter of 2017, the CLO pipeline remains robust and firms are taking steps to raise capital, partner with parties with capital or sell. Fitch believes lack of capital will not be a factor in CLO issuance.

Volcker Rule Many legacy CLOs will no longer be permissible investments by banks and must mature, be restructured or be disposed of by July 21, 2017. Small banks typically have much higher CLO exposure relative to their capital base and are vulnerable to most harm.

Low New CLOs are structured to be Volcker compliant, so banks could continue to purchase. Banks have until July 21, 2017 to conform, which has allowed nonconforming CLOs to be repaid or refinanced into conforming CLOs beforehand.

Chapter 11 Reform Could adversely alter recovery prospects of first-lien debt claimholders, leading to a likely increase in cost of financing for speculative-grade borrowers.

Low The commission plans to present its findings to Congress in 2018.

Source: LSTA, Fitch Ratings.

Select Leveraged Lending IssuesIssue Guidance

How debt should be calculated for the purposes of the leverage test.

It should reflect all of the issuer’s debt capacity, including unused RC availability, as well as accordion features included in the credit agreement.

Conditions for the exclusion of asset-backed loans (ABLs) from the definition of leveraged loans.

Permissible if they are the dominant source of ongoing funding for the borrower.

What is considered origination? New extension of credit, refinancing, or modification of an existing loan agreement, or a renewal of a matured or maturing loan transaction.

The treatment of covenant-lite loans. Potential weaknesses in one aspect of a transaction structure are assessed along with other financial aspects of the borrower.

Debt/EBITDA ratios in excess of 6x. Could raise concerns, but not a hard cap, as leverage levels are evaluated within the context of future cash flows as well as the borrowers’ industry condition.

Ability to fully amortize senior secured debt or to repay at least 50 percent of total debt over 5–7 years.

Similar to Debt/EBITDA ratio, evaluated along with other aspects of credit risk.

Source: Leveraged lending guidelines.


Leveraged Loans

specifically in areas of borrower repayment capacity, ability to justify valuations and sponsor projections. The Select Leveraged Lending Issues table on the previous page provides examples of selective issues that received additional clarification.

As implementation of the guidance continued, more questions were raised, prompting the regulators to hold a conference call with the banks in February 2015. Maintaining the stance that there are no hard and fast rules set by the guidance, the three agencies offered the concept of examiner red flags, which would involve taking a deeper look into the underwriting process and credit approval of the loan, but not necessarily assigning a non-pass grade. These included the following:

● Leverage in excess of 6x debt/EBITDA (debt includes undrawn incremental and accordion baskets);

● The majority of the repayment of a loan is projected to occur later in the life of the loan (5–7 years);

● Cash flow projections that are overly optimistic; ● Projections that are not stress-tested for changes in interest rates and foreign exchange

rates as well as potential covenant breaches; ● Credit agreements that lack covenant protections; ● EBITDA adjustments that are a large percentage of current EBITDA, although no percentage

cap was specifically identified; ● EBITDA adjustments that lack credible justification and documentation; and ● Regulators also stated they would look unfavorably on a loan if the private equity firm that

controlled the issuer had a history of paying itself dividends quickly after the loan.Impact

ImpactThe Interagency Guidance on Leveraged Lending presents a significant hurdle to investment banks’ abilities to underwrite transactions due to the examiner red flags, such as high leverage and aggressive EBITDA adjustments. Too many loans classified as nonpass ratings can result in regulatory penalties for the bank.

High purchase price multiples and leverage constraints have reduced LBO deal flow and prices for companies remain at historically elevated levels. Fitch estimates the overall median transaction multiple in 2016 was 10.9x, the highest it has been since 2008. The equity multiple for 2016 was 4.8x, compared with 3.2x, 3.8x and 3.9x in 2013, 2014 and 2015, respectively. Fitch believes the upward trend in equity multiples is a function of competition with corporate buyers, combined with

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

(x)

Note: Left axis represents total debt/EBITDA.Source: Thomson Reuters LPC.

LBO Leverage Multiples(Quarterly LBO Leverage for Broadly Syndicated Deals)

6.09x

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Leveraged Loans

the pressure of staying within the leverage levels prescribed by the leverage lending guidance. This view is supported by the observed increase in percentage of equity contribution since 2013.

While the primary goal of the leverage lending guidance is to rein in leverage to below 6.0x, 2016 saw leverage ratios edge up above this threshold. We have seen deals arranged by nontraditional lenders, such as KKR Capital, Macquarie Capital, Ares Capital and Jefferies Capital Partners, who are able to provide more aggressive terms than a bulge bracket investment bank because they are not regulated financial institutions. These aggressive structures cleared the market with relative ease thanks to market technicals favoring issuers in the second half of 2016. It remains to be seen how these firms will be able to handle a potential overhang if liquidity events similar to 2007 prevent them from syndicating deals.

Focus on Exploration and Production (E&P) CompaniesThe OCC released the Oil and Gas E&P Lending booklet in March 2016. The booklet outlines qualitative and quantitative guidelines to be followed in addition to the guidance to manage leveraged lending in the E&P sector. The qualitative guidelines are similar to those shown in the guidance, mostly emphasizing risk management and internal oversight. However, there are many quantitative hurdles to overcome that are specific to E&P names.

Fitch’s analysis suggests numerous U.S. high-yield Oil & Gas E&P companies may be assigned loan risk ratings of Substandard, Doubtful or Loss (collectively Classified) based on leverage ratio analysis and other factors included in regulatory assessment guidance.

Ramifications of Classified loan ratings could include further cuts to reserve-based revolver (RBL) borrowing bases, higher funding costs and reduced access to new loans at a time when bond market access is very limited for high-yield E&P companies. Nonbank lenders or specialized production financing may take up some RBL lending slack, but at a price.

For more information on the E&P lending guidance please see the special report E&P Lending Guidance Signals More Pain Ahead (OCC Lending Guidance Amplifies Challenges for Leveraged E&P Borrowers).

Risk Retention

BackgroundThe final set of credit risk retention rules, mandated by the Dodd-Frank Act, became effective Dec. 24, 2016. They are intended to enforce alignment of interests between securitizers and investors of securitizations by requiring the former to retain a certain percentage of the credit risk of the securitized assets. Generally, the rules require the securitizer or its majority-owned affiliate to maintain economic interest equal to at least 5% of the credit risk of the assets used as collateral for an issuance. These rules have a meaningful impact on CLO issuances and structure. To ensure compliance, a CLO can use one of three main approaches.

OCC Ratio Metrics and ThresholdsRatio Pass

Special Mention

Substandard or Worse

Funded Debt/EBITDAX (x) < 3.5 3.5–4.0 > 4.0Funded Debt/(Funded Debt + Equity Capital) (%) < 50 50–60 > 60Total Committed Debt as a Percentage of Total Unrisked and Undiscounted Proved Reserves (%) < 65 65–75 > 75EBITDAX – Earnings before interest, taxes, depreciation and amortization, plus depletion and exploration expenses. Source: Office of the Comptroller of Currency, Oil and Gas Exploration and Production Handbook.

https://www.fitchratings.com/site/fitch-home/re/879970




Leveraged Loans

Majority-Owned Affiliate (MOA) Under this model, the CLO manager owns the majority of the voting and economic equity in the MOA. This structure allows the CLO manager to continue as the collateral manager of the CLO and receive management fees while its MOA will hold the retention interest and receive related payments. Compared with other options, an MOA is a less time consuming and legally intensive vehicle to set up. However, an MOA may not be structured or sufficiently capitalized to serve as an originator for those who want to satisfy both U.S. and EU risk retention requirements.

Capitalized Majority-Owned Affiliate (C-MOA) More recently, there has been increased interest in the use of a hybrid structure that participants are referring to as the capitalized majority-owned affiliate (C-MOA). Unlike an MOA, which is a special purpose vehicle, a C-MOA would be capitalized beyond what is necessary to simply hold the retention interest so it can originate loans itself or through a related party, and/or select loans to acquire for its own account and then sell to the CLO. The minimum required equity capitalization of the C-MOA must come from the existing manager and additional debt and/or equity capital may come from third parties. The C-MOA should have sufficient capital to both originate loans for EU rules and acquire the required retention interests for various CLO transactions.

Capitalized Management Vehicle (CMV) The CMV option involves the creation of a newly capitalized and self-managed entity that would both act as the collateral manager and hold risk retention interests. The CMV must demonstrate independence; unlike the MOA and C-MOA, it must be completely unaffiliated with the manager, and the manager is not required to make capital contributions to the CMV. As with the creation of any new entity, raising the money, negotiating the terms and setting up a CMV necessarily entails significant time and expense — more so than any of the other options. However, one reason many managers are attracted to this approach is that a CMV could easily be modified to satisfy EU risk retention requirements, thereby offsetting some of the cost and expense to serve as a more global solution. Investors also find this structure appealing, because they get to control 100% of the CMV’s economic interests, unlike the MOA and C-MOA, for which investors control 85%–90% and the manager controls the rest. Some major CLO managers that have structured CMVs included Apollo Global Management, Oaktree Capital, Blue Mountain Capital Management, Golden Tree Asset Management, and Napier Park Global Capital.

ImpactThe widely expected consequence of the risk retention rule becoming effective was that it would crimp CLO origination. Most CLO managers are thinly capitalized and do not have the balance sheet or spare funds to purchase a significant percentage of the CLO notes. Thus, the months preceding the Dec. 24 deadline saw a surge in CLO pricings and CLO refinancings. Overall CLO issuance for 2016 was $72.4 billion, compared with $98.5 billion in 2015, as the expected effect of the regulation took hold. Of the $72 billion, $46 billion came to market in second-half 2016. January 2017 had a slow start, with only two CLOs pricing for a little less than $1 billion. However, in the second quarter of 2017, the CLO pipeline remains robust.

One positive expectation of the risk retention rule is that it might lead to increased participation, especially in the lower tranches, from nontraditional players, such as conservative asset management firms and pension funds.

While the general expectation is that CLO issuance will not reach its historic highs, this may be due more to the lack of collateral than the regulations.


Leveraged Loans

Volcker Rule

BackgroundOriginally proposed in 2010, the Volcker Rule (paragraph 619 of The Dodd-Frank Act) was not passed in its final form until July 2015. The spirit of the Volcker Rule is to prohibit banks from making speculative bets with their own funds. The rule prohibits:

● Most proprietary trading by banks. ● Bank ownership of hedge funds and private equity funds. ● Certain transactions between banks and covered funds they sponsor.

ImpactThe final rule exempted loans from the proprietary trading restrictions imposed on banks for most other assets and set out a clear path for CLOs’ complete exemption from the Volcker Rule. However, to qualify for the exemption from the Volcker Rule, CLOs would not be able to hold any securities other than short-term cash equivalents. The conformance period was extended to July 2017, but this extension does not resolve the issue for banks. Nearly all 2.0 CLOs will still be outstanding under the rule.

Foreign Account Tax Compliance Act (FATCA)

BackgroundFATCA requires foreign financial institutions (FFIs) to report information about their U.S. accounts to the IRS.

ImpactThe penalty for noncompliance is a 30% withholding on payments to a noncompliant FFI, including loan interest payments, principal repayments and sale proceeds of loans. To avoid withholding and to qualify as a participating FFI, an FFI will generally have to enter into an agreement with the IRS to:

● Identify and report on its U.S. accounts, and ● Withhold 30% tax on certain U.S.-connected payments to a nonparticipating FFI or

recalcitrant accountholder.

Withholding on interest payments under FATCA began July 1, 2014, and the grandfathering deadline was extended to July 1, 2014 (i.e. any obligation outstanding on July 1, 2014 will not be subject to FATCA). The withholding date for principal repayments and gross proceeds is unchanged (i.e. withholding began Jan. 1, 2017).

Chapter 11 Reform

BackgroundChapter 11 bankruptcy code generally provides for reorganization of corporations or partnerships. Chapter 11 reform arises from a need to address the more complex and higher leveraged capital structures of today’s companies.

ImpactInitial recommendations in the ABI’s Commission to Study the Reform of Chapter 11’s final report published in December 2014 could adversely alter recovery prospects of first-lien debt claimholders.

One principle that would reduce first-lien recovery prospects, if adopted, proposes allocating a redemption option value to the creditor class that receives no recovery and is immediately junior in seniority to a class of claims that does receive a distribution. This is being mandated as long


Leveraged Loans

as there is at least one class that would not receive any recovery. The proposal is being made to compensate for reorganizations or asset sales that often occur at cyclical trough points, and business or economic improvement is anticipated within a reasonable amount of time.

The reform suggestion would have a profound impact if passed by Congress. The ABI Commission did not recommend any changes to the way enterprise valuations are done for bankruptcy plans. A fundamental enterprise valuation would be completed using existing methodologies.

Potential Regulatory Reform in 2017

President Trump signed an Executive Order on Core Principles for Regulating the U.S. Financial System in February 2017. Fostering economic growth, efficient and effective regulation, and restoring accountability for federal regulatory agencies are among the core principles. The executive order essentially directs the secretary of treasury to report to the president within 120 days on laws and regulations that affect the core principles, along with recommended actions.

Middle Market [Credit 101] What Is the Middle Market?

The Middle Market is a subset of the broader leveraged loan market and is composed of companies with EBITDA of up to $100 million. Due to the opaque and private nature of the Middle Market, there is a lot of perception data and not much readily available actual data. Fitch estimates the size of the traditional Middle Market to total approximately $250 billion– $300 billion. Fitch also estimates the top four industries based on outstanding loans within the Middle Market to be Business Services, Technology, Healthcare and Industrial & Manufacturing.

Middle Market Players

There are numerous lenders in the Middle Market, and that number has grown over the past few years due to attractive deal structures (financial covenants) and higher yields compared with those that can be attained in Broadly Syndicated Deals. Lenders include, but are not limited to, CLO managers, Business Development Companies (BDCs), alternative Asset Managers, Credit Opportunity Funds and Regional Banks. Approximately 40% of lending was completed by three players in 2015: Antares Capital, BMO Capital Markets and Madison Capital.

Below is a small sample of lenders in the Middle Market.

How Do Issuers’ Structures in the Middle Market Compare with the Broadly Syndicated Market?

Middle Market issuers typically have certain characteristics other than their smaller size that differentiate them from their BSL counterparts.

Middle Market companies typically have more robust reporting packages and protective covenants due to deal terms being customized between the lender and the borrower.

Due to the buy-and-hold nature of Middle Market investors, there are typically not different groups

Players in the Middle Market ● Antares ● Maranon ● NewStar ● NXT ● Madison Capital ● PNC ● Golub ● CIT ● Natixis ● FifthThird ● Fifth Street ● KeyBank ● Midcap

https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states

https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states


Leveraged Loans

of institutions holding the paper at different prices with different agendas when a restructuring happens. This can lead to better outcomes as all lenders’ interests are aligned.

Private company loans in the Middle Market may be less liquid than comparable broadly syndicated deals due to the nature of the market, which will be reflected in the yield of the issuance.

Deals are primarily financed by nonbank institutions (BDCs and Fund/Asset Managers) as opposed to banks. An estimated 90% of Middle Market loans are now made by nonbank institutions, up from 28% in 1994.

What You Need to Know: Sponsored Versus Nonsponsored Deals

Sponsored Middle Market transactions refer to deals that have a private equity sponsor backing the equity of the company. Transactions with a sponsor typically have more seasoned management teams compared with nonsponsored deals due to the private equity company’s ability to leverage personnel from their portfolio companies. Sponsors will typically work with lenders more quickly to resolve any potential issues a credit may have, more so than in nonsponsored deals. Furthermore, sponsored borrowers can have additional access to equity capital that non-sponsored borrowers do not.

Approximately 30% of Middle Market loans are sponsored as opposed to nonsponsored.

What You Need to Know: Unitranche Facility

Traditionally, unitranche debt combines senior and junior debt into one loan instrument or tranche. The credit agreement does not differentiate between a first-out and a last-out piece, nor does the borrower negotiate with various parties if the deal is bifurcated with different tiered trancheholders. The issuer pays one interest margin that is a blend of a senior portioned and a subordinated portioned loan.

Direct Lending[Credit 101] What Is Direct Lending?

Direct lending is a strategy where nonbank entities bypass the traditional functions performed by a bank and lend their capital directly to companies. Direct lenders typically charge higher interest rates than bank lenders; the higher yield accounting for an illiquidity premium due to lack of a tradeable market for the loan. Companies that issue private debt can vary in size.

How Has Direct Lending Gained Traction?

Tightening Regulatory EnvironmentThe prominence of direct lending has increased in light of new regulations placed on banks. Three major regulations have been introduced in recent years that have impaired banks’ ability and willingness to lend capital:

● Basel III. ● The Dodd Frank Act. ● Interagency Guidance on Leveraged Lending.

The combination of these regulations have constricted banks’ lending activity by requiring banks to maintain specific capital ratios and avoid lending to highly leveraged entities. These regulations have created a supply gap in the credit markets, and in turn, created opportunities for unregulated institutions to lend in the banks’ stead.

Record FundraisingOn the demand side, the premium offered on private debt has further fueled the interest in direct-


Leveraged Loans

lending platforms as investors navigate the current low-yield environment. After a historic 2015, North America-focused private debt funds, with a focus on direct lending, raised $21 billion in 2016 compared with $33 billion last year.

Direct lending funds have continued to expand the scope of their lending opportunities as their size and presence has increased significantly over the years. A form of financing that was once only tapped by smaller, sponsor-backed companies has now evolved into a market that can meet the financing needs of much larger companies. For example, Ares Management, L.P. provided a $1.1 billion loan to support Thoma Bravo’s Qlik Technologies Inc. acquisition deal.

The scale at which direct lenders are now able to underwrite debt makes them a much more competitive option to borrowers in a time when traditional banks are shrinking balance sheets and curbing lending.

Why Is Direct Lending Attractive to Companies and Investors?

Companies targeted by direct lenders tend to be smaller, and usually have nonrated loans and limited access to the public markets. However, the range of companies issuing private debt has broadened in recent years as bank regulation has shrunk the availability of traditional forms of financing for many borrowers. Direct lenders have often been prepared to fund riskier deals and on more flexible terms than banks will accept. As such, these companies are willing to pay the higher yields that make direct lending attractive to investors. Direct lending also provides portfolio diversification to investors.

Direct-lending funds have grown significantly into viable alternatives, even for larger borrowers with access to public financing. In volatile markets, borrowers can benefit from the greater speed, flexibility and execution certainty provided by direct-lending platforms. Some companies may even prefer paying the premiums for private debt in return for keeping their financial information confidential.

Direct Lending as an Alternative to Traditional Bank Lending(Speed and Flexibility in Deploying Committed Capital Furthers Appeal of Direct Lending)

aThose providing capital to issuers (e.g. general partners, such as private equity firms, hedge funds, banks, etc.). bThose providing capital through the banks (i.e. lending participants). cThe Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation.Source: Fitch Ratings.

Direct Capital Providersb

Direct Lending Traditional Lending

SEC/State-Level Regulators

Issuer

Regulatory Adherance

Regulation DBlue Sky

Regulation

$ Capital1. Issuer info 2. $ Interest 3. $ Principal

Payments

Capital Providersa

SEC/State-Level Regulators

Issuer


Interagency Guidance on Leveraged Lending

$ Capital 1. Issuer info 2. $ Fees3. $ Interest 4. $ Principal Payments

Banks

1. Issuer info 2. $ Returns

$ Capital

RegulatoryAgenciesc


Regulation DBlue Sky Regulation

Indirect Capital Providersa

$ Returns $ Capital


Leveraged Loans

Private Equity and LBO Market[Credit 101] What Is the U.S. Private Equity (PE) Market?

The U.S. PE market is driven by private capital provided by funds, fund-of-funds, insurance companies and high net worth individuals, and is invested into private companies or used to

0

50

100

150

200

250(bps)


Middle-Market Yield Premium Averages 117 bps(Middle-Market Term Loan Yield Premium over Broadly Syndicated Term Loans)

Private Equity (PE) Firm Managers(General Partner [GP])

Composed of employees of the PE firm who are responsible for the entire investment cycle: deal

sourcing, transaction structuring, portfolio management, investment realization, etc.

Investors (Limited Partners [LP])

Composed of public pension funds, corporate pension funds, insurance companies, high net worth individuals, family offices, endowments, foundations,

fund-of-funds, sovereign wealth funds, etc.

Private Equity FundUsually organized as LPs or limited liability companies, and have a finite life of 10 years

Management FeesManagement fees are meant to cover operating costs and salaries of the GP. The profits the LP receives are net of these fees

Investment A

Investment B

Investment C

Remaining ProfitsRemaining profits are split between the GP and LPs

Private Equity Fund Structure

Investment profits, dividends and interest

Hurdle RateThe provision that requires LPs to recover their initial capital investment and receive a specified rate of return (typically 8%) before the GPs begin receiving carried interest

Carried InterestIf and when the LPs achieve hurdle rate, the GP is compensated with carried interest until they catch up, typically receiving 20% of total returns

Typically 80%Typically 20%



Leveraged Loans

buy out publicly traded companies. Pension funds, endowments and sovereign wealth funds are some of the largest groups of investors in PE because they can commit large sums of money for long holding periods. Private equity funds are formed as partnerships. The historical intent behind choosing this structure was to avoid duplicate taxation, such as individual investor taxation and taxation on a vehicle before investors have been paid out (e.g. corporate tax). Thus, investors participate in this structure as limited partners, whose liability is limited to the amount of their individual investment. The fund manager is the general partner.

PE firms earn a return on their investments through operational changes, structural changes, financial engineering and multiple expansion. Exit options from the investment would be selling to another PE firm (secondary buyout), selling interest to another corporate operating in the same or a similar industry (trade sale) or taking the company public through an IPO.

PE investments span the spectrum of companies needing equity capital to fund various stages of development.

Example Strategies of Private Equity FundsCategories Definition Purpose Targets Method of Financing

Leveraged Buyout Fund Funds that invest in more mature companies with positive cash flows. Typically employed when a sponsor wants to acquire a company.

Three main reasons: i) take a public company private; ii) spin off a portion of an existing business by selling it; iii) transfer private property.

Profitable, established companies. Small: $0 Mil.–$250 Mil.; Medium: $250 Mil.–$500 Mil.; Large: $500 Mil.–$1,000 Mil.; Mega: > $1,000 Mil.

Combination of debt and equity, where debt has traditionally exceeded 50% of the total financing. The bonds issued are typically speculative grade.

Venture Capital Funds Funds that provide equity capital to businesses in early stages of development. A typical company has limited or no access to public financial or bank loans.

Gives entrepreneurs the substantial capital needed for new products and ideas that typically cannot be financed through debt.

New businesses with large up-front capital requirements: electronics, software, computers, telecom, biotech and medical devices.

Equity; hybrid securities that include a contractual return; preferred equity.

Distressed-for-Control Funds

Funds that invest in financially or operationally distressed companies.

Investors hope to have control of company's equity following emergence from restructuring.

Companies experience financial or operational distress, default or are under bankruptcy.

Distressed debt securities that tend to trade at substantial discounts to their par value; equity.



Leveraged Loans

How Does Fitch Ratings Analyze Private Equity Companies?

[Credit 101] What Is an LBO?

In an LBO, a sponsor — a PE firm — buys a controlling interest in a company, funding the purchase with a combination of debt and equity. The debt portion of the funding package has traditionally been more than 50%, making companies with predictive, steady cash flows the best-suited targets for an LBO, in theory. Sponsors earn return through value creation driven by operational, structural and strategic changes to the company.

Fitch’s Private Equity Firm Credit Rating ConsiderationsComponent CommentLegal StructureKey FactorsFirm Structure General partner interests should be subordinated to that of limited partners

and debtholders.Fund Document TermsKey Man Events Viewed negatively if allow for liquidation of fund versus end of investment period.

Less risk if tied to group of individuals.Fee Base Management fees based on committed or invested capital are more predictable.Lock-Ups Inability to redeem capital allows for stable fee stream.Fee and Hurdle Rates The need for fee discounts or higher than peer hurdle rates would be

viewed negatively.Ancillary Fees A share of monitoring and transaction fees provides a revenue boost.Fund RaisingFund Maturities Presence of follow-on funds allows for laddering of fund maturities and more

fee stability.Limited Partners Loyal investor base can ease fund raising. Limited partner diversity by type and

geography viewed positively.

Quality of Underlying FundsKey FactorsIndustry Review industry concentrations and understand potential cyclicality of investments.Overall Fund Strategy Broad mandate versus sector fund.Geographic Distribution Consider outsized exposure to underperforming economies.Product Concentration Diversity of fund mandates can reduce performance correlations.Cash Consider sufficiency of fund cash for follow-on investments, as necessary.Liquid Investments Liquidity of holdings should improve as fund nears maturity.Fund Performance Analyze fund returns versus internal benchmarks and hurdle rates. Strong track

record supports raise of follow-on funds and generation of stable fees.

LeverageKey Leverage RatiosFund Leverage Not typical in private equity vehicles and viewed negatively, given illiquidity

of holdings.Debt/Fee-Related Earnings Leverage measured based on fee-related cash flows.FEBITDA/Interest Expense Debt service measured based on fee-related cash flows.Incentive Income Ability to generate incentive income not factored into operating cash flow but

provides cushion for debt service.Balance Sheet Investments/Debt

Balance sheet co-investments in funds are illiquid but can be viewed as collateral for outstanding debt.

Funding Flexibility Unsecured funding profile viewed favorably.

Liquidity and Risk ManagementKey Liquidity FactorsContingent Liquidity Should be sufficient to fund operations, debt maturities, clawbacks and co-

investments. Consider willingness/ability to provide liquidity to funds, if necessary.Clawback Risk Firm should reserve for employee portion of potential clawbacks if accrued

incentive compensation paid.Redemption Risk If redemption allowed, fund investments should be sufficiently liquid.Risk ManagementFund Valuation Valuation of investments needs to incorporate market data, and back-testing should

occur. Involvement of independent valuation firms viewed positively.Alignment of Interests General partners and employees should co-invest in fund vehicles.Conflicts of Interest Policies should be in place to manage potential investment conflicts between funds.FEBITDA – Fee-related earnings before interest, taxes, depreciation and amortization. Source: Fitch Ratings.


Leveraged Loans

What Is the Trend in the LBO Market?

Annual LBO issuance has slowed greatly since 2007, seeing only $88 billion of issuance in 2016, down from the 2007 high of $207 billion. The slowdown in the number and size of LBO

Example of Recent LBO Structure: Buyout of RackSpace Hosting, Inc. by Apollo

aPro forma adjusted EBITDA of $810 million. bUndrawn at close of the transaction. cThe term loan was repriced to L + 350 bps in December 2016. L – LIBOR. Source: Fitch Ratings, company 8-K filing.

Source of FundsAmount($ Mil.)

225b

1,200

Tenor

Seven years

Eight years

Pricing

L + 225 bps

8.625%

Total Transaction Multiple (x) 5.50

Revolving Credit Facility

1,258 —Equity

Total Secured Debt Multiple (x) 2.47

Sr. Secured

Sr. Unsecured

—

Senior Unsecured Notes

Seven years L + 400 bpsc Sr. Secured2,000Term Loan B(Covenant-Lite)

Seniority

—

1.48x

1.55x

2.47x

EBITDA (x)a

—

27

28

45

% of Capital Structure

BB+/RR1

BB–/RR4

—

BB+/RR1

Fitch Rating

Total Debt Multiple (x) 3.95

—

0

200

400

600

800

1,000

1,200

U.S. Private Equity Market History

(No. of Closed Deals)

Note: Gray sections represent a recessionary period as defined by the National Bureau of Economic Research. Source: Pitchbook Data, Inc.; Fitch Ratings.

First deal more than $1 Bil. for the decade:

Lubrizol Advanced Materials ($1.4 Bil.).

First deal more than $5 Bil. of the

decade: Toys ‘R’ Us acquired

for $7.5 Bil.

First fund more than $10 Bil.: Apollo Investment Fund VI.

First fund more than $15 Bil.:

TPG Partners V.

Equity Office purchased for $34 Bil.

Credit Crisis

Energy Future Holdings purchased for $45 Bil.

Largest private equity-backed IPO:

HCA, Inc. ($4.4 Bil.).

Largest LBO:EMC Corporation ($67

Bil).

Holding periods hit record high.

LBO issuance hits record $210

Bil.


Leveraged Loans

deals being done is attributable to leveraged lending guidelines, which has increased the need for a higher equity contribution in deals, and increased competition for deals, as the low-growth environment has attracted strategic buyers with significant cash coffers to the LBO space.

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50

100

150

200

250

2000 2002 2004 2006 2008 2010 2012 2014 2016

Annual LBO Loan Issuance($ Bil.)




Leveraged Loans

Primary Factors Affecting LBO Volume

aCost of debt is a weighted average calculation using ‘B’ high-yield bond pricing and institutional leverage loan yields. Weighting represents a 6.0x total deal leverage target with 4.0x leveraged loan leverage and 2.0x high-yield bond leverage.Source: Pitchbook Data, Inc.; Thomson Reuters LPC; Blooomberg Finance L.P.; U.S. Bureau of Economic Analysis (BEA), Fitch Ratings.

Impact on LBO Volume Metrics: 2007–2016

Market Hurdle Rates

> Disciplined management teams.> Not dropping regardless of the low interest rate environment.

Structure of Debt> Loose structures seen in peak cycle.> Significant carveouts, free and clear incremental debt.> Dislocation of supply and demand has led to a deterioration of credit terms and

tightened spreads.

Debt Leverage

> Both the rise in nontraditional, nonregulated bank activity and the ability for regulated banks to justify some deals greater than 6.0x has resulted in sustained debt-to-EBITDA levels (6.1x in fourth-quarter 2016).

6.5x5.9x

Equity Contribution

> Private equity contribution increasing due to combination of higher valuation multiples, leverage constraints stemming from compliance with the Leveraged Lending Guidelines, and fewer "Club Deals."

32.0%

42.5%

Growth

> Low-growth environment.

1.8%

1.6%

Cost Containment Opportunities

> Very little low-hanging fruit.> Investment grade maintaining

disciplined cost structures.

79.3%

78.7%

Cost of Debta

> Lower cost of debt supporting higher deal returns.

8.5%

6.2%

Valuation Multiples

> Competition between sponsors and corporate buyers has driven the average valuation multiple up to 10.9x in 2016 from 9.9x in 2015.

> The increase in overall valuation multiple was achieved through higher equity cushions.

10.2x10.9x


Leveraged Loans

[Credit 101] What Are BDCs?

Business development companies (BDCs) are permanent capital vehicles that provide financing to the middle market. BDCs are regulated under the Investment Company Act of 1940, and many elect to be treated as regulated investment companies for tax purposes under Subchapter M of the Internal Revenue Code, which requires the annual distribution of 90% of investment company taxable income to shareholders to avoid corporate taxes.

What Does the Regulatory Environment Look Like for BDCs?

Under the Investment Company Act of 1940, BDCs must have an asset coverage ratio if at least 200%, which is essentially equivalent to a maximum debt-to-equity ratio of 1:1. Failure to maintain asset coverage prohibits the BDC from incurring additional debt or paying dividends.

Discussions are currently being held among market participants, legislators and regulators regarding potential changes in BDC legislation. The most notable of these potential changes would be a decline in asset coverage requirements to 150% from 200%, effectively allowing BDCs to increase leverage to 2.0x from 1.0x.

Another potential change includes an expansion of the eligible portfolio company definition. BDCs must currently have at least 70% of their assets in qualifying assets. Nonqualifying assets generally include non-U.S. securities, public companies with market capitalizations above $250 million, CLOs and investments in finance companies. The expansion of the definition would preserve the allowance for nonqualifying assets and allow for up to 20% of assets to be invested in financial companies — including brokers, banks, insurers and niche lenders — allowing 50% of assets to be invested in what are currently nonqualifying assets.

How Have BDCs Performed Lately?

Operating PerformanceFitch’s rating actions in the space for 2016 were mostly negative, with Apollo Investment Corp. being downgraded to ‘BBB–’ from ‘BBB’, with the Negative Rating Outlook maintained. Pennant Park Investment Corp.’s Outlook was revised to Negative from Stable and BlackRock Capital Investment Corp.’s Outlook was maintained at Negative. Outsized energy exposure, increased portfolio risk, higher leverage and intense competition were the catalysts behind the rating actions.

Underwriting conditions have been competitive for several years, as the continuation of low interest rates around the globe has increased the demand for higher yielding middle-market paper for a variety of investor classes. While demand has been on the rise for several years, supply dropped meaningfully in 2016, bringing added pressure to middle-market deal structures and pricing. Fitch believes challenging underwriting conditions are likely to persist in 2017, further highlighting the importance of a BDC’s scale and platform, the consistency of its risk tolerance, and its access to meaningful deal flow to avoid adverse selection.

Non-accrual levels for the industry have been on the rise, but portfolio issues to date have generally been isolated to energy-related investments and idiosyncratic portfolio issues. Core industrywide defaults remain below historic norms and Fitch does not currently see a catalyst for meaningful portfolio deterioration over the near term. However, BDC portfolios are heavily concentrated in 2014–2016 vintages, which generally exhibit higher underlying leverage levels, and weaker terms and conditions. As a result, any cracks in the economy are likely to translate into asset quality issues more quickly, given the smaller embedded financial cushion in most portfolio credits.


Leveraged Loans

Funding Flexibility Capital market access was limited for rated BDCs in 2016, with $78 million of public equity issuance for the year. However, BDC share prices rallied as the year progressed, and the average share discount was just 3.4% for the rated peer group at Feb. 24, 2017; although the gap between the strongest and weakest stocks remains wide. Fitch expects equity issuance to increase in 2017, with those having access to the market benefiting from a competitive advantage. On the debt front, a $600 million issuance in September 2016 was the first public note issuance in nearly 17 months. Several BDCs also accessed the convertible note market in early 2017, given the rebound in share prices. Fitch expects public market access to remain challenging for some in 2017, but debt maturities this year are considerably more manageable.

Fitch’s outlook for the BDC sector remains negative, reflecting competitive underwriting conditions, given unattractive supply/demand dynamics in the middle market; earnings pressure; weakening asset quality metrics; and limited access to growth capital. While some firms are better positioned given their more conservative financial profiles, platform strength, capital market access and portfolio characteristics, others are likely to see rating pressure over the outlook horizon.

0

500

1,000

1,500

2,000

2,500

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

(%)

Yields Versus Stock Performance

Middle-Market Yield (LHS) WFBDC Index (RHS)

Sources: Thomson Reuters LPC, MarketWatch.

(50)

(40)

(30)

(20)

(10)

0

10

20

30

TSLX FSIC ARCC SLRC PNNT BKCC AINV Average

(%)

NAV Premium/Discount

02/26/16 2/27/17

Source: Company filings, Yahoo Finance.


Leveraged Loans

Defaults[Credit 101] What Happens in an Event of Default?

Default TypesA default represents a failure to fulfill an obligation set forth by a credit agreement, bond indenture or other legal contract. There are two main types of defaults for corporate debt issuers:

● A debt service default, otherwise known as a payment default, is a type of default that occurs when a borrower has failed to make a scheduled principal or interest payment.

● A technical default occurs when a borrower violates a covenant outlined in the debt agreement.

Default RemediesA default does not automatically force an issuer into a bankruptcy filing. While bankruptcy is an option, in many instances, a default is accompanied by a grace period that affords an issuer anywhere from three to 60 days — depending on the type of default and covenant structure — to remedy the situation before the debtholder can force the issuer into bankruptcy. Alternatives to bankruptcy can include a debt restructuring or an amendment to the debt agreement.

Debt restructuring is more prevalent for high-yield bond issuers whose lenders may be willing to exchange junior notes for a more senior class (explain the underlying motivation more). However, leveraged loans typically sit at the top of the capital structure, so there is little incentive to exchange debt. Instead, lenders may be willing to agree to an amendment granting additional fees, wider pricing or tighter covenants.

[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law?

Bankruptcy TypesAs a distressed company approaches default and previous attempts at restructuring existing debt and other forms of out-of-court workouts have failed, bankruptcy filing emerges as an option. U.S. corporates can seek bankruptcy protection under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code.

● Chapter 7 applies when the company is seeking a winding up or dissolution of its business. As soon as a Chapter 7 petition is filed, the legal title of the estate is automatically transferred to a Chapter 7 trustee appointed on day one of the filing.

(20)

(15)

(10)

(5)

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2010 2011 2012 2013 2014 2015 YTD 2016

($ Bil.)

Aggregate Originations and Repayments by Year

Originations Repayments Net

Source: Company filings, Fitch Ratings.


Leveraged Loans

● In contrast, under a Chapter 11 filing, the company continues to make decisions on behalf of the estate as a debtor-in-possession (DIP). Chapter 11 bankruptcies can end up being confirmed either via a plan of reorganization or a plan of liquidation if the latter maximizes recoveries for all creditors.

A significant majority of U.S. bankruptcies result in the reorganization and emergence of an issuer as a going concern (GC) — either as an independent GC that has shed some or all of its pre-petition debt, or as a new entity created to buy the assets and the business of a debtor under a bankruptcy sale. Although Chapter 7 liquidations are filed by issuers from time to time, Fitch’s U.S. corporate case study database of 150 companies indicates petitioning for Chapter 7 liquidation is rare outside the Retail sector.

Claim TypesA summary overview of the different types of claims that generally arise during a bankruptcy process is schematically presented in the chart on the next page.

United States Flow Chart


Financial Crisis/Liquidity Event

Out-of-court restructuring, including a distressed debt exchange

Chapter 7 Bankruptcy filing —Asset liquidation done by a trustee

Sufficient leverage reduction to become nondistressed

Insufficient debt reductions —More serious restructuring efforts needed

Emergence as a restructured independent going concern

Sale of all assets under Section 363 to a third party as a going concern

Going out of business liquidation under Chapter 11 (debtor controls process)

Debtor files a liquidating plan or converts to a Chapter 7 liquidation

Chapter 11 Bankruptcy filing


Leveraged Loans

What Are the Historical Default Rates for Leveraged Loans?

2007–2016The U.S. institutional leveraged loan default rate has averaged 2.7% for the 10-year period from 2007 to 2016. Leveraged loan defaults have remained low in the years since the financial crisis, and the annual default rate has ended below the 10-year average in six of the seven years since 2009. The annual leveraged loan default rate only rose slightly above 2.7% in 2014, when Energy Future Holdings Corp. (EFH) filed for bankruptcy and added over $19 billion to the default volume. As expected, the majority of the leveraged loan default activity is concentrated in 2008–2009. The default environment peaked in 2009, when the institutional leveraged loan default rate reached 10.5%.

Industry DefaultsDefaults from the Energy and Metals/Mining sectors composed 59% of the defaults experienced in 2016. While Utilities, Power & Gas and Chemicals represent a large portion of the total historical defaulted volume, the majority came from the single bankruptcy filings of EFH in April 2014 ($19 billion) and Lyondell Chemical Co. in January 2009 ($16 billion), respectively.

Companies in the Broadcasting & Media; Utilities, Power & Gas; Chemicals; Gaming, Lodging & Restaurants; and Energy industries composed the largest number of defaults from 2007 to 2016. These industries represented companies in secular decline, companies dealing with the effects of the recession in the years following the financial crisis, and companies exposed to the commodity cycle.

U.S. Bankruptcy Code — Pre- and Post-Petition Claims

aRefers to secured funding provided to the company as debtor-in-possession (DIP) by lenders subject to court approval. This debt may be secured by unencumbered assets or by a junior lien on already encumbered assets under section 364(c). If the company is still unable to obtain credit, only then will the court permit "DIP Financings" that are secured by a senior (priming) or equal “pari passu" lien on already encumbered assets under section 364(d). Such DIP financings that supersede existing liens require that existing/pre-petition secured creditor be adequately protected. bRefers to post-filing unsecured funding (trade payables) provided to the company by vendors and is entitled to treatment as an administrative expense (§ 364[a] and § 364[b]). If the company is unable to obtain funding based on administrative claim status, the court may approve it as a super-priority unsecured claim with priority over other administrative expense claims (§ 364[c]). BK – Bankruptcy. OPEB – Other post-employment benefits. DIP – Debtor-in-possession.Source: Fitch Ratings.

UnpaidTaxes

Unpaid Wages and Benefits(180-day pre-BK)

Pre-BKSecured

Pre-BK UnsecuredDebt

Pre-BKSubordinated

Defined Benefit Plans, Vested

OPEB

Environment Obligations

Secured Fundinga

Unsecured Creditb(Trade Payables)

Professional Fees Normal OperatingExpenses

Prepetition Period(Prebankruptcy)

Post-Petition Period(During Bankruptcy)Petition Date

EmergenceDateExpense:

Liability:

ContingentLiability:

If Reject/Terminate Contract

Prepetition (Liability)

Post-Petition (Liability)

Prepetition (Cont. Liab.)

Prepetition (Expense)

Post-Petition (Expense)

Payable for Goods Received up to 20 days Pre-BK

Additional Claims

Executory Contracts,

Leases

Priming or Pari-Passu Liens

(DIP Financing)

New or Junior Liens


Leveraged Loans

Most of the defaults in our 10-year default history come from companies in cyclical sectors that experienced severe downturns in their cash flows during the 2008–2009 financial crisis and recent commodities downturn. In many cases, an overleveraged capital structure, likely issued in the credit boom of 2006–2007 to fund a buyout or acquisition, compounded the challenges caused by a weak operating environment. Many of these companies were then unable to reach consensus with creditors on amend-and-extend transactions or below-par debt exchanges due to deteriorated EBITDAs and the credit crunch that followed the financial crisis.

In other cases, such as for companies in the Broadcasting & Media industry, more permanent secular declines in businesses — including yellow pages, newspapers, commercial printers and some technology companies — led to bankruptcy filings. Other defaults were made by highly leveraged companies that were confronted by individual liquidity or business challenges that could not be overcome out of court. Drivers included flawed business models, production problems, accounting issues, higher raw material costs, lack of funding market access, and steep declines in demand for key products due to cyclical downturns or competition.

What Is the Current Default Environment for Leveraged Loans?

Overall DefaultsThe current default rate environment remains generally benign for leveraged loans. The institutional leveraged loan default rate ended 2016 at 1.8%, significantly below the 2009 high of 10.5% and still below the 2007–2016 average of 2.7%. We believe leveraged credit fundamentals will remain largely unchanged from what is currently reflected in our ratings and default expectations. While leveraged loan defaults are forecast to rise, pockets of risk remain mostly isolated to the Retail, Energy, and Broadcasting/Media sectors.

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12

U.S. Institutional Leveraged Loan Default Rate($ Bil.)


Statistics:High: 10.5% (2009)Low: 0.2% (2007)Avg.: 2.9%

0102030405060708090100

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Volume Number of Issues

U.S. Institutional Leveraged Loan Default Volume


Missed Payment

17%

U.S. Institutional Leveraged Loan Default Rate — Default Source

Source: Fitch U.S. Leveraged Loan Default Index; Thomson Reuters LPC; Bloomberg.

Distressed Exchange

4%

Bankruptcy79%


Leveraged Loans

Energy, Metals/Mining DefaultsFalling commodity prices have taken a toll on the Energy and Metals/Mining sectors. The Energy institutional leveraged loan default rate was 14% and the Metals/Mining default rate was 24% at the end of 2016. However, the overall institutional leveraged loan market remains relatively incubated from commodity-related pressures compared with the high-yield bond market. Energy and Metals/Mining compose only 5% of the institutional leveraged loan market, while the high-yield bond market composes nearly a quarter of these sectors.

Institutional Leveraged Loan Default Profile — 2009 Versus Now2009 2016

Overall Default Rate (%) 10.5 1.8

Overall Default Volume ($ Bil.) 77.5 17.4

Size of Market ($ Bil.) 750.0 973.1


0 1 2 3 4 5 6 7 8

Total MarketInsurance

Food, Beverage & TobaccoComputers & ElectronicsIndustrial/Manufacturing

Supermarkets & Drug StoresHealthcare & Pharmaceutical

Services & MiscellaneousTelecommunicationsTextiles & Furniture

TransportationRetail

Consumer ProductsAutomotive

Leisure & EntertainmentEnergy

CableBanking & Finance

Paper & ContainersMetals & Mining

Gaming, Lodging & RestaurantsBuilding & Materials

Real EstateChemicals

Broadcasting & MediaUtilities, Power & Gas

Default Rates by Industry — 2007–2016 Average


(%)

Top 10 Defaulting Sectors (2007–2016) by Volume and Number of IssuersSector

Amount ($ Bil.) Sector

No. of Issuers

Broadcasting & Media 35.5 Broadcasting & Media 41Utilities, Power & Gas 23.9 Energy 34Chemicals 17.6 Gaming, Lodging & Restaurants 26Gaming, Lodging & Restaurants 14.8 Services & Miscellaneous 21Energy 13.4 Building & Materials 21Banking & Finance 12.0 Retail 18Cable 7.8 Automotive 16Metals & Mining 7.7 Metals & Mining 13Service & Miscellaneous 7.4 Healthcare & Pharmaceutical 13Building & Materials 6.6 Transportation 13Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.


Leveraged Loans

Energy and Metals/Mining Exposure Limited in Institutional Leveraged Loan Market (Institutional Leveraged Loan Market Size Versus High-Yield Bond Market Size)

Institutional Leveraged Loan Market

Energy and Metals/Mining

5%

Rest of Institutional Leveraged Loan Market

95%

High-Yield Bond Market

Energy and Metals/Mining

24%

Rest of High-Yield Bond Market

76%

0

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100

150

200

250

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450

2017 2018 2019 2020 2021 2022 ≥ 2023

Note: Data as of April 30, 2017.Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.


Sector FundamentalsDespite commodity prices hovering near recent historical lows, industry fundamentals are broadly stable across the corporate universe, with 22 of 25 sectors assigned a stable outlook in Fitch’s 2017 Outlook: U.S. Corporates (Fundamental Stability amid Growth Challenges). Four of the six negative sector outlooks are in commodities-related areas (Oil & Gas, Midstream Services, Oilfield Services and Mining). Other sectors on negative outlook include Alcoholic Beverages and Pharmaceuticals. However, these sectors are largely composed of investment-grade issuers and do not pose a systemic risk to the leveraged loan market.

MaturitiesThe bulk of institutional leveraged loan maturities have been successfully pushed back to 2020 and beyond. As a result, we do not view the refinancing cliff as a significant macro-leveraged finance market concern in the near to medium term. At a micro level, refinancing could be a significant credit issue for specific companies when access to debt capital tightens.

Leveraged Loan Maturity Schedule

($ Bil.)



Leveraged Loans

Recovery[Credit 101] What Is Recovery?

When it comes to corporate credit analysis, recovery refers to the amount of value a creditor can expect to recover from an investment in an event of default. Value can be in the form of cash, new debt or stock in an entity that emerges from bankruptcy.

Debtor-in-PossessionThe U.S. Chapter 11 framework is debtor in possession (DIP), which essentially means the debtor’s management can stay in place and operate its business in an ordinary manner while it seeks protection from creditors and takes steps to reorganize under the supervision of specialized bankruptcy courts.

These protections include the application of an automatic stay immediately upon filing, which restricts creditors from beginning or continuing actions to collect on most claims, and allows access to new funding, typically in the form of super-senior DIP financing. Chapter 11 therefore gives a company breathing room to operate its business with the same management — or a chief restructuring officer to be appointed if management has departed or been released by the ownership — while it negotiates a restructuring that satisfies the desire to remain a GC and generate the highest possible recoveries for all stakeholders via rehabilitation.

Chapter 11 allows a debtor to propose a plan of reorganization — and sometimes liquidation — before it can emerge from bankruptcy. The plan is voted on by creditors and is subject to court approval. If the plan proposed by the debtor is rejected and/or the debtor’s exclusive time period for proposing a plan has lapsed, creditors and/or other interested parties may propose an alternative or competing plan. In the event of competing plans, creditors will again be entitled to vote on the competing plans, with the court approving the plan if it is considered to be fair and equitable, and representative of the best and highest recovery for creditors.

Absolute PriorityUnder Chapter 11 bankruptcy code, the absolute priority rule establishes the order in which creditors get paid. Relative seniority is key for recovery performance, as debtholders get paid before equityholders, and secured debtholders get paid before unsecured debtholders. The one exception is unsecured administrative claims, which must be paid in full before secured claims for a Chapter 11 plan of reorganization (or plan of liquidation) to be confirmed. The graphic on the next page outlines the priority schedule for different types of claims.

Enterprise ValuationThe fundamental estimates of reorganization enterprise value (EV) are critical to the bankruptcy reorganization process. The fundamental EV, or negotiated settlement value, determines the amount of value, if any, to be distributed to each class of creditors. Fundamental EV estimates are typically completed by third-party advisors on both a going-concern reorganization basis and a liquidation-alternative basis for the disclosure statements used in the bankruptcy plans. The most common going-concern valuation methods applied by third-party financial advisors are discounted cash flow approaches, comparable company peer analyses and precedent transaction analyses.

Valuations are more often based on higher EBITDA projections for the company post emergence than historical EBITDA levels prior to the bankruptcy filing. Higher cash flows post emergence can be due to expectations of cyclical recoveries or cash flow benefits from shedding legacy liabilities — including union liabilities, lawsuits, rejection of unprofitable leases or achieving other improvements in cost structure — during the reorganization process.


Leveraged Loans

However, lower EBITDA after emergence can also be projected by companies that expect to remain mired in deep cyclical downturns or face the secular decline of their products or services, even after reorganization. Lower EBITDA forecasts can also be a function of shrinking the company during the bankruptcy process through asset sales or company split-ups.

Courts deal with valuation on a case-by-case basis, and it is often a negotiated value determined through a settlement among the various classes of claimants.

Creditor NegotiationsSenior and junior creditors often have opposing views on valuation. Impaired senior creditors — whose claims are not fully repaid in cash or through reinstatement (including principal and interest), and who wish to get most of a reorganizing company’s new equity instead — have an incentive to support a lower EV. This enables the senior creditors to prevent junior creditors or old common shareholders from getting any or a greater share of the new equity. Conversely, junior creditors and old common shareholders have a motive to value the reorganizing company at a higher EV to assume a controlling or material ownership interest in the newly reorganized company.

U.S. Bankruptcy Code — Priority Rules

aThe fact that a DIP lender holds a post-petition super-priority or secured claim under section 364(c) or 365(d) does not automatically entitle it to be deemed a administrative expense for purposes of section 1129(a)(9), which stipulates that administrative expense claims be paid in full in cash by the effective date for the plan to be confirmed. Therefore, the chart assumes that the court provides relief in the order, approving the DIP financing for the administrative expense priority even for secured DIP financings. bIf a prepetition secured creditor’s collateral is not adequately protected following a priming/pari DIP etc., then the difference is to be treated as a super-priority unsecured claim under section 507(b). This is not the same as a deficiency claim. cAs per priorities laid out in section 507 of the code. Since priority claims are nonetheless unsecured in nature, under the absolute priority rule that applies strictly under a Chapter 7 liquidation, unsecured priority claims rank lower than secured claims. However, for Chapter 11 scenarios, administrative expense/priority claims must be satisfied in full in cash by the effective date for the plan to be confirmed as per section 1129(a)(9) of the Bankruptcy code. The plan refers to either a plan of reorganization or a Chapter 11 liquidating plan. dAdministrative expenses refer to the actual, necessary costs and expenses of preserving the estate, which are allowed under Code Section 507(a)(2) and specified in 503(b). The code requires that all administrative claims be paid on the effective date of the plan, unless a particular claimant agrees to a different treatment. Holders of super-priority administrative expenses under § 507(b) are paid before other administrative expenses. eSecured claims that are undercollateralized result in deficiency claims §506 (representing that portion of the claim for which there is insufficient collateral). Deficiency claims are treated pari passu with unsecured claims. fIf defined benefit pension plans are terminated during bankruptcy, the resulting unfunded pension liability claim is treated as a unsecured claim but is structurally senior relative to the general unsecured creditor claims. gIf a Chapter 11 is converted to a Chapter 7, the administrative expenses of a Chapter 7 (including trustee fees) take priority over the Chapter 11 administrative expenses. DIP – Debtor-in-possession.Source: Fitch Ratings.

1. DIP Claimsa

► Priming DIP liens §364(d)► Pari-passu DIP liens §364(d); new DIP liens § 364(c)(2)► Super-priority unsecured DIP §364(c)(1)

2. Super-Priority Claims ► Inadequate protection §507(b) claim of prepetition secured creditorb

3. Priority Claimsc

► Administrative expensesd

— Wages and salaries and taxes (post-petition) §503(b)(1)— Professional fees for attorneys and accountants (post-petition) §503(b)(4)— Goods shipped to company within 20 days of filing (prepetition) §503(b)(9) — Unsecured DIP funding §364(a) and §364(b)► Unpaid wages for 180-day period prior to filing, up to $10,000 per employee (cap)► Unpaid employee benefit plan contributions (180-day period) up to cap balance left ► Prepetition taxes

4. Secured Claims: ► Existing prepetition liens §506(a), 552(b)

5. Unsecured Claims: ► Prepetition unsecured and trade debt ► Deficiency claimse

► Executory contract rejection damages ► Defined benefit plan termination claimsf

6. Subordinated Claims

7. Equity

Issuer Bankruptcy (BK)

Absolute Priority Rule:

1. DIP Facility Claims

2. Secured Claims (Pre-BK)

3. Priority Claimsc,g

4. Priority Tax Claims

5. Unsecured Claims

6. Subordinated Claims

7. Equity

Chapter 11 Chapter 7


Leveraged Loans

Even within the same class or seniority, creditors can have different motivations regarding valuation and case resolution. For example, a distressed investor that purchased an unsecured debt issue at a deep discount and wants to make a quick profit may not act like a regular trade creditor that wants to retain the customer for future business.

Because Chapter 11 entitles junior investors to insist on an appraisal of the debtor, the outcome of which is uncertain and can rapidly change, impaired senior lenders often agree to make distributions to junior creditors to lock in a “yes” vote on acceptance of a plan of reorganization. Fitch refers to these types of negotiated payments as concession payments. Concession payments highlight the complexity of the bankruptcy valuation negotiation process, where disparate creditor motivations may result in deviations from the rule of absolute priority.

[Credit 101] What Is DIP Financing?

A DIP facility is a form of financing arranged by a company while under the Chapter 11 bankruptcy process. DIP financing provides a bankrupt company with the funds necessary to operate its business while it is developing and implementing its plan of reorganization. DIP financing has super priority and is expected to recover before other pre-petition creditors on the liability waterfall.

In some cases, pre-petition lenders can convert all or a portion of their pre-petition claims into a DIP facility. This is referred to as a roll-up DIP. This gives the debtor new liquidity during bankruptcy and enables the pre-petition creditor to elevate its pre-petition claim to administrative priority status.

For more information on DIP financing, please refer to our Leveraged Loan Data section.

[Credit 101] How Does Fitch Estimate Recovery?

Recovery RatingsFor issuers with IDRs at ‘B+’ and below, Fitch performs a bespoke recovery analysis. Fitch completes a company valuation in a distressed scenario under both a going concern (GC) and liquidation approach. The GC scenario means the company emerges from bankruptcy and continues to stay in business, and the liquidation approach means ceasing all operations, such as a retailer going out of business and having an inventory liquidation sale. The higher of the two resulting values is then allocated to creditors according to their relative seniority. This is consistent with the best interest test applied in Chapter 11 plans.

DIP Loan SummaryCharacteristic DescriptionDescription Financing arranged by a company while under the Chapter 11 bankruptcy process.Purpose Provides a bankrupt company with funds necessary to operate its business while it is developing and

implementing its plan of reorganization.Priority Typical super priority, above other pre-petition creditors on the liability waterfall.Security Unencumbered assets and/or a priming lien on encumbered assets by providing adequate protection

of the interest of the existing lender holding a lien on such assets.Facility Types Revolvers and term loans.Funding Status Can be drawn and undrawn.Tenor Less than one year to multiyear.Arrangers Commercial banks and specialized finance companies.Investors Prepetition lenders.

Nontraditional DIP lenders including institutional lenders, CLOs/CDOs and hedge funds.Liquidity Limited to none.DIP – Debtor in possession. CDO – Collateralized debt obligations. Source: Fitch Ratings.


Leveraged Loans

More than 80% of the time, Fitch’s valuation is higher under the GC method, which is about the same share of GC outcomes for large company cases Fitch has analyzed in its bankruptcy case study enterprise valuation and creditor recovery report series.

Fitch also makes assumptions that a portion of the total value will be allocated to administrative expenses and claims, such as lawyer and consultant fees and DIP loan claims — this is usually 10% of value.

Fitch also will sometimes make an assumption that a certain percentage — usually up to 5% — of the remaining value will be allocated from a more senior creditor to a more junior creditor. This is a result of consensual settlements assumed to happen during the bankruptcy process to incent the junior creditors to vote to accept the proposed plan of reorganization and allow the company to emerge from bankruptcy more quickly.

A schematic of the process is shown below.

Each debt issue in the capital structure is assigned a Recovery Rating (RR) based on its expected recovery rate range — distributions as a percentage of the claim amount. Fitch’s six-category RR scale is shown in the table below.

Fundamental Drivers of Recovery Ratings (RR)


1. Enterprise or Liquidation Valuation

Assumed Going Concern EBITDA

xReorganization Multiple

=Enterprise Valuation (EV)

Going-Concern Approach

Book Value of Assetsx

Advance Rate%=

Liquidation Value (LV)

Liquidation Approach

Higher of LV and EV

2. Distribution to Various Claimants

Priority/Administrative Claims

Sr. Unsecured Claims

Sr. Subordinated

Old Equity

Sr. Secured Claims

Administrative Expense

Assumption (%)

Concessions Assumption

Outputs:

Recovery Ratings (RR) ScaleRR Description Recovery (%) Issue Notching from the IDRRR1 Outstanding 91–100 +3 (Usually Secured Debt Only)RR2 Superior 71–90 +2 (Unsecured Usually Capped)RR3 Good 51–70 +1RR4 Average 31–50 +0RR5 Below Average 11–30 (1)RR6 Poor 0–10 (2)–(3)IDR – Issuer Default Rating. Source: Fitch Ratings.


Leveraged Loans

For more information on Fitch’s Recovery Rating Methodology, including revolver assumptions and multiples used for valuation, please refer to the Criteria Summaries in the appendix section.

Bankruptcy Case StudiesFitch has gathered real world data on over 254 bankruptcy cases and analyzed their outcomes to create a useful feedback loop that we incorporate into our recovery analyses. We have published a series of bankruptcy case study reports since 2012 and will continue to expand on this effort.

The median corporate reorganization multiple was 6.1x for 191 companies across sectors, for which bankruptcy exit multiples could be estimated. This is higher compared with the 5.5x median assumed multiple calculated based on the Fitch portfolio. The chart below compares Fitch’s multiple assumptions with actual court valuation multiples.

Published Bankruptcy Case Study ReportsTitle Date

Telecom, Media and Technology Bankruptcy Enterprise Values and Creditor Recoveries (Fitch Case Studies — 13th Edition) 03/27/17

Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 12th Edition) 01/18/17

Gaming, Lodging and Restaurant Bankruptcy Enterprise Values and Creditor Recoveries (Fitch Case Studies — 11th Edition) 10/26/16

Retail Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 10th Edition) 09/28/16

Industrial and Manufacturing Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — Edition IX) 01/28/16

Healthcare, Food, Beverage and Consumer Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — Edition VIII) 08/12/15

Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — Edition VII) 04/27/15

Automotive Sector Bankruptcy Enterprise (Fitch Case Studies — Edition VI) Value and Creditor Recoveries 12/12/14

Telecom, Media and Technology Bankruptcy (Fitch Case Studies — Edition V of a Recurring Series) Enterprise Values and Creditor Recoveries 08/09/14

U.S. Gaming, Lodging and Restaurant Bankruptcy Enterprise Valuation and Creditor Recoveries 09/04/13

U.S. Retail Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries 04/16/13

Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries — Volume 2 02/14/13

Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries 06/07/12


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<4x 4x -<5x 5x to <6x 6x to <7x 7x to <8 8x to <9 >9

Fitch B+ and Lower U.S. Corporates Fitch U.S. Bankruptcy Case Study Court Outcomes

Comparison of Fitch Multiple Assumptions with Court Valuation Multiples

Source: Fitch Ratings, bankruptcy court disclosure statements.

(% Issuers)






















Leveraged Loans

The bankruptcy case studies also indicated most companies are reorganized as GCs because this produces a higher value than would be realized in liquidation. Ownership often changes hands in bankruptcy court, but most businesses continue to produce revenues and cash flows under the new owners in reorganization.

The Retail sector is an exception, with full chain liquidations a frequent outcome due to noncompetitive business models or undifferentiated lines. It is consequently appropriate to estimate a company’s value on both a GC and liquidation basis, and use the higher value to estimate recoveries for the different creditor classes, which is consistent with the best interest test in the bankruptcy code.

Going Concern

88%

Liquidation12%

Note: Based on outcomes of Recovery Rating analyses for 282 issuers in LTM ending August 2016.Source: Fitch Ratings, company filings.

Majority of Bankrupt Companies Reorganized as Going Concern(Estimates Completed from August 2015 to August 2016)


Leveraged Loans

BANKRUPTCY CASE STUDY – DEX MEDIA ET AL.

Dex Media, Inc. (2016)($ Mil., Except Where Noted)

Issuer ProfileFitch Industry Classification Broadcasting & MediaSubsector Yellow PagesPrepetition Ticker Symbol DXMMQPetition Date Assets $1,268 Emergence Parent Company Name/Ticker Dex Media, Inc./Private

Bankruptcy SummaryDid All Entities in the Group File? YesPlan Proposed by DebtorCourt District DelawareSubstantive Consolidation YesPetition Date 05/16/16Confirmation or Conversion Date 07/15/16Effective Date 07/29/16Duration (Months) TwoFiling — Type Chapter 11 (Prepackaged)Section 363 Asset Sale by Debtor NoVoluntary or Involuntary Filing VoluntaryPostconfirmation Liquidating Trust NoResolution Emerged/Reorganized (Private)

Key Drivers of Bankruptcy FilingKey Driver Flawed Business Model or Obsolete ProductKey Driver Untenable Capital Structure

Financial Profile12-Month

Period AmountPrepetition EBITDA Not Disclosed Not DisclosedPost-Emergence EBITDA Forecast 12/31/17 321Enterprise Value (EV) Range (or Asset Value Range)Low 1,450High 1,650Midpoint EV (Value) 1,550

Equity Value Range Low 850High 1,050Midpoint EV/Post-Emergence EBITDA Estimate (x) 4.8

Petition Date Versus Emergence Date Petition Date Emergence Date

Total Debt 2,380 600Consolidated Leverage (x) Not Disclosed 1.9Debt Shed in Bankruptcy — 1,780Debt Shed in Bankruptcy (%) — 75

Events Leading Up to Bankruptcy (or Contributing Factors)Dex Media, Inc.’s bankruptcy was driven primarily by continuing revenue erosion stemming from the secular decline of the business and an inability to realize expected cost synergies from the 2013 merger of Dex One Corporation and SuperMedia Inc. Liquidity at both predecessor companies was severely curtailed when the 2008 economic recession and accompanying capital market seizure, coupled with a decline in consumer usage of print directories, triggered a significant decline in print directory advertising sales, forcing both companies into bankruptcy twice. The 2013 merger was expected to create a stronger market participant, but the new company remained unable to offset continued secular declines in print directory spending and consumer directory utilization, with the internet exacerbating and accelerating both issues. Although Dex Media was able to grow digital product revenues, the growth was insufficient to offset the print declines. The company also failed to integrate the predecessor companies’ information technology systems into a more focused customer offering, driven primarily by a complicated post-merger corporate structure, hindering sales efforts and customer service along with expected cost reductions. Following the breach of two bank covenants on Dec. 31, 2015, Dex Media began discussions with its secured and unsecured creditors to recapitalize the company before the pending maturity of its $2.1 billion of secured bank debt facility on Dec. 31, 2016.

Valuation Estimate SummaryGoing Concern EVThe third-party valuation advisor estimated a range of reorganization values of $1.45 billion–$1.65 billion.The advisor relied on a discounted cash flow analysis, selected publicly traded company analysis and selected transaction analysis to estimate the EV.The assumptions and peer company names for the three valuation methodologies were not disclosed.The advisor assumed management’s projections were achieved, which included the following EBITDA forecast:($ Mil.) 2017 2018 2019 2020EBITDA 321.1 288.4 272.4 275.1

Liquidation Value AlternativeThe Chapter 7 alternative liquidation valuation assumed an orderly liquidation with a six-month wind-down period and resulted in estimated proceeds of $418.1 million–$516.3 million before wind-down costs and fees. Wind-down costs and fees were estimated at $32.0 million–$34.9 million. The valuation was based on discounts to asset book value as of Feb. 29, 2016, on low to high estimated recoveries, including: • Cash of $166.5 million at 100%.• Accounts receivable of $71.2 million–$99.1 million at 42%–58%.• Deferred revenue of $157.2 million–$206.0 million at 45%–59%.• Fixed assets of $13.0 million–$16.0 million at 40%–50%.• Intangible assets at $10.2 million–$20.3 million at 3%–5%.• Pension overfunding recovery of $0–$8.3 million at 0%–25%.Continued on next page. Source, unless otherwise noted: Disclosure statement dated May 2, 2016, plan statement dated July 15, 2016.


Leveraged Loans

Dex Media, Inc. (2016) (Continued)Estimated Recoveries for Select Claims

($ Mil., Except Where Noted)Form of Distribution

Claim Seniority Claim TypeAllowed Claims

Projected Recovery (%)

Equivalent RR Category Cash

Secured Notes

Unsecured Notes

Subordinated Notes

New Equity

Options/ Warrants

DIP and Priority Administrative/Priority N.A. 100.0 RR1 N.A. — — — — — Secured Secured Prepetition Facilities 2,109 73.0–82.0 RR2 — 600 — — 950 —

Unsecured12% Cash Pay/14% PIK Subordinated Notes 270 4.0–6.0 RR6 5 — — — — 9

Unsecured General Unsecured Claims N.A. 100.0 RR1 N.A. — — — — —Equity Equity Claims 0 0.0 RR6 — — — — — —

Estimated Claims 2,379 — Recoveries 5 600 0 0 950 9

New Borrowings at Emergence 0 — — — — — — — — Debt of Nonfiling Affiliates on Emergence Date 0 — — — — — — — —

Claim Seniority Claim Type DescriptionDIP and Priority Administrative/Priority ● There was no DIP.Secured Secured Prepetition Facilities ● There were four credit facilities:

о Dex East $300.4 million received 15.0% of new common stock, 13.5% of new first-lien term loan, 100% of remaining cash at Dex Easta.

о Dex West $274.5 million received 18.0% of new common stock, 14.7% of new first-lien term loan, 100% of remaining cash at Dex Westa.

о RHDI $567.7 million received 21.7% of new common stock, 23.2% of new first-lien term loan, 100% of remaining cash at RHDIa.

о SuperMedia $966.8 million received 45.4% of new common stock, 48.7% of new first-lien term loan, 100% of remaining cash at SuperMediaa.

● Holders received their pro rata shares of distributions of 100% of new common stock, the new $600 million takeback first-lien term loan and 100% of cash remaining at each entity.

Unsecured 12% Cash Pay/14% PIK Subordinated Notes

● Subordinated note claims received $5 million and warrants to purchase up to 10% of the new common stock

outstanding on the effective date. Estimated recovery assumed a range of $6.2 million–$13.3 million for the

estimated value of the warrants.Unsecured General Unsecured Claims ● Amounts were not disclosed. Claims were paid in full in cash.Equity Equity Claims ● No distributions.aNew common stock percentage subject to dilution from the warrants and issuance under the management incentive plan and any such holder’s exercise of the equity put option. Cash remaining after deducting intercompany payables and each entity’s share of minimum operating cash contributions and closing expenses. RR – Recovery Rating. DIP – Debtor in possession. N.A. – Not available. PIK – Payment in kind. Continued on next page. Source, unless otherwise noted: Company disclosure statement dated May 2, 2016, plan statement dated July 15, 2016.

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PIK – Payment in kind.Source: Bloomberg, Fitch Ratings.

Bond Price History — Dex Media, Inc.($270 Mil., 12% Cash Pay/14% PIK Subordinated Notes)

(% of Par)

Filing Date: 5/16/16

Confirmation Date: 7/15/16


Leveraged Loans

Recovery Rating BacktestingFitch’s RRs provide an unbiased and somewhat conservative estimate of recoveries. In a recent back test, our RRs were within one RR category of the implied RR — based on 30-day post-default security trading prices — for 80% of the 148 Fitch-rated debt issues that defaulted from January 2008 to December 2016.

How Do Leveraged Loans Perform in Fitch’s Recovery Analyses?

Overall DistributionsFitch assigns RRs based on ultimate recovery expectations. In the recurring Road to Recovery Ratings report series, Fitch deconstructs its recovery analyses and explores the effects of different capital structures and leverage on RRs for the first-lien debt instruments of 282 U.S. speculative-grade issuers.

The RRs on first-lien secured debt issues are concentrated at the ‘RR1’ end of the recovery scale, corresponding to a 91%–100% ultimate recovery rate expectation. While the sample

Dex Media, Inc. (2016) (Continued)Additional Information

Cash on Filing Date $166.5 million.Prepetition Bank Facility Commitments $2.11 billion of first-lien term loans.Prepetition Bank Facility Borrowings on Filing Date $2.11 billion of remaining principal under the term loans.Was the DIP a New Money Facility or Roll Up of a Prepetition Facility?

There was no DIP facility. The borrowers used cash on hand and cash from operating activities to fund operations.

Other Notable Issues Dex Media was formed by the merger between Dex One and SuperMedia that was consummated through a Chapter 11 process in April 2013.

Executory Contracts The specifics of contract assumptions and rejections were not disclosed.Deficiency Claims Yes; estimated at $19.4 million.Contingent Claims and/or Contingent Recoveries Disputed claims and contingent recoveries, including an adversary proceeding from the prior filing.Intercompany Claims Intercompany claims were reinstated. The amounts were not disclosed.Pension Claims/Motions The debtors maintained four defined-benefit pension plans and two nonqualified plans. Each plan has been

frozen, and no employee accrues future pension benefits. As of Dec. 31, 2015, accumulated benefit obligations for all defined-benefit pension plans were approximately $580 million, compared with total plan assets of approximately $511 million.

Postpetition Interest? No.If Yes, Recipient Class N.A.Concession Payments Yes.Recipient and Comments General unsecured claims and subordinated note claims.DIP – Debtor in possession. N.A. – Not applicable. Source: Fitch Ratings, company disclosure statement dated July 15, 2016.

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Zero Differential One Notch Two Notches Three Notches Four Notches

Fitch RR < Price-Implied RR Fitch RR > Price-Implied RR Cumulative

RR – Recovery Rating. Source: Fitch Ratings, Company ratings.

Forecast Delta Default +30-Day Issue Price-Implied RR Versus Fitch RR Estimate(All Seniorities)

(%, Sample Issues)


Leveraged Loans

is not exclusive to leveraged loans, the vast majority of our sample is composed of first-lien secured leveraged loans.

Capital Structure InfluencesIn Fitch studies, first-lien RR expectations decreased as the proportion of first-lien debt to total debt increased, although there were strong recoveries for most first-lien issues regardless of leverage through the first lien.

First-lien debt issue recoveries are somewhat more insulated from decreases in EV due to the protection of having a more senior position in the distribution waterfall. Exceptions include cases when all debt in the capital structure is equally secured with a first lien, there is more than one type of first-lien issue (each with a different collateral package) or the issuer is grossly overleveraged, so recoveries are sensitive to declines in EV.

What Are the Historical Post-Default Prices for Leveraged Loans?

The topic of recovery has substantial nuance, and there are multiple ways to measure recovery on defaulted corporate debt. Each approach has pros and cons, but in the end, all are linked and

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RR1 RR2 RR3 RR4 RR5 RR6

Recovery Rating Distribution — First-Lien Debt 2016

(% of Issues)

RR – Recovery Rating. Note: U.S. corporate public and private Issuer Default Ratings and Issuer Default Credit Opinions of ‘B+’/‘b+*’ and lower only.Source: Fitch Ratings.

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x < 3 3 < x < 5 5 < x < 7 x > 7


RR – Recovery Rating.Source: Fitch Ratings.

First-Lien Loans and Bonds RR Distribution by First-Lien Leverage Ratio

(%)


Leveraged Loans

reflect some assessment of firm value. The 30-day post-default price is a widely available and often used proxy for recovery rates.

What Are the Historical Emergence Prices for Leveraged Loans?

Another widely available and often-used proxy for recovery rates is the emergence price. We define emergence as the time shortly after a plan of reorganization has been confirmed by a bankruptcy court — and approved by requisite creditors — but before pre-petition debt is canceled and replaced with new debt and equity. Fitch research has shown that in times of market stress, post-default loan prices can be less predictive of ultimate recovery, making emergence prices another useful reference point.

CLOs[Credit 101] What Is a CLO?

A collateralized loan obligation (CLO) is a form of securitization composed of leveraged loans, which are pooled together and then sold to investors in various tranches. CLO collateral is primarily composed of BSLs and middle-market leveraged loans.

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0–10 > 10–20 > 20–30 > 30–40 > 40–50 > 50–60 > 60–70 > 70–80 > 80–90 > 90–100+

(%)


Average 60.7%, Median 63.3%

First-Lien Institutional Leveraged Loan 30-Day Post-Default Prices(2007–2016 Historical Distribution)

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First-Lien Institutional Leveraged Loan Emergence Prices(2007–2016 Historical Distribution)




Leveraged Loans

CLO TypesThere are two main types of CLOs:

• Arbitrage CLOs are created in an attempt to capture the excess spread between the higher yielding corporate loans and lower yielding structured product liabilities. The equity tranche receives all of the residual cash flows because all of the excess interest earned by the collateral is paid to the equity tranche holders.

• Balance sheet CLOs are used by issuers as a financing vehicle to obtain additional capital, which is secured by the assets on its balance sheet. Typically the issuer retains the equity in the transaction and the special purpose vehicle is consolidated onto the balance sheet.

CLO Life Stages


Structuring

Draft Documents

Equity Marketing

Debt Marketing

Pricing

Warehouse Assets

Closing and Funding

Ramp-Up Period

Noncall Period

Reinvestment Period

2–3 Weeks

1–4 Weeks

1–4 Weeks

< 1 Week

1–6 Months

3–5 Weeks

3–6 Months

2–3 Years

4–5 Years

7–9 Weeks

CLO Types and Characteristics (Post Credit Crisis)Arbitrage CLO Balance Sheet CLO

Market Share Approximately 95% Market Share 5%

Portfolio Selector Portfolio manager Portfolio Selector • Banks

• Specialty finance companiesDebt Issuer Bankruptcy-remote SPV Debt Issuer Bankruptcy-remote SPV

Purpose • Structured exposure to leveraged loan market

• Management fees

Purpose • Reduction of regulatory capital

• Reduces credit risk

• Cheaper financingCollateral Type Primarily broadly syndicated

leveraged loansCollateral Type Middle-market or broadly syndicated

leveraged loansCollateral Security Primarily senior secured loans Collateral Security Primarily senior secured loans

Collateral Origination/Sourcing

• Loans purchased into SPV from primary and secondary market

• Issuer not involved in asset origination

Collateral Origination/Sourcing

• Loans on balance sheet are transferred into SPV

• Issuer involved in asset origination

Issuer Capital Structure Primarily floating-rate notes with varying levels of priority and a (typically) unrated equity tranche

Issuer Capital Structure Primarily floating-rate notes with varying levels of priority and a (typically) unrated equity tranche.

Forms of Credit Enhancement • Generally 33%–38% subordination below senior class

• OC of rated notes

• Spread arbitrage

• OC and IC tests that, if failing, divert proceeds to redeem senior notes

Forms of Credit Enhancement

• Generally, 35%–50% subordination below senior class

• OC of rated notes

• Spread arbitrage

• OC and IC tests that, if failing, divert proceeds to redeem senior notes

SPV – Special-purpose vehicle. OC – Overcollateralization. IC – Interest coverage. Continued on next page. Source: Fitch Ratings.


Leveraged Loans

[Credit 101] What Are the Mechanics of an Arbitrage CLO?

An arbitrage CLO is created in an attempt to capture the excess spread between higher yielding assets (i.e. a portfolio of leveraged loans) and lower yielding liabilities (i.e. multiple tranches with various ratings).

Cash flows received from the underlying CLO collateral must follow a defined sequence of use known as a waterfall. On the next page we present a typical arbitrage CLO waterfall for interest and principal payments.

Arbitrage CLO Transaction

aAsset manager typically contributes a portion of equity. P&I – Principal and interest. C/e – Credit enhancement (based on subordination). NR – Not rated.Source: Fitch Ratings.

Administrative Agents

Collateral AdministratorTrustee

Portfolio of Leveraged Loans

Class A (AAAsf)

Class B (AAsf)

Class C (Asf)

Class D (BBBsf)

Class E (BBsf)

Arranger

Issuance Proceeds

P&I from Loans P&I from Loans

Issuance Proceeds

Typical c/e (%)

34–40

24–28

16–22

11–16

7–11

0

Assets Liabilities (Typical Rating)

Special-Purpose Vehicle

Asset Managera Equity (NR)

CLO Types and Characteristics (Post Credit Crisis) (Continued)Arbitrage CLO Balance Sheet CLO

Average Life of Liabilities 5–10 years for senior notes, 7–10 years for subordinated notes and equity

Average Life of Liabilities 5–10 years for senior notes, 7–10 years for subordinated notes and equity

Portfolio Management Style • Usually managed; three- to four-year reinvestment periods

• Reinvestment subject to satisfaction or maintenance/improvement of portfolio covenants

Portfolio Management Style • Static or managed. If managed, one- to three-year reinvestment period

• Reinvestment subject to satisfaction or maintenance/improvement of portfolio covenants

Use of Leverage Yes, 7x–12x (debt/equity) Use of Leverage Yes, 1x–5x (debt/equity)

SPV – Special-purpose vehicle. OC – Overcollateralization. IC – Interest coverage. Source: Fitch Ratings.


Leveraged Loans

Arbitrage CLO Interest/Principal Waterfall

aTransaction waterfalls can and do vary from deal to deal. These waterfalls are displayed for indicative purposes only. bCertain coverage tests may only be applicable in the principal waterfall during the reinvestment period or may not be included in the principal waterfall at all. cNonsenior coverage tests will usually include provisions for the payment of unpaid mezzanine/subordinate tranche interest amounts, in addition to payment of principal. Note: Coverage tests — overcollateralization (OC) and interest coverage (IC) tests.Source: Fitch Ratings.

Arbitrage CLO Interest Waterfalla

If any senior coverage tests are failing, pay principal on the senior notes until the applicable test is cured or until the class is paid in full.

If any Class C coverage tests are failing, pay principal sequentially beginning with the senior notes, until the applicable test is cured or until the classes are paid in full.

If any Class D coverage tests are failing, pay principal sequentially beginning with the senior notes, until the applicable test is cured or until the classes are paid in full.

If any Class E coverage tests are failing, pay principal sequentially beginning with the senior notes, until the applicable test is cured or until the classes are paid in full.This test is only applicable during the reinvestment period and is usually calculated in the same fashion as the junior-most OC test, with a higher test threshold. If failing, some percentage (e.g. 60%) of the remaining interest proceeds at this point of the waterfall can be used to reinvest in additional collateral or redeem the notes.

Arbitrage CLO Principal Waterfallb

Trustee and Other Agent Fees

Hedge Payments (If Applicable)

Senior Management Fee (0.15%–0.20%)

Class A Interest

Senior Coverage Tests

Class B Interest

Class C Interest

Class C Coverage Tests

Class C Deferred Interest

Class D Interest

Class D Coverage Tests

Class D Deferred Interest

Class E Interest

Class E Coverage Tests

Class E Deferred Interest

Interest Diversion Test

Subordinated Management Fee (0.25%–0.40%)

Equity Holders (Until Target IRR Reached)

15%–20% of Remaining Proceeds to Collateral Manager, 80%–85% to Equity

Unpaid Senior Fees

Unpaid Class A Interest

Unpaid Class B Interest

Senior Coverage Testsb

Class C Coverage Testsb,c

Class D Coverage Testsb,c

Class E Coverage Testsb,c

Reinvestment (During Reinvestment Period)

Sequential Redemption of Notes

Unpaid Subordinate Management Fee

Other Unpaid Fees

Equity Holders (Until Target IRR Reached)

15%–20% of Remaining Proceeds to Collateral Manager, 80%–85% to Equity

Senior Fees


Leveraged Loans

[Credit 101] Who Are CLO Market Participants?

CLO ManagersWith the increased demand and issuance of CLOs in recent years, new entrants to the market took advantage of favorable conditions and entered a space historically dominated by large institutional firms. As expected, the size profile of newer entrants is quite different than the frontier CLO 2.0 issuers of 2010 and 2011. Average firm assets under management of later entrants are significantly less than early issuers. As risk retention rules have evolved over time, this shift is moving back toward larger managers capable of complying with each new regulation.

InvestorsThe CLO investor base expanded over the past several years as the asset class became more attractive in a world of unappealing unlevered credit yields in other products. The ‘AAA’ investor base, in particular, continues to broaden and now includes regional U.S. banks to go along with the U.S. investment banks, Asian banks, insurance companies and pension funds. Prior to 2012, it was common for an anchor investor to take down the entire ‘AAA’ tranche. The broadening of the investor base has allowed the senior most tranches to be divided among several investors.

CLO Manager Ranking by Principal Liabilities (Debt Plus Equity)(As of Dec. 31, 2016) US CLOs Euro CLOs Total USD

Rank Manager(USD Bil.) Deals

(EUR Bil.) Deals

(USD Bil.) Deals

1 GSO Capital Partners 13.95 28 7.05 18 21.36 46

2 Carlyle Group 13.23 27 5.84 18 19.38 453 Credit Suisse Asset Management 16.25 24 2.38 8 18.84 32

4 Ares Management 13.46 27 2.04 8 15.61 35

5 PGIM 10.03 19 3.05 7 13.24 26

6 Apollo Global Management 10.83 17 1.61 4 12.52 21

7 CIFC Asset Management 11.69 26 0.00 0 11.69 268 CVC Credit Partners 8.55 17 2.77 7 11.46 249 Octagon Credit Investors 10.93 20 0.00 0 10.93 20

10 3i Debt Management 5.24 11 5.08 17 10.58 28

11 KKR Financial Advisors 5.27 11 4.85 16 10.37 27

12 Alcentra 4.33 11 5.73 19 10.36 30

13 MJX Asset Management 9.59 18 0.00 0 9.59 1814 Voya Alternative Asset Management 9.57 20 0.00 0 9.57 20

15 Fortress Investment Group 9.46 19 0.00 0 9.46 1916 BlueMountain Capital Management 8.85 20 0.41 1 9.29 21

17 Bain Capital Credit 7.87 17 1.14 3 9.04 20

18 Golub Capital 8.86 19 0.00 0 8.86 19

19 Oak Hill Advisors 7.10 13 1.24 4 8.57 17

20 Barings 5.85 12 2.57 7 8.43 1921 Och Ziff 7.91 14 0.41 1 8.34 15

22 Highland Capital Management 8.05 19 0.00 0 8.05 19

23 Guggenheim Investments 7.03 14 0.41 1 7.46 1524 Symphony Asset Management 7.27 14 0.00 0 7.27 1425 Invesco 6.96 16 0.00 0 6.96 16

Source: Creditflux.

CLO Investor BaseAAA Notes Mezzanine Notes Equity• Insurance Companies • Hedge Funds • Private Equity• Foreign Banks (European and Asian) • Asset Managers • CLOs (Vintage CLO 1.0)• Pension Funds • Insurance Companies • Credit Opportunity Funds• U.S. Regional Banks • CLOs (Vintage CLO 1.0) • CLO Managers• U.S. Investment Banks



Leveraged Loans

CLO HoldingsCLO holdings are well diversified across industries, with the greatest concentration in Technology, Healthcare and Retail. Below is a table of companies with the most debt held by CLOs.

Top 50 Holdings in U.S. CLO PortfoliosRank Company Name Industrya Principal ($ Bil.)

1 Valeant Pharmaceuticals Healthcare & Pharmaceutical 3.142 Dell Inc. Computers & Electronics 2.793 Asurion Corp. Insurance 2.764 TransDigm Transportation 2.755 First Data Corp. Computers & Electronics 2.726 Community Health Healthcare & Pharmaceutical 2.617 Albertson Supermarkets & Drug Stores 2.418 Calpine Corp. Utilities, Power & Gas 2.119 Charter Communications Cable 2.0510 Avago Technologies Computers & Electronics 2.0011 Scientific Games Leisure & Entertainment 1.9812 Univision Communications Broadcasting & Media 1.8913 American Airlines Transportation 1.8814 Bass Pro Group LLC Retail 1.7115 Numericable SAS Cable 1.6816 INEOS Group Ltd. Chemical 1.5917 Formula One Group Services & Miscellaneous 1.5318 PetSmart Inc. Retail 1.4519 WME IMG Holdings LLC Services & Miscellaneous 1.4220 Royalty Pharma Healthcare & Pharmaceutical 1.3921 Advantage Sales & Marketing Services & Miscellaneous 1.3522 Level 3 Communications Telecommunication 1.3423 Travelport Inc. Services & Miscellaneous 1.3024 Pharmaceutical Product Development Services & Miscellaneous 1.2825 BMC Software Computers & Electronics 1.2826 Berry Plastics Corp. Paper & Containers 1.2427 Federal-Mogul Corp. Automotive 1.2228 Endo Pharmaceuticals Healthcare & Pharmaceutical 1.2229 Universal Services of America LP Commercial Services 1.2130 TEX Operations Co. LLC Oil & Gas 1.1931 Dynegy Inc. Energy 1.1932 Protection One Services & Miscellaneous 1.1833 Acosta Media 1.1634 Fortescue Metals Group Ltd. Metals & Mining 1.1635 DTZ US Borrower LLC Real Estate 1.1536 Energy Transfer Equity, L.P. Energy 1.1537 Western Digital Corp. Technology 1.1538 Tribune Co. Broadcasting & Media 1.1439 MacDermid Inc. Chemical 1.1240 Sabre Holdings Corp. Services & Miscellaneous 1.1141 Infor Global Solutions Computers & Electronics 1.1042 Chrysler Corp. Automotive 1.0943 Communications Sales & Leasing Inc. Real Estate 1.0844 Cablevision Systems Corp. Cable 1.0645 Carestream Health Healthcare & Pharmaceutical 1.0346 ZIGGO BV Media 1.0347 Neiman Marcus Group Inc. Retail 1.0348 Petco Animal Supplies Retail 1.0149 WideOpenWest Finance LLC Cable 1.0150 Huntsman ICI Chemical 0.99aFitch defined. Source: Thomson Reuters LPC.


Leveraged Loans

How Does Fitch Ratings Analyze CLOs?

What Is the Level of Recent CLO Issuance?

Total CLO issuance for 2016 reached $63.5 billion from 136 CLOs, which represents a nearly 32% decline from the 2015 total of $98.6 billion from 177 deals. New issue-stated spreads on senior notes averaged 147 bps over LIBOR during the fourth quarter, slightly above the 2015 average of 155 bps.

Forty-three U.S. CLOs issued $21.6 billion in the fourth quarter of 2016, an increase from the $18.5 billion issuance from 38 CLOs during the fourth quarter of 2015. November 2016 claimed the highest volume of issuance for the final quarter as 18 deals priced $9.1billion of notes. Initial spread tests were set at 383 bps on average, similar to 386 bps in the third quarter and 377 bps a year ago. Credit enhancement for senior notes remained in line with the year’s average of 36.6%. The average initial weighted average life test was 8.3 years, above the average of 8.1 years for the entire year.

CLO Rating CriteriaRating Consideration ApplicationAsset Quality Asset quality is based on the corporate Issuer Default Rating (IDR) and term to maturity.

Asset quality is a primary driver of the default probability of the underlying corporate assets.Asset Security Asset security is determined by the seniority of the corporate obligation and the jurisdiction of

the issuer. Asset security is a primary driver of recovery rate assumptions.Portfolio Composition

Portfolio composition analysis focuses on industry, obligor and geographic concentrations within the underlying pool of assets. Portfolio composition is a determining factor of the level of portfolio correlation, which is a driver of default probability.

Portfolio Management

Ongoing portfolio management and trading may result in an evolving portfolio credit profile, extension risk and other portfolio changes not represented by the closing portfolio. The investment guidelines and permitted management terms are analyzed to evaluate the potential risk factors of a managed portfolio.

Performance and Surveillance

Migration beyond established benchmarks may suggest performance not contemplated by the credit enhancement (CE) afforded to the rated notes. The extent and magnitude of changes to portfolio quality and composition are the primary drivers of future rating movement.

Portfolio Default and Recovery Analysis

Cash flow analysis is used to determine whether a class of notes pays according to its terms under a series of defined scenarios for a given stress level. Different scenarios are evaluated assuming variations in default and recovery timing.

Structural Features The transaction structure is analyzed for features such as: priority of payments, overcollateralization (OC) and interest coverage (IC) tests, fee structure, excess spread and portfolio covenants. These features are then are incorporated into Fitch’s cash flow model.


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Leveraged Loans

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How Has the Commodity Cycle Downturn Affected CLOs?

Default ExposureThe number of CLOs with exposure to defaults decreased to 138 ($491.6 million) at the end of February 2017 from 140 ($494.1 million) at the end of fourth-quarter 2016. About $154.4 million of the $491.6 million total defaulted notional amount comes from issuers in the Energy (Oil & Gas) and Metals/Mining sectors.

Approximately 48.4% of the 285 deals in Fitch’s U.S. CLO Index had exposure to at least one defaulted issuer, with 5.6%, or 16 CLOs, exposed to at least three defaulted issuers. Across all 138 exposed CLOs, maximum exposure was five defaulted issuers. Average exposure was 0.7%.

The top five largest default exposures were Avaya Inc. at $201.5 million in 75 CLOs; Paragon Offshore Plc at $58.8 million in 25 CLOs; 21st Century Oncology Holdings, Inc. at $53.2 million in 13 CLOs; Essar Steel Algoma Inc. at $51.4 million in 12 CLOs; and TwentyEighty, Inc. at $39.6 million in 26 CLOs.


Leveraged Loans

Restructuring Dents MetricsIn several recent chapter 11 restructuring proposals, lenders of first-lien loans are being offered equity in the reorganized company. Equity may increasingly be seen in restructurings in the near term due to the distress in commodity sectors and noncommodity issuers with high pre-petition leverage, struggling business models and declining enterprise valuations.

Receiving equity dents key CLO metrics, as it receives no credit in the calculation of a CLO’s aggregate principal balance or overcollateralization ratios until the manager monetizes the equity position. How the equity portion of a recovery distribution will be accounted for is becoming more important to noteholders, as additional defaults are expected this year.

For more information on equity treatment in CLOs please see Equity in US Leveraged Loan Restructuring Dents US CLO Metrics.

Risk Retention Implications 2017

The U.S. risk retention rules became effective on Dec. 24, 2016, and a wave of refinancings swept across the CLO market to take advantage of the low-spread environment before the rules went into effect. Refinancings and resets inundated the market in fourth-quarter 2016, as 50 U.S. CLOs refinanced liabilities of over $23.6 billion. The average refinancing shaved 15 bps off its senior liability cost of funding. Resets accounted for $12.5 billion of refinancing activity. Asset managers as sponsors of CLOs are widely believed to be the parties responsible for compliance with risk retention, and would therefore bear the risk of enforcement action by a regulator in response to noncompliance with risk retention.

Examples of Recovery Rates Used in OC Calculations

Issuer

OC Recovery Rate (%)

Recovery Rate Basis

Market Pricea

No. of CLOs

Notional Value

($ Mil.)Avaya Inc. 45/50 Moody's or S&P 77 69 143 Paragon Offshore Finance 39 Market Value 39 25 59 Cumulus Media Holdings Inc. 50/30 Moody's or S&P 72 17 43 Essar Steel Algoma Inc. 35 Market Value 35 11 35 American Energy — Marcellus First Lien 45 Moody's 71 12 28 American Energy — Marcellus Second-Lien Term Loanb 25 Moody's 14 2 2 Answers Corporation — Term Loan 35–41 Market Value 35–41 7 24 Answers Corporation — Second Lien 1 Market Value 1 1 1 Peabody Energy Corporation 45/50 Moody's 101 10 25 Noranda Aluminum Acquisition Corp. 6 Market Value 6 16 24 Pinnacle Operating 45/20 Moody's or S&P 91 12 21 Sequa Corporation 50 Moody's 96 3 16 21st Century Oncology 60 Moody's 91 4 15 Transtar Holding Company — First Lien 45 Moody's 67 8 11 Transtar Holding Company — Second Lien 0 Market Value 0 10 8aMarket values can vary due to different reporting dates and sources of market data. The infromation provided here is based on the most recent trustee reports available at the time of the analysis. bSome CLO documents allow for the rating agency’s recovery rate to apply for the OC calculation within the first 30 days, even if it is higher than the market value. OC– Overcollateralization.Source: Trustee reports, Fitch Ratings.



55The Annual Manual (U.S. Leveraged Finance Primer) — Leveraged Loan Data May 31, 2017

Leveraged Loan Data

Leveraged Loan DataIssuance

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Leveraged Loan Issuance ($ Bil.)


Statistics:High: $1,135 Bil. (2013)Low: $218 Bil. (2001)Avg.: $545 Bil.

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Institutional Leveraged Loan Issuance($ Bil.)



0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Pro Rata Leveraged Loan Issuance($ Bil.)




Leveraged Loan Data

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Covenant-Lite Loan Issuance($ Bil.)


Statistics:High: $381 Bil. (2013)Low: $1 Bil. (2009)Avg: $130 Bil.

0

10

20

30

40

50

60

70

Monthly Covenant-Lite Loan Issuance — 2016($ Bil.)


Statistics:High: $59 Bil. (June)Low: $6 Bil. (January)Avg: $28 Bil.

0

5

10

15

20

25

30

35

40

45

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Second-Lien Loan Issuance($ Bil.)

Source: Bloomberg, Thomson Reuters LPC, Fitch Ratings.



Leveraged Loan Data

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ABL Issuance($ Bil.)

ABL – Asset-based lending.Source: Thomson Reuters LPC.


0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Large Middle Market Traditional Middle Market

Middle-Market Loan Issuance

($ Bil.)

Note: Large Middle Market defined as deal sizes $100 Mil.–$500 Mil. Traditional Middle Market defined as deal sizes less than $100 Mil. Source: Thomson Reuters LPC.

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Middle-Market Institutional Loan Issuance($ Bil.)




Leveraged Loan Data

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

DIP Loan Issuance($ Bil.)

DIP – Debtor in possession.Source: Thomson Reuters LPC.


0

20

40

60

80

100

2011 2012 2013 2014 2015 2016

Sponsored Versus Nonsponsored Covenant-Lite

Sponsored Nonsponsored


(%)

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Nonsponsored Sponsored

Sponsored Versus Nonsponsored Middle-Market Loan

($ Bil.)



Leveraged Loan Data

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(%)

Covenant Versus Covenant-Lite Second-Lien IssuanceCovenant Covenant-Lite


0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Latin American Loan Issuance(USD Bil.)


Statistics:High: USD69 Bil. (2006)Low: USD7 Bil. (2009)Avg.: USD28 Bil.

0

100

200

300

400

500

600

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Issuance Deal CountCanadian Syndicated Loan Issuance

(USD Bil.)


(No.)


Leveraged Loan Data

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Argentina Brazil Chile Colombia Mexico Peru Venezuela

Latin American Loan Issuance by Country

(USD Bil.)


Largest Leveraged Loan Deals — 2016

Borrower NameDate of Transaction

Total Deal Amount

($ Mil.)

Term Loan B Amount

($ Mil.)

Term Loan B Pricing

(bps)

LIBOR Floor

(%)Term Loan B

OIDYield

(%) PurposeAvago Technologies Finance Pte Ltd. 02/01/16 15,150 10,250 350 0.75 99.00 4.55 MergerAvago Technologies Finance Pte Ltd. 08/02/16 14,016 6,595 300 — 100.00 3.86 RefinancingWestern Digital Corp. 04/29/16 9,883 4,758 550 0.75 97.00 6.55 RefinancingAlbertson’s Inc. 06/22/16 6,525 6,525 375 1.00 99.75 4.55 RefinancingAlbertson’s Inc. 12/23/16 6,014 6,014 325 0.75 100.00 3.78 RefinancingKeurig Green Mountain Inc. 03/03/16 5,450 1,875 450 0.75 98.00 5.22 SBOGlobal Payments Inc. 10/31/16 5,025 542 250 — 100.00 3.29 RefinancingNRG Energy Inc. 06/30/16 4,411 1,900 275 0.75 99.50 3.80 RefinancingEnvision Healthcare 12/01/16 4,345 3,495 300 0.75 99.00 3.86 MergerFirst Data Corp. 10/14/16 4,268 4,269 300 — 100.00 3.82 RefinancingPetSmart Inc. 10/14/16 4,246 4,246 300 1.00 100.00 4.27 RefinancingDynegy Inc. 06/27/16 4,075 2,000 400 1.00 — 5.05 TakeoverVantiv Inc. 10/14/16 3,884 765 275 0.75 100.00 3.30 RefinancingMultiPlan Inc. 06/07/16 3,570 3,470 400 1.00 99.50 4.73 SBOYum! Brands Inc. 06/16/16 3,500 2,000 275 — 99.50 3.51 SpinoffOID – Original issue discount. SBO – Shareholder buyout. Note: Excludes bridge loan. Source: Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

Largest Covenant-Lite Deals — 2016


Total Deal Amount

($ Mil.)

Term Loan B Amount

($ Mil.)Term Loan B Pricing (bps)

LIBOR Floor (%)

Term Loan B OID Yield (%) Purpose

Avago Technologies Finance Pte Ltd. 02/01/16 15,150 9,750 350 0.75 99.00 4.55 MergerAvago Technologies Finance Pte Ltd. 08/02/16 14,016 6,595 300 — 100.00 3.86 RefinancingAlbertson’s Inc. 06/22/16 6,525 6,525 375 1.00 99.75 4.55 RefinancingAlbertson’s Inc. 12/23/16 6,014 6,014 325 0.75 100.00 3.78 RefinancingKeurig Green Mountain Inc. 03/03/16 5,450 1,875 450 0.75 98.00 5.22 SBOGlobal Payments Inc. 10/31/16 5,025 542 250 — 100.00 3.29 RefinancingADT Corp. 05/02/16 4,950 1,555 450 1.00 99.00 5.56 LBOEnvision Healthcare 12/01/16 4,895 3,495 300 0.75 99.00 3.86 MergerNRG Energy Inc. 06/30/16 4,411 1,900 275 0.75 99.50 3.80 RefinancingPetSmart Inc. 10/14/16 4,246 4,246 300 1.00 100.00 4.27 RefinancingVantiv Inc. 10/14/16 3,884 765 275 0.75 100.00 3.30 RefinancingMultiPlan Inc. 06/07/16 3,570 3,470 400 1.00 99.50 4.73 SBOTexas Competition Electric Holdings Co. 08/04/16 3,500 2,850 400 1.00 99.00 5.07 DIP

Yum! Brands Inc. 06/16/16 3,500 2,000 275 — 99.50 3.51 SpinoffVirgin Media Bristol LLC 12/16/16 3,400 3,400 275 — 99.75 3.73 Debt Repay.OID – Original issue discount. SBO – Shareholder buyout. DIP – Debtor in possession. Source: Thomson Reuters LPC, Bloomberg.

Largest Second-Lien Deals — 2016


Total Deal Amount

($ Mil.)

Second-Lien TL Amount

($ Mil.)

Second-Lien TL Pricing

(bps)LIBOR

Floor (%)Second-Lien

TL OID Yield (%) PurposeSunEdison Inc. 01/11/16 725 725 1,000 1.00 96.00 104.58 Debt Repay.Ancestry.com Inc. 10/19/16 1,900 500 825 1.00 99.00 8.76 Div. RecapMedAssets Inc. 01/22/16 1,730 500 950 1.00 97.00 10.55 LBOSerta Simmons Bedding LLC 11/08/16 2,625 450 800 1.00 98.50 8.74 Div. RecapUltimate Fighting Championship 08/18/16 1,950 425 750 1.00 99.00 8.06 LBOCision US Inc. 06/16/16 1,545 370 950 1.00 97.25 10.55 TakeoverAcrisure LLC 11/22/16 1,765 305 925 — — 1.05 MBOPress Ganey Holdings Inc. 10/21/16 1,098 268 725 1.00 99.00 7.95 SBOInfoblox Inc. 11/07/16 800 250 875 1.00 98.00 9.78 LBOATI Physical Therapy 05/06/16 955 225 — — — 1.05 SBOProAmpac 11/21/16 1,120 215 850 1.00 98.50 9.17 SBOPAE Holding Corp. 10/20/16 810 210 950 1.00 97.00 10.03 Div. RecapBioclinica 10/12/16 655 210 825 1.00 98.00 9.26 SBOPCI Pharma 07/01/16 730 205 875 1.00 98.00 10.21 SBOTruGreen LP 04/13/16 906 200 — — — 1.05 MergerTL – Term loan. OID – Original issue discount. MBO - Management buyout. SBO – Shareholder buyout. Source: Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

Largest ABL Deals — 2016


Total Deal Amount

($ Mil.)Specific ABL Facility

ABL Amount ($ Mil.)

ABL Pricing (bps)

Commitment Fee (bps) Purpose

Southern Glazer’s Wine and Spirits LLC 07/01/16 4,500 Revolver 4,500 150 — GCPUnited Rentals 06/08/16 2,497 Revolver 2,300 150 25.0 RefinancingGoodyear Tire & Rubber Co. 04/07/16 2,000 Revolver 2,000 125 25.0 RefinancingHudson’s Bay Co. 02/05/16 1,900 Revolver 1,900 150 30.0 GCPPerformance Food Group Co. 02/01/16 1,600 Revolver 1,500 150 37.5 RefinancingHERC Rentals Inc. 06/30/16 1,750 Revolver 1,400 175 37.5 SpinoffOffice Depot Inc. 05/13/16 1,200 Revolver 1,200 150 37.5 Work. Cap.Veritiv Corp. 08/11/16 1,365 Revolver 1,180 150 25.0 GCPSuperValu Inc. 02/04/16 1,000 Revolver 1,000 150 25.0 RefinancingArcelorMittal S.A. 05/23/16 1,000 Revolver 1,000 200 50.0 GCPSpartan Stores Inc. 12/16/16 1,000 Revolver 900 150 25.0 RefinancingNeiman Marcus Group Inc. 10/27/16 900 Revolver 900 175 25.0 GCPRavago Holdings America Inc. 07/13/16 864 Revolver 864 150 35.0 GCPEnvision Healthcare 12/01/16 4,895 Revolver 850 175 37.5 MergerUnited Natural Foods 04/29/16 890 Revolver 850 125 25.0 RefinancingABL – Asset-based loan. GCP – General corporate purposes. Source: Thomson Reuters LPC, Bloomberg.

Largest Middle-Market Deals — 2016


Total Deal Amount

($ Mil.)

Term Loan B Amount


LIBOR Floor (%)

Term Loan B OID Yield (%) Purpose

Wall Street Systems Inc. 08/26/16 498 498 375 1.00 — 4.65 GCP

Acadia Healthcare 05/26/16 494 494 300 0.75 100.00 3.83 Refinancing

Gray Television Inc. 01/21/16 485 425 350 0.75 99.00 4.56 Acquisition

Highland Acquisition Holdings 11/30/16 482 457 550 1.00 94.00 7.03 LBO

GYP Holdings III Corp. 09/27/16 481 481 350 1.00 100.00 4.42 Refinancing

Vantage Specialty Chemicals 08/05/16 481 386 450 1.00 99.25 5.20 Acquisition

MotorCity Casino 10/04/16 476 476 325 0.75 99.75 4.15 Refinancing

MW Industries 06/28/16 470 325 550 1.00 99.00 6.01 Refinancing

Builders Firstsource Inc. 08/22/16 470 470 375 1.00 100.00 4.44 Refinancing

American Bath Group 09/30/16 470 325 575 — 99.00 6.80 LBO

LDiscovery LLC 12/12/16 465 340 588 1.00 92.00 8.34 Takeover

Pharmaceutical Product Development 11/10/16 460 460 325 1.00 99.75 4.30 Div. Recap

Jamul Indian Village Development Corporation 10/20/16 458 438 983 1.00 — 10.88 Refinancing

Golden Nugget 09/28/16 458 320 350 1.00 — 3.97 Refinancing

VCVH Holding Corp. 05/25/16 455 315 500 1.00 99.00 6.00 LBO

OID – Original issue discount. GCP – General corporate purposes. Source: Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

Largest DIP Loan Deals — 2016

Borrower Name Date of TransactionDIP Facility

Amount ($ Mil.) Industry

Texas Competitive Electric Holdings Co. 08/04/16 3,500 Utilities

Energy Future Intermediate Holding Company LLC 10/20/16 1,400 Utilities

NewPage Corp. 01/26/16 675 Paper & Packaging

Peabody Energy Corp. 04/18/16 600 Mining

Sports Authority Inc. 03/03/16 595 Retail

Halcon Resources LLC 08/01/16 500 Oil & Gas

Arch Coal Inc. 01/21/16 275 Mining

Bauer Performance Sports Ltd. 10/31/16 200 Wholesale

Breitburn Energy Partners 12/15/16 150 Oil & Gas

Noranda Aluminum Acquisition Corp. 02/09/16 130 Manufacturing

Verso Paper Holdings LLC 01/26/16 100 Paper & Packaging

RCS Capital Corp. 02/08/16 100 Financial Services

Pacific Sunwear of California 04/07/16 100 Retail

Hancock Fabrics 02/03/16 98 Retail

Swift Energy Co. 01/06/16 75 Oil & Gas

DIP – Debtor in possession. SSource: Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

0

5

10

15

20

25

Covenant-Lite Loan Issuance by Industry — 2016(% of Covenant-Lite Loan Issuance)


0

5

10

15

20

25

30

35

Second-Lien Loan Issuance by Industry — 2016(% of Total Second-Lien Issuance)


Issuance by Industry

02468

1012141618

Leveraged Loan Issuance by Industry — 2016(% of Total Loan Issuance)



Leveraged Loan Data

0

5

10

15

20

25

ABL Issuance by Industry — 2016(% of Total Loan Issuance)

ABL – Asset-based loan. Source: Thomson Reuters LPC.

DIP Loan Issuance by Industry

DIP – Debtor in possession. Source: Thomson Reuters LPC.

Mining66%

Media9%

Oil & Gas9%

2014

General Manufacturing

< 1%

Telecommuni-cations

16%

Mining66%

Media9%

Oil & Gas9%

2015


< 1%

Telecommuni-cations

16%

Mining10%

Oil & Gas9%

Utilities56%

Financial Services

1%

2016

Retail & Supermarkets

11%

Wholesale2%


2% Paper & Packaging

9%

0

5

10

15

20

25

Latin American Loan Issuance by Industry — 2016

(%)



Leveraged Loan Data

Canadian Loan Issuance by Industry

Note: Numbers may not add due to rounding. Source: Thomson Reuters LPC.

Oil & Gas26%

Utilities14%

Mining10%

Media1%

2014

Other Industries

43%

Financials6%

Oil & Gas26%

Utilities14%

Mining11%

Media2%

2015

Financials10%

Other Industries

37%

Oil & Gas21%

Utilities12%

Mining11%Media

3%

2016

Financials11%

Other Industries

41%


Leveraged Loan Data

Issuance by Purpose

0

5

10

15

20

25

30

35

40

45

50

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(%)($ Bil.)

General Corporate Purposes % of Total Leveraged Loan Issuance


Leveraged Loan Use of Proceeds — General Corporate Purposes

0

10

20

30

40

50

60

70

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Refinancing Issuance % of Total Leveraged Loan Issuance

Leveraged Loan Use of Proceeds — Refinancing

($ Bil.)


(%)

0

10

20

30

40

50

60

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

M&A Issuance % of Total Leveraged Loan Issuance

Leveraged Loan Use of Proceeds — M&A/LBO

($ Bil.)

M&A – Merger and Acquisition. Note: Total issuance composed of pro rata and institutional issuance. Source: Thomson Reuters LPC.

(%)


Leveraged Loan Data

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Dividend Issuance % of Total Leveraged Loan Issuance

Leveraged Loan Use of Proceeds — Dividends

($ Bil.)

Note: Total issuance composed of pro rata and institutional issuance. Source: Thomson Reuters LPC.

(%)

Second-Lien Issuance by Purpose

GCP – General corporate purposes. SBO – Shareholder buyout. Note: Numbers may not add due to rounding. Source: Thomson Reuters LPC.

Debt Repay.

2%

Dividend Recap.

9%

LBO43%

2007

Takeover4%

M&A19%

GCP25%

Dividend Recap.

22%

SBO12%

LBO26%

M&A 25%

2011

GCP14%

M&A16%

LBO20%

SBO17%

Dividend Recap30%

Debt Repay.

6%

GCP11%

2016

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GCP Amend and Extends DIP/Exit Fin. M&A Other

ABL Use of Proceeds

(%)

ABL – Asset-based loan. GCP – General corporate purposes. DIP – Debtor in possession. Source: Thomson Reuters LPC.


Leveraged Loan Data

Latin American Loan Use of Proceeds

Note: Numbers may not add due to rounding. Source: Thomson Reuters LPC.

Project Finance

13%

Other9%

Working Capital14%

2014

Acquisition Line5%

Corporate Purposes

59%

Project Finance

16%

Other5%

Working Capital

1%

2015

Corporate Purposes

78%

Acquisition Line1%

Project Finance

20%

Other12%

Working Capital

3%

2016

Corporate Purposes

50%

Acquisition Line15%

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Corporate Purposes Debt Repayment M&A Working Capital Other

Middle Market Loan Use of Proceeds

($ Bil.)



Leveraged Loan Data

Pricing

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

BB B

Institutional Loan Spreads by Rating

(bps)

Source: Thomson Reuters LPC, Fitch Ratings.

Statistics:High (BB): 760 bps (2008)Low (BB): 179 bps (2006)Avg. (BB): 337 bps

High (B): 1,076 bps (2008)Low (B): 253 bps (2006)Avg. (B): 471 bps

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

LIBOR/LIBOR Floor LIBOR Spread OID

Institutional Term Loan Yield Components

(%)

OID – Original issue discount. Source: Thomson Reuters LPC, Fitch Ratings.

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

BB B

Pro Rata Loan Spreads by Rating

(bps)

Note: No pro rata ‘B’ data points from 2008 to 2009 available. Source: Thomson Reuters LPC.

Statistics:High (BB): 394 bps (2009)Low (BB): 141 bps (2007)Avg. (BB): 270 bpsHigh (B): 484 bps (2012)Low (B): 200 bps (2007)Avg. (B): 358 bps


Leveraged Loan Data

300

350

400

450

500

550

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Covenant-Lite Loan Pricing(bps)


Statistics:High: 500 bps (2012)Low: 335 bps (2007)Avg: 436.5 bps

150

200

250

300

350

400

450

1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16

ABL Pricing(bps)

ABL – Asset-based lending. Source: Thomson Reuters LPC.

Statistics:High: 432 bps (1Q09)Low: 162 bps (2Q07)Avg: 232 bps

0

200

400

600

800

1,000

1,200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

First Lien Drawn Second Lien Drawn

Second-Lien Loan Pricing — First Lien Versus Second

(bps)

aNo data points to record from 1Q08 to 4Q10. bNo data points to record from 4Q07 to 4Q10. Source: Thomson Reuters LPC, Fitch Ratings.

a b

Statistics (Second Lien):High: 1,022 bps (2011)Low: 577 bps (2007)Avg.: 768 bps


Leveraged Loan Data

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

LIBOR/LIBOR Floor Spread OID

Middle-Market Yield Components

(%)

OID – Original issue discount. Source: Thomson Reuters LPC.

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

DIP Loan Pricing(bps)

DIP – Debtor in possession. Source: Thomson Reuters LPC.

Statistics:High: LIBOR 831 (2015)Low: LIBOR 400 (2004)Avg.: LIBOR 579

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Average Revolver Spreads Average First-Lien Spreads

Middle-Market Loan Pricing (Revolver/Term Loan)

(bps)

Note: Data not avaliable for average first-lien spreads prior to 2002.Source: Thomson Reuters LPC.

Statistics (Avg. First-Lien Spreads):High: 650 bps (2009)Low: 307 bps (2006)Avg.: 453 bps


Leveraged Loan Data

Maturities

Institutional Leveraged Loan Maturity Schedule by Industry($ Bil.) 2017 2018 2019 2020 2021 2022

2023 and Beyond

Automotive 0.1 0.7 1.1 1.0 6.0 3.4 4.7Banking & Finance 0.0 0.6 1.2 7.8 5.5 11.9 22.3Broadcasting & Media 0.2 1.6 9.1 5.7 4.9 4.4 18.7Building & Materials 0.0 0.2 0.0 3.3 1.6 5.1 10.7Cable 0.0 0.0 1.2 1.1 2.8 0.2 5.3Chemicals 0.4 0.5 0.9 4.1 4.8 9.0 14.6Consumer Products 0.0 0.3 1.5 0.7 1.1 3.5 5.6Energy 0.0 4.3 1.4 8.7 13.6 2.3 7.5Food, Beverage & Tobacco 0.2 0.6 0.8 1.0 3.1 3.0 12.0Gaming, Lodging & Restaurants 0.0 0.3 2.0 4.7 10.0 1.3 25.8Healthcare & Pharmaceutical 0.5 2.9 9.6 7.4 22.6 26.1 34.2Industrial/Manufacturing 0.4 0.3 2.8 4.8 11.4 4.0 12.2Insurance 0.0 0.3 2.4 5.2 4.1 5.3 5.7Leisure & Entertainment 0.0 0.6 0.8 3.2 8.0 7.4 12.1Metals & Mining 0.7 0.3 1.8 3.3 1.6 3.3 2.0Paper & Containers 0.2 0.0 1.2 2.6 1.3 3.6 9.4Real Estate 0.0 0.0 0.0 0.7 3.0 2.9 6.0Retail 0.8 2.3 5.9 9.0 8.7 15.2 22.8Services & Miscellaneous 0.4 1.5 8.7 17.6 32.0 31.9 42.3Supermarkets & Drug Stores 0.0 0.0 1.7 0.8 4.6 1.5 3.1Technology 0.9 2.9 6.0 8.3 21.4 28.5 67.5Telecommunications 0.0 0.6 4.8 10.6 5.9 4.6 29.6Transportation 0.0 1.6 2.5 8.4 7.2 8.6 10.7Utilities, Power & Gas 5.7 1.2 1.5 4.4 3.5 1.4 16.6Total 10.4 23.5 68.8 124.6 188.6 188.4 401.3

Note: Data as of April 30, 2017. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

8 26

73

122

214 247

186

59

10 24

69

125

189 188

401

0

50

100

150

200

250

300

350

400

450

2016 2017 2018 2019 2020 2021 2022 ≥ 2023

April 2016 April 2017f:vkmawe

Institutional Leveraged Loan Maturity Schedule

Note: Data as of April 30, 2017.Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

($ Bil.)


Leveraged Loan Data

0

10

20

30

40

50

60

70

80

2017 2018 2019 2020 2021

ABL Maturity Schedule($ Bil.)

ABL – Asset-based lending. Source: Thomson Reuters LPC.

0

2

4

6

8

10

12

14

2017 2018 2019 2020 2021 2022

Middle-Market Loan Maturity Schedule($ Bil.)

Note: Includes both sponsor and nonsponsor maturities. Source: Thomson Reuters LPC.

0 2 4 6 8 10 12 14 16 18

2004200520062007200820092010201120122013201420152016

Average DIP Loan Tenor

(Months)DIP – Debtor in possession. Source: Thomson Reuters LPC.


Leveraged Loan Data

Secondary Bids

50

60

70

80

90

100

110

Overall Market Average Bid SMi 100

Leveraged Loan Secondary Bids

(% of Par)


Statistics:High (Overall): 99.34 (July 2014)Low (Overall): 60.19 (December 2008)Avg. (Overall): 93.52High (SMi 100): 100.78 (March 2006)Low (SMi 100): 62.78 (December 2008)Avg. (SMi 100): 95.54

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

50

60

70

80

90

100

110

Covenant-Lite Average Overall Bid SMi 100

Covenant-Lite Loan Secondary Bids

(% of Par)


Statistics (Cov-Lite):High: 101.0 (February 2007)Low: 57.7 (December 2008)Avg: 92.61

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

20

30

40

50

60

70

80

90

100

110

Second-Lien TL Average Market Bid SMi 100

Second-Lien Loan Secondary Bids

(% of Par)

TL – Term loan. Source: Thomson Reuters LPC.

Statistics (Second Lien):High: 99.3 (March 2007)Low: 36.3 (March 2009)Avg.: 83.9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Leveraged Loan Data

50

60

70

80

90

100

110

Middle Market (MM) SMi100 Overall Bid

Middle-Market Loan Secondary Bids

(% of Par)


Statistics (MM):High: 99.7 (June 2007)Low: 71.0 (March 2009)Avg.: 92.9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Loan Trading Volumes($ Bil.)

Source: LSTA.



Leveraged Loan Data

Retail Funds

0

20

40

60

80

100

120

140

160

180

200

Loan Retail Funds — Assets Under Management($ Bil.)


$174 Bil.

$24 Bil.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(4)

(2)

0

2

4

6

8

10

Monthly Loan Retail Fund Flows — 2016

($ Bil.)


Statistics:High: $7.6 Bil. (December)Low: ($3.2) Bil. (February)Avg: $0.7 Bil.

(30)

(20)

(10)

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Loan Retail Fund Flows

($ Bil.)


Statistics:High: $52 Bil. (2013)Low: ($24) Bil. (2014)Avg.: $5 Bil.


Leveraged Loan Data

Top 10 Largest Outflows/Inflows — 2016Outflows Inflows

Rank Week Ending Total ($ Mil.) Week Ending Total ($ Mil.)

1 01/27/16 (784) 12/07/16 1,760

2 01/20/16 (694) 12/21/16 1,511

3 02/17/16 (645) 12/14/16 1,504

4 02/24/16 (618) 11/23/16 1,119

5 01/06/16 (560) 12/28/16 924

6 06/29/16 (525) 11/16/16 666

7 02/10/16 (510) 10/19/16 515

8 01/13/16 (451) 09/28/16 481

9 02/03/16 (405) 10/05/16 432

10 03/02/16 (357) 10/12/16 415

Source: Lipper FMI.

Top 10 Largest Outflows/Inflows — All TimeOutflows Inflows

Rank Week Ending Total ($ Mil.) Week Ending Total ($ Mil.)

1 08/17/11 (2,120) 08/07/13 1,870

2 12/16/15 (2,039) 07/24/13 1,850

3 12/17/14 (1,780) 08/21/13 1,800

4 10/22/14 (1,656) 12/07/16 1,760

5 08/06/14 (1,497) 07/17/13 1,710

6 08/10/11 (1,490) 03/20/13 1,553

7 10/01/14 (1,437) 09/11/13 1,550

8 12/24/14 (1,287) 12/21/16 1,511

9 12/23/15 (1,280) 12/14/16 1,504

10 06/11/14 (1,220) 08/14/13 1,450

Source: Lipper FMI.


Leveraged Loan Data

Default Rates

0.3

2.9

12.0

1.6

0.5

1.8 2.0

3.6

1.7 1.7

0.1

2.8

4.6

3.0

0.9

2.2

0.2

1.5 1.9 2.2

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

BSL LMM

U.S. Institutional Leveraged Loan Default Rate — BSL

BSL ‒ Broadly syndicated loans. LMM ‒ Large middle market.Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

(%)

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. Institutional Leveraged Loan Cumulative Default Rates by Vintage


(%)

0.2

2.9

10.5

1.9

0.6

1.8 1.6

3.2

1.7 1.82.5

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F

U.S. Institutional Leveraged Loan Default Rate

F – Forecast.Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

(%)


Leveraged Loan Data

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Total MarketInsurance

Food, Beverage & TobaccoComputers & ElectronicsIndustrial/Manufacturing

Supermarkets & Drug StoresHealthcare & Pharmaceutical

Services & MiscellaneousTelecommunicationsTextiles & Furniture

TransportationRetail

Consumer ProductsAutomotive

Leisure & EntertainmentEnergy

CableBanking & Finance

Paper & ContainersMetals & Mining

Gaming, Lodging & RestaurantsBuilding & Materials

Real EstateChemicals

Broadcasting & MediaUtilities, Power & Gas

Default Rates by Industry — 2007–2016 Average

Note: Ranked by highest to lowest loan default rate. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

(%)

Institutional Leveraged Loan Industry Default Rates(%) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007–2016Automotive — 2.7 19.3 — — — — — — 2.4 2.8 Banking & Finance — — 33.4 2.1 0.4 5.8 — — — 1.5 4.1 Broadcasting & Media — 8.8 19.5 6.0 0.4 1.0 17.6 1.1 0.5 5.4 7.0 Building & Materials — 13.8 31.2 4.2 — 3.0 1.9 — — — 5.8 Cable — — 28.1 — — 2.3 — — — — 3.8 Chemicals — 3.7 44.2 — — — — — — 1.3 6.7 Computers & Electronics — — 1.9 0.2 — — — 0.2 0.1 0.4 0.3 Consumer Products — 0.9 8.1 3.2 0.5 1.6 — — 3.5 2.7 2.1 Energy — 1.7 2.6 — — 2.1 1.1 — 9.8 14.2 3.7 Food, Beverage & Tobacco — 1.2 0.8 — — 0.3 — — — — 0.2 Gaming, Lodging & Restaurants — 13.4 2.5 3.9 0.6 4.1 2.5 2.1 13.0 — 4.5 Healthcare & Pharmaceutical 0.2 0.3 1.0 1.7 — 0.4 0.1 0.3 2.3 — 0.7 Industrial/Manufacturing — — 4.0 1.9 — — — — — — 0.5 Insurance — — — — — — — — — — —Leisure & Entertainment 1.3 — 32.8 — 1.5 2.6 — 0.8 — 0.1 3.5 Metals & Mining 1.1 — 4.1 — — — — 2.3 12.9 23.6 4.4 Paper & Containers 1.3 1.9 11.8 2.9 12.9 — — — — 5.3 4.2 Real Estate — 19.8 21.1 0.9 — — — — — — 6.3 Retail 3.1 — 4.8 5.8 2.9 4.2 0.6 0.2 0.5 0.5 1.8 Services & Miscellaneous — 1.2 0.6 1.0 — 2.5 1.2 1.9 0.6 0.5 0.9 Supermarkets & Drug Stores — — 4.2 — — — — — — 2.2 0.6 Telecommunications — 2.0 5.2 — 0.5 2.5 — 1.9 — — 1.2 Textiles & Furniture — 3.7 8.1 — 2.5 — — — — — 1.6 Transportation — 4.6 1.2 — 0.1 9.8 1.0 3.3 — — 1.7 Utilities, Power & Gas — — — 5.7 0.2 1.5 — 50.9 — 1.5 7.2 Total Index 0.2 2.9 10.5 1.9 0.6 1.8 1.6 3.2 1.7 1.8 2.7 Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

2016 U.S. Institutional Leveraged Loan Defaults

Month IssuerPar Value

($ Mil.)Default

DateDefault Source Industry

January 2016 Arch Coal Inc. 1,879.3 01/11/16 Chapter 11 Filing Metals & MiningNewPage Corp. 731.3 01/26/16 Chapter 11 Filing Paper & ContainersRCS Capital Corp. 674.7 01/31/16 Chapter 11 Filing Banking & FinanceSubtotal 3,285.2

February 2016 Noranda Aluminum Holding Corp. 467.3 02/08/16 Chapter 11 Filing Metals & MiningParagon Offshore 641.9 02/14/16 Chapter 11 Filing EnergySubtotal 1,109.2

March 2016 Sports Authority Inc. 300.0 03/02/16 Chapter 11 Filing RetailTown Sports International Holdings Inc. 29.8 03/07/16 Distressed Exchange Leisure & EntertainmentAspect Software Inc. 447.3 03/09/16 Chapter 11 Filing Computers & ElectronicsSouthcross Holdings LP 575.0 03/28/16 Chapter 11 Filing EnergySubtotal 1,352.1

April 2016 Vertellus Specialties Inc. 455.0 04/12/16 Missed Payment ChemicalsPeabody Energy Corp. 1,164.9 04/13/16 Chapter 11 Filing Metals & MiningStallion Oilfield Holding Inc. 47.0 04/15/16 Distressed Exchange EnergyCore Entertainment Inc. 200.0 04/28/16 Chapter 11 Filing Broadcasting & MediaSubtotal 1,866.9

May 2016 Fairway Group Holdings Corp. 266.8 05/02/16 Chapter 11 Filing Supermarkets & Drug StoresAtlas Iron Ltd. 134.5 05/06/16 Distressed Exchange Metals & MiningDex Media Inc. 2,110.0 05/16/16 Chapter 11 Filing Broadcasting & MediaEP Energy LLC 38.0 05/17/16 Distressed Exchange EnergyFieldwood Energy LLC 517.5 05/26/16 Distressed Exchange EnergySubtotal 3,066.8

June 2016 Seventy Seven Operating LLC 492.0 06/07/16 Chapter 11 Filing EnergySubtotal 492.0

July 2016 FTS International Inc. 46.2 07/01/16 Distressed Exchange EnergyTranstar Holding Co. 540.0 07/08/16 Missed Payment AutomotiveC&J Energy Services Ltd. 1,049.4 07/20/16 Chapter 11 Filing EnergyAtinum Midcon I LLC 100.0 07/22/16 Chapter 11 Filing EnergyAtlas Resource Partners LP/Atlas Energy LP 315.0 07/27/16 Chapter 11 Filing EnergySubtotal 2,050.6

August 2016 Templar Energy LLC 1,450.0 08/05/16 Missed Payment EnergyStallion Oilfield Holding Inc. 328.0 08/14/16 Missed Payment EnergyForesight Energy LP 297.8 08/30/16 Restructuring Metals & MiningSubtotal 2,075.8

September 2016 No Default ActivityOctober 2016 Tervita Corp. 244.6 10/18/16 Chapter 15 Filing Services & Miscellaneous

Key Energy Services Inc. 289.7 10/24/16 Chapter 11 Filing EnergyPerformance Sports Group Ltd. 330.5 10/31/16 Chapter 11 Filing Consumer ProductsSubtotal 864.7

November 2016 Bennu Oil & Gas LLC 487.0 11/30/16 Chapter 7 Filing EnergySubtotal 487.0

December 2016 TwentyEighty Inc. 359.0 12/05/16 Missed Payment Services & MiscellaneousLa Paloma Generating Co. LLC 411.7 12/06/16 Chapter 11 Filing Utilities, Power & GasCumulus Media Inc. 28.7 12/30/16 Distressed Exchange Broadcasting & MediaSubtotal 799.4



Leveraged Loan Data

Post-Default Prices

Institutional Leveraged Loan 30-Day Post-Default Pricesa

First Lien(%) Covenant- Bond and Loan-OnlyDefault Year First Lien Second Lien BSL LMM Lite Loan Issuers Issuers2007 88.8 41.3 88.8 — — 88.8 —2008 49.4 18.5 48.0 58.6 37.6 45.3 56.4 2009 54.9 31.9 56.1 39.7 42.0 63.0 42.1 2010 77.9 12.1 84.7 64.9 — 82.7 76.5 2011 60.5 13.5 68.9 54.5 — 97.5 49.2 2012 65.5 26.5 67.3 60.0 59.0 68.9 64.5 2013 69.4 40.0 68.8 93.6 54.1 71.5 66.7 2014 78.4 53.3 78.5 77.6 — 78.3 80.1 2015 49.9 49.6 52.3 39.0 32.9 53.3 44.3 2016 50.1 23.7 46.5 40.7 43.1 48.2 52.0 2007–2016 60.7 32.5 61.3 56.4 43.8 64.4 55.1

Observations ($ Bil.)2007 0.8 0.4 0.8 — — 0.8 —2008 16.7 1.5 14.4 2.3 0.9 10.5 6.2 2009 48.1 2.3 44.7 3.4 4.1 29.4 18.6 2010 7.3 1.8 4.8 2.5 — 1.6 5.7 2011 1.0 0.4 0.4 0.6 — 0.2 0.7 2012 9.3 0.9 6.9 2.3 2.9 2.1 7.2 2013 9.1 0.2 8.9 0.2 1.7 5.2 4.0 2014 24.0 2.3 22.6 1.4 — 21.7 2.3 2015 9.8 2.2 8.0 1.8 4.3 6.2 3.6 2016 11.6 1.7 9.2 2.4 5.5 5.9 5.7 2007–2016 137.7 13.8 120.9 16.8 19.3 83.6 54.1aPar weighted and based on market prices post default. The year above is specific to defaulted loans with price data. BSL – Broadly syndicated loans. LMM – Large middle market. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.

Institutional Leveraged Loan 30-Day Post-Default Prices by Industrya

First LienCovenant- Bond and Loan-Only

(%) First Lien Second Lien BSL LMM Lite Loan Issuers Issuers ($ Bil.)2015Retail — 99.5 — — — — — —Gaming, Lodging & Restaurants 90.5 — 90.5 — — 90.5 — 1.7 Services & Miscellaneous 96.8 — 97.5 95.3 — 96.4 97.5 0.8 Healthcare & Pharmaceutical 44.9 — 44.9 — 41.7 — 44.9 2.1 Metals & Mining 44.2 — 47.1 35.0 53.9 43.2 54.5 2.4 Consumer Products 38.0 — — 38.0 — — 38.0 0.2 Energy 16.0 48.2 14.5 19.8 13.2 13.2 22.0 2.4 Computers & Electronics — 30.8 — — — — — —Broadcasting & Media — 5.0 — — — — — —

2016Automotive 71.4 56.9 71.4 — — 71.4 — 0.4 Banking & Finance 50.0 9.3 50.0 — — — 50.0 0.5 Broadcasting & Media 34.6 — 34.5 35.0 65.2 33.8 65.2 1.0 Chemicals 65.5 — 65.5 — — — 65.5 0.5 Computers & Electronics 98.0 — — 98.0 — 98.0 — 0.4 Consumer Products 98.9 — 98.9 — — — 98.9 0.3 Energy 53.6 20.5 47.9 73.3 38.6 56.2 51.9 3.4 Leisure & Entertainment 41.0 — — 41.0 41.0 — — 0.0 Metals & Mining 38.8 — 41.5 21.7 39.9 39.9 15.1 3.2 Paper & Containers 20.8 — 20.8 — — 20.8 — 0.7 Retail 14.0 — 14.0 — — — 14.0 0.3 Services & Miscellaneous 71.1 — 98.7 40.8 — 98.7 40.8 0.5 Supermarkets & Drug Stores 93.1 — — 93.1 — — 93.1 0.3 Utilities, Power & Gas — 47.1 — — — — — —aPar weighted and based on market prices post default. BSL ‒ Broadly syndicated loans. LMM ‒ Large middle market. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg.


Leveraged Loan Data

30-Day Post-Default Prices — First Lien ($137.7 Bil.)(% of Par)Default Year

Weighted Avg.

Straight Avg. Median Tranches

2007 88.8 92.9 92.9 22008 49.4 59.0 65.8 322009 54.9 52.5 48.1 682010 77.9 71.8 75.3 232011 60.5 62.3 53.8 62012 65.5 66.2 68.5 242013 69.4 72.1 73.9 152014 78.4 78.9 82.0 152015 49.9 50.6 43.2 162016 50.1 54.9 52.0 302007–2016 60.7 60.5 63.3 231

Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.

0

5

10

15

20

25

Distribution


(% Tranches)


30-Day Post-Default Prices — First-Lien BSL ($120.9 Bil.)(% of Par)Default Year

Weighted Avg.


2007 88.8 92.9 92.9 22008 48.0 55.9 57.0 192009 56.1 55.8 56.2 472010 84.7 83.5 83.2 112011 68.9 80.1 80.1 22012 67.3 68.1 68.5 142013 68.8 68.8 71.0 132014 78.5 74.3 79.0 92015 52.3 55.8 49.3 102016 46.5 55.0 57.6 202007–2016 61.3 62.0 66.5 147

BSL – Broadly syndicated loans. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.

02468

101214161820

Distribution


(% Tranches)


30-Day Post-Default Prices — First-Lien LMM ($16.8 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 58.6 63.4 67.0 132009 39.7 45.3 40.0 212010 64.9 61.0 69.9 122011 54.5 53.3 43.9 42012 60.0 63.6 66.6 102013 93.6 93.6 93.6 22014 77.6 85.9 93.3 62015 39.0 41.8 30.9 62016 40.7 54.9 47.5 102007–2016 56.4 57.8 54.8 84

LMM ‒ Large middle market. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.

0

5

10

15

20

25

Distribution


(% Tranches)



Leveraged Loan Data

30-Day Post-Default Prices — First-Lien Loans and Bonds ($83.6 Bil.)(% of Par)Default Year

Weighted Avg.


2007 88.8 92.9 92.9 22008 45.3 63.8 70.0 112009 63.0 61.7 66.1 332010 82.7 78.6 93.0 52011 97.5 97.5 97.5 22012 68.9 81.4 94.0 52013 71.5 78.2 84.3 42014 78.3 76.6 79.0 92015 53.3 49.4 42.4 102016 48.2 59.5 54.0 122007–2016 64.4 65.9 71.8 93


0

5

10

15

20

25

30

35

Distribution


(% Tranches)


30-Day Post-Default Prices — First-Lien Loans Only ($54.1 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 56.4 56.5 65.0 212009 42.1 43.8 40.0 352010 76.5 69.8 74.6 182011 49.2 44.6 43.9 42012 64.5 62.2 66.7 192013 66.7 69.9 71.0 112014 80.1 82.4 89.8 62015 44.3 52.5 48.1 62016 52.0 51.9 52.0 182007–2016 55.1 56.9 56.6 138


02468

1012141618

Distribution


(% Tranches)


30-Day Post-Default Prices — First-Lien Covenant Lite ($19.3 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 37.6 37.6 37.6 12009 42.0 33.5 34.2 82010 — — — 02011 — — — 02012 59.0 60.4 57.8 52013 54.1 58.8 39.1 52014 — — — 02015 32.9 33.0 30.7 62016 43.1 51.2 42.8 132007–2016 43.8 46.5 39.5 38


0

5

10

15

20

25

30

Distribution


(% Tranches)



Leveraged Loan Data

30-Day Post-Default Prices — Second Lien ($13.8 Bil.)(% of Par)Default Year

Weighted Avg.


2007 41.3 41.6 41.6 22008 18.5 16.5 15.0 112009 31.9 24.2 11.3 182010 12.1 12.3 10.8 82011 13.5 29.6 24.8 42012 26.5 21.1 8.6 62013 40.0 40.0 40.0 12014 53.3 39.3 43.4 42015 49.6 52.1 54.8 72016 23.7 37.1 26.6 92007–2016 32.5 27.7 15.1 70


05

1015202530354045

Distribution


(% Tranches)



Leveraged Loan Data

Emergence Prices

Emergence Prices — First Lien ($76.1 Bil.)(% of Par)Default Year

Weighted Avg.


2007 74.7 83.2 83.2 22008 58.6 50.0 51.9 192009 78.9 74.1 89.3 492010 76.2 73.2 84.0 92011 67.0 66.5 66.5 22012 57.1 57.4 54.9 42013 77.1 66.5 70.0 92014 70.2 74.8 79.0 52015 38.4 45.2 40.0 52016 55.7 61.3 62.0 82007–2016 71.2 66.6 73.4 112


0

5

10

15

20

25

30

35

Distribution


(% Tranches)


Institutional Leveraged Loan Emergence Pricesa

First LienBond

(%) First Second Covenant- and Loan Loan-Only Non-Default Year Lien Lien BSL LMM Lite Issuers Issuers Sponsored sponsored2007 74.7 20.6 74.7 — — 74.7 — — 74.72008 58.6 2.3 59.6 48.2 80.3 70.5 23.3 71.0 27.4 2009 78.9 29.2 80.7 55.7 85.7 89.3 55.7 62.8 89.6 2010 76.2 6.5 86.5 58.0 — 60.9 81.7 73.7 83.6 2011 67.0 55.0 — 67.0 — 78.0 55.0 — 67.0 2012 57.1 — 58.8 43.5 53.9 54.2 63.9 58.8 —2013 77.1 — 76.8 99.5 51.0 87.0 59.0 55.7 81.1 2014 70.2 60.8 76.5 47.3 — 90.5 58.7 55.0 77.6 2015 38.4 19.5 32.8 68.5 41.5 69.3 32.6 38.0 38.5 2016 55.7 11.5 43.0 83.3 85.5 62.1 48.5 53.0 59.3 2007–2016 71.2 27.5 72.5 59.7 66.2 82.1 51.7 64.3 76.8

Observations ($ Bil.)2007 0.8 0.4 0.8 — — 0.8 — — 0.8 2008 13.5 1.0 12.4 1.1 0.9 10.1 3.4 9.7 3.8 2009 38.8 1.2 36.1 2.8 3.2 26.9 11.9 15.5 23.4 2010 3.0 1.1 1.9 1.1 — 0.8 2.2 2.2 0.8 2011 0.3 0.0 — 0.3 — 0.2 0.1 — 0.3 2012 2.1 — 1.9 0.2 1.3 1.5 0.6 1.9 —2013 8.0 — 7.9 0.1 1.5 5.2 2.8 1.8 6.4 2014 2.7 1.9 2.1 0.6 — 1.0 1.7 0.9 1.8 2015 3.3 1.6 2.8 0.5 1.8 0.5 2.8 0.2 3.1 2016 3.5 0.2 2.4 1.1 0.4 1.9 1.6 2.0 1.5 2007–2016 76.1 7.3 68.3 7.8 9.1 48.8 27.3 34.2 41.9aPar weighted and based on market prices at emergence. The data above is specific to issuers that have emerged from bankruptcy with loan-price data. BSL – Broadly syndicated loans. LMM – Large middle market. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.


Leveraged Loan Data

Emergence Prices — First-Lien BSL ($68.3 Bil.)(% of Par)Default Year

Weighted Avg.


2007 74.7 83.2 83.2 22008 59.6 44.6 44.6 132009 80.7 78.8 91.2 342010 86.5 88.6 91.2 42011 — — — 02012 58.8 62.1 56.0 32013 76.8 62.4 59.3 82014 76.5 81.0 79.0 32015 32.8 30.6 40.0 32016 43.0 50.3 40.8 52007–2016 72.5 67.3 75.3 75

BSL – Broadly syndicated loans. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.

0

5

10

15

20

25

30

35

Distribution


(% Tranches)


Emergence Prices — First-Lien LMM ($7.8 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 48.2 61.7 57.8 62009 55.7 63.6 66.0 152010 58.0 60.8 61.5 52011 67.0 66.5 66.5 22012 43.5 43.5 43.5 12013 99.5 99.5 99.5 12014 47.3 65.5 65.5 22015 68.5 67.0 67.0 22016 83.3 79.6 85.5 32007–2016 59.7 65.1 65.3 37

LMM – Large middle market. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC.

0

5

10

15

20

25

30

35

Distribution


(% Tranches)


Emergence Prices — Second Lien ($7.3 Bil.)(% of Par)Default Year

Weighted Avg.


2007 20.6 20.6 20.6 22008 2.3 2.5 2.0 62009 29.2 15.1 5.3 102010 6.5 6.2 0.8 42011 55.0 55.0 55.0 12012 — — — 02013 — — — 02014 60.8 61.2 61.2 22015 19.5 24.7 18.5 32016 11.5 11.5 11.5 12007–2016 27.5 17.1 5.0 29


0

10

20

30

40

50

60

70

Distribution


(% Tranches)



Leveraged Loan Data

Emergence Prices — First-Lien Loans Only ($27.3 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 23.3 30.1 25.8 92009 55.7 55.9 46.0 212010 81.7 78.5 84.0 72011 55.0 55.0 55.0 12012 63.9 59.9 59.9 22013 59.0 52.3 39.1 52014 58.7 65.2 64.5 32015 32.6 29.9 38.0 32016 48.5 48.7 47.9 42007–2016 51.7 52.9 46.0 55


0

5

10

15

20

25

Distribution


(% Tranches)


Emergence Prices — First-Lien Covenant Lite ($9.1 Bil.)(% of Par)Default Year

Weighted Avg.


2007 — — — 02008 80.3 80.3 80.3 12009 85.7 79.5 94.8 72010 — — — 02011 — — — 02012 53.9 53.9 53.9 12013 51.0 53.0 39.1 42014 — — — 02015 41.5 41.5 41.5 12016 85.5 85.5 85.5 12007–2016 66.2 68.6 80.3 15


0

5

10

15

20

25

30

35

Distribution


(% Tranches)


Emergence Prices — First-Lien Loans and Bonds ($48.8 Bil.)(% of Par)Default Year

Weighted Avg.


2007 74.7 83.2 83.2 22008 70.5 67.8 75.0 102009 89.3 87.8 94.3 282010 60.9 54.3 54.3 22011 78.0 78.0 78.0 12012 54.2 54.9 54.9 22013 87.0 84.3 94.5 42014 90.5 89.3 89.3 22015 69.3 68.0 68.0 22016 62.1 73.8 91.9 42007–2016 82.1 79.8 92.0 57


0

10

20

30

40

50

60

Distribution


(% Tranches)



Leveraged Loan Data

Private Equity and Leveraged Buyout

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

No. of Closed Deals No. of Exits

Private Equity Investments and Exits

(No.)

Source: Pitchbook Data, Inc.

0

20

40

60

80

100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Business Services (B2B) Consumer Products and Services (B2C)Energy Financial ServicesHealthcare and Pharma Information Technology (IT)Materials and Resources

Private Equity Investments by Industry

(%)


0

2

4

6

8

10

12

14

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Median Transaction Multiples(x)


Statistics:High: 10.9x (2016)Low: 7.3x (2009)Avg.: 9.3x


Leveraged Loan Data

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

All Private Equity — Median Net IRRs by Vintage Year(%)

Source: Preqin.


Private Equity Dry Powder by Fund Type($ Bil., Years Ended Dec. 31)

Year BuyoutVenture Capital Growth

Other PEa

2006 378.2 101.3 27.9 23.1

2007 437.7 119.9 40.5 40.0

2008 481.1 117.5 49.7 36.8

2009 480.5 110.5 50.4 32.7

2010 422.3 102.3 54.4 24.7

2011 388.6 111.3 72.9 20.5

2012 358.6 108.2 71.4 22.5

2013 408.4 109.7 78.3 25.5

2014 450.9 117.0 83.6 34.4

2015 464.1 142.0 92.2 45.5

2016b 527.5 170.4 93.8 47.0aIncludes direct secondaries, multimanager and co-investment. bSept. 30, 2016. Source: Preqin.

Largest Private Equity Sponsors by Deal Count• Audax Group • ABRY Partners • HarbourVest Partners • GTCR• Kohlberg Kravis Roberts • The Carlyle Group • Vista Equity Partners • Providence Equity Partners• Apax Partners • AEA Investors • Genstar Capital • Summit Partners• Hellman & Friedman • Warburg Pincus


Common Private Equity Fund Investors• Funds of Funds • Pension • Insurance • Foreign Investor• ETFs • Endowments/Foundations • Investment Banks • Wealthy Founder/Individual

ETFs – Exchange-traded funds. Source: Fitch Ratings.


Leveraged Loan Data

Select Private Equity Transactions by FirmAcquisition Year

Target Total Purchase Price ($ Mil.)

Purchase Price Multiple (x) Status

Kohlberg Kravis RobertsEnergy Future Holdings Corp. 2007 43,218 7.9 BankruptHCA Inc. 2006 32,193 8.3 ExitedRJR Nabisco Inc. 1988 30,062 N.A. ExitedFirst Data Corp. 2007 27,497 14.6 CurrentAlliance Boots Holdings Ltd. 2007 23,351 30.8 ExitedBiomet Inc. 2006 11,427 16.2 ExitedNielsen Co BV 2006 10,643 15.9 CurrentSunGard Data Systems Inc. 2005 10,592 10.1 CurrentCapmark Financial Group Inc. 2005 8,800 N.A. CurrentToys ‘R’ Us Inc. 2005 7,544 11.4 CurrentDollar General Corp. 2007 7,321 16.3 ExitedSamson Investment Co. 2011 7,200 N.A. CurrentUS Foodservice 2007 7,100 25.7 ExitedDel Monte Foods Co. 2010 5,099 8.3 CurrentIntelsat Corp. 2004 4,681 7.9 Exited

The Blackstone GroupEquity Office Properties Trust 2006 34,102 18.3 CurrentHilton Worldwide Inc. 2007 26,235 15.3 ExitedFreescale Semiconductor Inc. 2006 16,222 11.2 ExitingBiomet Inc. 2006 11,427 16.2 ExitedNielsen Co BV 2006 10,643 15.9 CurrentSunGard Data Systems Inc. 2005 10,592 10.1 CurrentMichaels Stores Inc. 2006 5,523 11.7 ExitedGates Global Inc. 2014 5,400 9.6 CurrentTRW Automotive Holdings Corp. 2002 4,700 N.A. ExitedTravelport Ltd. 2006 4,300 N.A. ExitedNALCO 2003 4,235 N.A. ExitedExtended Stay America Inc. 2010 3,925 17.5 ExitedOfficefirst Immobilien 2016 3,566 N.A. CurrentThe Weather Channel LLC 2008 3,500 N.A. CurrentCatalent Pharma Solutions, Inc. 2007 3,320 N.A. Exited

TPG CapitalEnergy Future Holdings Corp. 2007 43,218 7.9 BankruptCaesars Entertainment ( f/k/a Harrah’s Entertainment Inc.) 2006 27,160 11.6 BankruptAlltel Corp. 2007 27,149 10.8 ExitedFreescale Semiconductor Inc. 2006 16,222 11.2 ExitingUnivision Communications Inc. 2006 12,606 19.5 CurrentBiomet Inc. 2006 11,427 16.2 ExitedSunGard Data Systems Inc. 2005 10,592 10.1 CurrentAvaya Inc. 2007 7,044 10.8 BankruptWashington Mutual Inc. 2008 7,040 N.A. ExitedIMS Health Inc. 2009 5,057 9.4 ExitedThe Neiman Marcus Group Inc. 2005 5,044 9.6 ExitedSabre Holdings Corp. 2006 4,998 12.1 CurrentLife Time Fitness, Inc. 2015 4,000 10.2 CurrentJ Crew Group Inc. 2010 2,637 8.4 ExitedPar Pharmaceutical Companies, Inc. 2012 1,934 9.0 Current

The Carlyle GroupKinder Morgan Kansas Inc. 2006 27,450 27.4 ExitedFreescale Semiconductor Inc. 2006 16,222 11.2 ExitingNielsen Co BV 2006 10,643 15.9 CurrentHD Supply Inc. 2007 8,500 N.A. ExitedVeritas Technologies 2016 7,400 N.A. CurrentHCRManor Care Inc. 2007 5,936 13.2 CurrentThe Hertz Corporation 2005 5,600 N.A. ExitedN.A. – Not available. Continued on next page Source: Bloomberg, Fitch Ratings.


Leveraged Loan Data

Select Private Equity Transactions by Firm (Continued)Acquisition Year

Target Total Purchase Price ($ Mil.)

Purchase Price Multiple (x) Status

The Carlyle Group (Continued)Allison Transmission Inc. 2007 5,575 N.A. ExitedAcosta Sales & Marketing 2014 4,750 13.0 CurrentDuPont Performance Coatings 2013 4,900 N.A. CurrentIntelsat Corp. 2004 4,681 7.9 ExitedOrtho-Clinical Diagnostics Inc. 2014 4,150 N.A. CurrentNBTY Inc. 2010 3,812 8.1 CurrentCommScope Inc. 2010 3,788 7.8 CurrentHamilton Sundstrand Industrial 2012 3,460 N.A. Current

Bain CapitalHCA Inc. 2006 32,193 8.3 ExitediHeart Media Inc. (f/k/a Clear Channel Communications Inc.) 2008 25,455 N.A. CurrentSunGard Data Systems Inc. 2005 10,592 10.1 CurrentNXP BV 2006 9,473 N.A. ExitedHD Supply Inc. 2007 8,500 N.A. ExitedToys ‘R’ Us Inc. 2005 7,544 11.4 CurrentBMC Software 2013 6,900 8.2 CurrentMichaels Stores Inc. 2006 5,523 11.7 ExitedThe Weather Channel LLC 2008 3,500 N.A. CurrentBloomin’ Brands ( f/k/a OSI Restaurant Partners LLC) 2006 3,259 9.8 ExitedNets Holding A/S 2014 3,140 12.4 CurrentWarner Chilcott PLC 2004 2,927 N.A. ExitedWorldPay Ltd. 2010 2,710 N.A. CurrentVertafore 2016 2,700 N.A. Current

GS Capital PartnersEnergy Future Holdings Corp. 2007 43,218 7.9 BankruptKinder Morgan Kansas Inc. 2006 27,450 27.4 ExitedAlltel Corp. 2007 27,149 10.8 ExitedBiomet Inc. 2006 11,427 16.2 ExitedSunGard Data Systems Inc. 2005 10,592 10.1 CurrentCapmark Financial Group Inc. 2005 8,800 N.A. CurrentARAMARK Corp. 2006 7,999 8.6 ExitedSolera Holdings 2016 6,500 N.A. CurrentHawker Beechcraft Corp. 2006 3,300 N.A. CurrentEducation Management Corp. 2006 3,124 N.A. CurrentTransUnion Corp. 2012 3,000 8.9 CurrentAdesa Inc. 2006 2,676 9.7 ExitedCCS Corp. 2007 2,556 9.6 ExitedAlliance Atlantis Communications Inc. 2007 2,145 4.4 ExitedHealthMarkets Inc. 2005 1,713 N.A. CurrentN.A. – Not available. Source: Bloomberg, Fitch Ratings.


Leveraged Loan Data

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Annual LBO Loan Issuance($ Bil.)



Largest LBOs — 2016

Borrower Name Private Equity SponsorDate of

TransactionPurchase

Price ($ Mil.)

Total Loan Amount


LIBOR Floor

(%)Term Loan

B OIDYield

(%)Dell Technologies MSD Capital/Siliver Lake/Temasek 09/07/16 60,000 46,775 250 0.75 99.88 3.41 ADT Security Services Apollo/Koch Industries/Protection 1 04/02/16 15,000 6,283 233 1.00 99.75 4.07 Keurig Green Mountain BDT/JAB/Mondelez International 03/03/16 15,000 3,297 438 0.75 98.00 4.75 MultiPlan CPPIB/GIC/Hellman & Friedman 06/07/16 7,500 3,570 400 1.00 99.50 4.57 Veritas Technologies GIC/Carlyle Group 06/07/16 7,400 2,822 629 1.00 85.00 10.18 PartnerRe Exor 03/18/16 6,900 4,750 200. 0.00 N.A. N.A.National Grid Allianz/Macquarie/Dalmore 12/09/16 6,743 2,504 N.A. N.A. N.A. N.A.Solera Holdings Baring/L Capital/GSCP/Vista Equity 03/03/16 6,500 2,507 475 1.00 97.00 5.43 Talen Energy Riverstone Holdings 12/06/16 5,200 2,000 500 1.00 98.50 5.45 Cleco John Hancock/Macquarie 04/13/16 4,700 1,750 175. N.A. N.A. N.A.Petco CPPIB/CVC Capital Partners 01/29/16 4,600 3,006 325 1.00 100.00 4.67 Solarwinds Harbourvest/Silver Lake/Thoma Bravo 02/05/16 4,500 1,825 350. 1.00 100.00 N.A.Rackspace US Apollo/Searchlight Capital Partners 11/03/16 4,300 3,425 350. 1.00 100.00 N.A.Ultimate Fighting Championship Fidelity/KKR/Fountainvest/MSD/Sequoia 07/11/16 4,000 1,950 325 1.00 99.00 4.15 Apex Technology Legend Capital/Pacific Alliance Group 11/26/16 4,000 1,583 N.A. N.A. N.A. N.A.OID – Original issue discount. BDT – BDT Capital Partners. JAB – JAB Holding Company. CPPIB – Canada Pension Plan Investment Board. GIC – GIC Private Limited. GSCP – Goldman Sachs Capital Partners. KKR – Kohlberg Kravis Roberts. MSD – MSD Capital. N.A. – Not available. Source: Thomson Reuters LPC; PitchBook Data, Inc.


Leveraged Loan Data

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Debt/EBITDA Equity/EBITDA

Private Equity Purchase Price Multiples

(x)


0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Equity Contribution Percentage

(%)




Leveraged Loan Data

Largest LBO Deals of All Time

Announcement Date Target Company Private Equity Sponsor

Purchase Price

($ Mil.)

EBITDA Multiple

(x) Industry

09/07/16 EMC Dell Technologies/MSD/Temasek Holdings 60,000 11.60 Information Technology07/02/15 Kraft Foods Group 3G/Berkshire Hathaway 55,000 N.A. Consumer Products & Services10/10/07 Energy Future Holdings Corp. AlpInvest/Avista/Black Canyon 48,100 27.71 Energy02/09/07 Equity Office Properties Trust BX 39,000 18.30 Financial Services11/17/06 HCA Holdings Bain/Claret/Claritas/Fidelity/KKR 33,000 8.23 Healthcare01/28/08 Caesars Entertainment AlpInvest/Apollo/Bear Growth 30,700 (12.99) Financial Services09/24/07 First Data Corp. KKR 29,000 17.66 Information Technology06/07/13 Kraft Heinz 3G Capital/Berkshire Hathaway 27,361 5.51 Consumer Products & Services12/11/08 Alltel Corp. GSCP/TPG 27,261 10.99 Information Technology11/16/07 Hilton Worldwide Inc. Argosy/BX 26,700 15.30 Consumer Products & Services10/16/15 Dell Technologies MSD/Silver Lake 24,900 N.A. Information Technology06/26/07 Archstone-Smith Trust Lehman/Tishman Speyer 22,200 38.30 Financial Services10/05/07 Alliance Boots Holdings Ltd. Ardian/CPPIB/KKR 22,040 15.72 Business Products & Services07/30/08 IHeartMedia Abrams/Bain/CPPIB/Highfields 19,000 (5.39) Consumer Products & Services06/26/06 Heathrow Airport CDPQ/Ferrovial/GIC 18,887 7.00 Business Products & Services12/01/06 Freescale Semiconductor Inc. Ardian/Bank of Scotland/Battery Ventures 17,600 (15.20) Information Technology09/06/16 Alcatel-Lucent Nokia 17,478 13.19 Information Technology02/04/08 Intelsat BC Partners/Entrepreneur Partners/Silver Lake 16,500 N.A. Information Technology11/29/12 Archstone-Smith Trust AVB/Brookfield/EQR/BX 16,000 N.A. Financial Services12/05/05 TDC Apax/KKR/Permira/Providence 15,300 3.54 Information Technology05/02/16 ADT Security Services Apollo/Koch Industries/Protection 1 15,000 8.45 Business Products & Services03/03/16 Keurig Green Mountain BDT/JAB/Mondelez International 15,000 15.30 Consumer Products & Services12/21/05 The Hertz CDR/North Cove/Carlyle/W Capital Partners 14,800 5.23 Consumer Products & Services04/30/10 LyondellBasell Industries Holdings Acess Industries/Apollo/Ares 14,500 1.27 Materials & Resources

BX – Blackstone Group LP. MSD – MSD Capital. 3G – 3G Capital Inc. AlpInvest – AlpInvest Partners BV. Avista – Avista Capital Holdings LP. Black Canyon – Black Canyon Capital. Bain – Bain Capital LLC. Claret – Claret Capital Limited. Claritas – Claritas Capital. Fidelity – Fidelity Investments. KKR – Kohlberg Kravis Roberts. Apollo – Apollo Global Management. Bear Growth – Bear Growth Capital Partners L.P. GSCP – Goldman Sachs Capital Partners. TPG – TPG Capital. Argosy – Argosy Capital. Silver Lake – Silver Lake Partners. Lehman – Lehman Brothers Holdings Inc. Ardian – Ardian USA. CPPIB – Canada Pension Plan Investment Board. Abrams – Abrams Capital Management LP. Highfields – Highfields Capital Management. CDPQ – Caisse de dépôt et placement du Québec. Ferrovial – Ferrovial, S.A. GIC – GIC Private Limited. AVB – AvalonBay Equity Residential. Brookfield – Brookfield Asset Management. EQR – Equity Residential. Apax – Apax Partners LLP. Permira – Permira Advisors LLC. Providence – Providence Equity Partners Inc. BDT – BDT Capital Partners. JAB – JAB Holding Company. CDR – Clayton, Dubilier, & Rice. North Cove – North Cove Partners. Carlyle – The Carlyle Group LP. Ares – Ares Capital Corp. N.A. – Not available. Source: Pitchbook Data, Inc.; Bloomberg.


Leveraged Loan Data

20 Largest Buyout/LBO Deals Post Credit CrisisAnnouncement Date Target Company Private Equity Sponsor

Purchase Price ($ Mil.)

EBITDA Multiple (x) Industry

09/07/16 EMC Dell Technologies/MSD 60,000 11.60 Information Technology07/02/15 Kraft Foods Group 3G/Berkshire Hathaway 55,000 N.A. Consumer Products & Services06/07/13 Kraft Heinz 3G/Berkshire Hathaway 27,361 5.51 Consumer Products & Services10/16/15 Dell Technologies MSD/Silver Lake 24,900 N.A. Information Technology11/29/12 Archstone-Smith AVB/Brookfield/EQR/BX 16,000 N.A. Financial Services05/02/16 ADT Security Services Apollo/Koch Industries/Protection 1 15,000 8.45 Business Products & Services03/03/16 Keurig Green Mountain BDT/JAB/Mondelez International 15,000 15.30 Consumer Products & Services04/30/10 LyondellBasell Industries Holdings Acess Industries/Apollo/Ares 14,500 1.27 Materials & Resources11/04/11 Acelity Apax/CPPIB 13,650 20.96 Healthcare09/23/13 D.E. Master Blenders 1753 Acorn/BDT/JAB/Quadrant 10,007 21.34 Consumer Products & Services03/01/11 Centro Properties BX 9,400 N.A. & Services06/28/11 Brixmor Property Trust Centerbridge/BX 9,400 10.12 Financial Services12/31/15 Qihoo 360 Technology China Renaissance Investment/CITIC 9,300 15.94 Information Technology01/30/15 Safeway Albertsons/Cerberus 9,200 7.16 Consumer Products & Services03/22/15 PetSmart Ace & Company/Ardian/BC Partners/CDPQ 8,700 12.27 Consumer Products & Services11/09/10 General Growth Properties Brookfield/China Investment Corp. 8,550 5.94 Financial Services06/17/15 Activision Blizzard Davis Advisors/Leonard Green & Partners 8,200 4.85 Information Technology10/11/13 IndCor Properties GIC/Global Logistic Properties 8,100 N.A. Financial Services02/27/15 Biomed Realty Trust BX 8,000 14.15 Financial Services10/14/15 Home Properties Lone Star Funds 7,600 16.83 Financial ServicesMSD – MSD Capital. 3G – 3G Capital Inc. Silver Lake – Silver Lake Partners. AVB – AvalonBay Equity Residential. Brookfield – Brookfield Asset Management. EQR – Equity Residential. BX – Blackstone Group LP. Apollo – Apollo Global Management. BDT – BDT Capital Partners. JAB – JAB Holding Company. Ares – Ares Capital Corp. Apax – Apax Partners LLP. CPPIB – Canada Pension Plan Investment Board. Quadrant – Quadrant Private Equity Pty Ltd. Centerbridge – Centerbridge Capital Partners LLC. CITIC – China International Trust Investment Corp. Ltd. Cerberus – Cerberus Capital Management. Ardian – Ardian USA. GIC – GIC Private Limited. N.A. – Not available. Source: Pitchbook Data, Inc.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Median Holding Period

(Years)

aAs of June 30, 2016.Source: Pitchbook Data, Inc.

Statistics:High: 5.3 years (2014)Low: 3.1 years (2008)Avg.: 4.3 years

a


Leveraged Loan Data

0

10

20

30

40

50

60

70

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Acquisition Exit Secondary Buyout IPO

Exits by Deal Type

(%)


0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Median Corporate Acquisition Valuation/EBITDA Exit Multiples(x)

aAs of June 30, 2016.Source: Pitchbook Data, Inc.

Statistics:High: 8.9x (2015)Low: 6.6x (2013)Avg.: 7.8x

a

Select Exits — 2016

CompanyInvestment Date

Exit Date

Investment Type

Exit Type

Investment Size

($ Mil.)

Exit Value

($ Mil.) Investors (Entry) Acquiror (Exit) IndustryMultiPlan, Inc. (Partial Sale)

02/14/17 05/16/17 Buyout Sale to General Partner

4,400 7,500 Ardian, Partners Group, Star Investment Holdings

GIC, Hellman & Friedman, Leonard Green & Partners

Healthcare IT

Hilton Worldwide (Partial Sale)

07/07/17 10/16/17 Public-to-Private

Trade Sale 26,000 6,500 Blackstone Group HNA Group Leisure

Quirónsalud 01/11/17 09/16/17 Buyout Trade Sale 1,274 6,420 CVC Capital Partners Fresenius Medical Care AG HealthcareCapsugel 04/11/17 12/16/17 Buyout Trade Sale 2,375 5,500 KKR Lonza Group Ltd. PharmaceuticalsBlue Coat Systems, Inc.

04/15/17 06/16/17 Buyout Trade Sale 2,400 4,650 Bain Capital Symantec Corp. IT Security

The Sun Products Corporation

07/08/17 06/16/17 Buyout Trade Sale 2,600 3,600 Vestar Capital Partners Henkel AG Consumer Products

Epicor Software 04/11/17 07/16/17 Public-to-Private

Sale to General Partner

976 3,300 Apax Partners KKR Software

KKR – Kohlberg Kravis Roberts & Co. L.P. Source: Preqin.


Leveraged Loan Data

0

10

20

30

40

50

60

70

80

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Proceeds Raised No. of Deals

Private Equity-Based IPO Volume

($ Bil.)

Source: Renaissance Capital, Greenwich, CT.

(No.)

Select Private Equity-Backed IPOs

Company Name Date of IPO Sponsor

Gross IPO Proceeds

($ Mil.) Industry

HCA Inc. 03/01/11 Bain/KKR 3,800 Healthcare & PharmaKinder Morgan, Inc. 02/10/11 GSCP/Highstar/Carlyle/Riverstone 2,900 UtilitiesPlains GP 10/16/13 First Reserve Corporation 2,816 EnergyFirst Data Corp. 10/15/15 KKR 2,560 Financial ServicesAlly Financial 04/10/14 Cerberus Capital, Oaktree Capital, Sun Capital 2,375 Financial ServicesHilton Worldwide Inc. 12/11/13 BX 2,340 HotelsTwitter 11/07/13 Rizvi Traverse Management 1,820 TechnologySantander Consumer USA 01/23/14 Centerbridge Partners, KKR, Warburg Pincus 1,800 Financial ServicesNielsen Holdings Inc. 01/01/11 BX/Carlyle/KKR/THO 1,800 Media & EntertainmentAntero Resources Corp. 10/10/13 Trilantic Capital Partners/Warburg Pincus/Yorktown Partners 1,572 EnergyHuntsman Corp. 02/21/05 MatlinPatterson 1,450 ChemicalsHertz Global Holdings Inc. 11/05/06 CDR/Carlyle/ML 1,320 FinanceIMS Health 04/04/14 TPG/Canada Pension/Leonard Green & Partners 1,300 TechnologySamsonite International S.A. 06/01/11 CVC/Royal Bank of Scotland 1,250 Consumer ProductsRealogy Holdings Corp. 10/01/12 Apollo 1,242 Consumer ProductsAthene Holding 12/08/16 Apollo 1,080 Financial ServicesWarner Chilcott PLC 09/21/06 Bain/DLJ Merchant Banking/JPM/THO 1,059 Healthcare & PharmaUS Foods Holding 05/25/16 KKR, CD&R 1,022 Consumer ProductsCOTY Inc. 06/13/13 Berkshire Partners/Rhone Capital 1,000 RetailingEnvision Healthcare Corporation 08/13/13 CDR 966 Healthcare & PharmaHD Supply Inc. 07/02/13 Bain/CDR/Carlyle 957 Business ServicesQuintiles Transnational Holdings 05/08/13 Bain/TPG 947 Healthcare & PharmaRice Energy 01/24/14 Natural Gas Partners 924 EnergyFreescale Semiconductor Inc. 05/01/11 BX/TPG/Carlyle/Permira Advisers LLP 783 TechnologyUnivar Inc. 06/18/15 CVC/Clayton Dubilier & Rice 770 ChemicalsARAMARK Holdings Corp. 12/12/13 CCMP Capital/GSCP/THO/TPG 725 Business ServicesDollar General Corp. 11/12/09 KKR 716 RetailingAllison Transmission Holdings Inc. 03/01/12 Carlyle/Onex Corp. 690 AutomotiveTransunion 06/25/15 Advent International Corp./GSCP 665 Business ServicesLa Quinta 04/09/14 BX 650 HotelsBain – Bain Capital LLC. KKR – Kohlberg Kravis Roberts. GSCP – Goldman Sachs Capital Partners. Highstar – Highstar Capital. Carlyle – The Carlyle Group LP. Riverstone – Riverstone Holdings LLC. BX – Blackstone Group LP. THO – Thomas H. Lee. CDR – Clayton Dublier & Rice Inc. ML – Merrill Lynch. TPG – TPG Capital. Canada Pension – Canada Pension Plan Investment Board. CVC – CVC Capital Partners Group. Apollo – Apollo Global Management. JPM – JPMorgan. Source: Fitch Ratings; Renaissance Capital, Greenwich, CT.


Leveraged Loan Data

0

500

1,000

1,500

2,000

2,500

0

50

100

150

200

250

300

350

400

450

500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capital Invested No. of Deals

Middle-Market Private Equity Activity

($ Bil.)


(No.)

Middle-Market Private Equity Deal Count by Industry

B2B – Business to business. B2C – Business to consumer. Note: Numbers may not add due to rounding. Source: Pitchbook Data, Inc.

B2B37%

B2C19%

Energy6%

Financial Services

8%

2011

Materials and Resources

5%Information Technology

12%

Healthcare13%

B2B30%

B2C25%

Energy11%

Financial Services

4%

2016

Materials and Resources

2%Information Technology

15%

Healthcare13%

Share of Middle-Market Private Equity Activity


2011

Core Middle Market

($100 Mil.–$500 Mil.)

48%

Upper Middle Market

($500 Mil.–$1 Bil.)14%

Lower Middle Market

($25 Mil.–$100 Mil.)

38%

2016

Core Middle Market

($100 Mil.–$500 Mil.)

46%

Upper Middle Market

($500 Mil.–$1 Bil.)15%

Lower Middle Market

($25 Mil.–$100 Mil.)

39%


Leveraged Loan Data

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Corp. Acquisition IPO Secondary Buyout

Middle-Market Exit by Type

(No.)


0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capital Raised Funds Closed

Annual Fundraising Volumes

($ Bil.)


(No.)

0

50

100

150

200

250

300

350

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capital Raised Number of Deals Closed (RHS)

U.S. Private Equity Energy Fundraising by Year

($ Bil.)


(No.)


Leveraged Loan Data

10

12

14

16

18

20

22

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Buyout Funds All Private Equity Funds

Average Fund Closing Time

(Months)


0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(CAD Bil.)

Annual Canadian Private Equity Deal Flow

aAs of Oct. 31, 2016.Source: Pitchbook Data, Inc.

a

Top Canadian PE Deals — 2016

Company NameDeal Value

($ Mil.) Investing Firm IndustryBombardier Transportation 2,089 CDPQ IndustrialsTrader Corp. 1,594 Thoma Bravo TechnologyOxford Properties Group 1,545 CPPIB Real EstateWolf Midstream 1,400 CPPIB Oil & GasGive & Go Prepared Foods 1,045 Thomas H. Lee Partners ConsumerConstellation Brands 1,039 Ontario Teachers' Pension Plan ConsumerTeine Energy 975 CPPIB Oil & GasGFL Environmental 800 Highbridge, Hawthorn EnergyRimRock Oil & Gas 685 Warburg Pincus Oil & GasPacific Exploration & Production 633 Catalyst Capital Group Oil & Gas

PE – Private Equity. CDPQ – Caisse de dépôt et placement du Québec. CPPIB – Canada Pension Plan Investment Board. Highbridge – Highbridge Principal Strategies. Hawthorn – Hawthorn Equity Partners. Source: Thomson Reuters LPC, Fitch Ratings.


Leveraged Loan Data

0

20

40

60

80

100

120

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(No.)(CAD Bil.)

Private Equity Exit ActivityExit Capital No. of Exits

aAs of Oct 31, 2016. Source: Pitchbook Data, Inc.

a

0

50

100

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200

250

300

350

400

450

500

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(No.)(USD Bil.)

Private Equity Buyout Investment in Canadian CompaniesDeal Values No. of Deals Closed (RHS)


7.3

3.8

12.2 16.1 14.7

11.1

45.4

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015 2016

(CAD Bil.)

Note: The high amounts raised in 2016 are substantially due to the closings of Brookfield Infrastructure Fund III, Brookfield Strategic Real Estate Partners II and Brookfield Capital.Source: Thomson Reuters LPC.

Private Equity Fundraising — Capital Raised


Leveraged Loan Data

Private Equity Buyout Investment by Deal Size Range — 2016


> $1 Bil.48%

Total Invested = $18.0 Bil.

$10 Mil.–$100 Mil.

12%

< $10 Mil.2%

$500 Mil.–$1 Bil.21%

$100 Mil.–$500 Mil.

17%

Total Number of Deals = 303

$10 Mil.–$100 Mil.

64

< $10 Mil.86

$500 Mil.–$1 Bil.

5

$100 Mil.–$500 Mil.

13

> $1 Bil.6Deal Values

Undisclosed129


Leveraged Loan Data

Collateralized Loan Obligations

0

50

100

150

200

250

300

350

400

450

500

U.S. Europe


($ Bil.)

CLO Assets Under Management

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Annual CLO Issuance($ Bil.)

Source: Thomas Reuters LPC.


0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Annual Middle-Market CLO Issuance($ Bil.)

Source: Fitch Ratings, public domain.



Leveraged Loan Data

0

5

10

15

20

25

30

0

2

4

6

8

10

12

14

16

Issuance Count

Monthly CLO Issuance — 2016

($ Bil.)

Source: Fitch Ratings, public domain.

(No. of CLOs)

86

88

90

92

94

96

98

100

102

Average Bid of U.S. CLO Portfolios

U.S. Average Bid U.S. Median Bid


(% of Par)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16 01/17

2016 U.S. CLO Refinancings and Resets

Resets Refinancings


($ Bil.)


Leveraged Loan Data

0

2

4

6

8

10

12

14

CLO Holdings by Industry — 2016(%)


120

125

130

135

140

145

150

155

160

165

170

01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16 01/17 02/17

U.S. CLO AAA Spreads — 2016(bps)


Statistics:High: 164 bps (May 2016) Low: 135 bps (Feb. 2017)Avg: 152 bps

0

5

10

15

20

25

30

35

40

2013 2014 2015 2016

CLO Size Distribution

(%)


($ Mil.)


Leveraged Loan Data

(200)

(100)

0

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014 2015 2016 2017

Post-2002 CLO Minimum OC Cushion(bps)

OC – Overcollateralization.Source: Intex, ©2017 Wells Fargo Securities, LLC. All rights reserved. Used with permission.

0

10

20

30

40

50

60

70

80

Minimum OC Minimum OC/Interest Diversion

Percentage of CLOs Failing OC Test

(%)

OC – Overcollateralization.Source: Intex, ©2017 Wells Fargo Securities, LLC. All rights reserved. Used with permission.


Leveraged Loan Data

CLO Transactions — 2016

Deal Name

Deal Size Amount

($ Mil.) Collateral Manager StructurerPricing

DateAAA CE

(%)

AAA Spread

(bps)Noncall (Years)

Reinvestment (Years)

Max. WAL

Babson CLO 2016-1 407.0 Babson Capital Mgmt Morgan Stanley 01/21/16 38.0 150 2.1 4.1 8.0

Voya CLO 2016-1 422.7 Voya Alternative Asset Mgmt JPMorgan 01/22/16 38.0 150 2.4 4.4 8.0

Madison Park XX 504.8 Credit Suisse Asset Mgmt JPMorgan 02/23/16 38.0 155 2.0 4.8 8.0

Neuberger Berman CLO XXI 361.5 Neuberger Berman Morgan Stanley 02/23/16 38.0 155 2.0 4.0 8.0

Magnetite XVII 501.2 BlackRock Deutsche Bank 02/24/16 36.0 155 2.1 4.1 8.0

Denali Capital CLO XII 358.8 Crestline Denali Capital BNP Paribas 02/25/16 36.5 175 2.0 4.0 8.0

Highbridge Loan Management 8-2016 406.8 Highbridge Principal Strategies Morgan Stanley 03/07/16 38.0 155 2.0 4.5 8.0

Oaktree EIF I Series A 470.0 Oaktree Capital Mgmt Wells Fargo 03/09/16 38.0 155 2.0 2.5 7.0

Symphony CLO XVII 512.0 Symphony Asset Mgmt GreensLedge 03/09/16 35.9a 285a 2.0 4.0 8.5

Wellfleet CLO 2016-1 358.5 Wellfleet Credit Partners Morgan Stanley 03/11/16 35.0 175 2.0 4.0 8.0

Carlyle GMS CLO 2016-1 401.6 Carlyle Investment Mgmt JPMorgan 03/16/16 38.4 155 2.0 4.0 8.0

ACAS CLO IX 405.5 American Money Mgmt Citigroup 03/17/16 33.0 158 1.0 0.0 5.3

Telos CLO 2016-7 252.4 Telos Asset Mgmt SG Americas Securities

03/17/16 37.4 165 1.0 0.0 5.3

LCM XXI 381.1 LCM Asset Mgmt Deutsche Bank 03/18/16 37.8 155 2.0 4.5 8.0

Mill Creek CLO II 302.5 40/86 Advisors Goldman Sachs 03/21/16 34.5 175 2.0 4.0 9.0

Octagon Investment Partners 26 507.7 Octagon Credit Investors Bank of America 03/23/16 38.0 158 2.0 4.5 8.0

Upland CLO 406.3 Invesco Senior Secured Mgmt Citigroup 03/23/16 35.0 160 2.0 4.0 8.0

Canyon Capital CLO 2016-1 451.1 Canyon Capital Advisors Goldman Sachs 03/30/16 35.0a 225a 2.0 4.0 8.0

BlueMountain CLO 2016-1 424.1 BlueMountain JPMorgan 04/13/16 37.9 158 2.0 4.5 8.0

Regatta VI CLO 411.0 Regatta Loan Management Morgan Stanley 04/15/16 37.0 175 2.2 4.2 8.0

AMMC CLO 18 406.2 American Money Mgmt Jefferies 04/20/16 39.3 165 2.0 4.0 8.0

Zais CLO 4 280.7 ZAIS Leveraged Loan Mgr RBC 04/20/16 32.5 155 0.8 0.0 5.8

Dryden 42 Senior Loan Fund 401.8 Prudential Investment Mgmt BNP Paribas 04/22/16 38.0 156 2.2 5.2 8.0

OCP CLO 2016-11 501.6 Onex Credit Partners Citigroup 04/22/16 38.0 159 1.0 2.0 6.0

Sound Point CLO XI 512.5 Sound Point Capital Credit Suisse 04/25/16 35.5 165 2.2 4.4 8.0

Palmer Square Loan Funding 2016-2 200.5 Palmer Square JPMorgan 04/26/16 32.7 140 1.0 0.0 5.2

Carlyle GMS CLO 2016-2 499.0 Carlyle Investment Mgmt Citigroup 04/27/16 38.0 156 2.3 4.5 8.0

HPS Loan Management 9-2016502.6 Highbridge Principal Strategies Citigroup 04/27/16 38.0 156 2.0 4.0 8.0

Race Point X CLO 401.9 Bain Capital Credit Citigroup 04/27/16 35.3 160 2.2 4.2 8.0

Black Diamond CLO 2016-1 358.6 Black Diamond JPMorgan 04/29/16 39.0 165 2.0 4.0 8.0

Trinitas CLO IV 406.6 Triumph Capital Wells Fargo 05/02/16 35.5 175 1.9 3.9 8.0

Cedar Funding V 397.2 Aegon USA Investment Mgmt Jefferies 05/05/16 36.5 161 2.1 4.1 8.0

ALM XIX 473.4 Apollo Credit Mgmt Citigroup 05/10/16 35.0 155 2.6 4.6 8.5

MidOcean Credit CLO V 405.3 MidOcean Credit Fund Mgmt Credit Suisse 05/12/16 36.0 170 2.0 4.0 8.0

Vibrant CLO IV 406.0 DFG Investment Advisers Goldman Sachs 05/13/16 35.0 210 2.1 4.1 8.0

Newfleet CLO 2016-1 356.3 Newfleet Asset Mgmt Wells Fargo 05/16/16 35.0 185 2.1 4.1 8.0

York CLO-3 403.2 York Managed Holdings Morgan Stanley 05/16/16 33.0 157 1.1 2.1 6.7

THL Wind River 2016-1 608.3 THL Credit RBC 05/18/16 36.0 165 2.1 4.1 8.1

Ocean Trails CLO VI 305.5 West Gate Nomura 05/23/16 36.7 175 3.1 4.1 8.0

Octagon Investment Partners 27 510.0 Octagon Credit Investors Citigroup 05/25/16 38.0 153 2.0 4.5 8.0

Arrowpoint CLO 2016-5 354.5 Arrowpoint Asset Mgmt Goldman Sachs 05/25/16 36.0 172 2.0 4.0 8.0

Steele Creek CLO 2016-1 306.5 Steele Creek BNP Paribas 05/26/16 36.5 170 2.0 4.0 8.0

KKR CLO 14 508.2 KKR Financial Advisors Natixis 05/31/16 36.0 162 2.1 4.1 8.0

TCI-Flatiron CLO 2016-1 408.8 TCI Capital Management LLC Bank of America 06/02/16 36.0 156 2.1 4.6 8.3 aThis transaction has a senior/subordinated ‘AAAsf’ note structure. The data provided references the subordinated ‘AAAsf’ tranche. CE – Credit enhancement. WAL – Weighted-average life. Continued on next page. Source: Fitch Ratings.


Leveraged Loan Data

CLO Transactions — 2016 (Continued)

Deal Name

Deal Size Amount


DateAAA CE

(%)

AAA Spread



Max. WAL

TIAA CLO I 454.6 Teachers Advisors Inc. Wells Fargo 06/03/16 35.0 170 2.0 4.0 8.0

Voya 2016-2 407.3 Voya Alternative Asset Mgmt Citigroup 06/07/16 35.3 154 2.0 5.0 9.0

TICP CLO V 2016-1 410.3 TICP CLO Mgmt Bank of America 06/09/16 40.0 164 2.0 4.0 8.0

ALM XVIII 450.1 Apollo Credit Mgmt BNP Paribas 06/09/16 38.9 153 2.0 4.5 8.0

Galaxy XXII CLO 400.0 PineBridge Investments Goldman Sachs 06/10/16 35.9 158 2.0 4.0 8.0

Westcott Park CLO 650.1 GSO/Blackstone Debt Funds Mgmt Wells Fargo 06/10/16 35.4 153 2.8 4.8 8.8

Seven Sticks CLO 401.5 Guggenheim Investment Mgmt Citigroup 06/15/16 36.0 170 2.0 4.0 8.0

1828 CLO 410.0 Guggenheim Investment Mgmt GreensLedge 06/15/16 37.8 160 2.0 4.0 8.0

Venture XXIII CLO 411.3 MJX Asset Mgmt Credit Suisse 06/16/16 36.0 165 2.0 4.0 8.0

Benefit Street Partners CLO IX 410.0 Benefit Street Partners Morgan Stanley 06/16/16 36.5 171 2.0 4.0 8.0

Ares XXXIX 510.0 Ares Mgmt JPMorgan 06/22/16 35.0 153 2.8 4.8 8.8

Anchorage CLO 8 409.8 Anchorage Capital Deutsche Bank 06/22/16 37.5 165 2.0 4.0 8.0

GoldenTree Loan Opportunities XII 409.7 GoldenTree Asset Mgmt GreensLedge 06/22/16 38.7 153 2.0 4.5 8.0

JFIN CLO 2016 353.5 Apex Credit Partners Jefferies 07/08/16 36.6 175 2.0 4.0 8.0

Annisa CLO 408.4 Invesco Senior Secured Mgmt Barclays 07/12/16 36.0 155 2.0 4.0 8.0

Sound Point CLO XII 722.5 Sound Point Capital Credit Suisse 07/14/16 35.5 166 2.2 4.2 8.0

Dryden 43 Senior Loan Fund 612.3 Prudential Investment Mgmt Deutsche Bank 07/15/16 36.5 154 1.9 4.9 9.0

Madison Park XXI 814.3 Credit Suisse Asset Mgmt Citigroup 07/15/16 35.5 153 1.9 4.9 9.0

BlueMountain CLO 2016-2 505.6 BlueMountain Citigroup 07/21/16 39.0 155 2.0 5.0 9.0

Apidos CLO XXIV 409.0 CVC Credit Partners Bank of America 07/22/16 38.0 150 1.9 4.9 8.0

Park Avenue Institutional Advisors CLO 2016-1 406.0 Park Avenue Institutional Advisors JPMorgan 07/25/16 37.4 170 2.0 4.0 8.0

ICG US CLO 2016-1 405.8 ICG Advisors Citigroup 07/26/16 36.0 165 1.9 3.9 8.0

Babson CLO 2016-II 411.0 Babson Capital Mgmt Morgan Stanley 07/29/16 37.0 145 2.2 4.2 8.0

Canyon Capital CLO 2016-2 460.8 Canyon Capital Advisors JPMorgan 08/08/16 36.0 150 2.1 4.1 8.0

Carlyle GMS CLO 2016-3 504.8 Carlyle Investment Mgmt Goldman Sachs 08/09/16 35.4 151 2.1 5.1 9.0

KKR CLO 15 410.8 KKR Financial Advisors Credit Suisse 08/10/16 36.0 156 2.1 4.1 8.0

Venture XXIV CLO 525.5 MJX Asset Mgmt Jefferies 08/11/16 35.6 156 2.1 4.1 8.0

Jamestown CLO IX 407.6 3i Debt Mgmt Citigroup 08/11/16 35.0 157 2.1 4.1 8.0

Ballyrock CLO 2016-1 354.1 Ballyrock Investment Advisors Goldman Sachs 08/16/16 36.0 159 2.1 4.1 8.0

Trinitas CLO V 410.0 Trinitas Capital Mgmt Morgan Stanley 08/18/16 36.0 170 2.1 4.1 8.0

Arch Street CLO 409.8 NewStar Financial Credit Suisse 08/22/16 36.0 165 2.1 4.1 8.0

Jay Park CLO 508.9 GSO/Blackstone Debt Funds Mgmt Citigroup 08/23/16 38.6 145 2.0 5.3 8.0

Dryden 45 Senior Loan Fund 659.1 Prudential Investment Mgmt Wells Fargo 08/23/16 38.0 145 2.0 4.8 8.0

Neuberger Berman CLO XXII 409.0 Neuberger Berman Bank of America 08/25/16 38.0 145 2.0 4.5 8.0

Crestline Denali CLO XIV 361.0 Crestline Denali Capital BNP Paribas 09/02/16 36.5 157 2.0 4.3 8.0

Octagon Investment Partners 28 705.5 Octagon Credit Investors Morgan Stanley 09/07/16 38.0 145 2.0 4.5 8.0

Garrison Funding 2016-1 410.1 Garrison Investment Group Deutsche Bank 09/08/16 36.5 169 2.0 4.0 8.0

TCI Symphony 2016-1 515.5 TCI Capital Management Bank of America 09/08/16 36.0 148 2.0 5.0 9.5

Ares XL 707.0 Ares Mgmt Goldman Sachs 09/13/16 35.0 143 2.0 5.0 8.0

Madison Park XXII 809.0 Credit Suisse Asset Mgmt Wells Fargo 09/15/16 35.5 148 2.0 5.0 9.0

OCP CLO 2016-12 557.8 Onex Credit Partners Bank of America 09/16/16 38.0 157 2.0 4.0 8.0

LCM XXII 448.6 LCM Asset Mgmt Natixis 09/16/16 37.0 148 2.0 5.0 9.0

Regatta VII Funding 407.1 Napier Park BNP Paribas 09/16/16 36.0 153 1.9 4.2 8.0

Zais CLO 5 408.5 ZAIS Leveraged Loan Mgr JPMorgan 09/23/16 35.0 153 2.0 4.0 8.0

Cathedral Lake IV 404.2 Carlson Capital Jefferies 09/26/16 40.3 165 3.0 5.0 8.0

THL Credit Wind River 2016-2 655.5 THL Credit Morgan Stanley 09/27/16 36.0 150 2.0 4.0 8.0 aThis transaction has a senior/subordinated ‘AAAsf’ note structure. The data provided references the subordinated ‘AAAsf’ tranche. CE – Credit enhancement. WAL – Weighted-average life. Continued on next page. Source: Fitch Ratings.


Leveraged Loan Data

CLO Transactions — 2016 (Continued)

Deal Name

Deal Size Amount


DateAAA CE

(%)

AAA Spread



Max. WAL

Voya CLO 2016-3 608.0 Voya Alternative Asset Mgmt Credit Suisse 09/28/16 38.0 143 2.0 4.8 8.0

Wellfleet CLO 2016-2 406.1 Wellfleet Credit Partners Citigroup 09/28/16 35.0 165 2.0 4.0 8.0

Magnetite XVIII 535.6 BlackRock Financial Mgmt Goldman Sachs 09/29/16 35.8 140 2.0 4.8 8.8

Apidos CLO XXV 716.5 CVC Credit Partners Bank of America 10/03/16 35.5 146 1.9 3.9 8.5

BlueMountain CLO 2016-3 480.1 BlueMountain Barclays 10/06/16 38.7 143 2.0 4.8 8.0

AMMC CLO 19 459.9 American Money Mgmt Mitsubishi UFJ 10/07/16 37.4 150 2.3 4.3 8.0

Burnham Park CLO 558.1 GSO/Blackstone Debt Funds Mgmt Wells Fargo 10/07/16 36.0 143 3.0 5.0 9.0

Cedar Funding VI 498.5 Aegon USA Investment Mgmt Jefferies 10/13/16 36.5 147 2.0 4.3 8.0

Shackleton 2016-IX 412.5 Alcentra NY Morgan Stanley 10/14/16 36.5 150 3.0 4.3 8.0

Sound Point CLO XIV 715.0 Sound Point Capital Credit Suisse 10/20/16 35.5 153 2.2 4.2 8.0

Neuberger Berman CLO XXIII 412.0 Neuberger Berman Bank of America 10/25/16 38.0 143 1.9 4.5 8.0

TICP CLO VI 2016-2 411.0 TICP CLO Mgmt Bank of America 10/26/16 38.0 155 2.1 4.1 8.0

Carlyle GMS CLO 2016-4 508.1 Carlyle Investment Mgmt Citigroup 10/27/16 39.5 143 2.0 4.8 8.0

Barings CLO 2016-III 512.3 Barings LLC Citigroup 10/28/16 38.0 143 2.1 4.9 8.0

Battalion CLO X 404.3 Brigade Capital Mgmt Citigroup 10/28/16 35.0 155 2.1 4.1 8.0

Salem Fields CLO 449.0 Guggenheim Investment Mgmt Citigroup 10/28/16 36.0 152 1.9 3.9 8.0

OHA Loan Funding 2016-1 609.0 Oak Hill Advisors Morgan Stanley 10/31/16 38.3 143 2.0 4.8 8.0

Atlas Senior Loan Fund VII 411.0 Crescent Capital Group Morgan Stanley 10/31/16 38.0 150 2.0 4.0 8.0

Bristol Park CLO 562.2 GSO/Blackstone Debt Funds Mgmt BNP Paribas 11/01/16 35.0 142 2.6 5.1 9.0

York CLO-4 408.0 York Managed Holdings Morgan Stanley 11/03/16 37.0 163 3.1 5.1 9.5

Mountain View 2016-1 309.0 Seix Investment Advisors LLC Citigroup 11/07/16 35.5 160 2.1 4.1 8.1

Anchorage CLO 9 563.7 Anchorage Capital JPMorgan 11/08/16 37.5 151 2.1 4.1 8.3

MidOcean Credit CLO VI 402.7 MidOcean Credit Fund Mgmt Jefferies 11/08/16 39.5 158 2.1 3.5 8.1

Palmer Square Loan Funding 2016-3 252.9 Palmer Square JPMorgan 11/09/16 26.9 115 2.0 0.0 8.0

Symphony CLO XVIII 504.0 Symphony Asset Mgmt BNP Paribas 11/16/16 38.0 143 2.5 4.5 8.0

Venture XXV CLO 601.6 MJX Asset Mgmt Jefferies 11/17/16 36.0 149 2.3 4.3 8.1

Voya CLO 2016-4 707.0 Voya Alternative Asset Mgmt Morgan Stanley 11/17/16 36.0 146 2.1 4.1 8.5

Benefit Street Partners CLO X 510.5 Benefit Street Partners Deutsche Bank 11/18/16 36.0 149 2.1 4.1 8.0

Madison Park XXIV 762.9 Credit Suisse Asset Mgmt JPMorgan 11/22/16 38.0 141 2.1 4.8 8.0

KKR CLO 16 711.3 KKR Financial Advisors Citigroup 11/22/16 35.0 149 2.0 4.0 8.0

OZLM XV 409.3 Och Ziff Loan Mgmt Bank of America 11/22/16 37.0 149 2.1 4.1 8.0

OHA Credit Partners XIII 410.5 Oak Hill Advisors GreensLedge 11/28/16 36.0 145 1.1 5.1 9.0

Ares XLI 614.1 Ares Mgmt BNP Paribas 11/29/16 35.0 141 2.6 5.1 9.1

LCM XXIII 407.6 LCM Asset Mgmt GreensLedge 11/30/16 38.3 140 2.1 5.1 9.5

Bain Capital Credit CLO 2016-2 548.7 Bain Capital Credit Mitsubishi UFJ 11/30/16 38.0 142 2.1 4.1 8.1

Allegro CLO IV 456.2 AXA Investment Managers Goldman Sachs 11/30/16 36.0 140 2.1 4.1 8.0

Riserva CLO 614.0 Invesco Senior Secured Mgmt Credit Suisse 12/01/16 36.0 146 2.1 4.1 8.0

HPS Loan Management 10-2016 410.2 Highbridge Principal Strategies Citigroup 12/01/16 38.0 141 2.9 4.9 8.0

Catamaran CLO 2016-1 408.8 Trimaran Advisors Credit Suisse 12/01/16 36.0 153 2.0 4.0 8.0

TCI-Cent CLO 2016-1 510.2 TCI Capital Management Citigroup 12/02/16 36.0 152 2.1 5.1 9.0

CIFC Funding 2016-I 509.3 CIFC Asset Mgmt BNP Paribas 12/05/16 35.5 148 2.1 4.1 8.0

Octagon Investment Partners 29 510.8 Octagon Credit Investors Credit Suisse 12/06/16 38.0 141 2.1 4.1 8.0

Vibrant CLO V 458.4 DFG Investment Advisors BNP Paribas 12/07/16 36.0 155 2.6 4.6 8.0

Oaktree EIF III Series I 601.7 Oaktree Capital Mgmt Wells Fargo 12/08/16 38.0 141 2.0 4.5 8.0

Taconic Park CLO 509.0 GSO/Blackstone Debt Funds Mgmt Citigroup 12/13/16 35.0 142 2.1 5.1 9.0

KVK CLO 2016-1 355.5 KVK Credit Strategies Goldman Sachs 12/13/16 37.5 154 2.1 4.1 8.1aThis transaction has a senior/subordinated ‘AAAsf’ note structure. The data provided references the subordinated ‘AAAsf’ tranche. CE – Credit enhancement. WAL – Weighted-average life. Source: Fitch Ratings.


Leveraged Loan Data

Arbitrage CLO Structural ProtectionsCoverage Tests PurposeOvercollateralization (OC) Tests

The OC tests protect noteholders in the event of credit quality deterioration and/or par value erosion in the portfolio. OC refers to the excess of the par amount of collateral available to secure one or more note classes over the par amount of those note classes. If the deal fails an OC test, cash flows are diverted from equity or more junior classes of notes to pay down the liabilities in order of seniority until the senior notes are paid in full, or until the test is back in compliance.

Interest Coverage (IC) Tests The IC tests protect noteholders in the event of a reduction in the cash flows produced by the portfolio collateral. The IC test is the ratio of the interest income received (or anticipated) on the assets between payment dates to interest payments due on the liabilities. If the deal fails an IC test, cash flows are diverted from equity or more junior classes of notes to pay down the liabilities in order of seniority until the senior notes are paid in full, or until the test is back in compliance.

Collateral Quality Tests

Weighted-Average Life (WAL)

The weighted average time until all the loans in the portfolio mature. Designed to prevent the total risk horizon of the portfolio from exceeding a covenanted level. The WAL is necessary in determining base default rates since default rates increase over time.

Weighted-Average Spread (WAS)

The WAS over LIBOR of the loan portfolio. This test ensures a minimum level of cash flow from the underlying portfolio that should be sufficient to pay interest on the liabilities, which are typically paid a spread over LIBOR.

Weighted-Average Recovery Rate

The weighted average recovery rate of the loan portfolio. This test measures what the expected recoveries may be upon default of the entire portfolio.

Weighted-Average Rating Factor (WARF)

The WARF is a measure of the average credit rating of the portfolio. It is an indicator of the portfolio's average credit risk.

Typical Investment Criteria (Minimum/Maximum Allowances)a

% First Lien/Sr. Secured % Synthetic Securities % Bonds % Zero-Coupon Securities

% Rated CCC+ or Below % Fixed-Rate Securities % Debtor in Possession Loans % Same Industry Category

% Non U.S. Issuer/Non-USD % Structured Finance % Revolving Credit Facilities % Covenant-Lite Loans

% Single Issuer/Obligor % Long-Dated Assets % Delayed-Draw Term Loans

% PIK-able Securities % Second Lien/Unsecured % Current Pay ObligationsaNot an exhaustive list. PIK – Payment in kind. Source: Fitch Ratings.

Precrisis Versus Post-Crisis Arbitrage CLO TermsPrecrisis (2006–2007) Post-Crisis (2011–2015)

Economics

Typical Deal Size ($ Mil.) 500 350–550

Average Asset Price (% of Par) 100 95–100

Weighted Average Spread Covenant (bps) 200–250 350–450

CLO AAA Spread (bps) 25–35 140–160

Leverage (Debt/Equity) (x) 10–12 8–12

Key Terms (Years)

Reinvestment Period 5–7 3–4

Final Legal Maturity 10–14 10–13

Noncall Period 3–4 1.5–2.0

Typical Key Portfolio Parameters

% of First-Lien Senior Secured Loans Minimum 85–90 Minimum 90

% of Second-Lien Loans Maximum 5–10 Maximum 5–10

% of Fixed-Rate Assets Maximum 5–10 Maximum 10

% of Assets Rated CCC+ or Below Maximum 5.0–7.5 Maximum 7.5

% of Structured Finance Securities Maximum 5 0



Leveraged Loan Data

Middle Market Versus Broadly Syndicated CLO ComparisonMiddle Market Broadly Syndicated

Issuance ($ Bil.) 5.6 64.0

Structure

AAA CE (%) 46.3 36.7

AAA Spread (bps) 215 157

Noncall (Years) 2.0 2.1

Reinvestment (Years) 4.0 4.3

Max WAL 8.0 8.1

Initial Target WARF 3,663 2,710

CE – Credit enhancement. WAL – Weighted-average life. WARF – Weighted-average rating factor. Source: Fitch Ratings, public domain.

Middle-Market CLO Deals — 2016

Deal NameDeal Size

($ Mil.) Collateral Manager StructurerAAA

CE (%)

AAA Spread



Golub Capital Partners CLO 30(M) 478 GC Investment Mgmt GreensLedge 26.0a 304a 2.1 4.0

NewStar Commercial Loan Funding 2016-1 348 NewStar Financial Wells Fargo 43.9 230 2.0 4.0

Golub Capital Partners CLO 31(M) 354 GC Investment Mgmt Wells Fargo 45.0 220 2.0 4.0

Monroe Capital MML CLO 2016-1 305 Monroe Capital Mgmt BNP Paribas 44.0 225 2.0 4.0

Golub Capital Investment Corp CLO 2016(M) 410 GC Investment Mgmt Wells Fargo 45.0 215 2.0 4.0

Cerberus Loan Funding XV 416 Cerberus Capital Mgmt Natixis 48.7 215 2.0 3.5

TIAA Churchill Middle Market CLO I 382 TIAA-CREF Alternatives Advisors Wells Fargo 43.5 215 1.8 4.0

Garrison Funding 2016-2 300 Garrison Investment Group Natixis 54.0 220 2.0 4.0

NewStar Berkeley 506 NewStar Financial Citigroup 42.0 210 1.9 3.9

Golub Capital Partners CLO 33(M) 410 GC Investment Mgmt Wells Fargo 23.8ᵃ 248ᵃ 2.0 4.0

Cerberus Loan Funding XVI 349 Cerberus Capital Mgmt Natixis 48.9 205 2.0 4.0

Fortress Credit Opportunities VII 700 Fortress Investment Group Natixis 52.7 205 2.0 4.0

Maranon Loan Funding 2016-1 304 Maranon Capital LP Citigroup 42.0 210 2.1 4.1

Cerberus Loan Funding XVII 349 Cerberus Capital Mgmt Wells Fargo 31.4a 253ᵃ 2.0 4.0

ᵃRefers to credit enhancement and spread of highest rate class. CE – Credit enhancement. Source: Fitch Ratings, public domain.


High-Yield Bonds

High-Yield Bond Basics 113[Credit 101] What Is the U.S. High-Yield Bond Market? 113

Second-Lien Bonds 115[Credit 101] What Are Second-Lien Bonds? 115What Is the Current Appetite for Second Lien Bonds? 115

PIK Bonds 115[Credit 101] What Are PIK Bonds? 115Why Do Issuers Choose PIK Bonds? 116How Is PIK Accounting Different? 116

Defaults 116[Credit 101] What Happens in an Event of Default? 116[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law? 117What Are the Historical Default Rates for High-Yield Bonds? 117What Is the Current Default Environment for High-Yield Bonds? 117What Is a Distressed Debt Exchange? 117

Recovery 119[Credit 101] What Is Recovery? 119[Credit 101] How Does Fitch Estimate Recovery? 119How Do High-Yield Bonds Perform in Fitch’s Recovery Analyses? 119What Are the Historical Post-Default Prices for High-Yield Bonds? 119

High-Yield Bond Data 120

113The Annual Manual (U.S. Leveraged Finance Primer) — High-Yield Bonds May 31, 2017

High-Yield Bonds

High-Yield Bond Basics

[Credit 101] What Is the U.S. High-Yield Bond Market?

Defining the MarketsThe high-yield bond market generally consists of bonds made to companies with Issuer Default Ratings (IDRs) of ‘BB+’ or lower. High-yield bonds can be secured or unsecured, and typically rank lower in terms of priority than loans. Bonds are issued to corporations and syndicated by banks to investors. Bonds are originated in several different forms, with cash pay and zero coupon being the most common types of bonds.

The characteristics of high-yield bonds are often dictated by the issuing company’s credit profile. High-yield companies typically have weaker operating profiles or higher leverage, resulting in a weaker cash flow profile. Due to these inherent risks coupled with a lower priority in the capital structure, investors typically demand higher yields than those demanded for loans.

High-Yield Bond TypesType DescriptionCash Pay Pays a fixed-coupon rate of interest, usually paid in cash, until maturity or an earlier stated

redemption date.Step Coupon Offers one interest (coupon) rate in the early years of the bond’s life, followed by a second,

higher interest rate at a specified date (the step-up date).Payment in Kind (PIK) Allows the issuer the option of paying the bondholder interest in cash now or the option to

accumulate interest and add it to the principal balance of the bond. At maturity, the issuer must pay both the principal and accumulated interest amounts to the holder of the bond.

Zero Coupon Sold at a deep discount from its face value and pays no current interest to the bondholders. Instead the interest is compounded and paid with the principal at maturity.

Convertible May be converted into shares of another security or cash under stated terms. The security is often the issuing company’s common stock.


High-Yield Bond CharacteristicsType DescriptionCoupon The interest rate stated on a bond when issued. There are generally three types of coupon structures.

• Cash Pay: The coupon is paid in cash, typically semiannually, and can be fixed or floating. • Floating Rate: Floating-rate notes (FRNs) typically pay quarterly interest that varies according to

the movement of the underlying benchmark (i.e. three-, six- or nine-month T-bill rate or LIBOR).• Payment-in-Kind (PIK): Allows the issuer the option of paying the bondholder interest in cash now

or the option to accumulate interest and add it to the principal balance of the bond.Maturity The date on which the principal amount of a bond becomes due, is repaid to the investor and interest

payments stop.Call Protection A protective provision for investors that prohibits the issuer from repaying the security in full for a stated

number of years. Call protection exists to protect bondholders from the risk that interest rates will fall before the call date. Investors’ yields can be negatively affected when a bond is called prior to maturity.

Call Premiums The premium paid by the issuer over par for the right to redeem the bond before the bond’s maturity date.Structure A high-yield bond can be unsecured or secured on a first- or second-lien basis. Further, it can be

senior, senior subordinated, subordinated or junior subordinated in rank.Make-Whole A lump-sum payment to the holder of the bond that is equal to the net present value of coupons they

would have received had the bond not been called.Put Provisions Allows a bondholder to sell a bond back to the issuer at a price, generally par, on certain stipulated

dates prior to maturity. Helps mitigate the risk of increasing interest during the stated put period.Equity Clawbacks A clawback provision in a bond gives the issuer an option to redeem a preset fraction of the bond

within a preset period at a predetermined price, as long as the funds used for the debt redemption come from an equity offering.

Warrants A provision that allows the holder of the bond the option to buy a defined number of warrants to purchase equity in the company at a later date.



High-Yield Bonds

Market History

Several factors have contributed to record growth in the U.S. high-yield bond market in recent years. Investor demand in particular has played a major role. As interest rates reached historic lows in the years following the financial crisis, the search for yield attracted new investors into the high-yield bond and leveraged loan markets. Insurance companies, mutual funds and pension funds were among the most active investors of high-yield bonds.

The U.S. high-yield bond universe surpassed $1.3 trillion at year end 2016, 81% growth compared with a decade ago. Energy and Metals/Mining compose 20% of the current outstanding amount. The lowest rated ‘CCC’ segment accounts for nearly 16.8% of the high-yield bond market, ‘B’ represented 35.2% and ‘BB’ were 48% of the universe.

High-Yield Bond Versus Leveraged Loan ComparisonCharacteristics High-Yield Bonds Leveraged LoansPriority Senior or Subordinated SeniorSecurity Unsecured/Secured SecuredRating ≤ BB+ ≤ BB+Average Deal Size (Average Range) Approximately $500 Mil.

($100 Mil.–$2.5 Bil.)Approximately $400 Mil. ($100 Mil.–$5.0 Bil.)

Coupon Fixed FloatingAverage Yield Approximately 5%–7% Approximately 3%–6%Call Protection Yes Some soft callsCovenants Yes — Incurrence Yes — Generally maintenanceTenor Approximately 10+ years Approximately 3–6 yearsAmortization No YesSecondary Liquidity Yes SomeInvestors Investors Retail Banks/Investors2016 Default Rate (%) 4.7 1.82016 Recovery Rate (%) 29.7 50.1


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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Oil Hits $26/Barrel Before Rebounding;

High-Yield Returns 17%

Key Events in the High-Yield Bond Market ($ Bil., Market Size)

Dot-Com Bubble Bursts

Telecom Default Volume Spikes

LBO Boom

High-Yield Default Rate Peaks At 16.4%;

High-Yield Returns > 50%

Secured Issuance Spikes

Credit Crisis

Fed Lowers Fed Funds Rate

Annual Issuance Hits New Record

= $307 Bil.

Note: Grey sections represent a recessionary period as defined by the National Bureau of Economic Research.Source: Fitch U.S. High Yield Default Index, Bloomberg.

Fed Begins Taper

Fed Completes Taper

Fed Begins Rate Hikes


High-Yield Bonds

Second-Lien Bonds

[Credit 101] What Are Second-Lien Bonds?

Second lien bonds are secured bonds that constitute a bifurcated deal structure in which the first-lien bondholders stand before second-lien bondholders for payments on asset claims. Due to their lower position in the capital structure, second-lien bonds are perceived to be riskier, and are consequently more expensive and have higher yields for investors than first-lien bonds.

Please refer to the Leveraged Loan section for further explanation of second-lien debt.

What Is the Current Appetite for Second Lien Bonds?

U.S. second-lien bond volumes dropped 28% to $16 billion in 2016 from the record $22.3 million recorded in 2015.

Demand shifted to floating-rate debt markets and there were fewer up-tiering exchanges from stressed energy companies that offered investors a swap into second lien in exchange for unsecured debt instruments in 2016. The Energy sector still accounted for 29% of all U.S. second-lien bond issues last year. First-quarter 2017 issuance across U.S. corporates continued to be sparse, with four issues totaling $1.8 billion.

PIK Bonds

[Credit 101] What Are PIK Bonds?

Payment-in-kind (PIK) is a relatively expensive source of debt funding that allows issuers to pay interest in the form of additional securities rather than in cash. Paying in kind can be optional — known as a toggle option — mandatory, or a combination of the two. Contingent cash-pay requirements were frequently included in recent PIK transactions. This means the issuer must make payments in cash when financial thresholds are met. When not met, the issuer may or must pay in kind, depending on the deal-specific terms. Thresholds vary from restricted payment basket availability under the company’s bank facility to maximum leverage or minimum liquidity levels. Maximum limits on the total number of payments that could be made in kind were relatively common in recent PIK issue indentures.

Defining the PIK MarketPIK volumes tend to fluctuate with the credit cycle and have recently constituted a much smaller share of total high-yield issuance, as the overall U.S. market has propelled to nearly $1.4 trillion.

2.6 3.0 2.35.9

3.6 2.0

13.9

21.1

13.5 12.1 13.510.9

22.3

1.81.2

7.8

4.3

2.8

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25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q17

U.S. Second-Lien Bond Issuance Volumes

1Q16 2Q16 3Q16 4Q16($ Bil.)

Source: Bloomberg, Fitch Ratings.


High-Yield Bonds

In 2014, $7.5 billion worth of PIK debt was issued, the fourth-largest annual U.S. PIK issuance. However, it represented less than 3% of total U.S. high-yield issuance. PIK issuance all but disappeared in 2015, with total issuance of $1.9 billion representing only 0.1% of U.S. high-yield issuance. This is in sharp contrast to 2007 ($16 billion) and 2008 ($14 billion) PIK volumes that represented 11% and 27%, respectively, of total U.S. high-yield issuance.

PIK issuance in 2016 was around $3.2 billion. While this represents around 1.3x the amount issued in 2015, it was not a consequence of the more aggressive market of 2016. The higher volume of PIK issuance in 2016 was driven by distressed debt exchanges in the energy sector (Nuverra Environmental Solutions, Pacific Exploration, W & T Offshore, to name a few examples).

Why Do Issuers Choose PIK Bonds?PIK options allow flexibility for the issuer in the event of cash flows temporarily deteriorating and liquidity becoming a concern. PIK debt has recently been used primarily to fund dividend recapitalizations of LBO targets or as a restructuring tool for distressed issuers. Periods of elevated PIK issuance tend to be driven by dividend deals.

How Is PIK Accounting Different?

Flexibility exists under U.S. GAAP regarding the cash flow statement treatment of the final accrued interest payment made on a PIK issue’s maturity or call date. This cash outflow can be classified as operating or financing.

If a company adopts the former treatment, the final bond payment would be bifurcated into an accrued PIK interest portion and an original principal portion on the cash flow statement. Payment of accrued interest would be classified as an operating cash outflow (based on Accounting Codification Standard 230-10-45-17), and the original principal payment amount would be classified as a financing cash flow. If a company adopts the latter treatment, the entirety of the cash payment at maturity would be classified as a financing cash flow, resulting in higher operating cash flow.

Defaults

[Credit 101] What Happens in an Event of Default?

Please refer to the Leveraged Loan section for Fitch Ratings’ explanation of what happens in an event of default.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

PIK Issuance % of Total Issuance

Deferred Payment (PIK) Bond Issuance

($ Bil.) (%)

PIK – Payment-in-kind.Source: Fitch U.S. High Yield Default Index, Bloomberg.



High-Yield Bonds

[Credit 101] What Options Are Available to Issuers Under U.S. Bankruptcy Law?

Please refer to the Leveraged Loan section for Fitch’s explanation of options available to issuers under U.S. bankruptcy law.

What Are the Historical Default Rates for High-Yield Bonds?

2001–2016The U.S. high-yield bond default rate has averaged 4.3% over the past 16 years. More significantly, the recessionary average over that time finished at 12.9%, while the non-recessionary average was a benign 2.3%. The 2009 recession involved several industries, leading to a 14% rate and a record yearly amount of $113 billion of default volume. The past six years produced reasonably low default activity, with a 2.5% average. The rate inched up over the last two years, reaching 3.2% in 2015 and 4.7% in 2016.

Industry DefaultsThe 2001–2002 recession involved one sector, Telecommunications, which produced the bulk of the default volume. The default rate climbed to a peak 16.8% in 2002. There were seven sectors in 2009 whose default rate topped 20%. Automotives led the way and produced the high sector mark at over 44%. Adverse credit markets led to financing difficulties for car buyers and liquidity problems for manufacturers. As a result, substantial reductions in vehicle sales led to cutbacks in original equipment manufacturers’ production and reduced parts demand from suppliers. At the same time, legacy labor and benefit costs were burdensome and prices of raw materials, including steel, were on the rise. These challenges caused widespread auto defaults.

Energy and Metals/Mining accounted for 84% of the total defaults in 2016. The $49.8 billion of defaults in those two sectors were led by LINN Energy, Inc.; Peabody Energy Corporation; and Pacific Exploration & Production Corp. The non-Energy and Metals/Mining default rate was 1% for 2016.

What Is the Current Default Environment for High-Yield Bonds?

Overall DefaultsFitch projects a 3% U.S. high-yield bond default rate for 2017 due to challenges in the Retail sector. Fitch forecasts a 9% default rate for Retail and a 3% rate for Energy. Overall, Fitch anticipates roughly $34 billion in defaults, less than the $59.6 billion posted last year

Energy, Metals/Mining DefaultsThe January TTM U.S. energy default rate peaked at 19.7% after Bonanza Creek Energy Inc. filed for bankruptcy and Sierra Hamilton LLC elected not to make an interest payment. The E&P subsector default rate reached 31.4%. The energy default rate should slide below 8% by the end of May en route to our 3% year-end Energy default rate equaling roughly $6 billion of defaults, compared with $39 billion in 2016.

What Is a Distressed Debt Exchange?

Fitch categorizes defaults under three methods: a bankruptcy filing, a missed interest payment in which the issuer does not cure its payment within the 30-day grace period, or a distressed debt exchange (DDE). A DDE occurs when bond investors are offered securities with structural or economic terms that are diminished compared with those of existing bonds.

DDEs accounted for 15% of the defaulted amount in 2016, but 42% on an issuer count basis. The 38 DDEs are more than the 26 in 2015, but less than the 45 registered in 2009.

The table on the next page details those issuers from 2008 through December 2016 that have experience a subsequent default following an initial DDE. This translates to roughly 43% of the sample and demonstrates that an initial DDE is often not enough to prevent another DDE or an eventual missed interest payment/filing.


High-Yield Bonds

Distressed Debt Exchanges with Subsequent Default Events: 2008–2016Issuer Industry Original DDE Subsequent DDE Missed Payment BankruptcyFrench Lick Resorts & Casino Gaming, Lodging & Restaurants April 2008 April 2009 — —Primus Telecommunications Group Inc. Telecommunications May 2008 — — March 2009Residential Capital LLC Banking & Finance June 2008 December 2008 May 2012 May 2012Six Flags Inc. Leisure & Entertainment June 2008 — — June 2009Metaldyne Corp. Automotive November 2008 — — May 2009Finlay Fine Jewelry Corp. Retail November 2008 — July 2009 —Neff Corp. Banking & Finance December 2008 — — May 2010Harrahs Operating Co Inc. Gaming, Lodging & Restaurants December 2008 April 2009 — January 2015American Achievement Group Holding Services & Miscellaneous March 2009 August 2009 — —Nxp Bv/Nxp Funding LLC Computers & Electronics March 2009 July 2009 — —Wolverine Tube Inc. Metals & Mining April 2009 — — October 2010Hawker Beechcraft Acquisition Co. Transportation June 2009 — May 2012 May 2012Affinity Group Inc. Services & Miscellaneous June 2009 — September 2009 —William Lyon Homes Inc. Building & Materials June 2009 October 2009 October 2011 —Momentive Performance Materials Inc. Chemicals June 2009 — — April 2014Advanta Capital Trust I Banking & Finance June 2009 — — November

2009Fairpoint Communications Inc. Telecommunications July 2009 — — October 2009NewPage Corp. Paper & Containers October 2009 — — September

2011Catalyst Paper Corp. Paper & Containers March 2010 — January 2012 November

2016Reddy Ice Holdings Inc. Services & Miscellaneous March 2010 — — April 2012Titan Petrochemicals Energy July 2010 — March 2012 —Brookstone Company Inc. Retail October 2010 — February 2014 —GMX Resources Inc. Energy December 2011 — — April 2013Dune Energy Inc. Energy December 2011 — — March 2015Dex One Corp. Broadcasting & Media April 2012 — — March 2013Verso Paper Holdings LLC Paper & Containers May 2012 July 2014, January 2015 January 2016 January 2016Chukchansi Economic Development Authority

Gaming, Lodging & Restaurants June 2012 — April 2013 —

Energy Future Holdings Corp. Utilities, Power & Gas December 2012 January 2015 April 2014 April 2014Travelport LLC Leisure & Entertainment April 2013 March 2014 — —American Media Inc. Broadcasting & Media October 2013 September 2014, March 2016 — —Winsway Enterprises Holdings Ltd. Metals & Mining October 2013 — May 2015 April 2016Affinion Group Holdings Broadcasting & Media December 2013 June 2014, November 2015 — —Altegrity Inc. Services & Miscellaneous June 2014 — January 2015 February

2015Walter Energy Inc. Metals & Mining August 2014 — June 2015 July 2015Hidili Industry International Metals & Mining October 2014 — November 2015 —Alpha Natural Resources Inc. Metals & Mining April 2015 — — August 2015Venoco Inc. Energy April 2015 — — March 2016Halcon Resources Corp. Energy April 2015 September 2015, December 2015 — July 2016SandRidge Energy Inc. Energy May 2015 August 2015, October 2015 — May 2016Midstates Petroleum Inc. Energy May 2015 — May 2016 May 2016Warren Resources Inc. Energy May 2015 October 2015 March 2016 —American Energy - Woodford LLC Energy June 2015 April 2016 — —Lightstream Resources Ltd. Energy July 2015 — July 2016 —Tonon Bioenergia S.A. Food, Beverage & Tobacco July 2015 — — December

2015SAExploration Holdings Inc. Energy August 2015 July 2016 — —Goodrich Petroleum Inc. Energy October 2015 — — April 2016Logan's Roadhouse Inc. Gaming, Lodging & Restaurants October 2015 — May 2016 August 2016Exco Resources Inc. Energy October 2015 October 2015, August 2016 — —Comstock Resources Inc. Energy February 2016 April 2016, May 2016, June 2016,

September 2016— —

Vanguard Natural Resources LLC Energy February 2016 — — February 2017

Community Choice Financial Inc. Banking & Finance February 2016 April 2016 — —PetroQuest Energy Inc. Energy February 2016 September 2016 — —Rex Energy Corp. Energy March 2016 April 2016 — —

DDE – Distressed debt exchange. Note: Fitch defines a default as a DDE, missed payment or bankruptcy. Source: Fitch U.S. High Yield Default Index.


High-Yield Bonds

Recovery

[Credit 101] What Is Recovery?

Please refer to the Leveraged Loan section for Fitch’s explanation of recovery.

[Credit 101] How Does Fitch Estimate Recovery?

Please refer to the Leveraged Loan section for Fitch’s approach to estimate recovery.

How Do High-Yield Bonds Perform in Fitch’s Recovery Analyses?

Most unsecured recovery ratings (RRs) trend in the average (RR4) to poor (RR6) ranges due to their lack of seniority in the capital structure.

What Are the Historical Post-Default Prices for High-Yield Bonds?

Fitch uses the 30-day post default price to determine recovery rates. Taking bid levels one month following a default is common practice in the high-yield market and is seen as a good proxy for the emergence price.

The recovery rates varied noticeably over the past 17 years, reaching highs of 66.4% of par in 2007 and lows of 22.5% in 2002. The historical recovery rate average is 37.9%. A high default environment usually leads to low recovery rates.

The recovery rate finished at 30.0% in 2016, as Energy and Metals/Mining defaults dragged down the overall average. The Energy recovery rate stood at 23.0% while Metals/Mining was at 15.7%, with these two troublesome sectors combining for 70% of the issue sample.

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Recovery Rating Distribution — Senior Unsecured Debt 2016

RR – Recovery Rating. Note: U.S. Corporates public Issuer Default Ratings and Credit Opinions of ‘B+’ and lower only.Source: Fitch U.S. High Yield Default Index; Advantage Data.

120The Annual Manual (U.S. Leveraged Finance Primer) — High-Yield Bond Data May 31, 2017

High-Yield Bond Data


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BofAML BB US HY IndexBofAML B US HY IndexBofAML CCC US HY Index

Option-Adjusted Spreads by Rating

(bps)

Source: BofA Merrill Lynch Global Research, used with permission.

0100200300400500600700800900

1,000

(bps)

OAS – Option-adjusted spread. Source: BofA Merrill Lynch Global Research, used with permission.

2016 Avg. OAS: 416 bps

Option-Adjusted Spreads by Industry (Top/Bottom Six) — 2016(BofAML US High Yield Index)

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Option-Adjusted Spread Comparison — Investment Grade Versus High Yield (bps)


May 2007: 152 bps

November 2008: 1,347 bps



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Monthly High-Yield Bond Issuance — 2016($ Bil.)

Source: Fitch U.S. High Yield Default Index, Bloomberg.

Statistics:High: $27 Bil. (May)Low: $8 Bil. (January)Avg.: $17 Bil.

(1.6) (1.1)

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Cumulative High-Yield Bond Returns — 2016(BofAML US High Yield Index)(%)


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Gold

S&P 500

IG Bonds

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HY CCC

U.S. Leveraged Loans

2016 Risk-Adjusted Returnsa

a(Annual return – seven-year zero coupon rate)/corresponding annualized volatility. HY – High-yield. IG – Investment-grade. MBS – Mortgage-backed securities. Source: BofA Merrill Lynch Global Research, used with permission, NYMEX, LSTA, S&P.



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Annual High-Yield Bond Returns by Rating Category(BofAML US High Yield Index)

(%)


Top 10 Largest Outflows/Inflows — 2016Outflows Inflows

Rank Week of Total ($ Mil.) Rank Week of Total ($ Mil.)

1 11/02/16 (4,116) 1 03/02/16 4,967

2 08/03/16 (2,500) 2 07/13/16 4,350

3 09/14/16 (2,462) 3 12/14/16 3,750

4 11/16/16 (2,284) 4 02/24/16 2,704

5 01/13/16 (2,107) 5 03/23/16 2,160

6 01/20/16 (2,043) 6 09/28/16 2,011

7 05/11/16 (1,900) 7 12/07/16 2,000

8 06/15/16 (1,802) 8 10/05/16 1,908

9 05/04/16 (1,800) 9 07/06/16 1,798

10 06/29/16 (1,628) 10 03/09/16 1,796

Source: Lipper FMI.

Top 10 Largest Outflows/Inflows of All TimeOutflows Inflows

Rank Week of Total ($ Mil.) Rank Week of Total ($ Mil.)

1 08/06/14 (7,068) 1 03/02/16 4,967

2 06/05/13 (4,600) 2 07/13/16 4,350

3 11/02/16 (4,116) 3 10/26/11 4,248

4 12/16/15 (3,811) 4 12/14/16 3,750

5 12/09/15 (3,460) 5 10/21/15 3,343

6 06/22/11 (3,430) 6 07/24/13 3,200

7 08/10/11 (3,420) 7 09/25/13 3,100

8 06/12/13 (3,280) 8 02/11/15 2,935

9 06/24/13 (3,125) 9 01/28/15 2,765

10 12/17/14 (3,080) 10 02/24/16 2,704

Source: Lipper FMI.



Top 10 Largest High-Yield Defaults 2000–2016

Issuer

Amount Outstanding at Default ($ Bil.)

Default Date Default Source Industry

WorldCom Inc. 26.3 07/22/02 Chapter 11 Filing Telecommunications

CIT Group Inc. 20.3 11/01/09 Chapter 11 Filing Banking & Finance

Energy Future Holdings 16.6 04/29/14 Chapter 11 Filing Utilities, Power & Gas

GMAC LLC 14.6 12/31/08 Distressed Exchange Banking and Finance

Caesars Entertainment Operating Co. 12.4 01/15/15 Chapter 11 Filing Gaming, Lodging & Restaurants

Charter Holding Co. LLC 12.6 03/27/09 Chapter 11 Filing Cable

General Motors Corp. 10.4 06/01/09 Chapter 11 Filing Automotive

Calpine Corp. 10.0 12/21/05 Chapter 11 Filing Utilities, Power & Gas

Residential Capital LLC 8.1 06/04/08 Distressed Exchange Banking & Finance

Residential Capital LLC 6.6 12/31/08 Distressed Exchange Banking & Finance

Source: Fitch U.S. High Yield Default Index.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Average Par Value of Defaults Per Issuer

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Statistics:High: $935 Mil. (2014)Low: $233 Mil. (2007)Avg.: $560 Mil.



Recovery Rates by Seniority — Bonds

(%)Weighted Avg. Recovery Rate

Straight Avg. Recovery Rate

Median Recovery Ratea

Number of Issues with Price Data

2001Senior Secured 60.3 35.8 21.7 34Senior Unsecured 30.0 21.9 14.1 212Senior Subordinated 16.6 20.3 16.3 70Total Defaulted Issues 31.5 22.9 16.6 316









2010Senior Secured 64.7 59.6 55.3 13Senior Unsecured 71.7 66.4 84.1 9Senior Subordinated 28.3 26.8 16.9 11Total Defaulted Issues 56.6 50.8 50.6 33aSimilar seniorities per issuer collapsed into one observation. Note: Recoveries 30 days post default based on market bid price. Continued on next page. Source: Fitch U.S. High Yield Default Index, Advantage Data.



Recovery Rates by Seniority — Bonds (Continued)

(%)Weighted Avg. Recovery Rate

Straight Avg. Recovery Rate

Median Recovery Ratea

Number of Issues with Price Data







2001–2016Senior Secured 57.2 53.1 51.5 345Senior Unsecured 34.1 34.5 27.0 1,206Senior Subordinated 25.9 28.7 20.3 275Total Defaulted Issues 38.7 37.8 29.6 1,826aSimilar seniorities per issuer collapsed into one observation. Note: Recoveries 30 days post default based on market bid price. Source: Fitch U.S. High Yield Default Index, Advantage Data.



2016 U.S. High-Yield Bond DefaultsMonth Issuer Par Value ($ Mil.) Default Date Default Source IndustryJanuary 2016 Arch Coal Inc. 3,225.0 01/11/16 Chapter 11 Filing Metals & Mining

Ultrapetrol Bahamas Ltd. 225.0 01/15/16 Missed Payment TransportationVerso Paper Holdings LLC 1,722.4 01/26/16 Chapter 11 Filing Paper & ContainersSubtotal 5,172.4

February 2016 Constellation Enterprises LLC 130.0 02/01/16 Missed Payment Metals & MiningSFX Entertainment 285.0 02/01/16 Chapter 11 Filing Services & MiscellaneousHorsehead Holding Corp. 215.0 02/02/16 Chapter 11 Filing Metals & MiningMurray Energy Corp. 96.5 02/02/16 Distressed Exchange Metals & MiningComstock Resources Inc. 40.0 02/03/16 Distressed Exchange EnergyVanguard Natural Resources LLC 168.2 02/05/16 Distressed Exchange EnergyNoranda Aluminum Holding Corp. 175.0 02/08/16 Chapter 11 Filing Metals & MiningCommunity Choice Financial Inc. 128.6 02/09/16 Distressed Exchange Banking & FinancePetroQuest Energy Inc. 214.4 02/11/16 Distressed Exchange EnergyA.M. Castle & Co. 203.3 02/18/16 Distressed Exchange Metals & MiningPacific Exploration & Production Corp. 4,104.2 02/19/16 Missed Payment EnergyCliffs Natural Resources Inc. 512.1 02/26/16 Distressed Exchange Metals & MiningCFG Investment S.A.C. 300.0 02/29/16 Missed Payment Services & MiscellaneousSubtotal 6,572.2

March 2016 Warren Resources Inc. 167.3 03/01/16 Missed Payment EnergyProspect Holding Company LLC 88.3 03/08/16 Distressed Exchange Banking & FinanceAspect Software Inc. 320.0 03/09/16 Chapter 11 Filing Computers & ElectronicsUCI International LLC 400.0 03/15/16 Missed Payment AutomotiveForesight Energy LP 600.0 03/17/16 Missed Payment Metals & MiningVenoco Inc. 308.2 03/18/16 Chapter 11 Filing EnergyAmerican Media Inc. 58.9 03/21/16 Distressed Exchange Broadcasting & MediaRex Energy Corp. 633.1 03/30/16 Distressed Exchange EnergyChaparral Energy Inc. 1.250.0 03/31/16 Missed Payment EnergySubtotal 3,825.8

April 2016 Comstock Resources Inc. 14.3 04/04/16 Distressed Exchange EnergySidewinder Drilling Inc. 132.7 04/11/16 Distressed Exchange EnergyPeabody Energy Corp. 4,758.4 04/13/16 Chapter 11 Filing Metals & MiningNuverra Environmental Solutions Inc. 328.1 04/13/16 Distressed Exchange EnergyComstock Resources Inc. 9.0 04/13/16 Distressed Exchange EnergyEnergy XXI Ltd. 2,653.7 04/14/16 Chapter 11 Filing EnergyEPL Oil & Gas Inc. 213.6 04/14/16 Chapter 11 Filing EnergyGoodrich Petroleum Corp. 291.8 04/15/16 Chapter 11 Filing EnergyOdebrecht Oil & Gas 550.0 04/17/16 Missed Payment EnergyRex Energy Corp. 17.2 04/22/16 Distressed Exchange EnergyCommunity Choice Financial Inc. 141.1 04/27/16 Distressed Exchange Banking & FinanceEV Energy Partners LP 72.9 04/27/16 Distressed Exchange EnergyAmerican Energy - Woodford LLC 148.0 04/28/16 Distressed Exchange EnergyION Geophysical Corp. 146.5 04/28/16 Distressed Exchange EnergyComstock Resources Inc. 1.0 04/28/16 Distressed Exchange EnergyMongolian Mining Corp. 600.0 04/29/16 Missed Payment Metals & MiningUltra Petroleum Corp. 1,300.0 04/29/16 Chapter 11 Filing EnergyMidstates Petroleum Co. 1,790.4 04/30/16 Chapter 11 Filing EnergySubtotal 13,168.8

May 2016 SquareTwo Financial Corp. 290.0 05/01/16 Missed Payment Banking & FinanceComstock Resources Inc. 14.9 05/03/16 Distressed Exchange EnergyLegacy Reserves, LP 169.4 05/04/16 Distressed Exchange EnergyCHC Helicopter 1,100.0 05/05/16 Chapter 11 Filing TransportationLinn Energy LLC 4,856.8 05/11/16 Chapter 11 Filing EnergyPenn Virginia Corp. 1,075.0 05/12/16 Chapter 11 Filing EnergyAmerican Energy - Permian 203.0 05/13/16 Distressed Exchange EnergyBreitburn Energy Partners LP 1,805.0 05/15/16 Chapter 11 Filing EnergyLogan’s Roadhouse Inc. 143.9 05/15/16 Missed Payment Gaming, Lodging & RestaurantSandRidge Energy Inc. 3,553.0 05/16/16 Chapter 11 Filing EnergyEP Energy LLC 570.6 05/17/16 Distressed Exchange EnergyU.S.J. - Acucar e Alcool S.A. 245.9 05/17/16 Distressed Exchange Food, Beverage & Tobacco

Continued on next page. Source: Fitch U.S. High Yield Default Index.



2016 U.S. High-Yield Bond Defaults (Continued)Month Issuer Par Value ($ Mil.) Default Date Default Source IndustryMay 2016 (Cont.) Camposol S.A. 147.5 05/24/16 Distressed Exchange Services & Miscellaneous

Linc USA GP 408.6 05/29/16 Chapter 11 Filing EnergyBill Barrett Corp. 84.7 05/31/16 Distressed Exchange EnergySubtotal 14,668.2

June 2016 Seventy Seven Energy Inc. 450.0 06/07/16 Chapter 11 Filing EnergySeventy Seven Operating LLC 650.0 06/07/16 Chapter 11 Filing EnergyCenveo Corp. 159.3 06/07/16 Distressed Exchange Broadcasting & MediaRolta America LLC 367.7 06/15/16 Missed Payment Computers & ElectronicsRolta LLC 126.7 06/15/16 Missed Payment Computers & ElectronicsTervita Corp. 1,275.0 06/15/16 Missed Payment Services & MiscellaneousTelemar Norte Leste S.A. 1,929.1 06/20/16 Bankruptcy TelecommunicationsOi SA 1,500.0 06/20/16 Bankruptcy TelecommunicationsComstock Resources Inc. 3.0 06/23/16 Distressed Exchange EnergyTriangle USA Petroleum Corp. 380.8 06/29/16 Chapter 11 Filing EnergySubtotal 6,841.5

July 2016 FTS International Inc. 31.3 07/01/16 Distressed Exchange EnergyGol Linhas Aereas Inteligentes S.A. 128.5 07/01/16 Distressed Exchange TransportationForbes Energy Services 280.0 07/15/16 Missed Payment EnergyLightstream Resources Ltd. 903.9 07/15/16 Missed Payment EnergyInversiones Alsacia S.A. 343.3 07/22/16 Missed Payment TransportationSAExploration Holdings Inc. 138.1 07/22/16 Distressed Exchange EnergyAtlas Energy Group LLC 667.7 07/27/16 Chapter 11 Filing EnergyHalcon Resources Corp. 2.480.7 07/27/16 Chapter 11 Filing EnergyIronGate Energy Services LLC 210.0 07/31/16 Missed Payment EnergySubtotal 5,183.6

August 2016 CNG Holdings Inc. 68.9 08/02/16 Distressed Exchange Banking & FinanceDFC Finance Corp. 739.3 08/17/16 Distressed Exchange Banking & FinanceLonestar Resources America Inc. 48.4 08/22/16 Distressed Exchange EnergyEXCO Resources Inc. 101.3 08/23/16 Distressed Exchange EnergyLight Tower Rentals Inc. 330.0 08/30/16 Chapter 11 Filing EnergyModular Space Corp. 375.0 08/31/16 Missed Payment Banking & FinanceSubtotal 1,662.9

September 2016 W&T Offshore Inc. 710.2 09/01/16 Distressed Exchange EnergyComstock Resources Inc. 1,137.5 09/02/16 Distressed Exchange EnergyBasic Energy Services Inc. 775.0 09/14/16 Missed Payment EnergyNebraska Book Co. 83.4 09/16/16 Distressed Exchange RetailClaire’s Stores Inc. 331.7 09/19/16 Distressed Exchange RetailPetroQuest Energy Inc. 243.5 09/22/16 Distressed Exchange EnergySubtotal 3,281.2

October 2016 American Gilsonite Co. 270.0 10/01/16 Missed Payment Metals & MiningKey Energy Services Inc. 675.0 10/01/16 Missed Payment EnergyPostmedia Network Inc. 268.6 10/05/16 Distressed Exchange Broadcasting & MediaCloud Peak Energy Inc. 381.5 10/12/16 Distressed Exchange Metals & MiningSamarco Mineracao S.A. 2,200.0 10/24/16 Missed Payment Metals & MiningSubtotal 3,795.1

November 2016 Catalyst Paper Corp. 285.5 11/01/16 Chapter 15 Filing Paper & ContainersPermian Holdings Inc. 184.3 11/01/16 Restructuring EnergyErickson Inc. 355.0 11/09/16 Chapter 11 Filing TransportationSubtotal 824.8

December 2016 21st Century Oncology Inc. 358.3 12/01/16 Missed Payment Healthcare & PharmaceuticalMemorial Production Partners LP 1,111.3 12/01/16 Missed Payment EnergyJack Cooper Enterprises Inc. 131.2 12/08/16 Distressed Exchange TransportationIllinois Power Generating Co. 825.0 12/09/16 Chapter 11 Filing Utilities, Power & GasStone Energy Corp. 775.0 12/14/16 Chapter 11 Filing EnergyOptima Specialty Steel Inc. 161.7 12/15/16 Chapter 11 Filing Metals & MiningCEDC Finance Corp. International Inc. 465.0 12/30/16 Chapter 11 Filing Food, Beverage & TobaccoSubtotal 3,827.4



Appendix

Sector Outlooks 128

Historical Rating Actions 129

Bankruptcy Case Studies 133Revolving Credit Utilization in Bankruptcy 133Substantial CF Revolver Utilization 133Outcomes Support CF Approach 133ABL Utilization 133Lower Retail Median Usage 134Outstanding Revolver Recoveries 134Corporate Rating Methodology 142Parent and Subsidiary Rating Linkage 143Recovery Rating Methodology 147ABL Recovery Analysis 149Pension Recovery Analysis 150Research Portfolio 152Rating Coverage List 158

U.S. Leveraged Finance Contact List 172

128The Annual Manual (U.S. Leveraged Finance Primer) — Appendix May 31, 2017

Appendix

Sector OutlooksRating Outlook Sector Outlook

Corporate Sector 2016 2017 2016 2017 HighlightsNorth American Aerospace & Defense Stable Stable Stable Positive Large order backlog and rising commercial aircraft production.

Global defense spending in relevant markets is growing at 3%–5%. Cash-deployment risks offset positive sector dynamics.

North American Airlines Positive Stable Positive Stable Soft unit revenue environment. Healthy levels of profitability. Rising labor costs.

Global Auto Industry Stable Stable Stable Stable Modest global demand growth. Demand in major markets mixed. Increasing technology risks.

U.S. Building and Home Products Stable Stable Stable Stable Continued cyclical improvement in U.S. construction activity. Weak overseas demand. Financial flexibility supports shareholder-friendly activities.

North American Chemicals Stable Stable Stable Stable Solid domestic growth. Portfolio transformation. Slowdown in investment.

North American Diversified Industrials & Capital Goods

Stable Stable Negative Negative Stabilization possible by late 2017, but could be slow. Mixed impact of U.S. presidential election results. Negative impact of cash deployment, including acquisitions, is a concern.

North American Energy Stable Negative Negative Stable Stabilizing commodity prices. Rebounding E&P activity. Inventories elevated into 2017.

U.S. Equity REITs Stable Stable Positive Positive Good property-level fundamentals. Management focus on risk profile. Leverage flat, coverage up.

U.S. Gaming Stable Stable Stable Stable Secular headwinds. REIT transactions. Suppliers’ high leverage.

U.S. Healthcare Stable Stable Stable Stable Regulatory risk is bifurcated, with healthcare providers and pharma facing the most risk. Credit metrics and liquidity conditions are expected to be relatively stable and supportive of current rating categories. Event risk could increase the potential for leveraging transactions.

U.S. Homebuilding Stable Stable Stable Stable Demographics, pent-up demand and steady easing of credit standards support multiyear housing growth. First-time homebuyers should be more prominent. Strong price appreciation and the prospect of higher mortgage rates could pressure affordability.

U.S. Lodging & Leisure Stable Stable Stable Stable Solid leisure end-demand. Mixed priorities of FCF. Overseas growth opportunities.

U.S. Media and Entertainment Stable Stable Stable Stable Operating environment conducive to growth. Evolution of media consumption spurs further disruption. Continued shareholder returns in excess of FCF factored into sector outlook.

North American Midstream Energy Stable Stable Stable Stable Trump administration favorable. Disciplined spending. Access to capital markets.

U.S. Retail & Restaurants Stable Stable Stable Stable Moderate consumer spending growth. Retail sales growth of 3%–4%; channel shifts continue. Restaurant sales growth of 4%; traffic flat to slightly negative.

U.S. Technology Stable Stable Negative Stable Solid large hyperscale buildouts and IoT (automotive)-driven growth. Expectations for high recurring cash flow validate hybrid IT models. Semiconductor consolidation drives collaboration and greater visibility.

North American Telecom and Cable Negative Negative Stable Stable Enduring competitive operating environment. Regulatory uncertainty under new administration. Data service demand supports stable operating profile.

Global Tobacco Negative Negative Stable Stable Modest top-line growth. Focus on cost reduction across many subsectors. M&A is expected to continue.

U.S. Utilities, Power & Gas Stable Stable Stable Stable Stagnant electricity growth. Low natural gas prices. Supportive regulatory environment. M&A key event risk. Challenging wholesale electricity markets.

E&P – Exploration and production. Source: Fitch Ratings.


Appendix

2016 Upgrades (IDR)Company From To Date SectorBrandywine Realty Trust BB+ BBB– 01/13/16 Non-Bank Financial InstitutionsBrandywine Operating Partnership L.P. BB+ BBB– 01/13/16 Non-Bank Financial InstitutionsJ. C. Penney Company, Inc. B– B 02/26/16 RetailingJ. C. Penney Corporation, Inc. B– B 02/26/16 RetailingGoodyear Tire & Rubber Company (The) BB– BB 03/11/16 Auto & RelatedGoodyear Dunlop Tires Europe B.V. BB– BB 03/11/16 Auto & RelatedCentex Corp. BB+ BBB– 03/11/16 HomebuildingPulteGroup, Inc. BB+ BBB– 03/11/16 HomebuildingJetBlue Airways Corporation B+ BB– 03/17/16 TransportationVulcan Materials Company BB+ BBB– 03/31/16 Building Materials & ConstructionHawaiian Holdings, Inc. B B+ 04/22/16 TransportationHawaiian Airlines, Inc. B B+ 04/22/16 TransportationSpectrum Brands, Inc. BB– BB 04/27/16 ConsumerMGM Resorts International BB– BB 05/10/16 Gaming, Lodging & LeisureCCO Holdings, LLC BB BB+ 05/13/16 TelecommunicationsCharter Communications Operating, LLC BB BB+ 05/13/16 TelecommunicationsDelta Air Lines BB+ BBB– 05/18/16 TransportationJ. C. Penney Company, Inc. B B+ 06/09/16 RetailingJ. C. Penney Corporation, Inc. B B+ 06/09/16 RetailingBoyd Gaming Corporation B B+ 08/04/16 Gaming, Lodging & LeisurePeninsula Gaming, LLC B B+ 08/04/16 Gaming, Lodging & LeisureUSG Corporation BB– BB 08/26/16 Building Materials & ConstructionDell Inc. BB BB+ 09/06/16 TechnologyDell International LLC BB BB+ 09/06/16 TechnologySouthwestern Energy Company BB– BB 09/12/16 Energy (Oil & Gas)D. R. Horton, Inc. BB+ BBB– 09/26/16 HomebuildingLevel 3 Communications, Inc. BB– BB 09/29/16 TelecommunicationsLevel 3 Financing, Inc. BB– BB 09/29/16 TelecommunicationsAmerican Axle & Manufacturing Holdings, Inc. BB– BB 09/30/16 Auto & RelatedAmerican Axle & Manufacturing, Inc. BB– BB 09/30/16 Auto & RelatedUnited Airlines, Inc. BB– BB 10/24/16 TransportationUnited Continental Holdings, Inc. BB– BB 10/24/16 TransportationFirstEnergy Corp. BB+ BBB– 11/10/16 Electric-CorporateConstellation Brands, Inc. BB+ BBB– 11/16/16 Food, Beverage & TobaccoCIH International S.a.r.l. BB+ BBB– 11/16/16 Food, Beverage & TobaccoCalAtlantic Group, Inc. BB– BB 12/05/16 HomebuildingMasco Corporation BB+ BBB– 12/22/16 Building Materials & Construction

IDR – Issuer Default Rating. Source: Fitch Ratings.

Historical Rating Actions


Appendix

2016 Downgrades (IDR)Company From To Date SectorWilliams Companies, Inc. (The) BBB– BB+ 01/11/16 Energy (Oil & Gas)Arch Coal, Inc. C D 01/11/16 Natural ResourcesWeatherford International Public Limited Company BB+ BB 01/22/16 Energy (Oil & Gas)Weatherford International LLC BB+ BB 01/22/16 Energy (Oil & Gas)Weatherford International Ltd. (Bermuda) BB+ BB 01/22/16 Energy (Oil & Gas)Transocean, Inc. BB+ BB 02/03/16 Energy (Oil & Gas)GlobalSantaFe Inc. BB+ BB 02/03/16 Energy (Oil & Gas)Murphy Oil Corporation BBB– BB+ 02/08/16 Energy (Oil & Gas)Peabody Energy (Formerly P&L Coal Holding Corp.) CCC CC 02/12/16 Natural ResourcesADT Corporation BB+ BB 02/16/16 Building Materials & ConstructionEnergy XXI LTD CC C 02/17/16 Energy (Oil & Gas)Energy XXI Gulf Coast, Inc. CC C 02/17/16 Energy (Oil & Gas)Chesapeake Energy Corp. B B– 02/24/16 Energy (Oil & Gas)Southwestern Energy Company BB– B+ 03/08/16 Energy (Oil & Gas)Advanced Micro Devices, Inc. B– CCC 03/11/16 TechnologyWindstream Services, LLC BB BB– 03/14/16 TelecommunicationsWindstream Holdings of the Midwest, Inc. BB BB– 03/14/16 TelecommunicationsPAETEC Holding Corp. BB BB– 03/14/16 TelecommunicationsUnit Corporation BB– B+ 03/15/16 Energy (Oil & Gas)Uniti Group Inc. BB BB– 03/15/16 TelecommunicationsCSL Capital, LLC BB BB– 03/15/16 TelecommunicationsPeabody Energy (Formerly P&L Coal Holding Corp.) CC C 03/16/16 Natural ResourcesTeck Resources Ltd. BB– B+ 03/16/16 Natural ResourcesHarsco Corporation BB+ BB 03/28/16 Diversified ManufacturingFrontier California, Inc. BB+ BB 03/31/16 TelecommunicationsFrontier Florida LLC BB+ BB 03/31/16 TelecommunicationsFrontier Southwest Inc. BB+ BB 03/31/16 TelecommunicationsStaples, Inc. BBB– BB+ 04/07/16 RetailingPeabody Energy (Formerly P&L Coal Holding Corp.) C D 04/13/16 Natural ResourcesEnergy XXI LTD C D 04/14/16 Energy (Oil & Gas)Energy XXI Gulf Coast, Inc. C D 04/14/16 Energy (Oil & Gas)Weatherford International Public Limited Company BB– B+ 05/05/16 Energy (Oil & Gas)Weatherford International LLC BB– B+ 05/05/16 Energy (Oil & Gas)Weatherford International Ltd. (Bermuda) BB– B+ 05/05/16 Energy (Oil & Gas)The Gap, Inc. BBB– BB+ 05/10/16 RetailingKronos International Inc. (Valhi, Inc. Unit) BB– B+ 05/10/16 ChemicalsKronos Worldwide, Inc. BB– B+ 05/10/16 ChemicalsTransocean, Inc. BB– B+ 05/12/16 Energy (Oil & Gas)GlobalSantaFe Inc. BB– B+ 05/12/16 Energy (Oil & Gas)Time Warner Cable Enterprises LLC BBB– BB+ 05/13/16 TelecommunicationsTime Warner Cable, LLC BBB– BB+ 05/13/16 TelecommunicationsCablevision Systems Corporation BB– B+ 06/17/16 TelecommunicationsCSC Holdings, LLC (Cablevision-U.S.) BB– B+ 06/17/16 TelecommunicationsCommunity Health Systems, Inc. B+ B 08/09/16 Health CareBrinker International, Inc. BBB– BB+ 08/10/16 Food, Beverage & TobaccoSignet Jewelers Ltd. BBB– BB+ 08/24/16 RetailingCF Industries, Inc. BBB– BB+ 10/18/16 ChemicalsCF Industries Holdings, Inc. BBB– BB+ 10/18/16 ChemicalsWeatherford International Public Limited Company B– CCC 11/14/16 Energy (Oil & Gas)Weatherford International LLC B– CCC 11/14/16 Energy (Oil & Gas)Weatherford International Ltd. (Bermuda) B– CCC 11/14/16 Energy (Oil & Gas)Lexmark International Inc. BB+ BB 11/29/16 TechnologyiHeartCommunications, Inc. CCC CC 12/08/16 Media & EntertainmentSunoco LP BB BB– 12/19/16 Energy (Oil & Gas)iHeartCommunications, Inc. CC C 12/21/16 Media & Entertainment



Appendix

25

20

15

10

5

0

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Upgrades Downgrades

2016 Speculative-Grade Upgrades/Downgrades by Industry

(No. of IDR Changes)


51 6638 39 49 38 35 29 28 29 31

35 40

125

178

32 29 34 22 18 2745

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Upgrades Downgrades

Historical Speculative-Grade Upgrades/Downgrades

(No. of IDR Changes)



Appendix

(15)

(10)

(5)

0

5

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15

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rising Stars Fallen Angels

Historical Rising Stars and Fallen Angels

(No. of Rating Actions)



Appendix

Bankruptcy Case Studies

Revolving Credit Utilization in Bankruptcy Fitch Ratings analyzed utilization rates of revolvers at the time of bankruptcy filing in the May 3, 2017 report, Revolving Credit Facility Performance in Bankruptcy (U.S. Corporate Revolver Utilization and Recovery Rates). The study was performed to verify Fitch’s typical drawdown assumptions in bespoke recovery analyses for issuers rated ‘B+’ and lower. This is a follow-up report to a study Fitch performed in September 2014.

Substantial CF Revolver UtilizationThe average and median utilization rates for 126 cash flow (CF) facilities on borrower bankruptcy petition dates were 78% and 91%, respectively. This is similar to the average and median rates of 79% and 94%, respectively, for the 64 CF revolvers in Fitch’s September 2014 revolver utilization study. The median utilization rate for CF revolvers was higher than on asset-backed loan (ABL) facilities.

Outcomes Support CF ApproachActual bankruptcy date CF revolver usage data continues to support Fitch’s analytical approach of assuming full draws of CF facilities in recovery tools. Results of Recovery Rating (RR) analyses performed with the recovery tool determine issue ratings relative to Issuer Default Ratings for issuers rated ‘B+’ and lower. Fitch analyzed petition date revolver usage using data from bankruptcy court plan disclosure statements.

ABL UtilizationThe average and median bankruptcy date utilization rates for 70 ABLs that had petition date usage information available were both 73%. The median increased from 64% on 30 ABL facilities in Fitch’s 2014 study and reflects heavy usage by some commodity-sensitive issuers that filed during the market price trough and in facilities for a couple recent retail cases.

0

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Source: Fitch Ratings, company disclosure statements.

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ABL – Asset-based loan.Source: Fitch Ratings, company disclosure statements.

ABL Revolving Facility Utilization

(Facility Count)





Appendix

Lower Retail Median UsageThe median utilization for the 21 retail ABLs was 54%, a rate below the corporate median, despite the recent retail cases that had high utilization. Structural features often limit retailer access, including springing restrictions if fixed-charge coverage ratios fall below 1.0x, reserve requirements or cash dominion. Fitch’s RR analysis considers specific collateral attributes and borrowing base expectations. Assumed retail ABL utilization rates are usually about 70% and vary based on Fitch’s views of collateral and availability.

Outstanding Revolver RecoveriesRevolver debt had excellent recovery rates, with ultimate recoveries averaging 89% for the 207 facilities that had borrowings outstanding on the bankruptcy petition dates, according to court documents. ABL recoveries were higher than those of CF revolvers. Recoveries averaged 96% and 85% on ABL and CF revolvers, respectively. Among ABLs, 89%, or 70 of the 78 facilities with this data available, received full recovery, including all Retail sector ABLs. For CF revolvers, 82 of 129 (64%) obtained 100% recovery.


Appendix

PIK Debt Recoveries in Bankruptcies

CompanyBankruptcy Date

Emergence Date PIK Debt Issue

PIK Holder Claim ($ Mil.)

PIK Debt Recovery Rate (%)

Form of PIK Debt Recovery Comment

Trump Holding and Funding (Parent of Trump Hotel and Casino Resorts, Inc.)

11/21/04 05/20/05 17.625% Second-Priority Notes

50 95.0 $47.7 Mil. of new notes plus accrued interest on $54 Mil.

The second-priority PIK notes were junior in priority to approximately $1.75 Bil. of first mortgage notes.

American Banknote, Inc.

01/19/05 04/15/05 10.375% Senior Unsecured Notes

96 95.0 New common stock There was only a modest amount of debt ahead of the PIK notes in priority. The equity distributed to the PIK holders was valued at $114 Mil. in the disclosure statement $108 Mil. allocated to PIK claims.

Pliant Corp. (First Bankruptcy)

01/03/06 07/19/06 11.625% Senior Secured Notes

254 100.0 The notes were reinstated in the first reorganization plan

In Pliant's first bankruptcy filing, the secured debt was reinstated and the more junior claims received distributions in the form of new notes and new common equity.

Bally Total Fitness Holdings Corp.

12/03/08 09/03/09 14.000% Subordinated Notes

231 0.0–1.5 3.000% share of new common stock and warrants shared with 15.625% subordinated noteholders

PIK claims were deeply subordinated to more senior debt, including $50 Mil. revolver and $242 Mil. term loan claims, $260 Mil. senior note claims, $75 Mil.–$245 Mil. of general unsecured claims. Secured term loan lenders received 94% of the new common stock.

Pliant Corp. (Second Bankruptcy)

02/11/09 12/03/09 11.625% Senior Secured Notes

393 50.0 100% of the new common stock

In Pliant's second filing, the $145 Mil. credit facility claims were reinstated, the secured PIK notes were exchanged for equity and $275 Mil. of unsecured claims received 0.5% recovery.

Finlay Enterprises, Inc.

08/05/09 08/02/10 Second-Lien Notes 23 100.0 Cash ABL revolver and second-lien claims were paid in full and third-lien claims received 45% of par in cash recoveries from proceeds from going out of business liquidation sale.

Finlay Enterprises, Inc.

08/05/09 08/02/10 Third-Lien Notes and Vendor Financing

194 45.0 Cash ABL revolver and second-lien claims were paid in full and third-lien claims received 45% cash recoveries from proceeds from going out of business liquidation sale.

Baseline Oil and Gas Corp.

08/28/09 10/07/09 15% Notes Due June 15, 2009 (12.5% Cash/2% PIK Interest)

107 65.0 $30 Mil. in new secured notes and $40 Mil. in new equity

Distributions were made in the form of new debt, preferred stock and new equity.

Atrium Companies, Inc.

01/20/10 04/28/10 15.000% Senior Subordinated Notes

220 2.5–3.9 Depends on plan alternative that was completed (new value or alternative acquisition). Would be in form of new common stock, cash or other consideration

PIK claims were junior in priority to $383 Mil. of secured debt and $48 Mil. of 11% priority unsecured notes.

Black Gaming LLC 03/01/10 08/04/10 12.750% Senior Subordinated Notes

66 0.0 Five-year warrants to buy 5% of common stock contingent upon reaching minimum enterprise value threshold of $140 Mil.

PIK claims junior in priority to $15 Mil. first-lien revolver borrowings and $125 Mil. second-lien notes.

Truvo USA LLC 07/01/10 11/30/10 PIK Debt 173 0.0–0.7 <$1 Mil. in warrants/options

Unsecured debt claims received de minimis distributions in the form of new common stock.

Wolverine Tube, Inc. 11/01/10 06/10/11 15.000% Senior Secured Notes

131 77.0 $30 Mil. of new first-lien notes less the distributable cash and 95% of the new common stock ($71 Mil.)

The main claims against the debtor were the PIK notes and PBGC claims. Common stock assumed to have total value of $75 Mil. based on financial projections exhibit to disclosure statement dated April 15, 2011.

American Media Operations, Inc.

11/17/10 12/22/10 9.000% Guaranteed Notes

25 100.0 New second-lien notes or PIK notes or preferred stock

PIK claims senior in priority to $356 Mil. of subordinated notes.

aRecovery rate not available due to valuation estimates not provided in disclosure statement. PIK – Payment in kind.. ABL – Asset-based loan. PBGC – Pension Benefits Guaranty Corporation. N.A. – Not applicable DIP – Debtor in possession. ERG – Economic redevelopment grant. Continued on next page. Source: Fitch Ratings, company reports, Bloomberg.


Appendix

PIK Debt Recoveries in Bankruptcies (Continued)

CompanyBankruptcy Date

Emergence Date PIK Debt Issue

PIK Holder Claim ($ Mil.)

PIK Debt Recovery Rate (%)

Form of PIK Debt Recovery Comment

Vertis Holdings, Inc. 11/18/10 12/20/10 13.500% Senior Unsecured Notes

258 5.0 3.75% share of the new common stock

Junior in priority to $90 Mil. first-lien revolver and $437 Mil. first-lien term loan claims, $492 Mil. second-lien notes (3 series).

Sbarro, Inc. 04/04/11 11/28/11 Second-Lien Term Loan

34 0.0 N.A. The first-lien holders received new debt and 100% of the new common stock.

Indianapolis Downs, LLC

04/07/11 04/11/13 15.500% Third-Lien Notes

78 16.0 Cash PIK claims junior to $98 Mil. of first-lien facility claims (rolled into DIP) and $375 Mil. of second-lien note claims. Recovery increased by $25 Mil. upon occurrence of specified scenario.

Friendly’s Ice Cream Corp.

10/05/11 07/01/12 $279 Mil. of Second-Lien Promissory Notes from Sun Capital Affiliate

50 0.0 N.A. Second-lien claimholder agreed to subordinate a portion of the claim amount to general unsecured claims per a settlement. Recovery cannot be determined due to intercompany transactions.

Dex One Corp. (Second Bankruptcy)

03/17/13 04/30/13 12.000% Senior Subordinated Notes

220 100.0 Notes were reinstated in a prepackaged filing

The bankruptcy filing enabled Dex One and its merger partner, SuperMedia, to complete their merger and to extend their respective debt credit facility maturities to 2016 from 2014, while keeping their prepetition capital structures intact and preserving equity interests. The merger closed on their plan of reorganization effective dates.

Revel AC Inc. 03/25/13 05/21/13 12.000% Second-Lien Notes

388 18.0 Share of contingent payment rights to any payments from the State of New Jersey's Economic Redevelopment Grant (ERG) proceeds

Junior in priority to $923 Mil. term loan claims and $208 Mil. of revolver and term loan claims. Recovery rate assumes maximum $70 Mil. of ERG payments.

GMX Resources Inc.a 04/01/13 02/04/14 Senior Secured Notes

338 — 100% of new common stock

The PIK notes were senior in priority to $102 Mil. unsecured debt.

Cengage Learning Holdco

07/02/13 04/01/14 13.750% Senior Unsecured Holdco Notes

68 0.4 N.A. The holdco notes were structurally subordinated and also subordinated to secured debt at the operating and holding companies. First-lien debt claims, including interest and related swap claims were approximately $4.6 Bil.

Loehmann’s Holdings Inc.

12/15/13 09/17/14 Third-Priority PIK Credit Agreement Claims

72 0.0 N.A. Claimholders were deemed to have rejected the plan of reorganization. Instrument had a prepetition PIK interest rate of 17%.

Coldwater Creek Inc. 04/11/14 10/01/14 $65 Mil. Senior Secured PIK Term Loan (Original Amount)

0 100.0 Cash from a portion of the liquidation asset sales proceeds

PIK notes were senior to $145 Mil. in unsecured claims. Distributions were made during the bankruptcy with proceeds from liquidation sales.

Texas Competitive Electric Holdings Company LLC

04/29/14 10/03/16 Unsecured Notes due November 2015 and PIK Toggle Notes due November 2016

5,237 6.8 $356 Mil. in cash The unsecured notes and PIK notes received a pro rata share of the $550 Mil. in cash.

Venoco, Inc. 03/18/16 07/25/16 Senior PIK Toggle Notes

327 0.0–0.4 Warrants Holders of the senior PIK toggle notes (upon acceptance of the plan) received a pro rata share of the new Denver Parent Corporation (DPC) warrants, the DPC residual value and the DPC settlement payments.

Dex Media, Inc. 05/16/16 07/29/16 12% Cash Pay/14% PIK Subordinated Notes

270 4.0–6.0 $5 Mil. in cash and $9 Mil. in warrants

Subordinated note claims received $5 Mil. and warrants to purchase up to 10% of the new common stock outstanding on the effective date. Estimated recovery assumed a range of $6.2 Mil.–$13.3 Mil. for the estimated value of the warrants.

aRecovery rate not available due to valuation estimates not provided in disclosure statement. PIK – Payment in kind. ABL – Asset-based loan. PBGC – Pension Benefits Guaranty Corporation. N.A. – Not applicable. DIP – Debtor in possession. ERG – Economic redevelopment grant. Source: Fitch Ratings, company reports, Bloomberg.


Appendix

Companies Featured in Bankruptcy Case Study ReportsName IndustryAllied Holdings, Inc. AutomobilesChrysler LLC (Old CarCo LLC) AutomobilesCollins & Aikman Corporation AutomobilesCooper-Standard Holdings Inc. AutomobilesDana Corporation, et al AutomobilesDelphi Corporation AutomobilesDura Automotive Systems, Inc. AutomobilesFisker Automotive Holdings, Inc. AutomobilesGeneral Motors Corp. (Motors Liquidation Corp.) AutomobilesHayes Lemmerz International, Inc. AutomobilesHolley Performance Products Inc. (2009 Case) AutomobilesHolley Performance Products, Inc. (2008 Case) AutomobilesJ.L. French Automotive Castings, Inc. (2006) AutomobilesJ.L. French Automotive Castings, Inc. (2009 case) AutomobilesKey Plastics LLC (2008 case) AutomobilesLear Corp. AutomobilesMark IV Industries, Inc. AutomobilesNoble International, Ltd. AutomobilesPlastech Engineered Products, Inc. AutomobilesRemy International, Inc. AutomobilesTower Automotive, Inc. AutomobilesVisteon Corporation et al. AutomobilesCorinthian Colleges, Inc. Broadcasting & MediaDex Media, Inc. (2016) Broadcasting & MediaDolan Company (The) Broadcasting & MediaEducation Holdings 1, Inc. (fka Princeton Review, Inc.) Broadcasting & MediaRelativity Media, LLC Broadcasting & MediaAffiliated Media, Inc. Broadcasting & MediaAmerican Media Operations, Inc. et al. Broadcasting & MediaCengage Learning Inc. Broadcasting & MediaCitadel Broadcasting Corp. Broadcasting & MediaDex One Corp. (2013) Broadcasting & MediaFreedom Communications Holdings, Inc. Broadcasting & MediaGateHouse Media, Inc. Broadcasting & MediaHaights Cross Communications, Inc. Broadcasting & MediaHoughton Mifflin Harcourt Publishing Company Broadcasting & MediaIdearc, Inc., et al. Broadcasting & MediaION Media Networks, Inc., et al. Broadcasting & MediaJournal Register Company Broadcasting & MediaLee Enterprises, Inc. Broadcasting & MediaLocal Insight Media Holdings, Inc. Broadcasting & MediaLodgeNet Interactive Corporation Broadcasting & MediaMorris Publishing Group, LLC Broadcasting & MediaMuzak Holdings LLC Broadcasting & MediaNebraska Book Company Broadcasting & MediaPenton Business Media Holdings, Inc. Broadcasting & MediaQuebecor World (USA), Inc., et al. Broadcasting & MediaR.H. Donnelly Corp. Broadcasting & MediaRDA Holding Co. (Readers Digest, 2013) Broadcasting & MediaRegent Communications, Inc. Broadcasting & MediaRHI Entertainment, Inc. Broadcasting & MediaSFX Entertainment, Inc. Broadcasting & MediaStar Tribune Company (The) Broadcasting & MediaSuperMedia Inc. (2013) a) Broadcasting & MediaThe Reader’s Digest Association, Inc., et al. Broadcasting & MediaTribune Company Broadcasting & MediaTruvo USA LLC, et al. Broadcasting & MediaVertis Holdings, Inc. Broadcasting & MediaYoung Broadcasting, Inc. Broadcasting & MediaMasonite Corporation, et. al. Building & MaterialsWilliam Lyons Homes, et. al. Building & MaterialsCharter Communications, Inc., et al. CableChemtura Corporation, Chemtura Canada Co./Cie Chemicals

Continued on next page. Source: Fitch Ratings.


Appendix

Companies Featured in Bankruptcy Case Study Reports (Continued)Name IndustryLyondell Chemical Company, et al. ChemicalsTronox Incorporated, et al. ChemicalsAllen Systems Group, Inc. (aka ASG) Computers & ElectronicsAspect Software, Inc. Computers & ElectronicsGT Advanced Technologies, Inc. Computers & ElectronicsBearingPoint, Inc. Computers & ElectronicsConexant Systems, Inc. Computers & ElectronicsEastman Kodak Company Computers & ElectronicsMagnaChip Semiconductor LLC, MagnaChip Finance Co. Computers & ElectronicsSpansion Inc. et al. Computers & ElectronicsHome Products International, Inc. Consumer ProductsSpectrum Brands, Inc. Consumer ProductsAlpha Natural Resources, Inc. EnergyAtlas Resource Partners, L.P. EnergyAventine Renewable Energy Holdings Inc. EnergyBaseline Oil and Gas Corp. EnergyCrusader Energy Group EnergyDelta Petroleum Corporation EnergyDune Energy, Inc. EnergyEnergy & Exploration Partners, Inc. EnergyEnergy Partners, Ltd. EnergyGeokinetics, Inc. EnergyGlobal Geophysical Services, Inc. EnergyGMX Resources, Inc. EnergyHalcón Resources Corporation EnergyHercules Offshore, Inc. (2015) EnergyMagnum Hunter Resources Corporation EnergyOffshore Group Investment Limited EnergyPacific Energy Resources Ltd. EnergyPenn Virginia Corporation EnergyQuicksilver Resources Inc. EnergyRAAM Global Energy Company EnergySabine Oil & Gas Corporation EnergySandRidge Energy, Inc. EnergySeehawk Drilling, Inc. EnergySemCrude L.P., et al. (SemGroup) EnergySeventy Seven Energy Inc. EnergyStallion Oilfield Services Ltd. EnergySwift Energy Company EnergyTeton Energy Corp. EnergyTexas Competitive Electric Holdings Company LLC (TCEH) EnergyTrico Marine Services, Inc. et al. EnergyTuscany International Holdings (USA) Ltd. EnergyTXCO Resources Inc. EnergyVenoco Inc. (dba Denver Parent) EnergyVeraSun Energy Corporation EnergyAgFeed Industries, Inc. Food, Beverage & TobaccoAurora Foods Inc. Food, Beverage & TobaccoEuroFresh, Inc. (2009) Food, Beverage & TobaccoHostess Brands, Inc. (now Old HB, Inc.) Food, Beverage & TobaccoInterstate Bakeries Corp. Food, Beverage & TobaccoLe-Natures, Inc. Food, Beverage & TobaccoMerisant Worldwide, Inc. Food, Beverage & TobaccoNew World Pasta Company Food, Beverage & TobaccoPierre Foods, Inc. Food, Beverage & TobaccoPilgrim's Pride Corporation Food, Beverage & TobaccoReddy Ice Holdings, Inc. Food, Beverage & TobaccoSupplements LT Inc. (fka Leiner Health Products) Food, Beverage & TobaccoWornick Company (The) Food, Beverage & TobaccoQCE Finance LLC (dba Quiznos Corp.) Gaming, Lodging & RestaurantsRevel AC, Inc. (2014) Gaming, Lodging & RestaurantsSbarro LLC (2014) Gaming, Lodging & RestaurantsTrump Entertainment Resorts, Inc. (2014) Gaming, Lodging & Restaurants



Appendix

Companies Featured in Bankruptcy Case Study Reports (Continued)Name IndustryBuffets Restaurants Holdings, Inc. Gaming, Lodging & RestaurantsAmelia Island Company Gaming, Lodging & RestaurantsBlack Gaming LLC Gaming, Lodging & RestaurantsCircus & Eldorado Joint Venture Gaming, Lodging & RestaurantsExtended Stay, Inc. Gaming, Lodging & RestaurantsFriendly’s Ice Cream Corp. Gaming, Lodging & RestaurantsGreektown Holdings, LLC, et. al. Gaming, Lodging & RestaurantsHerbst Gaming, Inc. Gaming, Lodging & RestaurantsIndianapolis Downs, LLC Gaming, Lodging & RestaurantsLouisiana Riverboat Gaming Partnership (Legends Gaming 2008) Gaming, Lodging & RestaurantsMagna Entertainment Corp. Gaming, Lodging & RestaurantsMajestic Star Casino LLC, (The) Gaming, Lodging & RestaurantsPerkins & Marie Callender’s Inc. Gaming, Lodging & RestaurantsPremier Entertainment Biloxi LLC (dba Hardrock Hotel & Casino Biloxi) Gaming, Lodging & RestaurantsRevel AC Inc. (2013) Gaming, Lodging & RestaurantsSbarro, Inc. (2011) Gaming, Lodging & RestaurantsStation Casinos, Inc., et al. Gaming, Lodging & RestaurantsTropicana Entertainment, LLC (aka OpCo Debtors) Gaming, Lodging & RestaurantsTrump Entertainment Resorts, Inc. (2009) Gaming, Lodging & RestaurantsUltimate Escapes, Inc. Gaming, Lodging & RestaurantsUno Restaurant Holdings Corp. Gaming, Lodging & RestaurantsaaiPharma, Inc. Healthcare & PharmaceuticalsAble Laboratories, Inc. Healthcare & PharmaceuticalsCurative Health Services, Inc. Healthcare & PharmaceuticalsDendreon Corporation Healthcare & PharmaceuticalsInSight Health Services Holdings Corp. (2010) Healthcare & PharmaceuticalsK-V Pharmaceutical Company (DrugTech) Healthcare & PharmaceuticalsMagellan Health Services, Inc. Healthcare & PharmaceuticalsMmodal Holdings, Inc. Healthcare & PharmaceuticalsOCA Inc. (Orthodontic Centers of America, Inc.) Healthcare & PharmaceuticalsOnCure Medical Corp. Healthcare & PharmaceuticalsOscient Pharmaceuticals Corporation Healthcare & PharmaceuticalsPhysiotherapy Holdings, Inc. Healthcare & PharmaceuticalsRotech Healthcare, Inc. Healthcare & PharmaceuticalsRural/Metro Corporation Healthcare & PharmaceuticalsSpheris Inc. Healthcare & PharmaceuticalsAmerican LaFrance, LLC Industrial/ManufacturingAMTROL Holdings, Inc. Industrial/ManufacturingAtrium Companies, Inc. Industrial/ManufacturingChassix Inc. Industrial/ManufacturingColt Defense LLC Industrial/ManufacturingEaglePicher Holdings Inc. Industrial/ManufacturingEnergy Conversion Devices, Inc. Industrial/ManufacturingExide Technologies Industrial/ManufacturingFedders Corporation Industrial/ManufacturingGlobal Power Equipment Group Inc. Industrial/ManufacturingInternational Aluminum Corp. Industrial/ManufacturingMomentive Performance Materials Inc. Industrial/ManufacturingMotor Coach Industries International Industrial/ManufacturingNational R.V. Holdings, Inc. Industrial/ManufacturingNeenah Enterprises, Inc. Industrial/ManufacturingO’Sullivan Industries, Inc. Industrial/ManufacturingPanolam Industries International, Inc. Industrial/ManufacturingPropex Inc. Industrial/ManufacturingSimmons Company Industrial/ManufacturingSolyndra LLC a) Industrial/ManufacturingTrue Temper Sports, Inc. Industrial/ManufacturingWellman Industrial/ManufacturingWolverine Industrial/ManufacturingBally Total Fitness Holdings Corporation Leisure & EntertainmentMGM Holdings Inc. (Metro-Goldwyn-Mayer Inc.) Leisure & EntertainmentSix Flags, Inc. Leisure & EntertainmentSource Interlink Companies, Inc. Leisure & Entertainment



Appendix

Companies Featured in Bankruptcy Case Study Reports (Continued)Name IndustryAllied Nevada Gold Corp. Metals & MiningArch Coal, Inc. Metals & MiningJames River Coal Company Metals & MiningMolycorp, Inc. Metals & MiningPatriot Coal Corp (2015) Metals & MiningAleris International, Inc. Metals & MiningASARCO LLC Metals & MiningBarzel Industries Inc. Metals & MiningPatriot Coal Corp. Metals & MiningAbitibiBowater, Inc. Paper & Forest ProductsSmurfit-Stone Container Enterprises, Inc. et al. Paper & Forest ProductsThe Newark Group, Inc. Paper & Forest ProductsALCO Stores, Inc. RetailAmerican Apparel, Inc. RetailBorders Group Inc. RetailBrookstone, Inc. RetailBSCV, Inc. (fka Boscov’s Inc.) et al. RetailCircuit City Stores, Inc., et al. RetailColdwater Creek Inc. RetailEddie Bauer Holdings, Inc. RetailFinlay Enterprises, Inc., et. al. RetailGoody’s, LLC, et al. RetailGottschalks, Inc. RetailHarry & David Holdings, Inc. RetailHub Holdings Corp., et. al. (fka Anchor Blue Retailing Group, Inc.) RetailLinens ’N Things, Inc., Linens Holdings Co., et al. RetailLoehmann’s Holdings Inc. et al. RetailLoehmann's Holdings Inc. (2013) RetailMovie Gallery Inc., et al. RetailOrchard Supply Hardware Stores Corporation RetailQuiksilver, Inc. RetailRadioShack Corporation RetailSyms Corp.; Filene’s Basement, LLC; Syms Clothing, Inc.; Syms Advertising Inc. RetailThe Bombay Company, Inc. et al. RetailValue City Holdings, Inc., et al. RetailWet Seal, Inc. (The) RetailBI- LO, LLC, et. al. Supermarkets & Drug StoresFairway Group Holdings Corp. Supermarkets & Drug StoresGreat Atlantic and Pacific Tea Company, Inc., (The) Supermarkets & Drug StoresPenn Traffic Company (2003 case) Supermarkets & Drug StoresPenn Traffic Company (2009 case) Supermarkets & Drug StoresWinn-Dixie Stores, Inc., et. al. Supermarkets & Drug StoresBroadview Networks Holdings, Inc. TelecommunicationsFairPoint Communications, Inc. TelecommunicationsFiberTower Corporation TelecommunicationsHawaiian Telcom Communications, Inc. TelecommunicationsLightSquared Inc. (fka Skyterra Communications) TelecommunicationsNII Holdings, Inc. TelecommunicationsPrimus Telecommunications Group, Inc. TelecommunicationsSorenson Communications, Inc. TelecommunicationsThe Standard Register Company TelecommunicationsUniTek Global Services, Inc. TelecommunicationsOneida Ltd. Textiles & FurnitureATA Holdings, Inc. (ATA Airlines) TransportationDelta Air Lines, Inc. et al. TransportationFrontier Airlines Holdings, Inc. TransportationGeneral Maritime Corporation TransportationMesa Air Group, Inc., et al. TransportationNorthwest Airlines Corporation, et al. TransportationUAL Corporation TransportationCalpine Corporation, et al. UtilitiesDynegy Holdings, LLC UtilitiesEdison Mission Energy UtilitiesEntergy New Orleans, Inc. UtilitiesMirant Corporation, et al. Utilities



Appendix

Criteria OverviewNameMaster Rating CriteriaCriteria for Rating Non-Financial Corporates

Other General Criteria Relevant for Corporates Parent and Subsidiary Rating LinkageRating Non-Financial Corporates Above the Country Ceiling Rating CriteriaRating Investment Holding Companies

Criteria on Priority, Security and Recovery Ratings Recovery Ratings and Notching Criteria for Non-Financial Corporate IssuersRecovery Ratings and Notching Criteria for Equity REITsRecovery Ratings and Notching Criteria for UtilitiesCountry-Specific Treatment of Recovery RatingsTreatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit AnalysisRating Aircraft Enhanced Equipment Trust Certificates

Relevant Special Reports and Worked Examples (To help interpret our criteria, these special reports provide examples of how our criteria are applied in typical, practical situations.)

Financial Ratios and AdjustmentsCash-Flow Measures in Corporate AnalysisDebt Factoring; Analytical Adjustments for Corporate Issuers and Their Recovery RatingsTreatment of Operating Leases in Corporate AnalysisAdjusting for Fair Value of Debt and Related Derivatives in Corporate AnalysisTreatment of Cash in Corporate Analysis

Leveraged FinanceAssigning Corporate Ratings to Issuers in RestructuringDifferentiating Credits Rated ‘B+’ and BelowTreatment of Junior Corporate Debt in Europe

Other TopicsUsing Commodity Prices in Corporate ProjectionsTreatment of Intra-Group Loans in Corporate Analysis

Related Resources: Other Cross-Sector Rating Criteria Relevant to CorporatesDistressed Debt ExchangeCriteria for Evaluating Third-Party Partial Credit GuaranteesNational Scale Ratings Criteria


























Appendix

Corporate Rating MethodologyFitch’s corporate ratings make use of both qualitative and quantitative analyses to assess the business and financial risks of fixed-income issuers and of their individual debt issues. An Issuer Default Rating (IDR) is an assessment of the issuer’s relative vulnerability to default on financial obligations, and is intended to be comparable across industry groups and countries.

A fundamental part of Fitch’s approach is based on a comparative analysis, through which Fitch reviews the strength of an issuer’s business and financial risk profile relative to others in its industry and/or rating category peer group.

Corporate Rating MethodologyKey Rating Factors DescriptionIndustry Risk Fitch determines an issuer’s ratings within the context of each issuer’s industry

fundamentals. Industries that are in decline, highly competitive, capital intensive, cyclical or volatile are inherently riskier than stable industries with few competitors, high barriers to entry, national dominance and predictable demand levels.

Operating Environment Fitch explores the possible risks and opportunities in an issuer’s technological changes. The agency considers the effects of geographical diversification and trends in the industry, expansion or consolidation required to maintain a competitive position. Industry overcapacity is a key issue, because it creates pricing pressure and, thus, can erode profitability. Also important are the stage of an industry’s life cycle and the growth or maturity of product segments, which determine the need for expansion and additional capital spending.

Company Profile Several factors indicate an issuer’s ability to withstand competitive pressures, including its position in key markets, level of product dominance and ability to influence price. Maintaining a high level of operating performance often depends on product diversity, geographical spread of sales, diversification of major customers and suppliers, and the comparative cost position.

Management Strategy and Corporate Governance

Fitch’s consideration of management strategy focuses on operating strategy, risk tolerance, financial policies and corporate governance. Corporate goals are evaluated, centering upon future strategy and past track record. Key factors considered are the mix of debt and equity in funding growth, the issuer’s ability to support higher levels of debt, and the funding requirement of new assets. The historical mode of financing acquisitions and internal expansion provides insight into management’s risk tolerance. Fitch considers management’s track record of its ability to create a healthy business mix, maintain operating efficiency and strengthen its market position. Financial performance over time provides a useful measure of management’s ability to execute its operational and financial strategies.

Ownership, Support and Group Factors

Fitch considers the relationship between parents and their subsidiaries in assigning IDRs and debt issue ratings. In most cases, separate issuers of debt within a corporate group are typically assigned separate (though potentially identical) IDRs. Issues in determining linkage include legal jurisdiction, corporate structures, company by-laws, loan documentation, the degree of integration between the entities and the strategic importance of a subsidiary.

Financial Profile Cash Flow and Earnings:Profits and cash flow affect the maintenance of operating facilities, internal growth and expansion, access to capital and the ability to withstand downturns in the business environment. Fitch’s analysis focuses on the stability of earnings and continuity of cash flows from the issuer’s major business lines. Sustainable operating cash flow supports the issuer’s ability to service debt and finance its operations and capital expansion without the reliance on external funding. Capital Structure:Fitch analyzes the capital structure to determine an issuer’s level of dependence on external financing. Several factors are considered to assess the credit implications of an issuer’s financial leverage, including the nature of its business environment and the principal funds from operations. Because industries differ significantly in their need for capital and their capacity to support high debt levels, the financial leverage in an issuer’s capital structure is considered relative to industry norms.



Appendix

Parent and Subsidiary Rating LinkageUnderstanding the multifaceted relationship between a parent company and its subsidiaries is crucial for determining each company’s respective probabilities of default.

Fitch employs the parent and subsidiary rating linkage methodology when assigning IDRs to nonfinancial companies that are tied together by a parent/subsidiary relationship. The methodology takes into account several considerations when assessing the legal, operational and strategic ties that can link the IDRs of two or more issuers. The steps taken by Fitch to determine the linking of IDRs collectively form the Linkage Considerations Framework (LCF). The LCF steps, including respective criteria, are summarized in the LCF Decision Matrix and LCF Flow Chart on the next two pages.

Rating Definition SummaryAAA: Highest Credit Quality ‘AAA’ ratings denote the lowest expectation of default risk. They are assigned

only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA: Very High Credit Quality ‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A: High Credit Quality ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB: Good Credit Quality ‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

BB: Speculative ‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time. However, business or financial flexibility exists that supports the servicing of financial commitments.

B: Highly Speculative ‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met. However, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

CCC: Substantial Credit Risk Default is a real possibility.CC: Very High Levels of Credit Risk Default of some kind appears probable.C: Near Default A default or default-like process has begun, or the issuer is in standstill,

or for a closed funding vehicle, payment capacity is irrevocably impaired. Conditions that are indicative of a ‘C’ category rating for an issuer include:

a. The issuer has entered into a grace or cure period following nonpayment of a material financial obligation.

b. The issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation.

c. The formal announcement by the issuer or their agent of a distressed debt exchange.

d. A closed financing vehicle where payment capacity is irrevocably impaired such that it is not expected to pay interest and/or principal in full during the life of the transaction, but where no payment default is imminent.

RD – Restricted default. Source: Fitch Ratings.


Appendix

LCF Decision MatrixQuestion Conclusion Criteria

1. Does a parent/sub relationship exist?

Yes/Uncertain

• Parent has majority ownership of sub

• Parent has influential control over sub

• Existence of sub is strategically important to parent

No

• Parent/investor holds passive equity stake in sub

• No control over strategic decisions of sub

• Existence of sub not particularly important to parent

2. Are sector-specific criteria available?

Yes • Refer to sector-specific criteria

No • Continue current analysis

3. Which entity has the stronger stand-alone credit profile?

Parent • Relative risk of default is higher for sub

Subsidiary • Relative risk of default is higher for parent

Equal • Relative risk of default is equal for parent and sub

4. Are legal, operational and strategic ties strong?

Yes

Legal

• Guarantees of debt obligations exist between entities

• Cross-default provisions in place

Operational

• Parent has control of sub’s board

• All external funding is channeled through parent

• Sub operations integral to the core business of the parent

Strategic

• Parent risks its own survival to keep sub operational

• High degree of demonstrated tangible support from parent to sub

No

Legal

• Covenants with dividend restrictions exist

• Policies exist to mitigate related-party transactions

• Breached covenants can easily be waived (i.e. private bank financing)

• Different legal jurisdictions impede enforceability

Operational

• Low level of senior management overlap

• Separate financing exists between parent and sub

Strategic

• Parent sells sub or lets sub fail if economically appropriate

• Absence of tangible support from parent to subIDR – Issuer Default Rating. LCF – Linkage considerations framework. Source: Fitch Ratings.


Appendix

In a case when a subsidiary has issued long-term public bonds but does not issue stand-alone financial statements or benefit from a downstream parent guarantee, the considerations in the flow chart above should be made. The above guidelines are not meant as an alternative to the parent-subsidiary linkage methodology used in the main criteria, nor are these guidelines meant for new debt issuances.

LCF Flow Chart

Does Parent/Sub Relationship Exist?

1

2

3

4 4

IDRs are Based on Stand-Alone Profiles

Refer to Sector-Specific Criteria Published by Fitch

Yes/Uncertain

No

NoYes

Which Entity has the Stronger Credit Profile?

Does Sector-Specific Criteria Exist?

Are Legal and Operational Ties Strong?

Are Legal, Operational and Strategic Ties Strong?

Same ParentSubsidiary

NoYesNoYes

Path B: Legal, Operational and Strategic Ties• Guarantees (Downstream)• Intra-Group Restrictions• Cross-Defaults• Different Jurisdictions• Operational Integration• Strategic Importance of Subsidiary• Tangible Support• Other/Intangibles

Path A: Legal and Operational Ties• Guarantees (Upstream)• Dividend Restrictions• Cross-Defaults• Different Jurisdictions• Management Control and Commonality• Centralized Treasury• Other/Intangibles

LCF – Linkage considerations framework. IDR – Issuer Default Rating. N.A. – Not applicable.Source: Fitch Ratings.

Same

N.A.

Consolidated

Same

Both

N.A.

Both Both

Can be the Same or Different

Parent Can be Notched Down or Sub Notched Up

Can be the Same or Different

Sub Can be Notched Down

Stand-Alone

Different

“Up Notching” Possible in Limited Situations

Conclusion:

Same or Different IDRs

Stand-Alone or Consolidated Credit Metric/Profile

Notching


Appendix

Rating Subsidiary Debt without Stand-Alone Financial Information or a Parent Guarantee

• Need for future bond market access• Material subsidiary cross-default language• Reputation Risk• Overall parent credit strength (a ‘BB’ parent may get less leeway than

an ‘A’ category)• Stated public intentions of management (if any)• Materiality of existing subsidiary debt compared to previous negative actions

(if applicable)


Committee should weigh the following factors to determine if debt of a subsidiary can be rated:

Future Flexibility/Evolving Business Strategy Do not rate subsidiary debt

Yes Do not rate subsidiary debt

Yes Was past actions related to relatively minor subs and/or debt amounts? No

Yes Do not rate subsidiary debt

No NoWill operations be materially integrated?

Yes

What is parent rational for not guaranteeing?

Costs/Administrative/Unknown

Is Parent rated ‘B’ category or lower?

No

Has management weakened debt holders before?

No/Unknown

Will operations be materially integrated?

Yes

Subsidiary’s debt can be rated


Appendix

Recovery Rating MethodologyFor issuers with IDRs at ‘B+’ and below, Fitch performs a bespoke recovery analysis for each class of obligations of the issuer. This analysis consists of three steps: estimating the distressed enterprise value (EV), estimating creditor claims and distribution of value.

The overall risk for a particular debt issuance is made up of two components: the relative probability of default for the issuer — reflected in its IDR — and the likely recovery for each class of debt given default. Therefore, the rating for an issuer’s debt instruments, whether secured, senior unsecured or subordinated, is notched from the issuer’s IDR.

Recovery Analysis Methodology Step 1: Estimating Distressed Enterprise Value (EV)Going Concern (GC) Approach Cash Flow Multiple: Fitch’s most often used recovery analysis, using a

distressed cash flow (typically EBITDA) and multiple based on actual or expected market and/or distressed multiples. A. Post-Default Cash Flow B. Multiple Selection and Application

Traded Asset Value: Acceptable for industry sectors with valuation approaches for assets that are actively traded on exchanges or frequently bought or sold.

Present Value of Cash Flow:

Acceptable when future cash flows can be estimated with adequate precision. Ex: U.S. Utility and Native American gaming sectors.

Liquidation Value (LV) Approach Involves discounting the book value of balance sheet assets and summing the results.

Step 2: Estimating Credit ClaimsFitch estimates existing claims through:• Claims that are typically taken on as a company’s fortunes

deteriorate.

• Claims that are necessary to the reorganization process and:

• Claims that have priority in the relevant bankruptcy code.

• Fitch’s analysis includes the following:

Revolving Claims:• Priority Administrative Claims

• Lease Rejection Claims

• Concession Assumption

• Pension and Other Post-Employment Benefit (OPEB) Obligations

• Other Non-Debt and Contingent Claims

Step 3: Distribution of ValueAfter the going concern of liquidation valuation processes are complete, the resulting distressed EV is allocated to creditors according to jurisdicitonal practice for distributing value among claimants according to the seniority of their claims (the waterfall approach).IDR – Issuer Default Rating. Source: Fitch Ratings.

Recovery Ratings (RR) Scale

Recovery Rating Description Recovery (%)Issue Notching

for B IDRIssue Notching

for BB IDR

RR1 Outstanding 91–100 +3 (secured debt only) +1 to +2

RR2 Superior 71–90 +2 (capped at RR2 for unsecured debt)

0 to +1

RR3 Good 51–70 1 0

RR4 Average 31–50 0 0

RR5 Below Average 11–30 –1 –1

RR6 Poor 0–10 –2 to –3 –1 to –2



Appendix

In some regions and cases, Fitch may assign Recovery Ratings (RRs) to debt instruments of issuers with ‘BB’ rating category IDRs. RRs in these situations are not computed via bespoke analysis.

In recovery analyses, Fitch generally chooses a multiple below M&A precedent transactions and market trading multiples, particularly during periods of robust valuations. This is because recovery analyses incorporate adverse circumstances and uncertainty surrounding the market conditions at the time of a hypothetical reorganization. Similarly, when markets are so depressed or disrupted they are essentially illiquid, Fitch recovery multiples may be higher than observed market multiples, if any are available.

B+ and Below IDR/Debt Instrument MappingIDR B+ B B– CCC CC C RD DRR1 BB+ BB BB– B CCC+ CCC CCC CCCRR2 BB BB– B+ B– CCC CCC– CCC– CCC–RR3 BB– B+ B CCC+ CCC– CC CC CCRR4 B+ B B– CCC CC C C CRR5 B B– CCC+ CCC– C C C CRR6 B–/CCC+ CCC+/CCC CCC/CCC– CC/C C C C CIDR – Issuer Default Rating. Source: Fitch Ratings.

Typical BB Rating Category Recovery Rating Assignment and Notching

First-Lien SecuredSecond-Lien Secured and

Senior Unsecured Subordinated

IDR RR NotchingInstrument Rating RR Notching

Instrument Rating RR Notching

Instrument Rating

BB+ RR1 +1 BBB– RR4 0 BB+ RR5 –1 BBBB RR1 +1 or +2 BB+/BBB– RR4 0 BB RR5 –1 BB–BB– RR1 +2 BB+ RR4 0 BB– RR5 –1 B+IDR – Issuer Default Rating.RR – Recovery Rating. Source: Fitch Ratings.


Appendix

ABL Recovery AnalysisThe presence of an ABL materially affects the residual EV available for other creditors in the capital structure.

In the case of well-structured ABL facilities with credit-protective features — such as availability limited by a borrowing base formula, springing or full-cash dominion, or frequent monitoring/reporting of collateral — Fitch assumes ABL debt will recover ahead of other first-lien debt under the recovery waterfall. Where a cash dominion feature is in place, Fitch will assume an additional source of recovery (cash component). In instances where the ABL is secured by specific (and not all) assets, Fitch will first deduct the value of assets pledged for such facilities (collateral component) from the overall valuation so the remaining creditors’ recoveries are assessed more realistically.

Fitch acknowledges not all ABL facilities are created equal, and the strength of each structure will need to be evaluated separately.

Enterprise Value — Fitch-Employed Multiple for Recovery AnalysisFitch-

EmployedMultiple for

(LTM EBITDA Multiplesa, 10-Year Historical RecoveryAs of June 30, 2016) Public Marketb Transaction/Takeoutc AnalysisSector Low High Median Current Low High Median Averaged

Automotive 4.70 7.70 5.50 4.80 6.20 14.90 9.10 5.0Broadcasting & Media 6.50 10.60 8.90 9.70 7.40 15.10 11.30 6.0Building & Materials 7.80 21.90 11.40 10.70 2.20 16.50 11.00 5.5Chemical 4.60 11.30 9.10 11.30 4.90 17.40 9.30 5.5Computers & Electronics 6.30 10.90 9.70 9.70 11.60 20.80 15.80 6.0Consumer Products 5.90 15.10 9.30 9.40 7.70 12.30 10.40 7.0Energy 4.50 14.00 9.60 14.00 6.00 11.60 8.90 4.0e

Food, Beverage & Tobacco 8.40 15.40 10.80 13.50 7.90 15.70 10.10 6.5Gaming, Lodging, Leisure & Restaurants 7.20 12.10 9.20 10.40 6.40 12.90 10.70 6.0Healthcare & Pharmaceutical 7.20 11.20 10.30 10.70 9.70 18.10 16.20 7.0Industrial/Manufacturing 4.60 9.60 8.40 9.30 7.50 14.60 10.00 5.0Metals & Mining 5.10 13.30 8.80 7.50 7.30 19.90 11.70 5.0Paper & Containers 6.10 9.00 8.00 8.10 4.40 10.90 8.70 5.0Retail 5.00 11.50 8.60 9.30 6.90 13.40 9.60 5.5Services & Miscellaneous 7.40 11.40 8.70 9.60 7.20 16.50 11.10 6.0Telecommunication & Cable 6.40 10.40 8.90 10.10 8.00 23.10 10.80 5.0Transportation 5.80 9.40 7.60 8.80 6.20 12.20 9.50 5.0Utilities 6.00 11.10 9.30 9.00 3.40 16.00 8.70 —All Sectors 6.20 10.00 9.30 10.00 7.50 12.20 10.70 5.5aLTM EBITDA refers to LTM of EBITDA. Multiples represent Fitch estimates. bMarket multiples are assessed specifically for speculative-grade, publicly traded U.S. companies. Current values are based on market capitalization as of Sept. 15, 2016. cTransaction multiples cover M&A transactions across the rating spectrum. dRepresents the mean distressed multiple assumed by Fitch for purposes of its recovery analysis, based on Fitch’s explicitly rated and credit opinion portfolio of U.S. leveraged issuers. The range of multiples assumed by Fitch within each sector is determined by subsector classifications and issuer-specific idiosyncratic factors. Because the Fitch-employed multiple is applied to a distressed EBITDA value, it generates a lower enterprise value than would otherwise have been obtained in a nondistressed scenario. For companies where the recovery value is maximized under a liquidation scenario, the implied multiple has been imputed based on liquidation value and distressed EBITDA. eRefers to an implied EBITDA multiple derived from Fitch’s assumed distressed valuation metric of an average of $12.50/boe (enterprise value per barrel of oil equivalent) used in recovery analysis, subject to adjustment. Source: Worldscope Fundamentals (Thomson Reuters LPC), Bloomberg, Fitch Ratings.


Appendix

For more information on Fitch’s methodologies in the recovery analysis of ABL facilities please see Evaluating U.S. Asset-Based Lending Facilities (Recovery Outcomes and Analysis for ABL-Inclusive Capital Structures).

Pension Recovery AnalysisTerminated underfunded pension liabilities can meaningfully impair recoveries of other credit classes in a bankruptcy scenario in the following ways.

First, the unpaid minimum funding contributions and premiums are treated as administrative claims so they will recover even before secured debt. Second, the amount owed to the Pension Benefits Guaranty Corporation (PBGC) can be calculated in various ways and results in drastically different amounts. Other general unsecured claims can be materially affected as a result. Third, the controlled group liability doctrine entitles the PBGC to assert claims on each and every member within the controlled group. The doctrine can effectively put the PBGC ahead of other unsecured claims.

Even if the unfunded pension plan is not terminated in bankruptcy, the periodic minimum funding contribution payments are entitled to administrative expense treatment during the pendency of the bankruptcy.

ABL Recovery Analysis MethodologyStep 1: Estimating Distressed Enterprise Value (EV)Going Concern (GC) Approach

Step 1 remains largely unaffected by the presence of an ABL when estimating EV under the going concern approach. The sample of comparable transaction or market multiples used to form an input assumption includes industry peers with ABL-inclusive capital structures.

Liquidation Value (LV) Approach

Fitch Advance Rates Liquidation approach involves discounting book value of balance sheet assets and summing results. In absence of detailed valuation reports, analytical guidance is generally drawn from the history of ABLs in the sector or historical liquidation experience.

Reliance on Third-Party Valuations

Analytical consideration given to third-party appraiser valuation reports. Fitch advance rates should not be confused with advanced rates used in ABLs. Analyst discretion determines appropriate discount to be applied to book values based on additional considerations such as: credit risk of obligors, asset portfolio concentration risk and potential deterioration of collateral.

Administrative Expense Fitch deducts administrative expense claims up to 10% of EV to arrive at adjusted EV.

Step 2: Estimating ABL ClaimsThe following considerations of sizing ABL claims remain unchanged regardless of whether EV is maximized under a going concern or liquidation scenario.• Revolving Claims

– In the case of CF-based revolving claims, Fitch assumes unused portions of committed lines are fully drawn to extent permitted. Greater judgement exercised for ABL revolvers that can only be drawn up to borrowing base availability. Fitch also considers borrowing base availability may or may not have significant seasonal fluctuations.

• Alternative Sources – Additional factors to assess strategic value of ABL considered for capital structures with an ABL and a CF-based revolving facility.

Step 3: Distribution of Value to ABLFitch identifies two sources of recovery for an ABL — a collateral component and a cash component regardless of whether EV is maximized under a going concern or liquidation scenario.• ABL Recovery — Collateral Component

– Waterfall: ABL is entitled to priority over other first-lien cash flow-based debt to extent of the value of specific collateral securing ABL. Fitch first allocates portion attributable to liquidation value of specific assets securing the ABL; and the EV for the other first lien debt is net of the amount allocated to the ABL collateral component.

– First-Out/Last-Out Tranches: Different payment prioirities among various tranches of an ABL are reflected accordingly in the distribution waterfall.

• ABL Recovery — Cash Component – Cash on balance sheet generally assumed to dissipate during or before bankruptcy. In the case of ABLs, value of cash included in estimating recoveries for ABL facilities that have sprining or full cash dominion feature.

ABL – Asset-based loan. CF – Cash flow. Source: Fitch Ratings.




Appendix

Fitch’s Recovery Considerations — U.S. Defined Benefit Pension PlansGoing Concern Scenario Fitch assumes an underfunded pension plan remains with a reorganized entity. Therefore,

a pension liability will not show up in the waterfall of claims, but rather remain as an ongoing expense for the new entity.

Liquidation Scenario Fitch’s analysis only includes the Pension Benefits Guaranty Corporation (PBGC) as an unsecured creditor in liquidation scenarios, or for those companies whose future annual pension commitments severely impair cash flow expectations.Claim Priority: Upon plan termination, the PBGC assumes the pension plan and files

a matured claim as an unsecured creditor. The PBGC claim will be entitled to recover as if it held an unsecured upstream guarantee form each controlled group member.

Claim Size: The size of the PBGC claim for unfunded pension liability will typically be estimated on a GAAP basis for purposes of Fitch’s recovery methodology. However, if the claim amount calculated by the PBGC is substantially different, Fitch will analyze the difference and decide the final amount case by case.

Other Issues: Fitch’s analysts may also factor in U.K. pension regulator powers if there are materially underfunded U.K. pension plans in the group. For companies with material foreign assets, Fitch’s analysts may assume that the PBGC may attach a lien on such assets.


U.S. Pensions — Illustrative Application of Recovery Methodology

aPension Benefits Guaranty Corporation (PBGC) files a contingent claim for the full unfunded benefit liability (UBL) amount of $100 in each and every controlled group entity's bankruptcy case. If the pension plan is not terminated, the claim does not arise. bSubsidiary B is not a controlled group entity since it is below the 80% ownership threshold. cResidual equity value upstreamed to U.S. parent from 75% owned non-CGE = 75% of $80 = $60. RR – Recovery Rating. CGE – Controlled group entity. N.A. – Not applicable.Source: Fitch Ratings.

Example 1 — Going Concern Approach (Pension Plan Continues)

U.S. Parent — Plan SponsorPension Contingenta Claim ($100) = N.A.

Unsecured Debt ($100) = $60 Recovery (RR3)

$0 $60c

100% 75%b

Example 2 — Liquidation Approach (Pension Plan Terminates)

U.S. Parent — Plan SponsorPBGC Unsecured Claima ($100) = $30b Recovery


$0 $60c

100% 75%e

aPension Benefits Guaranty Corporation (PBGC) files a contingent claim for the full unfunded benefit liability (UBL) amount of $100 in each and every controlled group entity's case. bPBGC will share pro rata with other unsecured creditors at the parent sponsor’s level. Note that PBGC’s aggregate recovery (from the sponsor and all controlled group members) cannot exceed 100% of its claim. cResidual equity value upstreamed to U.S. parent from 75% owned non-CGE = 75% of $80 = $60. dNot only does PBGC recover as an unsecured creditor in the parent sponsor’s bankruptcy but also recovers separately from each member of the controlled group as an unsecured creditor, up to an aggregate recovery of 100% of its claim. eSubsidary B is not a controlled group entity because it is below the 80% ownership threshold. RR – Recovery Rating. CGE – Controlled group entity. Source: Fitch Ratings.

Subsidiary A — CGE[Net Assets = $100]

Pension Contingenta Claim ($100) = N.A.Unsecured Debt ($100) = $100 Recovery (RR1)

Subsidiary B — Non CGE[Net Assets = $130]


Subsidiary A — CGE[Net Assets = $100]

PBGC Unsecured Claima ($100) = $50d RecoveryUnsecured Debt ($100) = $50 Recovery (RR4)

Subsidiary B — Non CGE[Net Assets = $130]



Appendix

For more information on Fitch’s methodologies in the recovery of pensions please see Pension Liabilities in Bankruptcy.

Research Portfolio

Sector Handbooks(Comprehensive analysis of business profiles and capital structures for largest issuers)Date Title01/15/16 U.S. Diversified Industrials and Capital Goods Handbook01/25/16 High-Yield Retail Checkout (Comprehensive Analysis of Major High-Yield Retailers)02/10/16 European Non-Food Retail, Lodging, Restaurants Speculative-Grade Handbook04/12/16 All In: Global Gaming Handbook (Second Edition)05/04/16 The Checkup: High-Yield Healthcare Handbook

(Comprehensive Analysis of High-Yield U.S. Healthcare Companies)05/06/16 U.S. Transmission and Distribution Utilities Handbook

(A Detailed Review of Electric and Gas T&D Utilities — Second Edition)06/06/16 The Annual Manual (U.S. Leveraged Finance Primer)08/09/16 U.S. Integrated Electric Utilities Handbook (A Detailed Review of Integrated Electric Utilities)09/15/16 Investment Grade Oil & Gas Handbook (North American Exploration and Production)10/24/16 High-Yield Media and Entertainment Handbook (Fitch Ratings’ Credit Profile Analysis of Issuers)10/24/16 Investment-Grade Media and Entertainment Handbook (Fitch Ratings’ Credit Profile Analysis of Issuers)10/31/16 U.S. Competitive Generators Handbook

(A Detailed Review of Competitive Generation Companies — Second Edition)11/03/16 U.S. Utility Parent Companies Handbook

(A Detailed Review of Utility Parent Holding Companies — Second Edition)11/30/16 Defense & Security Handbook11/30/16 North American Chemicals Handbook (A Detailed Review of Companies in the Chemicals Sector)12/21/16 The Drill Bit Docket: High-Yield Oil & Gas Handbook (North American Exploration and Production) 01/31/17 High-Yield Retail Checkout (Comprehensive Analysis of Major High-Yield Retailers)



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Appendix

Recent U.S. Leveraged Finance ResearchDate Link04/24/17 EBITDA Adjustments (Dress for Success)04/19/17 Second-Lien Debt Analysis (Rising U.S. Loan Volumes, Highly Leveraged Issuers)04/19/17 All In: Global Gaming Handbook04/18/17 Fitch U.S. High Yield Default Insight (U.S. High Yield Default Rate Decline Continues in April)04/18/17 Pockets of Interest Rate Risk (Select U.S. Leveraged Issuers and Their Exposure to Rising Rates)04/04/17 U.S. LF Data Comparator03/27/17 Telecom, Media and Technology Bankruptcy Enterprise Values and Creditor Recoveries (Fitch Case Studies — 13th Edition)03/22/17 Fitch U.S. Leveraged Loan Default Insight (iHeart DDE Would Propel Default Rate Above 2%; Loan Market Surpasses $1 Trillion)03/14/17 Fitch U.S. High Yield Default Insight (U.S. High Yield Default Rate Below 3% by End of May; Retail Lags in Secondary Market)02/27/17 Fitch U.S. Leveraged Loan Default Insight (Retail 2017 Default Rate Forecasted at 9%; Retail’s Secondary Slump Continues)02/17/17 Bridging the Refinancing Cliff Update (Funding Gap Minimal; Refinancings Push Maturities to 2020 and Beyond)02/15/17 Fitch U.S. High Yield Default Insight (U.S. High Yield, Energy Default Rates Fall in February)02/09/17 All Inclusive: U.S. Lodging & Leisure01/31/17 High-Yield Retail Checkout (Comprehensive Analysis of Major High-Yield Retailers)01/30/17 Fitch U.S. High Yield Default Insight (Avaya Headlines January Defaults; 2016 U.S. Defaults Tally $60 Billion)01/23/17 New Language in Make-Whole Premiums (A New Approach to Drafting as Court Interpretation Changes)01/19/17 Fitch U.S. Leveraged Loan Default Insight (January TTM Default Rate Heads to 1.5%; Sponsored Rate Approaching 1%)01/18/17 Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 12th Edition)12/22/16 Fitch U.S. Leveraged Loan Default Insight (December TTM Default Rate Below 2%; Post-Default Bid Prices Improving)12/19/16 U.S. Leveraged Finance: Road to Recovery Ratings (Recovery Prospects Trend Lower)12/15/16 Fitch U.S. High Yield Default Insight (U.S. HY Default Rate Roughly 3%; iHeart Largest U.S. Bonds of Concern Name)12/12/16 U.S. LF Data Comparator12/07/16 U.S. Engineering and Construction Bankruptcy Study (Implications for Infrastructure Project Investors and Creditors)12/05/16 U.S. Leveraged Loan Chart Book - Third-Quarter 201611/22/16 Fitch U.S. Leveraged Loan Default Insight (2016 Default Rate Heading for a 2% Finish; Maturity Wall Low Until 2020)11/21/16 Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers11/10/16 Fitch U.S. High Yield Default Insight (Yankee Rate Surpasses 6%; Energy YTD Default Volume Approaches $40 Billion)10/26/16 Gaming, Lodging and Restaurant Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 11th Edition)10/25/16 Fitch U.S. Leveraged Loan Default Insight (2017 Default Rate Forecasted at About 2%; 22-Month Default Streak Snapped)10/18/16 Country-Specific Treatment of Recovery Ratings10/14/16 Fitch U.S. High Yield Default Insight (Fitch Expects 2017 Default Rate Around 3%, Down from 5% in 2016)09/28/16 Retail Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 10th Edition)09/27/16 U.S. Leveraged Finance Multiple EV-aluator09/27/16 U.S. Leveraged Finance Multiple EV-aluator (Excel File)09/23/16 U.S. LF Data Comparator09/22/16 Fitch U.S. Leveraged Loan Default Insight (Default Rate Below 1% Excluding Energy, Metals/Mining; E&P Subsector Tops 30%)09/13/16 Fitch U.S. High Yield Default Insight (YTD Default Total Surpasses $60 Billion As August Slowdown Short-Lived)08/18/16 Fitch U.S. Leveraged Loan Default Insight (Energy Looms Large Among Fitch’s Loans of Concern)08/11/16 Fitch U.S. High Yield Default Insight (U.S. HY TTM Default Rate Exceeds 5%; Energy YTD Defaults Tally $33 Billion)07/29/16 European Leveraged Loan Chart Book - 2Q1607/28/16 Fitch 50 (Capital Structure Diagrams & Debt Document Summaries for Fifty of the Largest U.S. Leveraged Credits)07/28/16 Fitch U.S. Leveraged Loan Default Insight (Energy Defaults Continue in Third Quarter; Secondary Market Shakes Off Brexit Vote)07/22/16 U.S. LF Data Comparator07/12/16 Fitch U.S. High Yield Default Insight (Energy TTM Default Rate Hits 15%; Oi SA’s Bankruptcy Propels Yankee Rate Over 5%)06/16/16 Fitch U.S. High Yield Default Insight (Energy Defaults Tally $13 Billion in May; June TTM Default Rate Approaching 5%)06/08/16 Distressed Debt Exchange06/06/16 The Annual Manual (U.S. Leveraged Finance Primer)05/23/16 Funding Trends for Bankruptcy and Distressed Debt (DIP Financing Available, Fundraising Robust)02/25/16 Second-Lien Debt (Energy and Exchanges Driving Second-Lien Bond Issuance)01/28/16 Industrial and Manufacturing Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — Edition IX)Source: Fitch Ratings.







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Appendix

Additional Research by SectorDate Title with Link Sector 01/18/16 Updating Fitch’s Mid-Cycle Commodity Price Assumptions Chemicals & Natural Resources03/04/16 Peabody Energy Recovery Tools Chemicals & Natural Resources03/07/16 Arch Coal, Inc. Recovery Tools Chemicals & Natural Resources03/08/16 North American Met Coal Dashboard Chemicals & Natural Resources06/02/16 Albemarle Corporation — Corporate Forecasts Chemicals & Natural Resources06/15/16 Gold Price Assumptions Raised

(Interest Rate Environment, Global Uncertainty, Investment Purchases Provide Support)Chemicals & Natural Resources

06/17/16 Freeport-McMoRan Inc. — Corporate Forecasts Chemicals & Natural Resources06/20/16 Alcoa Inc. — Corporate Forecasts Chemicals & Natural Resources07/21/16 Current and Former ‘BBB–’ Metals and Mining Credits (What High-Yield Investors Want to Know) Chemicals & Natural Resources08/03/16 Natural Resources Fallen Angel Subordination

(Weak Commodity Prices, Lax Indenture Terms Heighten Subordination Risk)Chemicals & Natural Resources

08/09/16 Westlake Chemical Corporation — Corporate Forecasts Chemicals & Natural Resources08/18/16 North American Methanol Dashboard (August 2016) Chemicals & Natural Resources08/26/16 Updating Commodity Price Assumptions Chemicals & Natural Resources09/01/16 E.I. du Pont de Nemours and Company — Corporate Forecasts Chemicals & Natural Resources09/09/16 Dow Chemical Company — Corporate Forecasts Chemicals & Natural Resources09/09/16 United States Steel Corporation (U.S. Steel Corp.) — Corporate Forecasts Chemicals & Natural Resources10/10/16 Kronos Worldwide, Inc. — Corporate Forecasts Chemicals & Natural Resources10/31/16 The Mosaic Company — Corporate Forecasts Chemicals & Natural Resources11/03/16 Monsanto Company — Corporate Forecasts Chemicals & Natural Resources11/07/16 Freeport-McMoRan Inc. — Corporate Forecasts Chemicals & Natural Resources11/09/16 CF Industries, Inc. — Corporate Forecasts Chemicals & Natural Resources11/28/16 2017 Outlook: North American Chemicals (Portfolio Actions to the Fore) Chemicals & Natural Resources11/30/16 North American Chemicals Handbook (A Detailed Review of Companies in the Chemicals Sector) Chemicals & Natural Resources01/13/16 High-Yield E&P Asset Coverage (Capital Structures, Cost Positions in Focus) Energy (Oil & Gas)01/14/16 Hess Corporation — Corporate Forecasts Energy (Oil & Gas)01/20/16 Oil & Gas Price Assumptions Lowered (Resilient Production, El Niño Push Recovery Out) Energy (Oil & Gas)01/26/16 2016 Outlook: U.S. Oil & Gas (Rating Outlook Shifts to Negative) Energy (Oil & Gas)02/18/16 Marathon Oil Corporation — Corporate Forecasts Energy (Oil & Gas)02/24/16 Using Commodity Prices in Corporate Projections Energy (Oil & Gas)03/01/16 Murphy Oil Corporation — Corporate Forecasts Energy (Oil & Gas)04/07/16 Apache Corporation — Corporate Forecasts Energy (Oil & Gas)04/08/16 ConocoPhillips Company — Corporate Forecasts Energy (Oil & Gas)04/12/16 E&P Lending Guidance Signals More Pain Ahead

(OCC Lending Guidance Amplifies Challenges for Leveraged E&P Borrowers)Energy (Oil & Gas)

04/13/16 U.S. Refining Dashboard (April 2016) Energy (Oil & Gas)04/18/16 Anadarko Petroleum Corp. — Corporate Forecasts Energy (Oil & Gas)04/22/16 Pioneer Natural Resources Co. — Corporate Forecasts Energy (Oil & Gas)04/26/16 Marathon Petroleum Corporation — Corporate Forecasts Energy (Oil & Gas)05/02/16 Full-Cycle Costs Drop for North American E&Ps (Faster Reset in North America, but Future Givebacks Likely) Energy (Oil & Gas)05/04/16 Marathon Oil Corporation — Corporate Forecasts Energy (Oil & Gas)05/04/16 U.S. Driller Dashboard Energy (Oil & Gas)05/25/16 QEP Resources, Inc. — Corporate Forecasts Energy (Oil & Gas)06/07/16 Asset Sales in a Down Cycle (What North American Corporates Are Saying in Q1) Energy (Oil & Gas)06/20/16 U.S. Natural Gas Dashboard Energy (Oil & Gas)06/30/16 Murphy Oil Corporation — Corporate Forecasts Energy (Oil & Gas)07/07/16 Southwestern Energy Company — Corporate Forecasts Energy (Oil & Gas)07/14/16 U.S. and Canadian E&P Transactions (Focus on Small Onshore Deals, Financial Buyers Remain on Sidelines) Energy (Oil & Gas)07/25/16 Valero Energy Corporation — Corporate Forecasts Energy (Oil & Gas)08/01/16 U.S. Crude Oil and Refined Products Pipelines Dashboard (First-Half 2016) Energy (Oil & Gas)08/11/16 Jones Energy, Inc. — Corporate Forecasts Energy (Oil & Gas)08/23/16 Chesapeake Energy Corp. — Corporate Forecasts Energy (Oil & Gas)09/06/16 Capital Structure Management in the Trough (What North American Upstream Companies Are Saying in Q2) Energy (Oil & Gas)09/15/16 Investment Grade Oil & Gas Handbook (North American Exploration and Production) Energy (Oil & Gas)10/12/16 U.S. Refining Dashboard (October 2016) Energy (Oil & Gas)11/29/16 2017 Outlook: North American Energy (Pricing and Credit Quality Have Begun to Turn a Corner) Energy (Oil & Gas)11/29/16 Oil Prices May Flatline in 2017; Slow Recovery Likely in Longer Term Energy (Oil & Gas)12/02/16 U.S. Natural Gas Dashboard (Second-Half 2016) Energy (Oil & Gas)12/14/16 Hess Corporation — Corporate Forecasts Energy (Oil & Gas)12/21/16 The Drill Bit Docket: High-Yield Oil & Gas Handbook (North American Exploration and Production) Energy (Oil & Gas)01/17/17 Share Buybacks in the Energy Sector (Strongly Procyclical, but Treasury Options Limited) Energy (Oil & Gas)01/25/17 U.S. and Canadian E&P Transactions (Transactions and Prices March Up, Permian Leads Charge) Energy (Oil & Gas)01/05/16 U.S. Gaming Recovery Tools (Third-Quarter 2015) Gaming01/05/16 U.S. Gaming Supplier Dashboard (Third-Quarter 2015) Gaming01/14/16 U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp. Gaming01/14/16 U.S. Leveraged Finance Spotlight Series: Scientific Games Corporation Gaming02/29/16 U.S. Gaming Regulatory Monitor (A State-by-State Guide to Existing and Proposed Gaming Regulations) Gaming04/06/16 U.S. Gaming Recovery Tools (Fourth-Quarter 2015) Gaming04/12/16 All In: Global Gaming Handbook (Second Edition) GamingMLP – Master limited partnership. TMT – Telecom, Media & Technology. Continued on next page. Source: Fitch Ratings.
































































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Appendix

Additional Research by Sector (Continued)Date Title with Link Sector 04/20/16 U.S. Regional Casino Gaming Dashboard (First-Half 2016) Gaming04/26/16 Las Vegas Strip Gaming Dashboard Gaming04/26/16 Macau Gaming Dashboard Gaming04/26/16 U.S. Gaming Supplier Dashboard Gaming06/02/16 Atlantic City Casino Tour Takeaways Gaming06/28/16 U.S. Gaming Recovery Tools (First-Quarter 2016) Gaming07/18/16 U.S. Gaming Regulatory Monitor (A State-by-State Guide to Existing and Proposed Gaming Regulations) Gaming07/21/16 Las Vegas Strip: Secularly Sound, Cyclically Vulnerable (A Credit Investor’s Guide to the Las Vegas Strip) Gaming10/03/16 2016 Global Gaming Expo Takeaways (IGT and Scientific Games Still Have Work to Do) Gaming10/12/16 Las Vegas Strip Gaming Dashboard (Second-Half 2016) Gaming10/12/16 U.S. Regional Casino Gaming Dashboard (Second-Half 2016) Gaming10/13/16 Macau Gaming Dashboard (Second-Half 2016) Gaming10/17/16 U.S. Gaming Supplier Dashboard (Second-Half 2016) Gaming12/01/16 2017 Outlook: Macau Gaming (Long Recovery Ahead) Gaming12/01/16 2017 Outlook: U.S. Gaming (Cyclical Gains to Offset Secular Pressures) Gaming12/14/16 Eye in the Sky Series: Japan (Gaming Jurisdiction Surveillance Monitor) Gaming01/04/17 U.S. Leveraged Finance Spotlight Series: Scientific Games Corp. Gaming01/27/17 Eye in the Sky Series: Macau (Gaming Jurisdiction Surveillance Monitor) Gaming01/27/17 Eye in the Sky Series: Philippines (Gaming Jurisdiction Surveillance Monitor) Gaming01/27/17 Eye in the Sky Series: Singapore (Gaming Jurisdiction Surveillance Monitor) Gaming01/27/17 Eye in the Sky Series: South Korea (Gaming Jurisdiction Surveillance Monitor) Gaming01/05/16 Hospitals' Credit Diagnosis (Affordable Care Act (ACA) Growing Pains) Healthcare & Pharma01/15/16 U.S. Healthcare Corporates Dashboard (Third-Quarter 2015) Healthcare & Pharma02/03/16 Global Pharmaceutical R&D Pipeline (2015 — Strong Year for Approvals) Healthcare & Pharma02/23/16 Navigating the U.S. Pharmaceutical Channel (Innovative Pharmaceutical Manufacturers) Healthcare & Pharma03/30/16 U.S. Healthcare Recovery Tool (Fourth Quarter 2015) Healthcare & Pharma04/20/16 Hospitals’ Credit Diagnosis (Noteworthy Items in Patient Volume Trends) Healthcare & Pharma05/04/16 The Checkup: High-Yield Healthcare Handbook

(Comprehensive Analysis of High-Yield U.S. Healthcare Companies)Healthcare & Pharma

05/04/16 U.S. Healthcare Corporates Dashboard (Fourth-Quarter 2015) Healthcare & Pharma05/13/16 U.S. Healthcare Recovery Tool (First Quarter 2016) Healthcare & Pharma06/14/16 Global Pharmaceutical R&D Pipeline (Diverging Trends for Cholesterol-Lowering Drugs) Healthcare & Pharma06/17/16 Drug Pricing Pushback Highlights Need for Innovation Healthcare & Pharma06/29/16 Hospitals’ Credit Diagnosis (Tough Headwinds to Less-Acute Patient Volumes) Healthcare & Pharma07/12/16 U.S. Healthcare Corporates Dashboard (First-Quarter 2016) Healthcare & Pharma09/06/16 Global Pharmaceutical R&D Pipeline (Despite Setbacks, Pursuit of Cancer Treatments Continues) Healthcare & Pharma09/12/16 What Investors Want to Know: U.S. Healthcare (Takeaways from Recent Investor Meetings) Healthcare & Pharma10/11/16 Hospitals' Credit Diagnosis (Community Health Systems' Struggles Intensify) Healthcare & Pharma11/30/16 2017 Outlook: Global Pharma and Biotech Healthcare & Pharma12/06/16 2017 Outlook: U.S. Healthcare (Fundamental Stability Despite Regulatory Uncertainty) Healthcare & Pharma12/13/16 Healthcare REIT Viewpoints — 4Q16 Healthcare & Pharma01/07/16 Under One Roof: U.S. Housing in 2016 Homebuilding & Construction01/11/16 The Tale of the "Measuring" Tape (U.S. Home Improvement Industry) Homebuilding & Construction01/29/16 U.S. Building Materials Dashboard Homebuilding & Construction01/29/16 U.S. Building Products Sector Dashboard Homebuilding & Construction02/02/16 U.S. Homebuilding, Building, and Home Products and Services Recovery Tools Homebuilding & Construction02/04/16 U.S. Homebuilding/Construction: The Chalk Line (Winter 2015/2016) Homebuilding & Construction03/01/16 U.S. Building Materials Volume and Pricing Trends (Fourth-Quarter 2015) Homebuilding & Construction04/28/16 U.S. Homebuilding, Building, and Home Products and Services Recovery Tools (First-Quarter 2016) Homebuilding & Construction05/10/16 U.S. Homebuilding/Construction: The Chalk Line (Spring 2016) Homebuilding & Construction06/20/16 What Investors Want to Know: Under One Roof — U.S. Housing Forum 2016 Homebuilding & Construction07/07/16 U.S. Leveraged Finance Spotlight Series — Beazer Homes USA, Inc. Homebuilding & Construction12/01/16 2017 Outlook: U.S. Building and Home Products (Modest Growth Ahead, Construction Cycle Maturing) Homebuilding & Construction12/01/16 2017 Outlook: U.S. Housing and Homebuilders (Mid-to-Late Innings of a Multi-Year Expansion) Homebuilding & Construction01/15/16 U.S. Diversified Industrials and Capital Goods Handbook Industrials & Transportation01/26/16 U.S. Diversified Industrials/Capital Goods Dashboard Industrials & Transportation05/10/16 Diversified Industrials/Cap Goods Dashboard Industrials & Transportation05/20/16 U.S. Auto Dashboard (First-Half 2016) Industrials & Transportation06/16/16 North American Airline Dashboard (June 2016) Industrials & Transportation07/08/16 U.S. Leveraged Finance Spotlight Series — Bombardier Inc. Industrials & Transportation07/26/16 U.S. Leveraged Finance Spotlight Series: The Goodyear Tire & Rubber Company Industrials & Transportation08/03/16 Global Aircraft Enhanced Equipment Trust Certificate Comp Book Industrials & Transportation08/11/16 U.S. Diversified Industrials/Capital Goods Dashboard (August 2016) Industrials & Transportation09/02/16 Aircraft Collateral in Downturns (Passenger Aircraft as Collateral in Secured Debt Transactions) Industrials & Transportation09/20/16 Rating Aircraft Enhanced Equipment Trust Certificates

(Deutsche Bank 6th Annual Aircraft Finance & Leasing Conference)Industrials & Transportation

09/26/16 U.S. Defense Spending Review (Upturn Supports Sector, but Budget Caps and Election Risks Persist) Industrials & Transportation11/16/16 U.S. Defense Spending Review Update

(Upturn Supports Sector, but Budget Caps and Continuing Resolutions Risks Persist) Industrials & Transportation

MLP – Master limited partnership. TMT – Telecom, Media & Technology. Continued on next page. Source: Fitch Ratings.







































































Appendix

Additional Research by Sector (Continued)Date Title with Link Sector 06/06/16 U.S. REIT Debt Capital Access Improving, Still Murky (What U.S. Equity REITs Are Saying) REITs07/18/16 What Investors Want to Know: U.S. REITs

(Questions and Takeaways Post-NAREIT Conference and Investor Meetings)REITs

09/14/16 REITs Adjust to Bundling by Selling Skilled Nursing Facilities (What Healthcare REITs and Operators Are Saying) REITs09/22/16 2Q16 U.S. Equity REIT Liquidity: Clear Route Ahead REITs11/16/16 Recovery Ratings and Notching Criteria for Equity REITs REITs11/17/16 Offshore and Private Equity Buying Healthcare Real Estate (What Healthcare REITs and Operators Are Saying) REITs12/05/16 2017 Outlook: U.S. Equity REITs (Solid Fundamentals and Liquidity Support Positive Sector Outlook) REITs12/13/16 Industrial REIT Viewpoints — 4Q16 REITs12/13/16 Multifamily Viewpoints — 4Q16 REITs12/13/16 U.S. Office REIT Viewpoints — 4Q16 REITs12/13/16 U.S. Retail REIT Viewpoints — 4Q16 REITs12/22/16 3Q16 U.S. Equity REIT Liquidity Report (Show of Strength Entering the New Year) REITs01/25/16 High-Yield Retail Checkout (Comprehensive Analysis of Major High-Yield Retailers) Retail & Consumer01/29/16 U.S. Retail Recovery Tool (Third-Quarter 2015) Retail & Consumer02/10/16 European Non-Food Retail, Lodging, Restaurants Speculative-Grade Handbook Retail & Consumer04/04/16 European-Based Brewers Results Dashboard 2015 Retail & Consumer04/19/16 Aramark Retail & Consumer04/27/16 What Investors Want To Know: EMEA Food Retail Retail & Consumer05/19/16 Bloomin' Brands, Inc. Retail & Consumer05/20/16 Anheuser Busch InBev NV/SA Retail & Consumer07/22/16 CEC Entertainment, Inc. — Amended Retail & Consumer12/12/16 2017 Outlook: U.S. Retail and Restaurants (Sector Challenges Force Business Model Transformations) Retail & Consumer01/31/17 High-Yield Retail Checkout (Comprehensive Analysis of Major High-Yield Retailers) Retail & Consumer01/19/16 Constellation Software Inc. TMT04/01/16 U.S. Leveraged Finance Spotlight Series - Sprint Corporation TMT05/17/16 The Dun & Bradstreet Corporation — Corporate Forecasts TMT06/23/16 Infor (US), Inc. TMT07/22/16 An Exclusive Preview (Fitch’s 2016 U.S. Movie Exhibitor Industry Report) TMT10/12/16 Credit Encyclo-Media: Fitch Ratings’ Comprehensive Analysis of the U.S. Media and Entertainment Sector

(Volume IX, 2016–2017)TMT

10/24/16 High-Yield Media and Entertainment Handbook (Fitch Ratings’ Credit Profile Analysis of Issuers) TMT10/24/16 Investment-Grade Media and Entertainment Handbook (Fitch Ratings’ Credit Profile Analysis of Issuers) TMT12/05/16 2017 Outlook: North American Telecommunications and Cable TMT12/05/16 2017 Outlook: U.S. Media & Entertainment TMT12/05/16 2017 Outlook: U.S. Technology (Slowing Moore’s Law Shifts Focus to Hyper-scale and IoT) TMT01/05/17 U.S. Leveraged Finance Spotlight Series: Netflix, Inc. TMT01/07/16 Arizona Regulation: Improved Regulatory Compact Utilities, Power & Gas01/11/16 LDCs Become the Growth Utilities (Infrastructure Replacement Provides Pipeline for Organic Growth) Utilities, Power & Gas01/12/16 U.S. Utilities, Power & Gas Dashboard (Fourth-Quarter 2015) Utilities, Power & Gas01/12/16 U.S. Utilities, Power & Gas Fourth-Quarter Rating Action Summary Report Utilities, Power & Gas02/23/16 DTE Electric Co. — Corporate Forecasts Utilities, Power & Gas02/23/16 DTE Energy Co. — Corporate Forecasts Utilities, Power & Gas02/23/16 DTE Gas Co. — Corporate Forecasts Utilities, Power & Gas02/24/16 Oil Price Assumption for Fitch Corporate Analysis Lowered Again to USD35 for 2016 Utilities, Power & Gas03/18/16 A Warm December Caps EPS Growth for U.S. Utilities (2015 Year-End Earnings Calls Wrap-Up) Utilities, Power & Gas03/31/16 U.S. Utilities O&M Trends Dashboard (March 2016) Utilities, Power & Gas04/04/16 U.S. Utilities, Power & Gas First-Quarter 2016 Rating Action Summary Report Utilities, Power & Gas04/04/16 Utilities Power & Gas Dashboard (First-Quarter 2016) Utilities, Power & Gas05/06/16 U.S. Transmission and Distribution Utilities Handbook

(A Detailed Review of Electric and Gas T&D Utilities — Second Edition)Utilities, Power & Gas

05/09/16 Smooth Sailing Ahead for Wind Power (Secular Trends Support Capacity Expansion) Utilities, Power & Gas05/20/16 AGA Wrap-Up Report (Stable Intermediate Outlook Belies Potential Headwinds) Utilities, Power & Gas06/01/16 U.S. Utilities: Mild Winter Hurts Earnings (First-Quarter 2016 Earnings Calls Wrap-Up) Utilities, Power & Gas06/29/16 U.S. Electric Utilities Fuel Mix Dashboard (June 2016) Utilities, Power & Gas07/07/16 U.S. Utilities, Power & Gas Dashboard (Second-Quarter 2016) Utilities, Power & Gas07/07/16 U.S. Utilities, Power & Gas Second-Quarter 2016 Rating Action Summary Report Utilities, Power & Gas07/14/16 US Nuclear Retirements Continue Amid Low Power Prices Utilities, Power & Gas07/18/16 Net Energy Metering (A Secular Credit Challenge for IOUs) Utilities, Power & Gas08/09/16 U.S. Integrated Electric Utilities Handbook (A Detailed Review of Integrated Electric Utilities) Utilities, Power & Gas08/19/16 California Regulation: Emerging Technologies Challenge the Status Quo Utilities, Power & Gas08/25/16 Utility ROEs Still Trending Down Utilities, Power & Gas08/30/16 U.S. Utilities: Summer Heat Keeps Earnings on Track (Second-Quarter 2016 Earnings Wrap-Up) Utilities, Power & Gas09/30/16 Energy Storage Dashboard Utilities, Power & Gas10/05/16 U.S. Utilities, Power & Gas Dashboard (Third-Quarter 2016) Utilities, Power & Gas10/05/16 U.S. Utilities, Power & Gas Third-Quarter 2016 Rating Action Summary Report Utilities, Power & Gas10/28/16 U.S. Nuclear Plants Well Positioned for Decommissioning (Nuclear Trust Funds Provide Safety Net) Utilities, Power & Gas10/31/16 U.S. Competitive Generators Handbook

(A Detailed Review of Competitive Generation Companies — Second Edition)Utilities, Power & Gas

MLP – Master limited partnership. TMT – Telecom, Media & Technology. Continued on next page. Source: Fitch Ratings.







































































Appendix

Additional Research by Sector (Continued)Date Title with Link Sector 11/03/16 U.S. State Election Preview (State Contests Have More Immediate Impact on Utilities than Federal Races) Utilities, Power & Gas11/03/16 U.S. Utility Parent Companies Handbook

(A Detailed Review of Utility Parent Holding Companies — Second Edition)Utilities, Power & Gas

11/17/16 EEI 2016 Wrap-Up: Touting Growth in a Low Carbon World Utilities, Power & Gas11/29/16 2017 Outlook: U.S. Utilities, Power & Gas (The Rising Undercurrents) Utilities, Power & Gas12/02/16 U.S. Utilities: Hot Summer Heats Up Earnings (Third-Quarter 2016 Earnings Wrap-Up) Utilities, Power & Gas12/21/16 Offshore Wind Dashboard (December 2016) Utilities, Power & Gas01/09/17 U.S. Utilities, Power & Gas Dashboard (Fourth-Quarter 2016) Utilities, Power & Gas01/09/17 U.S. Utilities, Power & Gas Fourth-Quarter 2016 Rating Action Summary Report Utilities, Power & Gas01/11/17 U.S Utilities, Power & Gas Data Comparator (Sector Financials Remain Stable) Utilities, Power & Gas01/11/17 U.S. Utilities, Power and Gas Peer Study — Data Comparator Addendum Utilities, Power & GasMLP – Master limited partnership. TMT – Telecom, Media & Technology. Source: Fitch Ratings.













Appendix

Rating Coverage List

Rating Coverage by SectorIssuer Name Sector RatingAIM Group USA Inc. Aerospace & Defense NPR

Atlantis Acquisitions Intermediate Holding Corporation Aerospace & Defense NPRBombardier Inc. Aerospace & Defense BCTS-CSI Holdings, Inc. Aerospace & Defense NPRDigitalGlobe, Inc. Aerospace & Defense NPREngility Corporation Aerospace & Defense NPREngility Holdings, Inc. Aerospace & Defense NPRHuntington Ingalls Industries, Inc. Aerospace & Defense BB+Kratos Defense & Security Solutions, Inc. Aerospace & Defense NPROrbital ATK, Inc. Aerospace & Defense BB+TransDigm Group Aerospace & Defense BTransDigm Inc. Aerospace & Defense BTriumph Group, Inc. Aerospace & Defense NPRTronair Parent Inc. Aerospace & Defense NPRWesco Aircraft Hardware Corp. Aerospace & Defense NPRWest Star Aviation Holdings, LLC Aerospace & Defense NPR1a Smart Start Inc. Auto & Related NPRAdient Global Holdings Ltd Auto & Related NPRAdient plc Auto & Related NPRAllison Transmission Holdings, Inc. Auto & Related BBAllison Transmission, Inc. Auto & Related BBAmerican Auto Auction Group, LLC Auto & Related NPRAmerican Axle & Manufacturing Holdings, Inc. Auto & Related BB–American Axle & Manufacturing, Inc. Auto & Related BB–Automotive Remarketing Group, Inc. Auto & Related NPRBestop, Inc. Auto & Related NPRBombardier Recreational Products Inc. Auto & Related NPRCrowne Group Holdings, LLC Auto & Related NPRCrowne Group, LLC Auto & Related NPRDriven Performance Brands, Inc. Auto & Related NPRExpress Oil Group, Inc. Auto & Related NPRGoodyear Dunlop Tires Europe B.V. Auto & Related BBGoodyear Tire & Rubber Company (The) Auto & Related BBGST AutoLeather, Inc. Auto & Related NPRHorizon Global Corporation Auto & Related NPRInnovative Aftermarket Systems Auto & Related NPRJM Family Enterprises, Inc. Auto & Related NPRLKQ Corporation Auto & Related NPRLKQ Italia Bondco, S.p.A. Auto & Related NPRMeritor, Inc. Auto & Related B+Milton Industries, Inc. Auto & Related NPRPAI Holdco, Inc. Auto & Related NPRPittsburgh Glass Works LLC Auto & Related NPRSoutheastern Automotive Aftermarket Service Holdings, LLC Auto & Related NPRTenneco, Inc. Auto & Related BB+Titan International, Inc. Auto & Related NPRTower Automotive Holdings USA, LLC Auto & Related NPRA.B. Property Services, Inc. Building Materials & Construction NPRBlack & Veatch Corporation Building Materials & Construction NPRBuilders FirstSource, Inc. Building Materials & Construction NPRChelsea Building Products, Inc. Building Materials & Construction NPRCHI Doors Holding Corp. Building Materials & Construction NPRCustom Window Systems, Inc. Building Materials & Construction NPRDayton Superior Corp. Building Materials & Construction NPRDayton Superior Holdings, LLC Building Materials & Construction NPRFoundation Building Materials, LLC Building Materials & Construction NPRGCP Applied Technologies Inc. Building Materials & Construction NPRIBA Holdings, LLC Building Materials & Construction NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingKiewit Infrastructure Group Inc. Building Materials & Construction NPRLedcor Industries Inc. Building Materials & Construction NPRMasco Corporation Building Materials & Construction BBB–Mohawk Industries, Inc. Building Materials & Construction BBB+Nortek Inc. Building Materials & Construction NPRQuanex Building Products Corporation Building Materials & Construction NPRQuanex Corporation Building Materials & Construction NPRSiteOne Landscape Supply Holding LLC Building Materials & Construction NPRSiteOne Landscape Supply, Inc. Building Materials & Construction NPRSRS Distribution, Inc. Building Materials & Construction NPRSRS Group Holdings, Inc. Building Materials & Construction NPRTop Knobs, Inc. Building Materials & Construction NPRUSG Corporation Building Materials & Construction BBVulcan Materials Company Building Materials & Construction NPRCNH Industrial NV Capital Goods NPRColumbus McKinnon Corporation Capital Goods NPRNavistar International Corporation Capital Goods B–Navistar, Inc. Capital Goods B–Octavius Corporation Capital Goods NPRWinnebago Industries, Inc. Capital Goods NPRAP Plastics Group, LLC Chemicals NPRCF Industries Holdings, Inc. Chemicals BB+CF Industries, Inc. Chemicals BB+Charter NEX Films, Inc. Chemicals NPRDuBois Chemicals, Inc. Chemicals NPRDYK Prime Acquisition Parent, LLC Chemicals NPRIngevity Corporation Chemicals BBIPS Corporation Chemicals NPRKoppers Holdings Inc. Chemicals NPRKronos International Inc. (Valhi, Inc. Unit) Chemicals B+Kronos Worldwide, Inc. Chemicals B+Niacet Corporation Chemicals NPROlin Corporation Chemicals NPRPeach State Labs, LLC Chemicals NPRPolymer Additives Holdings, Inc. Chemicals NPRPolymer Solutions Group Finance, LLC Chemicals NPRPolyOne Corp. Chemicals NPRPQ Corporation Chemicals NPRRain CII Carbon LLC (US) Chemicals NPRSummit Research Labs Inc. Chemicals NPRVersum Materials, Inc. Chemicals NPRVinmar International Ltd. Chemicals NPR4 Over Inc. Consumer NPRACCO Brands Corporation Consumer BBAvon International Operations, Inc. Consumer B+Avon Products, Inc. Consumer B+Badger Sportswear Acquisition, Inc. Consumer NPRCoty B.V. Consumer NPRHollander Sleep Products LLC Consumer NPRKidKraft, Inc. Consumer NPRN2Y Acquisition Company, LLC Consumer NPRNorth Haven Cadence Buyer, Inc. Consumer NPRSafariland, LLC Consumer NPRSpectrum Brands, Inc. Consumer BBSRP Acquisition Inc. Consumer NPRSundial Group Holdings LLC Consumer NPRSundial Group LLC Consumer NPRTaylor Precision Products, Inc. Consumer NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingThe Chefs’ Warehouse, Inc. Consumer NPRYeti Holdings, Inc. Consumer NPRAavid Purchaser Corp. Diversified Manufacturing NPRAbrasive Products and Equipment, LLC Diversified Manufacturing NPRAG Finco LLC Diversified Manufacturing NPRAlpha Packaging Holdings Inc. Diversified Manufacturing NPRArconic Inc. Diversified Manufacturing BB+Atkore International Group Inc. Diversified Manufacturing NPRAtkore International, Inc. Diversified Manufacturing NPRBakercorp International, Inc. Diversified Manufacturing NPRBlount International, Inc. Diversified Manufacturing NPRBrass Smith Innovations, LLC Diversified Manufacturing NPRChromalox, Inc. Diversified Manufacturing NPRCoherent Holding GmbH Diversified Manufacturing NPRCoherent, Inc. Diversified Manufacturing NPRComar Holding Company, LLC Diversified Manufacturing NPRElement Materials Technology Group Diversified Manufacturing NPREnergizer Holdings, Inc. Diversified Manufacturing NPREWT Holdings III Corp. Diversified Manufacturing NPRForterra Finance, LLC Diversified Manufacturing NPRForterra, Inc. Diversified Manufacturing NPRGlobal Brass and Copper Holdings, Inc. Diversified Manufacturing NPRGlobal Brass and Copper, Inc. Diversified Manufacturing NPRHarsco Corporation Diversified Manufacturing BBImperial Bag & Paper Co., LLC Diversified Manufacturing NPRIndustrial Container Services, LLC Diversified Manufacturing NPRIntegrated Power Services Holdings, Inc. Diversified Manufacturing NPRJason Incorporated Diversified Manufacturing NPRJason Industries, Inc. Diversified Manufacturing NPRLazer Spot Holdings Corporation Diversified Manufacturing NPRLazer Spot, Inc. Diversified Manufacturing NPRLiqui-Box Corporation Diversified Manufacturing NPRManitowoc Foodservice, Inc. Diversified Manufacturing NPRMilacron Holdings Corp. Diversified Manufacturing NPRMilacron LLC Diversified Manufacturing NPRMKS Instruments, Inc. Diversified Manufacturing NPRMTS Systems Corporation Diversified Manufacturing NPRMueller Water Products, Inc. Diversified Manufacturing NPROhio Transmission Corporation Diversified Manufacturing NPROxiCool, Inc. Diversified Manufacturing NPRParagon Films, Inc. Diversified Manufacturing NPRPolk Acquisition Corp. Diversified Manufacturing NPRPower Services Holding Company Diversified Manufacturing NPRPrimoris Services Corporation Diversified Manufacturing NPRRBS Global, Inc. Diversified Manufacturing NPRRoberts-Gordon LLC Diversified Manufacturing NPRRotometrics Holdings, Inc. Diversified Manufacturing NPRRyan Herco Flow Solutions Diversified Manufacturing NPRSafe Fleet Acquisition Corp. Diversified Manufacturing NPRThe Gordian Group, Inc. Diversified Manufacturing NPRThe Hillman Companies, Inc. Diversified Manufacturing NPRThe Hillman Group, Inc. Diversified Manufacturing NPRThe Walsh Group, Ltd. Diversified Manufacturing NPRTooling Acquisition Co. Diversified Manufacturing NPRTrident Maritime Systems, LLC Diversified Manufacturing NPRWireCo Worldgroup (Cayman) Inc. Diversified Manufacturing NPRAcademic Acquisition Holdings, LLC Diversified Services NPRAffinion International Holdings Limited Diversified Services NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingAffinion Investments LLC Diversified Services NPRAll Web Leads, Inc. Diversified Services NPRAmerican Academy Holdings, LLC Diversified Services NPRAncestry.com Inc. Diversified Services NPRArchway Marketing Holdings, Inc. Diversified Services NPRAsurion, LLC Diversified Services NPRBT Purchaser, LLC Diversified Services NPRCatapult Learning, LLC Diversified Services NPRCIBT Solutions, Inc. Diversified Services NPRCoAdvantage Corporation Diversified Services NPRConvergint Technologies Holdings, LLC Diversified Services NPRCredit Infonet Holdings, Inc. Diversified Services NPRDisa Holdings Acquisition Subsidiary Corporation Diversified Services NPRDominion Marine Media, LLC Diversified Services NPREnsono LP Diversified Services NPREvolve IP, LLC Diversified Services NPRExpedited Travel LLC Diversified Services NPRGarretson Resolution Group, Inc. Diversified Services NPRHeat Parent, L.P. Diversified Services NPRHelios WSS Holdings, Inc. Diversified Services NPRHodges-Mace, LLC Diversified Services NPRHughes Rolf Jensen Holding Company Diversified Services NPRHVAC Holdings, Inc. Diversified Services NPRIron Mountain Inc. Diversified Services NPRLogan’s Linen, LLC Diversified Services NPRMaterial Handling Services, LLC Diversified Services NPRMSHC, Inc. Diversified Services NPROn Assignment, Inc. Diversified Services NPRPine Environmental Services LLC Diversified Services NPRQuad/Graphics, Inc. Diversified Services NPRQuality Solutions, Inc. Diversified Services NPRRealogy Group LLC Diversified Services NPRRisk Strategies Company Diversified Services NPRRyan, LLC Diversified Services NPRServiceMaster Global Holdings, Inc. Diversified Services NPRSimplify Compliance, LLC Diversified Services NPRSovos Compliance, LLC Diversified Services NPRStena AB Diversified Services NPRStena International S.A. Diversified Services NPRStoneMor Operating LLC Diversified Services NPRStoneMor Partners L.P. Diversified Services NPRSutherland Global Services, Inc. Diversified Services NPRTowne Holdings, Inc. Diversified Services NPRTribune Publishing Company Diversified Services NPRTriNet Group, Inc. Diversified Services NPRVantiv, Inc. Diversified Services NPRVenbrook Insurance Services, LLC Diversified Services NPRVision Media Management & Fulfillment, LLC Diversified Services NPRAllegheny Energy Supply Co., LLC Electric-Corporate BAllegheny Generating Co. Electric-Corporate B+Ameresco Electric-Corporate NPRAVANGRID, Inc. Electric-Corporate BBB+Calpine Construction Finance Company, L.P. Electric-Corporate B+Calpine Corporation Electric-Corporate B+Commonwealth Edison Co. Electric-Corporate BBB+ContourGlobal L.P. Electric-Corporate B+Dayton Power & Light Company Electric-Corporate BB+DPL Inc. Electric-Corporate B+NPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingFirstEnergy Generation, LLC Electric-Corporate CCFirstEnergy Nuclear Generation, LLC Electric-Corporate CCFirstEnergy Solutions Corp. Electric-Corporate CCIPALCO Enterprises, Inc. Electric-Corporate BB+Mountaineer Gas Company Electric-Corporate BB+Rochester Gas and Electric Corporation Electric-Corporate BBB+The AES Corporation Electric-Corporate BB–TransAlta Renewables Inc. Electric-Corporate NPRAM Conservation Holding Corporation Energy (Oil & Gas) NPRAntero Resources Corporation Energy (Oil & Gas) NPRBristow Aircraft Leasing Limited Energy (Oil & Gas) NPRBristow Group Inc. Energy (Oil & Gas) NPRBristow U.S. Leasing LLC Energy (Oil & Gas) NPRBristow U.S. LLC Energy (Oil & Gas) NPRCarrizo Oil & Gas Inc. Energy (Oil & Gas) NPRCascade Drilling, L.P. Energy (Oil & Gas) NPRCITGO Holding, Inc. Energy (Oil & Gas) B–CITGO Petroleum Corp. Energy (Oil & Gas) BColumbia Pipeline Group, Inc. Energy (Oil & Gas) BBB+Continental Resources Inc. Energy (Oil & Gas) NPRCrestwood Equity Partners, LP Energy (Oil & Gas) NPRDrill Rigs Holdings Inc. Energy (Oil & Gas) NPRDrillship Alonissos Shareholders Inc. Energy (Oil & Gas) NPRDrillships Financing Holding Inc. Energy (Oil & Gas) NPRDrillships Ocean Ventures Inc. Energy (Oil & Gas) NPREnergy Transfer Equity, L.P. Energy (Oil & Gas) BBErgon Energy (Oil & Gas) NPRGlobalSantaFe Inc. Energy (Oil & Gas) B+Green Plains Holdings II LLC Energy (Oil & Gas) NPRIFM (US) Colonial Pipeline 2 LLC Energy (Oil & Gas) BB+Jones Energy Holdings, LLC Energy (Oil & Gas) BLaredo Petroleum, Inc. Energy (Oil & Gas) NPRMEG Energy Corp. Energy (Oil & Gas) BMurphy Oil Corporation Energy (Oil & Gas) BB+Newfield Exploration Company Energy (Oil & Gas) BB+NGL Energy Partners LP Energy (Oil & Gas) B+NuStar Energy LP Energy (Oil & Gas) BBNuStar Logistics, L.P. Energy (Oil & Gas) BBOasis Petroleum Inc. Energy (Oil & Gas) NPRPacific Drilling V Limited Energy (Oil & Gas) NPRPacific Sharav S.A.R.L. Energy (Oil & Gas) NPRPBF Holding Company LLC Energy (Oil & Gas) NPRPBF Logistics LP Energy (Oil & Gas) NPRQEP Resources, Inc. Energy (Oil & Gas) BBRSP Permian, Inc. Energy (Oil & Gas) NPRSeacor Holdings, Inc. Energy (Oil & Gas) BSM Energy Company Energy (Oil & Gas) NPRSouthcross Energy Partners, LP. Energy (Oil & Gas) NPRSouthern Natural Gas Company Energy (Oil & Gas) BBB+Southwestern Energy Company Energy (Oil & Gas) BBSunoco LP Energy (Oil & Gas) BB–Transocean Phoenix 2 Limited Energy (Oil & Gas) B+Transocean Proteus Limited Energy (Oil & Gas) B+Transocean, Inc. Energy (Oil & Gas) B+UELS, LLC Energy (Oil & Gas) NPRUnit Corporation Energy (Oil & Gas) B+W&T Offshore Inc. Energy (Oil & Gas) NPRWeatherford International LLC Energy (Oil & Gas) CCCNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingWeatherford International Ltd. (Bermuda) Energy (Oil & Gas) CCCWeatherford International Public Limited Company Energy (Oil & Gas) CCCWilliams Companies, Inc. (The) Energy (Oil & Gas) BB+Culligan Holding, Inc. Environmental Services NPREnviroSolutions Holdings Inc. Environmental Services NPRIndustrial Services Acquisition, LLC Environmental Services NPRQW Holding Corporation Environmental Services NPRUS Ecology, Inc. Environmental Services NPRAdvancePierre Foods Holdings, Inc. Food, Beverage & Tobacco NPRAdvancePierre Foods, Inc. Food, Beverage & Tobacco NPRAgroFresh Solutions, Inc. Food, Beverage & Tobacco NPRAlliance One International Inc. Food, Beverage & Tobacco NPRAmplify Snack Brands, Inc. Food, Beverage & Tobacco NPRAramark Food, Beverage & Tobacco NPRB&G Foods, Inc. Food, Beverage & Tobacco NPRBall Corporation Food, Beverage & Tobacco BB+Berry Plastics Group, Inc. Food, Beverage & Tobacco NPRBloomin’ Brands, Inc. Food, Beverage & Tobacco NPRBlue Harvest Fisheries Holdings, LLC Food, Beverage & Tobacco NPRBlue Harvest Fisheries, LLC Food, Beverage & Tobacco NPRBrinker International, Inc. Food, Beverage & Tobacco BB+Carr Management, Inc. Food, Beverage & Tobacco NPRCheckers Drive-In Restaurants, Inc. Food, Beverage & Tobacco NPRChefs’ Warehouse Parent, LLC Food, Beverage & Tobacco NPRCIH International S.a.r.l. Food, Beverage & Tobacco BBB–Clearwater Seafoods LP Food, Beverage & Tobacco NPRDairyland USA Corp. Food, Beverage & Tobacco NPRDarling Ingredients, Inc. Food, Beverage & Tobacco NPRDarling International Canada Inc. Food, Beverage & Tobacco NPRDarling International NL Holdings B.V. Food, Beverage & Tobacco NPRDean Foods Company Food, Beverage & Tobacco BB–Dean Holding Company Food, Beverage & Tobacco BB–Del Real, LLC Food, Beverage & Tobacco NPRGold Standard Baking, Inc. Food, Beverage & Tobacco NPRGold Star Food Service, Inc. Food, Beverage & Tobacco NPRHigh Liner Foods Inc. Food, Beverage & Tobacco NPRIdaho Pacific Holdings, Inc. Food, Beverage & Tobacco NPRKFC Holding Co. Food, Beverage & Tobacco NPRLiggett Group LLC Food, Beverage & Tobacco NPRLipari Foods Holdco, LLC Food, Beverage & Tobacco NPRLipari Foods Operating Company LLC Food, Beverage & Tobacco NPRNational Grape Cooperative Association, Inc. Food, Beverage & Tobacco NPRNellson Nutraceutical, LLC Food, Beverage & Tobacco NPRNomacorc, LLC Food, Beverage & Tobacco NPROskar Blues Brewery Holdings LLC Food, Beverage & Tobacco NPRPinnacle Foods Finance LLC Food, Beverage & Tobacco NPRPizza Hut Holdings LLC. Food, Beverage & Tobacco NPRProAmpac Intermediate Inc. Food, Beverage & Tobacco NPRRestaurant Technologies, Inc. Food, Beverage & Tobacco NPRShari’s Management Corporation Food, Beverage & Tobacco NPRSilgan Holdings Inc. Food, Beverage & Tobacco NPRSpecialty Brands Holdings, Inc. Food, Beverage & Tobacco NPR

Taco Bell of America, LLC Food, Beverage & Tobacco NPRTruco Enterprises, LP Food, Beverage & Tobacco NPRTruco Holdings LLC Food, Beverage & Tobacco NPRUS Foods Holding Corp. Food, Beverage & Tobacco NPRVector Group Ltd. Food, Beverage & Tobacco NPRWelch Foods Inc. Food, Beverage & Tobacco NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingWestminster Cracker Company, Inc. Food, Beverage & Tobacco NPRYUM! Brands, Inc. Food, Beverage & Tobacco NPRAristocrat Leisure Ltd. Gaming, Lodging & Leisure NPRBoyd Gaming Corporation Gaming, Lodging & Leisure B+Bright Horizons Family Solutions Inc. Gaming, Lodging & Leisure NPRCityCenter Holdings, LLC Gaming, Lodging & Leisure NPRConfederated Tribes of the Coos, Lower Umpqua and Siuslaw Indians Gaming, Lodging & Leisure NPRDirect Travel, Inc. Gaming, Lodging & Leisure NPRGaming and Leisure Properties, Inc. Gaming, Lodging & Leisure NPRHersha Hospitality Limited Partnership Gaming, Lodging & Leisure NPRHersha Hospitality Trust Gaming, Lodging & Leisure NPRHilton Grand Vacations Borrower LLC Gaming, Lodging & Leisure NPRHilton Grand Vacations Inc. Gaming, Lodging & Leisure NPRILG, Inc. Gaming, Lodging & Leisure NPRInterstate Hotels & Resorts, Inc. Gaming, Lodging & Leisure NPRInterval Acquisition Corp. Gaming, Lodging & Leisure NPRJackpotjoy plc Gaming, Lodging & Leisure NPRKalispel Tribe Gaming, Lodging & Leisure NPRMarriott Ownership Resorts, Inc. Gaming, Lodging & Leisure NPRMarriott Vacations Worldwide Corporation Gaming, Lodging & Leisure NPRMGM China Holdings Limited Gaming, Lodging & Leisure BBMGM Grand Paradise, S.A. Gaming, Lodging & Leisure BBMGM Growth Properties LLC Gaming, Lodging & Leisure NPRMGM Growth Properties Operating Partnership LP Gaming, Lodging & Leisure NPRMGM Resorts International Gaming, Lodging & Leisure BBMorongo Band of Mission Indians Gaming, Lodging & Leisure NPRNorwegian Cruise Line Holdings, Ltd. Gaming, Lodging & Leisure NPRNTM Holdings LLC Gaming, Lodging & Leisure NPRPeninsula Gaming, LLC Gaming, Lodging & Leisure B+PlayCore Holdings, Inc. Gaming, Lodging & Leisure NPRQuechan Indian Tribe Gaming, Lodging & Leisure B–Red Rock Resorts, Inc. Gaming, Lodging & Leisure NPRRegal Entertainment Group Gaming, Lodging & Leisure B+Safe Harbor Marinas, LLC Gaming, Lodging & Leisure NPRSoulCycle Inc. Gaming, Lodging & Leisure NPRTown Sports International, LLC Gaming, Lodging & Leisure NPRTroon Golf, LLC Gaming, Lodging & Leisure NPRVistana Signature Experiences, Inc. Gaming, Lodging & Leisure NPRWynn America, LLC Gaming, Lodging & Leisure NPRWynn Las Vegas LLC Gaming, Lodging & Leisure NPRWynn Macau, Limited Gaming, Lodging & Leisure NPRWynn Resorts (Macau), SA Gaming, Lodging & Leisure NPRWynn Resorts, Limited Gaming, Lodging & Leisure NPRABB Concise Acquisition LLC Health Care NPRAcadia Healthcare Company, Inc. Health Care NPRAdvanced Instruments, LLC Health Care NPRAeneas Buyer Corp. Health Care NPRAkorn, Inc. Health Care NPRAnesthesia Consulting & Management, LP Health Care NPRArgon Medical Devices, Inc. Health Care NPRAvadyne Health Holdings, Inc. Health Care NPRBehavioral Health Group Health Care NPRBHS Hospital Services, Inc. Health Care NPRCHS/Community Health Systems, Inc. Health Care BClarion Brands Holding Corporation Health Care NPRClarion Brands, LLC Health Care NPRClarkson Eyecare, LLC Health Care NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingCMI Intermediate, Inc. Health Care NPRCollagen Matrix, Inc. Health Care NPRCommunity Health Systems, Inc. Health Care BDeca Dental Management, LLC Health Care NPREating Recovery Center, LLC Health Care NPREHE Holdings, Inc. Health Care NPRERC Intermediate Holdco, LLC Health Care NPRFamilia Management Group, LLC Health Care NPRFCT Hospice LLC Health Care NPRGenesis Healthcare, Inc. Health Care NPRGlobal Healthcare Exchange, LLC Health Care NPRHCA Holdings, Inc. Health Care BBHCA Inc. Health Care BBHealthTronics, Inc. Health Care NPRHero DVO, LLC Health Care NPRHPH-TH Holdings, Inc. Health Care NPRImpax Laboratories Inc. Health Care NPRINC Research, LLC Health Care NPRIndivior Finance LLC Health Care NPRIndivior Finance Sarl Health Care NPRIndivior Global Holdings Ltd. Health Care NPRInteger Holdings Corporation Health Care NPRIWP Holdings, LLC Health Care NPRJaguar Holding Company II Health Care NPRLakeview Health Acquisition Company Health Care NPRLannett Company, Inc. Health Care NPRLeehar Distributors, LLC Health Care NPRLifePoint Health, Inc. Health Care BBMallinckrodt CB LLC Health Care NPRMallinckrodt International Finance SA Health Care NPRMedical Depot Holdings, Inc. (d/b/a Drive DeVilbiss Healthcare) Health Care BMedImpact Holdings, Inc. Health Care BB–MI OpCo Holdings, Inc. Health Care BB–Oliver Street Dermatology Holdings LLC Health Care NPROsmotica Holdings US LLC Health Care NPRPatheon Holdings Cooperatief U.A. Health Care NPRPathGroup Holding Corporation Health Care NPRPharmaceutical Product Development, LLC Health Care NPRPPT Management Holdings, LLC Health Care NPRPRA Health Sciences, Inc. Health Care NPRQuintiles IMS Incorporated Health Care NPRQuorum Health Corporation Health Care NPRScribeAmerica HoldCo, LLC Health Care NPRScribeAmerica, LLC Health Care NPRSH Franchising, LLC Health Care NPRSP Lab Equipment LLC Health Care NPRSpectrum Parent, Inc. Health Care NPRSterling Healthcare Holdings Health Care NPRStratose Intermediate Holdings II LLC Health Care NPRTeam Health Holdings, Inc. Health Care BTenet Healthcare Corp. Health Care BThe Dermatology Group, P.C. Health Care NPRThe Eye Academy of America Ltd. Health Care NPRThe Lasik Vision Institute, LLC Health Care NPRThe RiteDose Corporation Health Care NPRTrialCard Incorporated Health Care NPRTrue Health Diagnostics LLC Health Care NPRU.S. Anesthesia Partners Holdings, Inc. Health Care NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingUniversal Health Services, Inc. Health Care BB+US Acute Care Solutions, LLC Health Care NPRVeterinary Specialists of North America, LLC Health Care NPRVWR Corp. Health Care NPRWCG HoldCo LLC Health Care NPRWedgewood Village Pharmacy Health Care NPRZ-Medica, LLC Health Care NPRBeazer Homes USA, Inc. Homebuilding B–CalAtlantic Group, Inc. Homebuilding BBD. R. Horton, Inc. Homebuilding BBB–Hovnanian Enterprises, Inc. Homebuilding CCCKB Home (formerly Kaufman and Broad Home Corp.) Homebuilding B+Lennar Corporation Homebuilding BB+M/I Homes, Inc. Homebuilding B+Meritage Homes Corporation Homebuilding BB–RE/MAX Holdings, Inc. Homebuilding NPRAMC Networks Inc. Media & Entertainment NPRAnsira Partners, Inc. Media & Entertainment NPRArgyle Executive Forum, LLC Media & Entertainment NPRBendon Publishing International, Inc. Media & Entertainment NPRCA Alabama Holdings, Inc. Media & Entertainment NPRCA Daytona Holdings, Inc. Media & Entertainment NPRCIP Revolution Holdings, LLC Media & Entertainment NPRClear Channel International B.V. Media & Entertainment BClear Channel Worldwide Holdings Inc. Media & Entertainment BCommScope Inc. (CommScope) Media & Entertainment NPRCommScope Technologies LLC Media & Entertainment NPRCorporate Visions, Inc. Media & Entertainment NPRCross Mediaworks, LLC Media & Entertainment NPRCrown Media Holdings, Inc. Media & Entertainment NPRDigital Room Holdings, Inc. Media & Entertainment NPRFirst Data Corp. Media & Entertainment B+HMH Publishers LLC Media & Entertainment NPRHoughton Mifflin Harcourt Publishers, Inc. Media & Entertainment NPRHoughton Mifflin Harcourt Publishing Company Media & Entertainment NPRiHeartCommunications, Inc. Media & Entertainment CCKC Mergersub, Inc. Media & Entertainment NPRKnowledge Universe Education LLC Media & Entertainment NPRLions Gate Entertainment Corp. Media & Entertainment NPRLSC Communications, Inc. Media & Entertainment NPRMailsouth, Inc. Media & Entertainment NPRMatch Group, Inc. Media & Entertainment NPRMedia Storm, LLC Media & Entertainment NPRMGM Holdings Inc. Media & Entertainment NPRMood Media Corporation Media & Entertainment NPRMood Media Group SA Media & Entertainment NPRNaylor, LLC Media & Entertainment NPRNEP Europe Finco B.V. Media & Entertainment NPRNEP Group, Inc. Media & Entertainment NPRNEP/NCP Holdco, Inc. Media & Entertainment NPRNetflix, Inc. Media & Entertainment NPRNew Media Holdings II LLC Media & Entertainment NPROutfront Media Capital Corp. Media & Entertainment NPROutfront Media Capital LLC Media & Entertainment NPRR.R. Donnelley & Sons Company Media & Entertainment NPRRandall-Reilly, LLC Media & Entertainment NPRReading International Inc. Media & Entertainment NPRRecorded Books, Inc. Media & Entertainment NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingRegal Cinemas Corporation Media & Entertainment B+Rock-It Cargo USA LLC Media & Entertainment NPRSalem Media Group, Inc. Media & Entertainment NPRSinclair Broadcast Group Inc. Media & Entertainment NPRSinclair Television Group, Inc. Media & Entertainment NPRSirius XM Holdings Inc. Media & Entertainment NPRUnivision Communications, Inc. Media & Entertainment BWME Entertainment Parent, LLC Media & Entertainment NPRAmeriGas Finance Corp. Natural Gas & Propane BBAmeriGas Partners, L.P. Natural Gas & Propane BBHeritage Operating, L.P. Natural Gas & Propane NPRBorchers Inc. Natural Resources NPRCNX Coal Resources LP Natural Resources NPRForesight Energy LLC Natural Resources B–Foresight Energy LP Natural Resources B–Freeport-McMoRan Inc. Natural Resources BB+Taseko Mines Limited Natural Resources NPRTeck Resources Ltd. Natural Resources BBU.S. Silica Company Natural Resources NPRU.S. Silica Holdings, Inc. Natural Resources NPRBrandywine Operating Partnership L.P. Non-Bank Financial Institutions BBB–Brandywine Realty Trust Non-Bank Financial Institutions BBB–CoreCivic, Inc. Non-Bank Financial Institutions BB+Drury Development Corp. Non-Bank Financial Institutions NPRDuke Realty Corporation Non-Bank Financial Institutions BBB+Duke Realty Limited Partnership Non-Bank Financial Institutions BBB+Hudson Advisors L.P. Non-Bank Financial Institutions NPRMack-Cali Realty Corporation Non-Bank Financial Institutions BB+Mack-Cali Realty, L.P. Non-Bank Financial Institutions BB+Medical Properties Trust, Inc Non-Bank Financial Institutions NPRMid-America Apartment Communities, Inc. Non-Bank Financial Institutions BBB+Mid-America Apartments L.P. Non-Bank Financial Institutions BBB+MPT Operating Partnership, L.P. Non-Bank Financial Institutions NPRPrologis, Inc. Non-Bank Financial Institutions BBB+Prologis, L.P. Non-Bank Financial Institutions BBB+Quality Care Properties, Inc. Non-Bank Financial Institutions NPRSabra Health Care Limited Partnership Non-Bank Financial Institutions BB+Sabra Health Care REIT, Inc. Non-Bank Financial Institutions BB+Talmage LLC Non-Bank Financial Institutions NPRThe Geo Group, Inc. Non-Bank Financial Institutions NPRTorchlight Investors, LLC Non-Bank Financial Institutions NPR5.11, Inc. Retailing NPRAbercrombie & Fitch Management Co. Retailing NPRAlphabet Holding Company, Inc. Retailing NPRAshley Stewart Holdings, Inc. Retailing NPRBluestem Brands, Inc. Retailing NPRCabela’s Incorporated Retailing NPRCEC Entertainment Inc. Retailing NPRClaire’s (Gibraltar) Intermediate Holdings Limited Retailing NPRConn’s, Inc. Retailing NPRFamily Dollar Stores Inc. Retailing NPRGeneral Nutrition Centers, Inc. Retailing NPRG-III Apparel Group, LTD Retailing NPRG-III Leather Fashions, Inc. Retailing NPRHanna Andersson, LLC Retailing NPRHBI Australia Acquisition Co. Pty Ltd. Retailing NPRHoosier HD Holdings, Inc. Retailing NPRInterior Logic Group, Inc. Retailing NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingJ. C. Penney Company, Inc. Retailing B+J. C. Penney Corporation, Inc. Retailing B+Kmart Corp. Retailing CCKmart Holding Corp. Retailing CCL Brands, Inc. Retailing BB+Levi Strauss & Co. Retailing BBLiberty Interactive LLC Retailing BBLong’s Drugs Incorporated Retailing NPRLulu’s Fashion Lounge, Inc. Retailing NPROllie’s Bargain Outlet Holdings, Inc. Retailing NPROllie's Holdings, Inc. Retailing NPRParty City Holdco Inc. Retailing NPRPet Holdings ULC Retailing NPRPet Supermarket, Inc. Retailing NPRPet Valu Canada Holding Corporation Retailing NPRPHI Acquisitions, Inc. Retailing NPRPierre HoldCo, Inc. Retailing NPRPlanet Fitness, Inc. Retailing NPRPotpourri Group, Inc. Retailing NPRPT Intermediate Holdings II, LLC Retailing NPRQVC, Inc. Retailing BBReladyne Inc. Retailing NPRSears Holdings Corporation Retailing CCSears Roebuck Acceptance Corp. Retailing CCSears, Roebuck and Co. Retailing CCSignet Jewelers Ltd. Retailing BB+Spencer Spirit Holdings Inc. Retailing NPRStaples, Inc. Retailing BB+SuperValu Inc. Retailing BThe Container Store Group, Inc. Retailing NPRThe Gap, Inc. Retailing BB+Toys ‘R’ Us - Delaware, Inc. Retailing CCCToys ‘R’ Us Property Co. I, LLC. Retailing CCCToys ‘R’ Us Property Co. II, LLC Retailing CCCToys ‘R’ Us, Inc. Retailing CCCTRU Taj LLC Retailing CCCAdvanced Micro Devices, Inc. Technology NPRAir Newco 6 S.a.r.l Technology NPRAir Newco LLC Technology NPRAlliance Data Systems Corporation Technology NPRAltice US Finance I Corp. Technology NPRAnixter Inc. Technology BB+Anixter International Inc. Technology BB+API Technologies Corp. Technology NPRBluePay Processing, LLC Technology NPRBusiness & Legal Resources, Inc. Technology NPRCanyon Companies S.a.r.l. Technology NPRCavium, Inc. Technology NPRCDW LLC Technology NPRChauvet & Sons, LLC Technology NPRCiena Corporation Technology NPRCision AB Technology NPRCompusearch Software Systems, Inc. Technology NPRComputer Sciences Corp. Technology BBB+Conduent Incorporated Technology BBCorel Corporation Technology NPRCotiviti Corporation Technology NPRCotiviti Holdings, Inc. Technology NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingCPI Acquisition, Inc. Technology NPRCPI Card Group Inc. Technology NPRCrystal Solar, Inc. Technology NPRCSC Computer Sciences UK Holdings Limited Technology BBB+Cvent, Inc. Technology NPRCypress Semiconductor Corporation Technology NPRDell Inc. Technology BB+Dell International LLC Technology BB+Dell Technologies Inc. Technology BB+DialogDirect, Inc. Technology NPRDiebold, Incorporated Technology NPREastman Kodak Company Technology NPREIG Investors Corp. Technology NPREMC Corp. Technology BB+Equinix, Inc. Technology BBFVW Consolidated Holding Corporation Technology NPRGenesys Telecommunication Laboratories Inc. Technology NPRGlobal Payments, Inc. Technology NPRGlobal Software, Inc. Technology NPRGlobal Software, LLC Technology NPRGoDaddy, Inc. Technology NPRGreeneden Lux 3 S.a.r.l. Technology NPRGreeneden U.S. Holdings II, LLC Technology NPRGTCR Valor Companies, Inc. Technology NPRHarbortouch Payments, LLC - CO Technology NPRHimagine Solutions, Inc. Technology NPRImagine Communications Corp. Technology NPRInfinite RF Holdings, Inc. Technology NPRInfoblox Inc. Technology BLeidos Holdings, Inc. Technology NPRLexmark International Inc. Technology BBLW Buyer, LLC Technology NPRMicron Semiconductor Asia Pte. Ltd. Technology NPRMicron Technology Inc. Technology NPRMSX IBS Holdings, Inc. Technology NPRNeuStar, Inc. Technology NPRON Semiconductor Corp. Technology NPROneTouchPoint Corp. Technology NPROnyx CenterSource, Inc. Technology NPROrbotech Inc. Technology NPROrbotech Ltd. Technology NPRPacific (BC) TopCo 3 Limited Technology NPRPayCom Acquisition Corp. Technology NPRPayCom Acquisition, LLC Technology NPRPegasus Business Intelligence, LP Technology NPRPHNTM Holdings, Inc. Technology NPRPing Identity Corporation Technology NPRProject Alpha Intermediate Holding, Inc. Technology NPRProQuest LLC Technology NPRQlik Technologies Inc. Technology NPRRackspace Hosting, Inc. Technology BB–RealD Inc. Technology NPRRedwood Ahead Acquisition, LLC Technology NPRRevenew Purchaser LLC Technology NPRRovi Guides, Inc. Technology NPRRovi Solutions Corporation Technology NPRSciquest, Inc. Technology NPRSmyth Companies, LLC Technology NPRNPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingSS&C European Holdings S.A.R.L. Technology NPRSS&C Technologies Holdings Europe S.A.R.L. Technology NPRSS&C Technologies Holdings, Inc. Technology NPRSymantec Corporation Technology BB+Symantec Holdings Limited Technology BB+Synchronoss Technologies, Inc. Technology NPRT2 Systems, Inc. Technology NPRTessera Holding Corporation Technology NPRTestEquity LLC Technology NPRTiVo Corporation Technology NPRTTM Technologies Enterprises (HK) Limited Technology NPRTTM Technologies, Inc. Technology NPRVantiv, LLC Technology NPRVeriFone Inc. Technology NPRVeriFone Intermediate Holdings, Inc. Technology NPRWall Street Systems Delaware, Inc. Technology NPRWestern Digital Corp. Technology BB+WEX Inc. Technology NPRXerox Business Services LLC Technology BBZotec Partners, LLC Technology NPRZywave, Inc. Technology NPRCablevision Systems Corporation Telecommunications B+CCO Holdings, LLC Telecommunications BB+Cequel Capital Corporation Telecommunications NPRCequel Communications Holdings I, LLC Telecommunications NPRCharter Communications Operating, LLC Telecommunications BB+Clearwire Communications LLC Telecommunications B+Cogeco Communications Inc. Telecommunications BB+CSC Holdings, LLC (Cablevision-U.S.) Telecommunications B+CSL Capital, LLC Telecommunications BB–DISH DBS Corporation Telecommunications BB–DISH Network Corp. Telecommunications BB–Frontier California, Inc. Telecommunications BB–Frontier Communications Corporation Telecommunications BB–Frontier Florida LLC Telecommunications BB–Frontier North Telecommunications BB–Frontier Southwest Inc. Telecommunications BB–Frontier West Virginia Telecommunications BB–GOGO Intermediate Holdings LLC Telecommunications NPRKore Wireless Group Inc. Telecommunications NPRLevel 3 Communications, Inc. Telecommunications BBLevel 3 Financing, Inc. Telecommunications BBQuebecor Media, Inc. Telecommunications NPRSprint Communications, Inc. Telecommunications B+Sprint Corporation Telecommunications B+Telephone and Data Systems, Inc. Telecommunications BB+Telular Corporation Telecommunications NPRTime Warner Cable Enterprises LLC Telecommunications BB+Time Warner Cable, LLC Telecommunications BB+T-Mobile US, Inc. Telecommunications NPRT-Mobile USA, Inc. Telecommunications NPRUnited States Cellular Corp. Telecommunications BB+

Uniti Group Inc. Telecommunications BB–UPN Intermediate Holdings LLC Telecommunications NPRVideotron Ltd. Telecommunications NPRWindstream Holdings of the Midwest, Inc. Telecommunications BB–Windstream Services, LLC Telecommunications BB–Air Canada Transportation B+NPR – Not publicly rated. Continued on next page. Source: Fitch Ratings.


Appendix

Rating Coverage by Sector (Continued)Issuer Name Sector RatingAmerican Airlines Group, Inc. Transportation BB–American Airlines, Inc. Transportation BB–Auto Europe Acquisition Corp. Transportation NPRAWP, Inc. Transportation NPRCasella Waste Systems, Inc. Transportation NPRDBI Holding LLC Transportation NPRDelta Air Lines Transportation BBB–Garda World Security Corporation Transportation B+Hawaiian Airlines, Inc. Transportation B+Hawaiian Holdings, Inc. Transportation B+JetBlue Airways Corporation Transportation BB–MetroGistics LLC Transportation NPRPilot Air Freight, LLC Transportation NPRRavn Air Group, Inc. Transportation NPRSpan Acquisition Co., LLC Transportation NPRSpirit Airlines, Inc. Transportation BB+St. George Warehousing & Trucking Co. Of California, Inc. Transportation NPRSwift Transportation Co., LLC Transportation NPRUnited Airlines, Inc. Transportation BBUnited Continental Holdings, Inc. Transportation BBVirgin America Inc. Transportation BBB–Vouvray Acquisition Limited Transportation NPRVouvray Finance Limited Transportation NPRVouvray US Finance LLC Transportation NPRWaste Pro USA, Inc. Transportation NPRNPR – Not publicly rated. Source: Fitch Ratings.


Appendix

U.S. Leveraged Finance Contact ListName Title Market Sector Coverage Phone EmailRichard Hunter Global Head of Corporates Corporate Finance +44 203 530-1102 [email protected] Simonton U.S. Regional Group Head Corporate Finance +1 312 368-3138 [email protected] Weaver U.S. Deputy Regional Group Head Corporate Finance +1 312 368-3156 [email protected] Hatton Global Group Credit Officer Corporate Finance +44 203 530-1061 [email protected] Larrondo Group Credit Officer

U.S. and Canada Corporate Finance +1 212 908-9189 [email protected]

Healthcare & Pharma GroupMegan Neuburger Managing Director Group Head — Healthcare & Pharma +1 212 908-0501 [email protected] Costa Senior Director Healthcare & Pharma, Healthcare REITs +1 212 908-0524 [email protected] Kirby Director Healthcare & Pharma +1 312 368-3147 [email protected] Caitlin Blalock Associate Director Healthcare & Pharma +1 312 368-3154 [email protected] Immordino Associate Director Healthcare & Pharma +1 212 908-9163 [email protected]

Industrials & TransportationCraig Fraser Managing Director Group Head —

Industrials & Transportation +1 212 908-0310 [email protected] Akin Adekoya Director Diversified Industrials,

Capital Goods and Transportation +1 212 908-0312 [email protected] Ause Senior Director Diversified Industrials and Capital Goods +1 312 606-2302 [email protected] Stephen Brown Senior Director Autos and Transportation +1 312 368-3139 [email protected] David Petu Director A&D, Diversified Manufacturing and EETCs +1 212 908-0280 [email protected] Joseph Rohlena Director Airlines, Transportation and EETCs +1 312 368-3112 [email protected] Nicholas Varone Associate Director A&D, Diversified Manufacturing +1 212 908-0349 [email protected] Zahn Senior Director Diversified Manufacturing +1 312 606-2336 [email protected]

Leveraged Finance GroupMichael Paladino Managing Director Group Head — Leveraged Finance;

Real Estate & Leisure +1 212 908-9113 [email protected] Sharon Bonelli Senior Director Leveraged Finance +1 212 908-0581 [email protected] John Kempf Senior Director Leveraged Finance +1 646 582-4710 [email protected] Lee Associate Director Leveraged Finance +1 212 908-0881 [email protected] Nirenberg Director Leveraged Finance and REITs +1 212 612-7747 [email protected] Petrova Director Leveraged Finance +1 646 582-4885 [email protected] Rosenthal Senior Director Leveraged Finance +1 212 908-0286 [email protected]

Real Estate & Leisure GroupMichael Paladino Managing Director Group Head — Leveraged Finance;

Real Estate & Leisure +1 212 908-9113 [email protected] Stephen Boyd Senior Director Sector Head — Lodging & Leisure; REITs +1 212 908-9153 [email protected] Bumazhny Senior Director Sector Head — Gaming; Homebuilding &

Building Products and Services +1 212 908-9179 [email protected] Joseph Fontana Associate Director Gaming, Lodging & Leisure, REITs +1 646 582-4968 [email protected] Mansfield Director Gaming & Leisure +1 212 908-0899 [email protected] Marks Managing Director Sector Head — REITs +1 212 908-9161 [email protected] Pappas Director REITs and Homebuilding & Building

Products and Services +1 646 582-4784 [email protected] Rulla Director Homebuilding & Building Products

and Services +1 312 606-2311 [email protected]

Retail & Consumer GroupMonica Aggarwal Managing Director Group Head — Retail & Consumer +1 212 908-0282 [email protected] Bill Densmore Senior Director Tobacco, Beverage & Agri Products;

Telecommunications & Cable +1 312 368-3125 [email protected] Itskovitz Senior Director Sector Head — Consumer +1 312 368-3118 [email protected] Silverman Senior Director Sector Head — Retail +1 212 908-0840 [email protected] Norfleet Taylor Senior Director Restaurants & Grocery +1 312 368-3195 [email protected] JJ Boparai Associate Director Retail +1 212 908-0543 [email protected] Gomes Associate Director Restaurants & Grocery +1 212 908-9142 [email protected] Yuan Associate Director Consumer Products & Packaged foods +1 646 582-4890 [email protected] on next page.

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Appendix

U.S. Leveraged Finance Contact List (Continued)Name Title Market Sector Coverage Phone EmailTechnology, Media & Telecommunications GroupDavid Peterson Senior Director Group Head — Technology,

Media & Telecommunications +1 312 368-3177 [email protected] Patrice Cucinello Director Media & Entertainment +1 212 908-0866 [email protected] Culver Senior Director Telecommunications +1 312 368-3216 [email protected] Dustin DeMaria Associate Director Technology +1 312 368-2071 [email protected] Kranefuss Senior Director Media & Entertainment +1 212 908-0791 [email protected] Kurland Associate Director Technology +1 212 908-0281 [email protected] Lin Senior Director Technology +1 312 368-5471 [email protected] McKay Associate Director Telecommunications +1 312 368-3148 [email protected] McNeil Director Technology +1 646 582-4768 [email protected] Pompeii Senior Director Technology +1 312 368-3210 [email protected] Schroeder Associate Director Technology +1 312 368-2056 [email protected] Sehgal Associate Director Telecommunications +1 312 368-3137 [email protected]

Utilities & Natural Resources GroupShalini Mahajan Managing Director Group Head —

Utilities and Natural Resources +1 212 908-0351 [email protected] Bonar Senior Director Basic Materials/Natural Resources +1 212 908-0579 [email protected] Brownsword Senior Director Gas, Midstream and MLPs +1 646 582-4881 [email protected] Chapman Senior Director Utilities, Power & Gas +1 646 582-4886 [email protected] Kritikos Senior Director Energy (Oil & Gas) +1 312 368-3150 [email protected] Molica Senior Director Sector Head — Gas, Midstream and MLPs +1 212 908-0288 [email protected] Joan Okogun Senior Director Energy (Oil & Gas) +1 212 908-0384 [email protected] Sadeghian Senior Director Energy (Oil & Gas) +1 312 368-2090 [email protected] Philip Smyth Senior Director Utilities, Power & Gas +1 212 908-0531 [email protected] Philippe Beard Director Utilities, Power & Gas +1 212 908-0242 [email protected] Kevin Beicke Director Utilities, Power & Gas +1 212 908-0618 [email protected] Bell Director Energy (Oil & Gas) +1 312 368-3149 [email protected] Connelly Director Gas, Midstream and MLPs +1 212 908-0290 [email protected] Julie Jiang Director Utilities, Power & Gas +1 212 908-0708 [email protected] Tremblay Director Utilities, Power & Gas +1 312 368-3203 [email protected] Cameli Associate Director Basic Materials/Natural Resources +1 312 368-3160 [email protected] Cordes Associate Director Energy (Oil & Gas) +1 312 368-3120 [email protected] Neama Associate Director Utilities, Power & Gas +1 212 908-0561 [email protected]

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The Annual Manual U.S. Leveraged Finance Primer · Annual CLO Issuance Reached Record High in 2014...

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Transcript of The Annual Manual U.S. Leveraged Finance Primer · Annual CLO Issuance Reached Record High in 2014...