KDP ASSET MANAGEMENT, INC. High Yield Asset Outlook Update April 2015 KDP Asset Management, Inc. 24 Elm Street Montpelier, Vermont 802.223.0440 HighYield@kdpam.com KDP
HY Market Volatility Remains Low on a Relative Basis HY CDX OTR 5Y 900 800 700 2011 600 500 2012 400 300 12/31 3/31 6/30 9/30 200 2015 2010 2014 2013 Source: Bloomberg data through 3/31/2015 2 KDP
Credit Surveys: Institutional Investor Concerns Source: Chart 1: Bank of America Merrill Lynch. Situation Room 3/13/2015 Chart 2: Bank of America Merrill Lynch. Credit Market Strategist 1/16/2015 Chart 3: Bank of America Merrill Lynch. US Fixed Income Weekly 11/7/2014 Chart 4: Bank of America Merrill Lynch. Credit Market Strategist 9/12/2014 3 KDP
Fund Flows by Asset Class 2015 (4/2) 2014 2013 Loans -13.2% 2012* 2011 2010 Source: Charts 2010: BofA Merrill Lynch. Situation Room: Equity Beat Debt. 1/3/2011 Chart 2011: BofA Merrill Lynch. Situation Room 12/1/2011 * Chart 2012: BofA Merrill Lynch. Situation Room 11/29/2012 Chart 2013 Bank of America Merrill Lynch. The High Yield Flow Report 1/2/2014 Chart 2014: Bank of America Merrill Lynch. Situation Room 1/2/2015 Chart 2015: Bank of America Merrill Lynch. Situation Room 4/2/2015 4 KDP
Mutual Fund Outflows More Than Offset By Robust CLO Demand Loan Mutual Funds CLO Volume Source: J.P.Morgan. Leveraged Loan Market Monitor 4/1/2015 5 KDP
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Market Size ($ billions) (a) New Issue Volume ($ billions) High Yield Issuance Remains Strong 2015 1400 350 1200 300 1000 250 800 200 600 150 400 100 200 50 0 0 Market Size New Issue Volume (a) Market size excludes defaulted issues. Source: Edward I. Altman, NYU/Salomon Center; BofA Merrill Lynch Global Research; J.P. Morgan; KDP Investment Advisors, Inc. 3/31/2015 6 KDP
Net Loan Issuance Remains Active on Strong Demand Source: Credit Suisse. 2015 Leveraged Finance Strategy Monthly 4/2/2015 7 KDP
Maturity Runway Has Been Extended High Yield Bonds Maturing by Year as of 12/31/08 High Yield Bonds Maturing by Year as of 3/31/2015 Leveraged Loans Maturing by Year as of 12/31/08 Leveraged Loans Maturing by Year as of 9/30/14 Source: Credit Suisse. 2008 data: Leveraged Finance Strategy Monthly 10/2/2014; 2015 data: 2015 Leveraged Finance Strategy Monthly 4/2/2015 8 KDP
High Yield Supportive Credit Metrics Source: Morgan Stanley: Leveraged Finance Chartbook 3/30/2015 9 KDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 KDP DRR Net Change Moody's Default Rate KDP Default Risk Ranking Net Changes & Moody s Default Rate 20 15% 10% 10 5% 0 0% -10-5% -10% -20-15% -30-20% -25% -40-30% KDP Default Risk Ranking Net Change Moody's Default Rate March 31, 2015 Source: KDP 10 KDP
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 High Yield Bond & Loan Defaults 200 180 184.7 160 140 120 High Yield Bonds Insitutitional Bank Loans EX TXU and Caesars 2014 Defaults Were $16.0 Billion (Lowest Since 2007) 100 80 60 64.1 63.5 49.1 70.2 40 20 0 8.6 25.2 35.4 27.9 10.1 28.8 8.5 4.4 19.8 21.2 22.6 19.1 4.5 Note: Includes grace period defaults Source: J.P. Morgan Default Monitor 3/31/2015 On 4/29 TXU filed Chapter 11. Outstanding debt included $16.6B in bonds and $19.5B in institutional loans. This is the largest high-yield default on record. 11 KDP
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Low Default Environment for Foreseeable Future 14% Moody s Historical High Yield Default Rate 1971 February 2015 12% 10% 8% 6% 4% 2% 0% 2.7% projected Dec. 2015 2.3% February 2015 (ex-txu) (ex-txu) Source: Chart 1: KDP Chart 2: : J.P. Morgan Default Monitor 3/31/2015 Note: Loan Defaults are par-weighted 12 KDP
Spreads Remain Wide Relative to Default Rates EX TXU 2014 HY Bond Defaults Were 1.68% vs. 2.97% shown on this chart. High Yield Bonds EX TXU 2014 Loan Defaults Were 1.68% vs. 4.20% shown on this chart. Leveraged Loans Source: J.P. Morgan Default Monitor 3/31/2015 Note: HY Bond and Loan Defaults are par-weighted 13 KDP
KDP HY Daily Index Yield and 5-Year Treasury Yield 20 KDP Index Yield 18 16 14 12 10 8 6 5.39% - 3/31/15 4 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: KDP 5-Year Treasury Yield 9 8 7 6 5 4 3 2 1.37% - 3/31/15 1 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Bloomberg 14 KDP
1/31/2003 4/30/2003 7/31/2003 10/31/2003 1/30/2004 4/30/2004 7/30/2004 10/29/2004 1/31/2005 4/29/2005 7/29/2005 10/31/2005 1/31/2006 4/28/2006 7/31/2006 10/31/2006 1/31/2007 4/30/2007 7/31/2007 10/31/2007 1/31/2008 4/30/2008 7/31/2008 10/31/2008 1/30/2009 4/30/2009 7/31/2009 10/30/2009 1/29/2010 4/30/2010 7/30/2010 10/29/2010 1/31/2011 4/29/2011 7/29/2011 10/31/2011 1/31/2012 4/30/2012 7/31/2012 10/31/2012 1/31/2013 4/30/2013 7/31/2013 10/31/2013 1/31/2014 4/30/2014 7/31/2014 10/31/2014 1/31/2015 KDP Defensive High Yield Composite to the 5-Year Treasury KDP Defensive High Yield Composite Spread to 5-Year Treasury 1400 High 11/28/2008 1222bp 1200 1000 800 600 3/31/2015 430bp 400 200 0 Low 5/31/2007 134bp 6/30/2014 304bp Source: KDP 15 KDP
High Yield & Loans Both at Attractive Spread Levels Source: Chart 1: Morgan Stanley Credit Strategy Playbook 3/24/2015; Chart 2: Goldman Sachs The Credit Trader 3/27/2015 16 KDP
For High Yield Investors, Disinflation & Low Growth Best Possible Environment Source: BofA Merrill Lynch. The US Fixed Income Situation: Is the US Becoming Japan?. 8/20/2010 17 KDP
Credit Surveys: Top Risk-Adjusted Return Over Next 12 Months High Grade Managers High Yield Managers Source: Bank of America Merrill Lynch. Credit Market Strategist 3/13/2015 18 KDP
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