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Is There More Upside in High Yield?

Is There More Upside in High Yield?. DC Finance Institutional Investor Conference. May 24, 2010. Global Credit Strategy. Par is not a ceiling The key is what happens to the default rate Economic trend favors a lower default rate Diverse approaches point to a default rate decline

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Is There More Upside in High Yield?

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  1. Is There More Upside in High Yield? DC Finance Institutional Investor Conference May 24, 2010

  2. Global Credit Strategy Par is not a ceiling The key is what happens to the default rate Economic trend favors a lower default rate Diverse approaches point to a default rate decline “Wall of Maturities”: An overstated problem 2

  3. Par Is Not a Ceiling 3

  4. After This Big a Rally, Can We Expect Good Performance? 4 Source: BofA Merrill Lynch Global Research.

  5. There Is Upside from 100 5 Total Return for the Year U.S. High Yield Year Index Beginning Price 1997 99.483 Total Return 2004 102.621 Price Gain Key: Income Source: BofA Merrill Lynch Global Research.

  6. The Key Is What Happens to the Default Rate 6

  7. Change in Default Rate versus High Yield Price Return 7 1987 – 2009, Annually In 17 out of 23 years, the default rate and the high yield index price moved in opposite directions Sources; BofA Merrill Lynch Global Research, Moody’s Investors Service.

  8. Economic Trend Favors a Lower Default Rate 8

  9. Real Growth in GDP – Germany 9 2008 – 2010, Quarterly Sources; Bloomberg.

  10. Real Growth in GDP – U.S. 10 2008 – 2010, Quarterly Sources; Bloomberg.

  11. Real Growth in GDP – U.K. 11 2008 – 2010, Quarterly Sources; Bloomberg.

  12. Diverse Approaches Point to a Default Rate Decline 12

  13. Global Default Rate 13 1985-2010, Quarterly Moody;s employs atime-tested econo-metric model • - - - Moody’s projection Sources: BNP Global Credit, Moody’s Investors Service.

  14. Liquidity Correlates with Default Rate 14 The least liquid companies defaultat a much higher ratethan the others Source: Moody's Investors Service.

  15. Liquidity Improvement Points to Default Rate Decline 15 The number of highlyilliquid companies hasfallen dramatically Source: Moody's Investors Service.

  16. Market-Based Default Rate Forecast 16 The proportion of companieswith spreads greater than +1,000basis points has declined from apeak of 84% in December 2008 As of May 6, 2010 Source: BofA Merrill Lynch Global Research.

  17. “Wall of Maturities”: An Overstated Problem 17

  18. Distribution of U.S. Debt Maturities 18 2010-2020, Annually Maturing debt is not a significant problem in 2010-2011 Source: BofA Merrill Lynch Global Securities.

  19. Projected Resolution of 2010-2014 19 $770 Billion Leveraged Loan Maturities Fitch sees 90% of maturities being resolved before taking into account equity issuance oracquisitions Source: Fitch Ratings.

  20. Fitch’s Key Assumptions 20 • Loan issuance at 1998-2003 level (before CLO boom) • Only modest CLO new issuance • 45% of loan issuance used to refinance loan maturities • $125 billion annual high yield issuance – below peak levels, which are considered unsustainable • Non-refinancing uses of high yield issuance at levels consistent with historical experience

  21. Conclusion 21 We cannot travel backward in time to buy the high yield market at 54, But among the opportunities available today, high yield remains attractive. High Yield should outperform conventional fixed income over the next 12 months.

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