KDP ASSET MANAGEMENT, INC.

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1 ASSET MANAGEMENT, INC. High Yield Bond and Senior Secured Bank Loan Outlook March 2016 Asset Management, Inc. 24 Elm Street Montpelier, Vermont

2 The Case for High Yield Bonds Fundamentals: High Yield Default Rate Estimated To Increase On Energy/ Metal/Mining Concerns Technicals: HY Flows Have Turned Positive Source: J.P. Morgan, Default Monitor 3/1/2016 Source: Credit Suisse, CS Credit Strategy Daily Comment 3/1/2016 Macro: High Yield Sentiment at Low End of Historical Range Despite More Attractive Valuation Valuation: Defaults May Rise But Spreads Have Widened More Source: Morgan Stanley, US Corporate Credit Chartbook, 2/29/ Source: J.P.Morgan, Default Monitor, 3/1/2016

3 High Yield Observations Fundamentals Low level of near-term maturities mitigate tightening financial conditions. Default rates could rise sharply if an oil average of $30/bbl materializes and Metal/Mining deteriorates further. Minimal default rate risks outside the Energy /Metal Mining sectors due to solid fundamentals and supportive US economy. Overall credit metrics have peaked, but 's credit analysts continue to see supportive credit metrics outside of Energy and Metals/Mining sectors. Broad refinancing at low rates has pushed interest rate coverage levels to near-record highs. Leverage levels rising driven by industry-wide earnings pressures. Technicals The HY sell-off accelerated into mid-february, but then rallied sharply to positive on the month on higher oil prices and improving economy. Mutual fund flows turned positive for the 2 nd time in last 12 months with an inflow of $2.7B in the last week of February. The new issue market remains dormant. Market s negative response to headline risk remains accentuated and the overall move-up-in-quality trade continues. Both oil and iron ore prices have shown signs of stabilization. Valuations High yield carry is attractive given a broadly supportive domestic macro environment. Wide spreads reflect uncertain global growth expectations as buyers demand a hefty liquidity and risk premium. CCC bonds continue to underperform due to rise in illiquidity premiums and until oil prices show positive momentum. High yield spreads more than sufficient to absorb anticipated increase in interest rates. We believe current high yield bond prices have priced in much of the negative news. 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 commodity prices. High yield volatility expected to remain elevated in near term due to uncertain commodity price outlooks, geo-political risks, and uncertain ramifications of current concerns over China and its impact on global growth. Deflationary concerns causing global central banks to implement additional quantitative easing measures bode well for spread products longer-term as risk aversion and safe haven demand eventually ebb. Data-dependent Treasury rates to remain volatile reflecting greater risk aversion and safe-haven demand. Higher-quality high yield credits continue to provide one of the best relative risk/return potentials. 3

4 The Case for Senior Secured Bank Loans Fundamentals: Loan Default Rate Estimated To Tick Up But Remains Muted Due To Lower Energy Exposure Technicals: Sharp Fall Off In CLO Issuance Coupled With Loan Fund Outflows Pressure Loan Prices Source: J.P. Morgan, Default Monitor 3/1/2016 Source: Morgan Stanley, US Corporate Credit Chartbook, 2/29/2016 Macro: Risk Adjusted BB Senior Secured Loans Compelling Valuation: Loan Spreads Remain Above Historical Averages Source: Morgan Stanley, US Corporate Credit Chartbook, 2/29/2016 Source: J.P.Morgan, Leveraged Loan Market Monitor, 3/1/2016 4

5 Senior Secured Bank Loan Observations Fundamentals Low default rate environment due to solid fundamentals and less exposure to energy and metal/mining sectors. No near-term maturity concerns. New issue leverage levels beginning to decline. Interest coverage ratios remain healthy. Technicals Low loan prices reflect mutual fund outflows and sharp fall-off in CLO supply. Meager new loan activity driven primarily by event driven acquisition funding needs. Mutual funds have reported 31 weeks of consecutive outflows due to low Treasury yields and dovish Fed comments. Sharp fall off in CLO creation reflects dramatic steepening in CLO credit curves. Valuations Significant potential for principal appreciation opportunities as average loan prices have fallen to 92. Adjusted 3-year loan spreads are at multi-year highs and well above the long term average. Spreads for BB senior secured bank loans slightly lower than BB HY bond spreads but with much lower volatility. Overall loan volatility should remain relatively subdued as loans are higher in cap structure, have higher recovery levels, and have floating rates. Global growth concerns causing Energy and Metals/Mining loans to continue to underperform the broader market. Macro Floating-rate bank loans for defensively postured investors are compelling given the attractive risk/reward adjusted returns, portfolio diversification benefits, ability to mitigate interest rate risks, and lessen duration. Leveraged loans perceived to have one of the best risk-adjusted returns over next 12 months. Floating-rate nature of bank loans provides a natural hedge to an increase in interest rates. Negative correlation to Treasuries and low correlation to other asset classes Overall demand for loans should increase when Fed begins to raise rates. 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 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. 6