KDP ASSET MANAGEMENT, INC.

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1 ASSET MANAGEMENT, INC. High Yield Bond and Senior Secured Bank Loan Outlook February 2017 Asset Management, Inc. 24 Elm Street Montpelier, Vermont

2 The Case for High Yield Bonds Fundamentals: High Yield Defaults Declining Technicals: HY Spreads Room To Tighten Further Source: J.P. Morgan, Default Monitor, 2/1/2017 Source: Credit Suisse, CS Credit Strategy Daily Comment, 1/18/2017 Macro: Optimal Allocation High Yield To Investment Grade Remains High Valuation: Credit Risk Premium Indicates Best Opportunity in B and BB Rated High Yield Source: J.P. Morgan, 2016 High-Yield Annual Review, 12/29/ Source: Goldman Sachs, The Credit Trader, 1/28/2017

3 High Yield Observations Fundamentals Defaults are declining and projected to remain below historical average levels. Low levels of near-term maturities. Earnings for HY companies are improving. analysts continue to see supportive credit metrics. Technicals High yield maintained its positive momentum in January, again led by CCC bonds. Gross new issuance surged 69% to in January rebounded but approximately 50% were refinancings. Mutual fund flows were a negative $122MM compared to inflows of $6.4B in December. Metals & Mining and Energy significantly outperformed again in January. Market performance now more dependent on interest rate risk rather than credit risk. Low sovereign yields and expectation for continued monetary accommodation should foster a strong foreign bid for spread products. Valuations Higher-quality carry remains at fair value amid global central bank accommodation and broadly supportive macro environment. Commodity-focused credits no longer offer a yield advantage over the broader HY market. CCC bond outperformance will follow any bullish sentiment in equity markets. HY spreads are at a post-crisis low but have room to tighten further. Macro Expected modest rise in interest rates should be absorbed by additional spread compression in High Yield. Proposed changes to NAIC weights may increase insurance company participation in higher-quality high yield sectors. External macro shocks and idiosyncratic headline events remain the greatest risks for lower quality credits.. 3

4 The Case for Senior Secured Bank Loans Fundamentals: Coverage Levels Are Declining, But Remain Firm Technicals: Repricings Near Record Levels As Loan Prices Rise Above Par Source: Goldman Sachs, The Credit Trader, 1/19/2017 Source: J.P. Morgan, Credit Strategy Weekly Update, 1/27/2017 Macro: Adding Loans To High Grade Portfolios Can Reduce Risk While Significantly Increasing Returns Valuation: Risk Adjusted BB Senior Secured Loans Compelling Source: J.P. Morgan, 2016 Leveraged Loan Annual Review,, 1/31/ Source: Morgan Stanley, 2017 US Credit Outlook, 1/13/2017

5 Senior Secured Bank Loan Observations Fundamentals Low default rate environment due to solid fundamentals and less exposure to energy and metal/mining sectors. Excluding these sectors, the loan default rate is 0.7%. No near-term maturity concerns. New issue leverage beginning to decline as regulatory pressures increase. Interest coverage levels continue to decline. Technicals Strong technicals due to their floating-rate advantage enabled loans to post their seventh consecutive month of positive performance in January. Gross loan issuance surged 69% in January to $118B as refinancing/repricing totaled $67B with the rally in loan prices. Loan fund flows were positive for the seventh consecutive month on higher LIBOR and interest rate expectations. Valuations Minimal principal appreciation as median loan price at Continuing repricing activity putting downward pressure on spreads but will be offset in part by increasing LIBOR. Adjusted 3-year loan spreads in January declined 12bp to 446bp, below the long-term median of 537bp. Overall loan volatility should remain relatively subdued as loans are higher in cap structure, have higher recovery levels, and are floating, with LIBOR rates above 100bp and rising. Macro Floating-rate bank loans for defensively postured investors are compelling given the attractive risk/reward adjusted returns, and portfolio diversification benefits. Leveraged loans expected to have one of the best risk-adjusted returns in Floating-rate nature of bank loans provides a natural hedge to increasing interest rates and lowers duration risk. Negative correlation to Treasuries and low correlation to other asset classes. 5

6 This is an analytical piece and the asset classes discussed herein, and any other materials provided to you, are intended only for discussion purposes and are not intended as an offer or solicitation of an offer with respect to the purchase or sale of any security and should not be relied upon by you in evaluating the merits of investing in any securities. These materials are not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to local law or regulation. Past performance is not indicative of future results. The asset classes discussed herein should not be perceived as investment recommendations and may no longer be in an account s portfolio. It should not be assumed that investments in any asset class discussed was or will prove profitable. Characteristics, allocations and account quality ratings of any particular account may vary based on investment guidelines defined bythe client. The views expressed herein represent the opinions of Asset Management, Inc. and its affiliates and are not intended as a forecast or guarantee of future results. This material may not be reproduced or used in any form or medium without express written permission. Additional information on, including fee schedules can be found in Form ADV Part II which is available upon request. The characteristics, sectors, and industries discussed herein should not be perceived as investment recommendations and may no longer be in an account s portfolio. It should not be assumed that investments in any sector or industry discussed was or will prove profitable. Characteristics, sector, industry weight allocations and account quality ratings of any particular account may vary based on investment guidelines defined by the client. The data represent the aggregate characteristics of all securities held in the Composite. Data is obtained from Advent Axys and Bloomberg and is believed to be accurate and reliable. 6