Opportunities in Emerging Market Corporate Debt

Opportunities in Emerging Market Corporate Debt June 2012 Hatteras Annual Conference Raleigh, North Carolina David C. Hinman, CFA Managing Principal and Chief Investment Officer Tel 949-207-6311 Fax 949-698-7267 Email: dhinman@sw-assetmanagement.com

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I. SW Asset Management Overview II. EM Corporate Debt Market III. Philosophy, Process & Portfolio Construction IV. Market Outlook & Risks V. The Long/Short Approach 3

Global credit manager with expertise in EM corporate debt Global credit specialists with experience in various credit cycles Long/short, event-driven investment strategy Specialists in hard and local currency corporate bonds Five-year track record in current strategy Each partner has 15+ years of institutional buy-side experience SEC-registered investment advisor 4

Decades of institutional investment, operational and business management experience Complementary buy-side investment backgrounds in EM and developed market credit SW Asset Management Value Proposition Five-year track record and demonstrated ability to navigate various credit markets Experience successfully managing credit portfolios in crisis periods (2001/2002, 2007/2008, 2011) Alignment of manager and investor incentives Significant business commitment by managing partners 5

EM Corporate Debt EM Sovereign Debt EM Equity US High Yield EM corporate debt is a growing asset class with attractive attributes relative to EM sovereign debt, EM equities & US high yield Issued primarily in USD and under US or UK law: Highest Sharpe Ratio: Generally secured by assets and/or owner guarantees: Least research coverage: Fewest dedicated mandates: 7

Historical Sharpe Ratios* Over the last decade, EM corporate debt has offered a more attractive riskreward profile than EM equities BAML EM Corporate Index MSCI EM Index (equity) 1Y 1.03 (0.45) 3Y 2.02 0.79 5Y 0.71 0.13 10Y 1.19 0.40 8 *Source: Bank of America Merrill Lynch, Bloomberg, as of April 30, 2012.

The EM corporate debt market has grown sharply since 2001 and EM economies have become a larger percentage of World GDP Market Value Outstanding* EM Corporate Debt vs. EM Sovereign Debt In billions, USD 800 CS Sovereign Bond Index 700 600 500 400 300 200 100 CS EM Corporate Index EM GDP as a percentage of World GDP (RHS) 40% 35% 30% 25% 20% 15% 10% 5% 0 0% 9 *Sources: IMF, Credit Suisse. 2012 GDP data are based on IMF Estimates, as of April 30, 2012

Credit Suisse publishes an emerging market corporate bond index comprised of dollar-denominated corporate debt in global emerging markets. Credit Suisse EM Corporate Index* CS EMCI Industry Breakdown* Number of issues 1072 Number of issuers 487 Market value outstanding $710 billion Countries 42 All others, 29% Banking, 23% Average Rating (S&P/Moody s/fitch) Yield 5.34% Duration 5.02 BBB/Baa2/BBB Telecom, 7% Electric Utilities, 10 7% Basic Industries, 13% Energy, 21% *Source: Credit Suisse As of April 30, 2012

Historical Default Rates* EM Corporate Debt vs. US High Yield Since 2000, defaults of EM corporate bond issuers have generally been lower than defaults of US high yield issuers 16% 14% 12% 10% 8% 6% 4% EM Corporates US High Yield 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Sources: JP Morgan. Default rates are calculated based on face value outstanding. Only EM corporate issuers with USD-denominated debt are included. 11

Correlation of Monthly Returns* Since 2002, EM corporate debt has displayed low correlation to other asset classes Index CS EM Corporate Bond (1) 1 1.00 Barclays US Aggregate Bond (2) 2 0.56 1.00 Barclays US Corporate High Yield (3) 3 0.78 0.22 1.00 S&P 500 (4) 4 0.55-0.03 0.72 1.00 MSCI EM (5) S&P GSCI (6) 5 0.64 0.10 0.71 0.81 1.00 6 0.38-0.01 0.35 0.39 0.51 1.00 *Source: Morningstar. Data time period: 1/2002 to 3/2012. 12

A different approach to credit management The best opportunities exist in the least developed markets Emerging market credit opportunities outnumber those in developed credit markets Emerging market corporates are under-researched, under-followed and under-appreciated Fundamental credit analysis is necessary but not sufficient; a multifaceted approach works best Bonds often trade on factors unrelated to fundamentals Systemic risks to risk assets have risen since 2008 Credit risk can and should be hedged Risk-managed shorts significantly mitigate tail risk Innovative hedges are necessary 14

Thematic Macro Orientation Fundamental Analysis Fundamental Analysis Technical Analysis Technical Analysis Macro country and industry views Identify opportunities in dislocated market segments Utilize extensive contacts in global credit network Analyze asset value, debt structure and free cash flow generation Evaluate business model and competitive landscape Create pro forma debt structure and assess liquidation value Critical as to purchase timing and entry price Identify type of holders to assess magnitude of forced selling or buying Invest Invest CIO and portfolio manager must agree on all purchases and sales Scale into positions based on dealer positioning and forced sellers or buyers Monitor and Harvest Monitor and Harvest Understand catalysts and exit opportunities Reassess return potential in relation to other opportunities Risk Management Risk Management Which factors could cause a significant shock to valuations? Which credits will have an intuitive and opposite reaction to such an event? 15

How does investment process feed into portfolio construction? Our portfolio is comprised of four trade-types: Yield Event-Driven Trading Hedging 16

Neutral outlook tempered somewhat by credit valuations and the possible re-emergence of problems in Europe Opportunities remain despite headwinds facing the global economy Evolving from a banking/sovereign default concern to one of economic growth, especially Western Europe and Asia Risks to hedge are Middle East geopolitical, China growth/asset quality, Brazilian growth/policy actions and Western European issues as they emerge Fed ZIRP to continue, perhaps no QE3, but neither US nor the developed world economy able to stand on its own 18

Absolute Positioning How does our outlook play out in the portfolio construction? Long Short Sector Energy Financials Country Argentina Columbia Indonesia Russia China Brazil Most of EU Currency USD BRL *Source: SW Asset Management as of 5/14/12 19

The Fixed-Income Mis-Allocation Problem Traditional bond allocations are to countries with: High leverage Low yields Slowest economic growth Least ability to repay Solutions? Allocate to countries with high growth rates Refine asset allocation (EM corporate debt) Invest using alternative methods & strategies (long/short) 21

Total Return in Market Volatility* Since 2001, EM corporate debt has generally sold off less than EM sovereign debt and EM equities during periods of heightened volatility CS EM Corporate Index CS Sovereign Bond Index MSCI EM Equity Index May 02 Jul 02-3.2% -9.2% -15.9% Apr 04 May 04-4.4% -6.6% -10.0% May 06 Jun 06-0.7% -1.9% -10.6% Sept 08 Oct 08-24.1% -19.7% -40.1% Aug 11 Sept 11* -5.3% -4.4% -22.2% *Sources: Credit Suisse, Bloomberg. The time periods above were selected based on total returns for all three indices being negative for at least 2 consecutive months. During August 2011, the SBI Index returned 0.38% while CS EM Corporate Index and MSCI EM Equity Index had negative returns but this period was included for comparison purposes. 22