ING Senior Loan Group Talking Points March 24, 2011 Better Market Tone Lifts Average Bids Q – What happened to loan prices this week? Q – What has been the effect on yields? A – On a secondary spread to three year call basis, the yield A – We saw a bit of a rebound. The average bid of the on the L100 Index increased 23 bps since last week’s reading S&P/LSTA U.S. Leveraged Loan 100 Index (the “L100 Index”), to end at L+489. The chart below shows the secondary spread which tracks the 100 largest loans in the broader S&P/LSTA history for the L100 Index since the beginning of 2010. Leveraged Loan Index (the “Index”), recovered approximately half of last week’s decline, gaining 30 bps to end at 95.24. [Please note that Index yield data is only available on a one The broad Index lagged a bit, but inched higher nonetheless, week lagging basis, thus the data demonstrated below is for adding 17 bps to finish out at 95.40. g p t e ee e d g a c 8, 0 ] the week ending March 18, 2011.] Bids generally strengthened in the secondary market this week, as macro concerns over a potential runaway nuclear Average Three Year Call Secondary Spreads crisis in Japan quieted. Overall trading volume was relatively S&P/LSTA L100 Index ¹ light, due in large part to a well-attended industry January 1, 2010 to March 18, 2011 conference. In the primary market, loan investors continued to push back on the more aggressive refinance requests L+700 (those that remain, that is, as most purely opportunistic offerings have been pulled), and arrangers found themselves L+625 having to slant terms in favor of buyers in order to clear the L+489 market. Finally, inflows into loan mutual funds slowed this L+550 week, but remained positive, while high yield and municipal flows remained negative. L+475 The following two charts show the average bid price history for the Flow Name Composite and the entire Index, L+400 respectively, since the beginning of 2010. 10 10 10 10 10 10 10 10 10 10 10 10 11 11 /2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/ 20 /1/ 20 /1/ 20 /1/2 0 /1/2 0 /1/2 0 11 1/1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 Average Bid S&P/LSTA L100 Index January 1, 2010 to March 24, 2011 For the week ended March 18, 2011, the secondary spread to 97 three year call yield on the overall Index ended 14 bps higher, at L+520. 95 The following chart shows the secondary spread history for the Index since the beginning of 2010. 93 95.24 91 Average Three Year Call Secondary Spreads S&P/LSTA Leveraged Loan Index2 89 January 1, 2010 to March 18, 2011 L+700 87 0 10 10 10 10 10 10 10 10 0 0 0 11 11 11 01 01 / 201 / 201 /2 /2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/ 2 /1 /1 /2 0 /1/2 0 /1/2 0 1/1 2/1 3 4 5 6 7 8 9 10 11 12 1/1 2 3 L+650 L+600 Average Bid L+520 S&P/LSTA Leveraged Loan Index L+550 1, 24, January 1 2010 to March 24 2011 L+500 97 L+450 95 10 10 10 10 10 10 11 11 /2 0 /2 0 /2 0 /2 0 /2 0 /1/ 20 /2 0 /2 0 93 1/1 3/1 5/1 7/1 9/1 11 1/1 3/1 95.40 91 89 87 10 10 10 10 10 10 10 10 10 10 10 10 11 11 11 /2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/2 0 /1/ 20 /1/ 20 /1/ 20 /1/2 0 /1/2 0 /1/2 0 1/1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 ING Senior Loan Group Talking Points March 24, 2011 Q – Any default activity? to pause. Regardless, a breather from the inflow swell is a not an unwelcome turn of events. We’ll be curious to see what the No. March i default-free. Th chart b l A – N M h remains d f lt f h The h t below shows coming weeks bring. the historical default rates for the Index by both issuer number and principal amount since December 31, 2009. And why do flows matter? Simply, because they ultimately 3 drive investment discipline – in terms of both pricing and Lagging 12 Month Default Rate structure. Too much, too quickly can cause, at least on the S&P/LSTA Leveraged Loan Index margin, erosion on both fronts. A sufficient amount of new December 31, 2009 to March 24, 2011 investment product (fresh primary loans, in our market’s case) is 12% the time-tested regulating mechanism. To that end, we 10% continue to monitor developments/activity in the areas of M&A equity-driven) (strategic and private equity driven) and capital spending for 8% clues regarding future deal flow. Our friends at the banks, 6% those responsible for arranging financing for these types of 1.62% transactions, continue to point to healthy screening activity and 4% dialogue with their client counterparts. 2% 0% 1.11% /09 1/1 0 2/1 0 3/1 0 4/1 0 5/1 0 6/1 0 7/1 0 8/1 0 9/1 0 /10 1/10 2/10 1/1 1 2/1 1 12 10 1 1 Defaults B I N b D f lt By Issuer Number D f lt B P i i l A t Defaults By Principal Amount Q – You mentioned a slowdown in loan fund inflows. Can you provide more color? A – Inflows into loan funds tapered off rather dramatically over the past week. Per Lipper FMI, the total for the week ended March 23 was $57 million, down from a robust $686 million during the previous week. Note, however, this Poor s/LCD. Unless otherwise noted, the source for all data in this report is Standard & Poor’s/LCD. S&P/LCD does not make any positive reading marked th 38th consecutive week i th iti di k d the ti k in the representations or warranties as to the completeness, accuracy or sufficiency of the data in this report. black for loan flows. 1 – Assumes 3 Year Maturity. Three year maturity assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments during the 3 years. Discounted spread is calculated based upon the current bid price, not on par. Moreover, while down, loans were not out. The headline 2 – Excludes facilities that are currently in default. number for high yield was negative $2.8 billion (although 3 – Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service. Vast majority are institutional tranches. Issuer default rate is calculated as the number of defaults over the last twelve months divided by the number of there appears to be some material skew based on the recent issuers in the Index at the beginning of the twelve-month period. Principal default rate is calculated as the amount defaulted over the last twelve months divided by the amount outstanding at the beginning of the twelve-month period. closure of two HY funds; confirmation likely to come next week) and negative $640 million from municipals. The only General Risks for Floating Rate Senior Bank Loans: Floating rate senior bank loans involve certain risks. Below investment grade assets carry a higher than notable positive recipient was high-grade corporates, which normal risk that borrowers may default in the timely payment of principal and added approximately $1.1 billion. Duration-defiance clearly , y interest on their loans, which would likely cause the value of the investment to continues in that space. decrease. Changes in short-term market interest rates will directly affect the yield on investments in floating rate senior bank loans. If such rates fall, the Why the slowdown? One reason is the macro nervousness investment’s yield will also fall. If interest rate spreads on loans decline in general, traceable to the geopolitical events of last week. In addition, the yield on such loans will fall and the value of such loans may decrease. When short-term market interest rates rise, because of the lag between changes in such there is the prospect that the likely growth-slowing (at least short term rates and the resetting of the floating rates on senior loans, the impact initially) events in Japan could cause the ECB and other of rising rates will be delayed to the extent of such lag. Because of the limited central bankers currently considering a rate bump (the U.S. secondary market for floating rate senior bank loans, the ability to sell these loans in a timely fashion and/or at a favorable price may be limited. An increase or Federal Reserve being conspicuously absent from that group) decrease in the demand for loans may adversely affect the loans. Contact Information The ING Senior Loan Group is a part of ING Investment Management, the world-wide investment arm of ING Group N.V., with over 700 investment professionals managing nearly $500 billion in assets globally. Our Group is headquartered in Scottsdale, Arizona U.S.A., with an additional office in London, England. We manage senior loans through three U.S. based mutual funds, a Luxembourg based SICAV, a collective trust for U.S. based pension plans, a Group Heads separate account, a privately offered fund which invests primarily in European loans, and several structured finance vehicles (CLOs). The ING Senior Loan Group is comprised of 25 investment professionals and 19 dedicated support staff. There are five portfolio management teams in Dan Norman Scottsdale, each of which is responsible for particular industries, and a European team that is responsible for European loan management. Our two Group Heads, the chief credit officer and a senior credit officer comprise the Investment Committee, which approves all investment decisions. Finally, the team is Jeff Bakalar supported by a highly qualified trading, operations, analytics and legal team that is dedicated exclusively to this asset class. This commentary has been prepared by ING Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer 7337 E. Doubletree Ranch Road to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations Scottsdale, AZ 85258 USA and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.