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High Yield Fixed Income Update

N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S . High Yield Fixed Income Update. June 30, 2008. Edward Casey Richard Inzunza, CFA. Fund Managers, Northern High Yield Fixed Income Fund. High Yield Update Agenda. Review of Current Environment

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High Yield Fixed Income Update

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  1. N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S High Yield Fixed Income Update June 30, 2008 Edward Casey Richard Inzunza, CFA Fund Managers, Northern High Yield Fixed Income Fund

  2. High Yield Update Agenda • Review of Current Environment • High Yield Market Outlook

  3. High Yield Environment Review • In 2007 high yield default rates & spreads reached historic lows following strong economic growth and accommodative credit creation from structured markets ( please see OAS and default charts) • Problems in the housing market severely impaired structured credit markets and caused financial markets to cease functioning properly • The systemic disruption culminated in a liquidity crisis that threatened the imminent failure of Bear Stearns. The Federal Reserve helped to structure the rescue of Bear Stearns by J.P. Morgan, aided by credit available directly from the Federal Reserve • In response to the financial market turmoil the Federal Reserve lowered the Fed Funds target by 325bps, including a 75bps inter-meeting move. Several liquidity measures were introduced by the Federal Reserve, ECB and Bank of England to ease market liquidity tensions • Credit market sentiment cautiously recovered early in the second quarter as financial institutions were able to raise additional capital through the issuance of common equity, preferred stock and hybrid securities. Bank capitalization remains weaker than before the crisis and lending standards have tightened considerably (please see C&I lending chart)

  4. High Yield Environment Review - High Yield Index Spreads High Yield Market Option-Adjusted Spread (OAS) Source: Lehman Brothers 2% Capped Index, June 2008

  5. High Yield Environment Review – Moody’s Default Rate 20-year Moody’s Global Default Rate Average 4% Source: Moody’s, December 2007

  6. High Yield Environment Review – Tightening Lending Standards Tightening Standards for Commercial & Industrial Loans (Small Companies) versus High Yield Spreads Source: Federal Reserve Survey, April 2008, Lehman Brothers June 2008

  7. High Yield Market Outlook • The disruptions in the financial and banking system are likely to result in a reduction in the availability of credit to all areas of the economy • This reduction in credit is expected to have a negative impact on spending in the broader economy. The reduction in demand will reduce earnings, with HY companies the most at risk • The risks to growth are skewed to the downside given the multitude of headwinds facing the economy; weak residential market, tightening lending standards, weakening labor market, high commodities prices and low consumer confidence • The transition from a financial/banking system disruption to a problem in the broader economy is expected to occur in a two-stage process in which the impact to the broader economy lags the financial system by 6 to 9 months. Therefore, the impact to the broader economy should continue through 2008 • The safety net of "free money" that had artificially suppressed the default rate over the past few years is no longer available to support distressed companies

  8. High Yield Market Outlook (continued) • Weaker issuers are expected to breach financial covenants. Lenders are expected to seek increases in effective interest rates, a floor on LIBOR and waiver fees • The default rate is likely to increase due to the normal seasoning cycle. A further reduction in credit availability will add pressure to the default rate going forward • The HY index at 689 on June 30 was within the 675-725 six month target range set by Northern Trust Global Investment’s Credit Strategy Committee. HY portfolio management expects negative earnings to pressure spreads as the earnings cycle progresses. However, a significant widening beyond 1,000bps is not expected in the near term due to lower risk of systemic failure

  9. Important Information The preceding discussion is general in nature, is intended for informational purposes only, and is not intended to provide specific advice or recommendations for any individual or organization. Because the facts and circumstances surrounding each situation differs, you should consult your attorney, tax advisor or other professional advisor for advice on your particular situation. There are risk involved with investing, including possible loss of principal. The information in this communication has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. Additional information is available upon request. The Lehman U.S. Corporate High Yield 2% Issuer cap Index is an unmanaged index that is not available for direct investment. Past performance is no guarantee of future results.

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