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1 ASSET MANAGEMENT, INC. High Yield Bond and Senior Secured Bank Loan Outlook October 2015 Asset Management, Inc. 24 Elm Street Montpelier, Vermont

2 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 by the 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. 2

3 The Case for High Yield Bonds Fundamentals: Default Environment Remains Historically Low as Spreads Rise Technicals: BBs at Widest to BBBs Since 2011 Source: J.P.Morgan, Default Monitor 10/1/2015 Source: Morgan Stanley, Leveraged Finance Insights 10/2/2015 Macro: High Yield Sentiment at Low End of Historical Range - Recommended Position Higher Valuation: Spread on Defensive High Yield Composite is at 2-Year High Spread of the Defensive High Yield Composite to 5-Year Treasury 9/30/ bp Source: Morgan Stanley, Leveraged Finance Chartbook 9/28/ Source: :, U.S. Department of the Treasury as of 9/30/2015

4 High Yield Observations Fundamentals Minimal near-term maturities Historically low default rate - excluding commodities - environment due to solid fundamentals and supportive US economy. 's credit analysts continue to see constructive current metrics outside of certain metal/mining sectors. Broad refinancing at low rates has pushed interest rate coverage levels higher, further reducing default risk. Rising leverage levels due to lackluster EBITDA growth and rising new issuance driven by M&A and capital expenditures. Technicals Retail mutual fund flows have been negative for four consecutive months. Several large new issues priced at yields much higher than anticipated, causing a broader repricing of the secondary market for Telecoms, Cable and Chemicals. Fears of upcoming revolver redeterminations due to oil prices pressuring the Energy sector. In recent risk-off environment spreads have widened significantly across most sectors reflecting global growth concerns. Spreads likely to tighten once volatility ebbs and given high yield s negative correlation to interest rates. Valuations Wide spreads compared to benign default environment High yield carry is very attractive relative to other fixed income asset classes. Off-the-run credits will remain cheap due to rise in liquidity premiums. Spreads more than sufficient to absorb anticipated increase in rates. Short duration high yield outperforming during risk off. Macro Exogenous market shocks and idiosyncratic headline events are the greatest risks for lower quality credits, with large relative spread widening given market illiquidity and low energy prices. High yield volatility expected to remain elevated in near-term due to sharp sell-off in oil prices, geo-political risks, global economic concerns, and interest rate uncertainty. Minimal inflationary pressures and accommodative monetary policies worldwide bode well for spread products. Rising Treasury rates in the US remains most significant risk for other fixed income classes. Higher-quality high yield credits continue to provide one of the best relative risk/return potentials. 4

5 The Case for Senior Secured Bank Loans Fundamentals: Low Default Rate for Foreseeable Future Technicals: No Maturity Wall Source: J.P.Morgan, Default Monitor 10/1/2015 Source: Credit Suisse, Leveraged Finance Strategy Monthly 10/6/2015 Macro: Loans Remain Top Pick of Respondents For Risk Adjusted Returns Over Next 12 Months Valuation: Loan Spreads Rise Further in September - Approach 2-Year Highs Loan Strategy Composite Adjusted spread to LIBOR - 3 yr. Discount Margin As of 9/30/2015 Source: BofA Merrill Lynch Credit Market Strategist 9/11/2015 Source: 9/30/2015 5

6 Senior Secured Bank Loan Observations Fundamentals Historically low default rate environment due to solid fundamentals No near term maturity concerns Strong balance sheets, as recent rise in leverage levels beginning to stabilize. Interest coverage ratios remain at post-crisis highs. Technicals Mutual fund flows remained negative for the 4 th straight month in September. New issuance was $9.5 billion in September which was the lowest issuance since January Strong CLO volume in 2015 combined with subdued new loan issuance is providing a strong tailwind for the loan market. Liquidity remains good reflecting two-way flow with active secondary trading volume. Valuations Potential for principal appreciation opportunities with only 7.2% of loans trading above par. Adjusted 3-year loan spreads at YTD high and above long term average. Loan volatility remains subdued as they are higher in cap structure and have floating rates. Global growth concerns causing energy / metal mining loans to significantly underperform the broader market. Macro Leveraged loans widely perceived to have best risk-adjusted return over next 12 months. Rising Treasury rates remain the most significant risk for most fixed income asset classes. Floating-rate nature of bank loans provides a natural hedge to an increase in interest rates. Generally negative correlation to Treasuries and low correlation to other asset classes Low loan volatility also reflects seniority in the capital structure resulting in lower credit loses due to their higher recovery rates. Overall demand for loans remains strong when Fed raises rates and amid continued strong CLO demand. 6

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