The US Institutional

Corporate Loan Market and

an Overview of CLOs

Moderator:

Elliot Ganz, LSTA

Panelists:

Jeff Bakalar, Voya

Matthew Miller, Crescent Capital

Tel Aviv, June 13, 2017

Topics for Today

• Introduction to the US Institutional Corporate Loan Market

• What are US institutional corporate loans?

• Why are they attractive investments?

• How can you invest in the loan market?

• Introduction to CLOs

• Structure

• Performance

• Investing in CLO equity

2

What are Institutional Corporate Loans?

Extensions of credit to non-investment grade corporate borrowers originated by major banks A global market in excess of $1 trillion

Issued by mid- to large-sized companies to finance acquisitions and other growth initiatives

Senior in the capital structure; secured by a first priority lien on a borrower’s assets Repaid before other creditors/equity upon a credit event

Collateral typically provides substantially higher recoveries

Floating rate with coupon return comprised of a nominal credit spread over LIBOR Rates reset every 45 - 60 days on average (duration of approximately 0.2 years)

Structurally less liquid (i.e., longer settlement times) but actively traded in an established secondary market Average trade volumes in excess of $500 billion annually over the past 5 years

■ Large, syndicated

loans to non-

investment grade

companies

■ Secured by the

borrower’s assets

■ Rank highest in a

borrower’s capital

structure

■ Floating rates of

interest

3

Senior in the Capital Structure with a Lien on

Assets

Senior Unsecured Notes

High Yield Bonds

Preferred/Common Equity

20%-40%

20%-40%

Downstream guarantees from a holding co.

Upstream guarantees from subsidiaries

Receivables

Inventory

Plant & Equipment

Borrower Liabilities% of Borrower

Liabilities

Seniority and Collateral for Senior Loans

Borrower Assets

Cash (in certain cases)

Senior Secured Loans 40%-60%

Property (including real estate)

Intangible Assets (patents, trademarks)

Pledged to:

PaidFirst

Paid Last

4

The Four Building Blocks of the Loan Investment

Thesis – All Providing Value in Today’s Market

Ultra–short duration; directly correlated with changing short-term

rates

No active rebalancing necessary

Structural Protection: Senior secured position and pledge on

borrower assets has resulted in significantly lower historical loss

rates than those for subordinated and unsecured debt obligations

Capital Preservation: Loan demand/prices positively influenced by

rising rates (i.e., the opposite of bonds)

Competitive yields on both an absolute basis and relative basis,

particularly when adjusting for duration and potential credit loss

Attractive yields

Lower volatility

Floating rate

coupon

Key structural downside protection

Structural advantages (i.e., floating rate, senior and collateral

backing)

Differentiated and diverse global investor base works to dampen

volatility

Lower volatility and high income create attractive Sharpe Ratios

5

There are Many Ways to Invest in The U.S.

Institutional Corporate Loan Market

Separately Managed Accounts

▪ Customized

▪ Large Investment

▪ Tailored Liquidity

Provisions

Comingled Funds

▪ Medium Investment Size

▪ Periodic Liquidity

Provisions

▪ Ease of Administration

CLOs

▪ Structured Vehicle

▪ Different Risk Tranches (Rated

Floating Rate Notes vs.

Equity)

▪ Inherently Less Liquid

Mutual Funds

▪ Retail Funds/ETF

▪ Ease of Investment

▪ Small Investment Size

▪ Daily Liquidity

6

Introduction to CLOs

Assets

Illustrative Underlying Credit Assets Illustrative CLO Balance Sheet

Lo

sse

s

Ca

shflo

ws

Subordinated Notes

Not Rated

[9 - 11] %

Class E Notes

[BB]

[4 - 6] %

Class D Notes

[BBB]

[4 - 6] %

Class C Notes

[A]

[5 - 9] %

Class B Notes

[AA]

[9 - 13] %

Class A Notes

[Aaa/AAA]

[60 - 62] %

How a CLO Works: Transparent Portfolio of Loan

Assets That Support CLO Debt and Equity

CLOs invest in pieces of loans to mostly well-known U.S. and international companies and the portfolios are

actively managed by experienced asset managers

The interest and principal of the loans pay the interest (and principal) of the CLO notes, starting at the AAA

notes and working the way down the waterfall

If there are losses on loans from defaults, those losses impact the equity holdings first 8

CLOs Have Suffered Practically No Losses

Impairments include principal losses (0.81%), distressed exchanges (0.14%), EOD/Expected

losses (0.08%) and other possible losses (0.1%)

Highest rated tranche to suffer a loss was rated A2

Not one Aa or Aaa rated tranche has ever suffered an impairment

Unimpaired98.9%

Impaired1.1%

Source: Moody’s Investors Service

Performance of 5176 CLO tranches, 1996-Aug 2014

9

CLO Yield and Relative Value

Where is the Value in the CLO Capital

Structure?

• CLO note yields increase materially as one moves down the rating scale

• At every rating level, CLO notes tend to yield more than the equivalently rated

investments in other asset classes

Source: BAML

0

100

200

300

400

500

600

700

800

900

1,000

AAA AA A BBB BB B

Sp

read

(b

ps)

New Issue U.S. CLO Tranche Spreads

11

Bottom of Capital Structure:

Cash-on-Cash Equity Returns

Source: BAML

0%

5%

10%

15%

20%

25%

30%

7/1

/06

11

/1/0

6

3/1

/07

7/1

/07

11

/1/0

7

3/1

/08

7/1

/08

11

/1/0

8

3/1

/09

7/1

/09

11

/1/0

9

3/1

/10

7/1

/10

11

/1/1

0

3/1

/11

7/1

/11

11

/1/1

1

3/1

/12

7/1

/12

11

/1/1

2

3/1

/13

7/1

/13

11

/1/1

3

3/1

/14

7/1

/14

11

/1/1

4

3/1

/15

7/1

/15

11

/1/1

5

3/1

/16

7/1

/16

11

/1/1

6

3/1

/17

Retu

rn (

%)

CLO Equity Returns by Vintage (and LTM 1.0 Avg.)

US LTM WAvg (CLO 1.0) 2011

2012 2013

2014 2015

• U.S. CLO cash on cash equity returns averaging more than 15%

12

Post-Crisis CLO Equity 2.0 IRR Beat Comparables

Source: Citi Research

Cross Asset Weighted Average IRRs

Source: Citi Research, Cambridge Associates, as of 12/31/2016; PE returns are as of 06/30/2016

*Our priced 2.0 sample includes 125 CLO equity tranches from 2012 to 2015 vintages, about 20% of the overall universe. It is still representative of the overall universe and showing

roughly the same distribution of CLO equity NAV, structure/leverage, and vintage. Paid-down deals will be excluded from the analysis so CLO 1.0 IRRs are biased to outperforming

deals. *Our method takes CLO equity’s monthly secondary mark and historical cashflows to calculate the running since-inception IRR for each deal, and then calculate the weighted

average return of all sampled CLO 2.0 equity.

*Private equity sample is based on 1,283 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed

between 1986 and 2014. CA research shows that most funds take at least six years to settle into their final quartile ranking, and previous to this settling they typically rank in 2-3 other

quartiles; therefore fund or benchmark performance metrics from more recent vintage years may be less meaningful. However, when a private equity fund stops reporting its data, it will

be removed from the sample base. Thus, “survivorship bias” exists in both the US PE performance database and our US CLO equity sample, which could skew the returns upwards.

4.6%

7.1% 7.1% 6.9%

10.7%

22.5%

10.8%

3.6% 4.3%

6.7%

8.9%

11.8%12.2%

18.3%

0%

5%

10%

15%

20%

25%

S&

P L

ev L

oan

Inde

x

Citi

US

HY

Bon

d In

dex

Rus

sell

S&

P 5

00

US

Priv

ate

Equ

ity

2005

-07

US

CLO

Equ

ity

2005

-07

EU

R C

LO E

quity

S&

P L

ev L

oan

Inde

x

Citi

US

HY

Bon

d In

dex

Rus

sell

S&

P 5

00

US

Priv

ate

Equ

ity

2012

-15

US

CLO

Equ

ity

2013

-15

EU

R C

LO E

quity

Average 10-year return vs CLO

1.0 Equity

Average 3-year return vs CLO

2.0 Equity

13

But Both US CLO 1.0 and 2.0 Equities Beat

Peers in Public and Private Equity

Source: Citi Research, Intex, Cambridge Associates, as of 12/31/2016

*PE returns are as of 06/30/2016.

0%

5%

10%

15%

20%

25%

2005 2006 2007 2012 2013 2014 2015

US Private Equity US CLO Equity Russell 2000

14

CLO Equity Still Provides Optionality Today

Source: Citi Research

Source: Citi Research, Intex, as of 4/30/2017 Source: Citi Research, LCD, as of 5/23/2017

Tighter AAA supports CLO Refi/Reset An inevitable choice to enhance CLO

Equity returns

100

110

120

130

140

150

160

170

180

190

200

0

2

4

6

8

10

12

14

16

18

20

Feb

-13

Jul-1

3

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Jan-

16

Jun-

16

Nov

-16

Apr

-17

bp

$bn

Reset & Refi Volume

CLO 2.0 AAA DM (RHS)

1121

60 57

90

72

352

22

12

596

11

10

8

3

0

20

40

60

80

100

120

140

2011 2012 2013 2014 2015 2016 2017 YTD

$bn

Remaining Volume Refi Volume Reset Volume

15

Addressing Regulatory “Risk Retention”

Requirements Can Enhance CLO Equity Yields

“Risk retention” rules and an ever shifting CLO equity buyer

base have forced capital constrained managers to look for capital

partners to assist in their ongoing CLO issuance programs

In exchange for this capital, investors trade some liquidity for

additional yield in the form of sharing of management fees and

warehouse facility income

This could add up to 400bps to the yield on a portfolio of CLO

Equity

16

Appendix

There Are 300 Active Institutional Loan Investor

Groups & Portfolios

0

50

100

150

200

250

300

350

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Active Institutional Lender Groups/Portfolios

Avg. Institutional Lender Count Per Deal

Source: S&P Capital IQ LCD

Finance &Insurance

Co.

Hedge,Distressed

& HYFunds

LoanMutualFunds

CLO

0%

10%

20%

30%

40%

50%

60%

70%

Institutional Lender Market Share

18

Institutional Corporate Loans Are an Important

Component of the U.S. Debt Markets

US Debt Market Universe US Corporate Debt

Inst. Corp Loans$960B HY Bonds

$1,550B

HG Bonds$6,608B

Treasury$13,192B,

Mortgage Related$8,728B

Muni’s$3,715B

Fed Agencies$1,995B

Money Market$2,807B

Asset Backed$1,327B

Inst. Corp. Loans

$960 Bil

HY Bonds $1,550Bil

HG Bonds$6,608 Bil

Total Size of the US Debt Market $40.9T

as of 12/31/15

Total Size of US Corporate Debt $9.1T

as of 12/31/16

Source: Credit Suisse19

The U.S. Institutional Corporate Loan Market

Provides Substantial Trading Liquidity

Source: The LSTA Trade Data Study

0%

25%

50%

75%

100%

$-

$250

$500

$750

$1,000

2010 2011 2012 2013 2014 2015 2016

Bil

lio

ns

Trade Volume Avg. Size of the S&P/LSTA Leveraged Loan Index Turnover Ratio (%)

20

Structural Characteristics Provide Unique

Benefits

Fundamental Characteristics Key Benefits

Large mature market; active secondary

market

Risk/reward/correlation advantages

Superior structural features compared to

other credit assets

Attractive yields on an absolute and

relative basis

Favorable credit performance through many

cycles

High recovery rates; lower losses upon

default

Floating rate coupon, typically between 300-

400 basis points, provides potential income

upside in today’s low rate environment

Embedded potential inflation/rising rate

hedge

LIBOR Floors provide downside income

protection

Downside protection by way of short

duration profile

Source: Apollo/LSTA 21

U.S. Institutional Corporate Loans Have Relatively

Low Losses as Compared to High Yield Bonds

0%

1%

2%

3%

4%

5%

Default rate Expected loss

Institutional term loans

Sr. Unsec'd HY bonds

0%

10%

20%

30%

40%

50%

60%

70%

Loss given default

Institutional term loans

Sr. Unsec'd HY bonds

➢ Loans are senior and secured, contributing to a lower loss rate

➢ Loss given default is low for loans - 19% because recovery rates are so high – 80%

➢ Loan repayment rates are high, averaging 2.7% per month since 2001

➢ Loans are floating rate (based over LIBOR), so interest rate risk is minimal

22Source: S&P Capital IQ/LCD, Moody’s Investors Service, Bloomberg

2%

3%

4%

5%

6%

7%

8%

9%

10%

2010 2011 2012 2013 2014 2015 2016 2017

Senior Loans (Discount Yield to 3 Year Call)

US HY (YTW): +32 bps

US IG (YTW): -222 bps

Historically competitive yield

with virtually no duration risk

U.S. Institutional Corporate Loans Exhibit

Strong Relative Values

US IG

US HY

MBS

Municipal Bonds5-7 Year Treasuries

Senior Loans

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8E

ffective Y

ield

(%

)Effective Duration (years)

Yield and Duration Comparisons

S&P/LSTA Leveraged Loan Index and Various Asset Classes

Data as of January 31, 2017

*Discount Yield to 3 Year Call uses Secondary Spread for the S&P/LSTA Leveraged Loan Index Index plus 3 Month LIBOR at month-end. Three year maturity

assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments

during the 3 years. Secondary spread is calculated based upon the current bid price, not on par. The Index is not subject to any fees or expenses. Investors cannot invest

directly in an index. Past performance does not guarantee future results and there is the possibility of loss. The S&P/LSTA Leveraged Loan Index is an unmanaged total

return index that captures accrued interest, repayments, and market value changes.

23Source: S&P/LCD, BAML and Bloomberg

The Indices are not subject to any fees or expenses. An investor cannot invest directly in an index. Past performance does not guarantee future results and there is the possibility of loss.

Institutional Corporate Loans Have Exhibited

Lower Volatility and Attractive Sharpe Ratios

Loans have continued to experience less volatility as

compared to most traditional income asset classes,

particularly high yield bonds

Provides a unique asset allocation tool and has resulted in

attractive Sharpe Ratios

Sharpe Ratio

Data as of January 31, 2017

Annualized Standard Deviation

Data as of January 31, 2017

3.88

1.19

1.87

4.17

0.80 1.29

0.00

1.00

2.00

3.00

4.00

5.00

1 Year 3 Years 5 Years

S&P/LSTA Leveraged Loan Index

Barclays US Corporate High Yield - 2% Issuer Capped

2.88 2.89 2.50

4.916.02

5.38

0.00

2.00

4.00

6.00

8.00

1 Year 3 Years 5 Years

S&P/LSTA Leveraged Loan Index

Barclays US Corporate High Yield - 2% Issuer Capped

Average 12-month Lagging Standard Deviation of Returns

January 2010 to January 2017

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2010 2011 2012 2013 2014 2015 2016 2017

S&P/LSTA Leveraged Loan Index

BA/ML High Yield Master II Index

10-Year US Treasuries

24Source: charts clockwise left to right: S&P/LCD, not annualized; S&P/LSTA Leveraged Loan Index; Barclays U.S. Corporate High Yield – 2% Issuer Capped

Correlations Between Loans and Various

Assets

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, Ibbotson Associates

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

Credit Suisse Leveraged Loan Index Return Corrolation (1992-2016)

25

0

1,000

2,000

3,000

4,000

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

Jan

-14

Jan

-16

Company Coverage

Number of Loans Priced

0

2,000

4,000

6,000

8,000

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

Jan

-14

Jan

-16

Number of Quotes Provided Daily by35 Broker/Dealers

In 1999 The U.S. LSTA/TRLPC Secondary Mark-to-Market (MTM) Pricing Service Launched

Source: LSTA/Thomson Reuters LPC MTM Pricing26

In 2001 The Wall Street Journal Began Coverage

on The Senior Secured Corporate Loan Market

❖ Transparency and acceptance of MTM prices were critical in establishing today’s secondary market liquidity levels.

Source: Wall Street Journal27

Institutional Corporate Loans Have Returned 5.8%

on Average Over 20 Years (only two down years)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

S&P/LSTA Leveraged Loan Index ML US High Yield Index

ML US Corp Index

28Source: S&P/LSTA Leveraged Loan Index

The Institutional Corporate Loan Market is

Less Volatile Than Other Debt Markets

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

12-M

o.

Lag

gin

g S

D o

f R

etu

rn

S&P/LSTA Leveraged Loan Index Index ML US High Yield Index

ML US Corp Index ML 10yr US Treasury

29Source: S&P/LSTA Leveraged Loan Index

While Secondary Loan Market Prices Have Fluctuated Over

the Past 5 Years, Annual Interest Income has Averaged 5%

-2%

0%

2%

4%

6%

8%

10%

12%

2012 2013 2014 2015 2016

Total Return Interest Return

90

92

94

96

98

100

102

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

AVG Trade Price

Median Trade Price

Source: LSTA Trade Data Study & S&P/LSTA LLI30

The Secondary Loan Market Allows Managers to Create

Industry Diversification Through Sector Allocation

Source: S&P/LSTA Leveraged Loan Index31

L+

L+100

L+200

L+300

L+400

L+500

L+600

L+700

L+800

L+900Discounted Margin (to maturity)

CLO Investors

Geographic Distribution

• U.S.

• Japan

• Non-Japan Asia

• Europe

Investor Types

• Banks

• Asset Managers

• Insurance Companies

• Pension Funds

• Mutual Funds

• Hedge Funds

• High Net Worth

• Other

CLO investors come from many regions of the world

Investors include banks, asset managers, insurance companies, pension funds, mutual funds,

hedge funds, high net worth investors and and more

32

Lifecycle of a CLO

•The manager and the arranger determine the key features of the deal, and start negotiations with initial investors. The manager starts to identify and purchase assets, often with the use of a warehouse facility. This process starts up to severalmonths before pricing.

Pre-pricing

•Commitments are finalized and discount margins (or fixed coupons) for the liabilities are determined. Closing typically occurs two to four weeks later, at which point interest starts to accrue.Pricing

•Usually, the manager does not have the full portfolio purchased by the time of pricing, and has a ramp-up period (six months is common) to purchase the remaining assets. Once the target portfolio size has been reached, the CLO passes the effective date, at which point various coverage and portfolio quality tests start to apply.

Ramp-up

•CLO equity investors can exercise the rights to call a deal after a non-call period (typically 2 years for 2.0 deals). When calling the deal, equity investors repay the debt tranches at par, through refinancing proceeds or from the sale of the loan portfolio.

Non-call period

•Equity investors may be incentivized to refinance the debt tranches of the deal after the end of the non-call period to lower the cost of funding. In certain cases, they may make additional changes to the deal document such as extending the length of the reinvestment period.

Refi/Reset

•The CLO manager actively manages the loan portfolio during the reinvestment period (typically 4+ years for 2.0 deals), using loan principal repayments and asset sale proceeds to purchase new assets. CLO investors generally do not receive principal payments during this period as this cash is mostly reinvested in new assets.

Reinvestment period

•Once the reinvestment period ends, most loan principal receipts are allocated to CLO liabilities, usually in strict sequential order. Often loan prepayments or the proceeds of sales of assets that the manager deems credit impaired or credit improved may still be reinvested. Equity investors often choose to call the deal at some point.

Amortization (and call)

33

Comparing CLO Default/Loss Experiences to Other

Asset Classes

• CLOs performed well through

the financial crisis and beyond

• There have been no defaults

on CLO notes rated AA or

better

• CLO note default rates are far

below those of other asset

classes

• CLO note default rates are far

below those of equivalently

rated bonds

0%

5%

10%

15%

20%

25%

30%

35%

Lo

ss R

ate

s (%

)

Loss Rate for IG CLO Notes Well Below Other ABS

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

AAA AA A BBB BB

Cu

mu

lati

ve D

efa

ult

Rate

(%

)

Default Rate of CLO Notes Well Below Equivalently Rated Corporate Bonds

CLO Notes

Corp Bonds

Source: BAML, S&P, Wells Fargo34

Testing the Resilience of CLO Notes to Loan

Defaults

• The two major default cycles in the recent loan market are 2000-2003 and 2009-2010

• 2000-2003 cycle was less severe, but lasted longer

• The 2009-2010 cycle was more severe, but shorter

• We can test what multiple of the default rates seen in the earlier periods would be necessary to cause

losses on CLO notes today

Source: S&P/LSTA Leveraged Loan Index

0%

2%

4%

6%

8%

10%

12%

Dec

-98

Jun

-99

Dec

-99

Jun

-00

Dec

-00

Jun

-01

Dec

-01

Jun

-02

Dec

-02

Jun

-03

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Defa

ult

rate

(%

)

Historical Leveraged Loan Default Rate

35

Testing the Resilience of CLO Notes to Loan Defaults

• Model assumes a 40% loss given default on

loans. (In contrast, the average historical

loss given default/loss severity is 20-30%.)

• Then we determine what multiple of the

2001-2003 and 2008-2009 default

experience would be necessary to create

losses on the average CLO note (at each

rating level)

• The top chart shows the multiples of 2001-

2003 defaults necessary to create losses for

different tranches. For instance, the default

rate would need to be 4x the 2001-2003

default rate in order to create losses on a

typical A rated CLO note (red bar).

• The bottom chart shows the multiples of

2009-2010 defaults necessary to create

losses for different tranches. For instance,

the default rate would need to be 3x the

2009-2010 default rate in order to create

losses on a typical BBB rated CLO note

(gold bar).

Source: BAML

0

1

2

3

4

5

6

7

8

AAA AA A BBB BB B

Mu

ltip

le o

f ’0

1-02 D

efa

ult

Rate

Multiple of 2001-03 Default Rate Necessary to Create a Loss

0

1

2

3

4

5

6

7

8

AAA AA A BBB BB B

Mu

ltip

le o

f ‘0

9-1

0 D

efa

ult

Rate

Multiple of 2009-10 Default Rate Necessary to Create a Loss

N/A

N/A

36

Relative Value: Top of the Capital Structure

Source: BAML

-

20

40

60

80

100

120

140

160

180

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Aug-

16

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

Sp

read

(b

ps)

U.S. vs. Euro New Issue CLO AAA Spreads

U.S. CLO AAA

Euro CLO AAA

0

20

40

60

80

100

120

140

160

180

200

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

Sp

read

(b

ps)

U.S. CLO AAA vs. CMBS 10-Yr AAA Spreads

CLO AAA Secondary

CMBS 10Y AAA Secondary

• U.S. CLO AAA spreads remain wide relative to CMBS and to European CLO spreads

37

Relative Value: Spreads on CLO BB and B Rated

Notes vs. BB and B Rated Loans

Source: BAML, S&P/LCD

0

200

400

600

800

1000

1200

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Sp

read

(b

ps)

Spreads of BB Rated Loans vs. BB Rated CLO Notes

Loan BB all-in spread

CLO BB

0

200

400

600

800

1000

1200

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Sp

read

(b

ps)

Spreads of B Rated Loans vs. B Rated CLO Notes

Loan B all in spread

CLO B

• U.S. CLO BB and B spreads are wider than spreads on BB and B rated term loans

• Recall that default rates on CLO notes are lower than on equivalently rated bonds

38

2017 U.S. and European CLO Issuance,

Refinancings and Resets

Source: TR-LPC

-

5

10

15

20

25

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Aug-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

U.S. CLO Issuance, Refis and Resets

CLO Resets

CLO Refis

CLO Issuance

$B

ils.

-

1

2

3

4

Jan

-16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Aug-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

CLO Resets

CLO Refis

CLO Issuance

Euro CLO Issuance, Refis and Resets

€B

ils.

• U.S. CLO issuance has been accelerating after a quiet January 2017; however, the market has

been dominated by refinancings and resets

• European issuance is lower; refinancings and resets also gaining traction

39

U.S. CLO New Issue Spreads Trend Tighter

Source: BAML

50

100

150

200

250

300

350

400

450

500

Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Sp

read

(b

ps)

U.S. CLO New Issue Spreads (AA, AA, A Notes)

AAA

AA

A

200

300

400

500

600

700

800

900

1,000

1,100

Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Sp

read

(b

ps)

U.S. CLO New Issue Spreads (BBB, BB Notes)

BBB

BB

• U.S. CLO note spreads have trended tighter

• In late April, there was a slight uptick in spreads

40

U.S. CLO Reinvestment Periods are

Trending Longer

Source: BAML

0

1

2

3

4

5

6

7

8

03Q

1

03Q

3

04Q

1

04Q

3

05Q

1

05Q

3

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

10Q

1

10Q

3

11Q

1

11Q

3

12Q

1

12Q

3

13Q

1

13Q

3

14Q

1

14Q

3

15Q

1

15Q

3

16Q

1

16Q

3

17Q

1

Rein

vest

men

t P

eri

od

(years

)

Average U.S. CLO Reinvestment Periods Trend Longer

• Reinvestment periods have been trending longer, with a number of

2017 deals having five-year reinvestment periods

41

U.S. CLO Market Sees Many Refis, Resets

Source: TR-LPC, BAML

On CLO Refis and Resets:

• Most 2.0 CLOs allow equity investors to refinance a CLO deal on a tranche-by-tranche basis after the non-call period.

• New secured notes with lower coupon spreads are generally issued in a refi while the original bonds are redeemed in full using the

proceeds from the refi.

• Equity investors recognize that these deals are now closer than the end of reinvestment and are able to tap debt investors looking for

shorter-WAL bonds with lower coupon spreads.

• Refinancings that extend the reinvestment periods are known as “resets”.

• Because of the change in deal terms, the consent of all noteholders may be required for a reset to be carried out.

• As compared to the issuance of a new deal, the up-front cost of doing a reset is likely lower.

• Equity investors already have some sense of the CLO manager's strategies and if they are pleased with their performance to date, they

might be incentivized to carry out a reset.

• "Rolling over the collateral portfolio" in a reset can also be easier than ramping up a new one from scratch.

• The SEC issued a no-action letter indicating that deals already in place as of December 2014 will not trigger risk retention requirements

if they go through a refi subject to a number of restrictions. Resets do not qualify for this carve-out.

-

5

10

15

20

25Ja

n-1

6

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Aug-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

U.S. CLO Issuance, Refis and Resets

CLO Resets CLO Refis CLO Issuance

$B

ils.

42

Different Investment Opportunities Exist in

New Issue CLOs, Refis and Resets

Source: BAML

Investment Characteristics

• New Issue CLOs

• Longer duration

• Higher spread

• New portfolio of assets

• Refinancings

• Shorter duration

• Lower spread

• Familiarity with manager

• May have some underperforming assets

in portfolio

• Resets

• Longer duration

• Higher spread

• Familiarity with manager

• May have some underperforming assets

in the portfolio

80

90

100

110

120

130

140

- 1.00 2.00 3.00 4.00 5.00 6.00

Actual Recent Primary BSLCLO Spreads

Reset / New-

Issue from the

primary

market

Refi from the

primary

market

Years Until End of Reinvestment

AA

A S

pre

ad (

bp

s)

U.S. BSL Credit Curve

(AAA Spread vs. Years Until End of Reinvestment)

43

Where will U.S. CLO AAA spreads be in the

2H17?

*Based on a sample of deals where discount margin available

100

110

120

130

140

150

160

170

180

190

Jan-16 Mar-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17

AA

A D

isco

un

t M

arg

in* b

ps

AAA Discount Margins

0%

10%

20%

30%

40%

50%

60%

<100 bps 110 bps 120 bps >130 bps

% o

f su

rvey r

esp

on

den

ts

Where will U.S. CLO AAA spreads be in 2H17?

Source: TR-LPC

• CLO spreads have contracted materially in the past year

• In a recent survey, over 50% of CLO professionals estimated CLO spreads would be around LIB+110 in 2H17

44

CLO Issuance Expected to Meet or Exceed $70B

in 2017

0%

10%

20%

30%

40%

50%

60%

<$40 $40-$50 $50-$60 $60-$70 >$70%

of

surv

ey r

esp

on

den

ts

2017 CLO issuance estimates ($B.)

Full year 2017 CLO issuance estimates

0

20

40

60

80

100

120

140

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Issu

an

ce (

$B

.)

Annual CLO issuance

Source: Wells Fargo, TR-LPC

• While slower than in recent years, U.S. CLO issuance has accelerated in recent months

• In a recent survey, half of CLO professionals expected $70 billion or more of CLO issuance in 2017

45