High Yield Bonds: The Growing Challenge

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1 High Yield Bonds: The Growing Challenge Martin Fridson, CFA CEO, FridsonVision LLC Fallacy of Composition Percent High Yield Intermediate Treasuries Investment Grade Corporates Average Yield (Annual, To Maturity) Average Return (Annual) 1

2 Default Rate Moody s Speculative Grade Default Rate, Trailing-Twelve-Months U.S. Percentage of Issuers, Q Q1, Quarterly 1% 1% % % % % % Q Q 199 Q 1999 Q Q1 Q Q Q Source: Moody s Investors Service. New Issuance Quality Percentage of New Issuance Rated BB- and Higher by Senior-Equivalent Rating By Number of Issues, % % % % % % 1% % Sources: Advantage Data, Bloomberg.

3 Default Rate and Risk Premium Default Rate* versus High Yield Spread-versus-Treasuries** Q 19 Q1, Quarterly 1% 1, 1% 1% % % % % 1, % Q 19 Q 199 Q 199 Q 199 Q 199 Q 1 Q Default Rate (Left Scale) Spread-versus-Treasuries (Right Scale) * Moody s Speculative Grade Default Rate, Trailing-Twelve-Months, U.S. % of Issuers. ** U.S. High Yield Master II Index (HA) YTM minus U.S. Treasury, Current 1-Yr (GA1) YTM. Sources: Merrill Lynch & Co., Moody s Investors Service. High Yield Index Total Return 197- Percent

4 High Yield Total Return and Total Return Premium Years between Trough and Peak Default Rate Year Total Return Total Return Premium (basis points) 199.1% -1, % -1, % % % 1,7 -.1% -1,99 BB vs. B: Total Return Differential Percent

5 Dynamics of Industry Returns Transition of Industry Rankings by Total Return Semiannual Basis Period New in Top 1 From Middle to Top 1 From Bottom 1 to Top 1 New in Bottom 1 1H 1997 na na na na H H H 199 1H H H 7 H 1 1H 1 9 H 1 1H 7 7 H 1H 9 H 1 1H Average Industry Returns Industry Rankings by Total Return Second Half of Industry Total Return Top 1 Airlines Entertainment Wirelines Transportation Services Environmental Other Industrial Wireless Construction Machinery Textile Oil Field Services.7%.%.9%.1%.%.1%.%.%.7%.7% Bottom 1 Automotive Paper Electric Utility Home Construction Packaging Retailers Media Cable Consumer Products Aerospace/Defense Natural Gas Pipelines -.% -.1% -.1%.%.7%.9% 1.% 1.% 1.7% 1.% Note: Only industries with 1 or more issues are shown. Source: Lehman Brothers.

6 Industry Value Tracker Industry % Trading Wider than Estimated Total # of Issues Paper.9% 1 Media Non-Cable 1.% 7 Automotive 77.7% 1 Cheap Independent Energy Wirelines 71.11% 7.% Metals/Mining.7% 1 Health Care.% 1 Chemicals 7.1% 1 Consumer Cyclical Services.% Retailers.% Packaging.% 1 Environmental.7% 1 Food & Beverage.7% 1 Consumer Products.1% 1 Media Cable.1% 1 Technology.9% 9 Transportation Services.% 1 Aerospace/Defense 9.1% 17 Industrial Other.7% 1 Pipelines.9% 1 Rich Gaming Electric 17.% 1.9% 17 9 Oil Field Services 1.79% 19 Wireless 1.9% 1 Lodging Note: Based on Spreads as of April,. Sources: Advantage Data, FridsonVision LLC, Lehman Brothers. 7.1% 1 Industry Value Tracker Performance Total Returns Relative to High Yield Index August, to March 9,, Monthly Basis Category Cheap Neutral Rich Total # of Cases 1,1 9,9 Average Outperformance.9% -.1% -.1% -.% Sources: Advantage Data, FridsonVision LLC, Lehman Brothers.

7 Distressed Index Total Return Percent Distressed Debt Index Face Value At Beginning of Year, $ Billion

8 New Issuance Volume $ Billion Source: Bloomberg. U.S. Debt versus Equity Equity outperforming Debt April 1, to April 19, Issuer Coupon (%) Maturity Stock Ticker Bond Price Change Stock Price Change Difference ETHYL CORPORATION.7 /1/1 NEU.7%.9% -.% VISTEON CORP 7. /1/1 VC.%.1% -.1% VALMONT INDTRIES INC.7 /1/1 VMI -.%.% -.% CONSTAR INTERNATIONAL 11. 1/1/1 CNST -.% 17.9% -1.7% AMKOR TECHNOLOGIES INC 9. /1/ AMKR.9% 1.% -.9% TENNECO AUTOMOTIVE INC. 11/1/1 TEN.%.77% -.77% GRANT PRIDECO INC.1 /1/1 GRP -1.1% 1.9% -19.% PEABODY ENERGY CORP.7 /1/1 BTU -.1% 1.9% -19.% FREEPORT-MCMORAN C & G.7 /1/1 FCX -.7% 1.99% -17.7% ENERGY PARTNERS LTD.7 /1/1 EPL.% 17.1% -1.9% Sources: Bloomberg, Lehman Brothers.

9 U.S. Debt versus Equity Debt outperforming Equity April 1, to April 19, Issuer Coupon (%) Maturity Stock Ticker Bond Price Change Stock Price Change Difference WOLVERINE TUBE 7.7 /1/ WLV.% -.7%.% EMMIS OPERATING CO.7 /1/1 EMMS.% -1.9% 1.9% MILACRON ESCROW CORP 11. /1/11 MZ.% -1.9% 1.9% DANKA BINESS SYSTEMS 11. /1/1 DNK LN 1.% -9.% 1.% DURA OPERATING 9. /1/9 DRRA 9.%.%.7% ADVANCED MICRO DEVICES INC /1/1 AMD.% -.1%.1% GLOBAL CROSSING UK FINANCE 1.7 1/1/1 GLBC.% -7.% 7.7% CSK AUTO INC 7. 1/1/1 CAO 1.% -.% 7.9% TEMBEC INDTRIES INC 7.7 /1/1 TBC CN -.7% -1.% 7.% HANGER ORTHOPED GROUP 1.7 /1/9 HGR.7% -.9%.9% Sources: Bloomberg, Lehman Brothers. U.S. Debt versus Equity Performance Relative Performance versus Lehman Brothers U.S. Corporate High Yield Index Price Returns, Monthly Basis, December 1, to March 1, Group # of Cases Average Price Return Average Index Price Return Difference Buys.%.1% 1.% Sells -1.7%.1% -.11% Sources: Advantage Data, FridsonVision LLC, Lehman Brothers. 9

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