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VIEWS: 32 PAGES: 25

  • pg 1
									Presentation to the Petrochemical
Feedstock Association of the Americas

On the State of the Credit Markets

November 12, 2009

Richard R.S. Smith
Managing Director
Co-Head of Loan & High Yield Markets
RBS Global Banking and Markets
(203) 897 2393
Richard.S.Smith@rbs.com
Agenda
I.    Executive Summary: Macro-Economic Overview

II.   High Grade Bank Market Update

III. High Grade Bond Market Update

IV. Leveraged Bank Market Update

V.    High Yield Bond Market Update

VI. Q & A




                                                   2
Executive Summary: Macro-Economic
Overview
RBS Market Update and Analysis
Economic Indicators - Fundamentals Continue to Thaw
• Fundamentals in the                                                                  • Almost any barometer of
                               A jobless recovery?                                                                     Borrowing costs at record lows…
  economy continue to                                                                    market sentiment has
                                            Unemployment Rate
  improve featuring                                                                      undergone a sharp and       5%
                             10%            Consumer Confidence              70
  improving                                                                              unprecedented                                            Fed Funds Rate
  manufacturing data         9%                                              60          correction since            4%                           3 Month LIBOR
  and signs of life in the                                                               touching March 9th
  housing market;            8%                                              50          extremes. The Dow has       3%
  despite moderating                                                                     eclipsed 10,000, crude is
                             7%                                              40                                      2%
  monthly job losses,                                                                    flirting with $80/barrel,
  overall unemployment                                                                   10-year rates are
                             6%                                              30                                      1%
  still weighs heavily on                                                                considerably higher and
  general economic           5%                                               20         borrowing costs are at      0%
  recovery                    Oct-08      Jan-09   Apr-09     Jul-09     Oct-09          record lows                  Oct-08    Jan-09   Apr-09     Jul-09   Oct-09

                                                            Source: Bloomberg                                                                     Source: Bloomberg


• After pricing out the                                                                • Speculation now
                                   Equity rally out of steam?                                                         Return to growth in late 2009?
  “apocalypse” scenarios                                                                 revolves around the
  of late 2008, are these                                                                viability and
                               1,300                                                                                 2%                     GDP
  current valuations                                     S&P 500                         sustainability of the
  really representative of     1,200
                                                                                         current recovery. Do        0%
  a recessionary               1,100                                                     these numbers
  economy or have we           1,000                                                     represent real              -2%
  come “too-far, too-fast”                                                               progress towards a
                                   900                                                                               -4%
  as investors sought                                                                    return to growth or
  overly-depressed                 800
                                                                                         has a stimulus-fueled
                                                                                                                     -6%
  values following a panic         700                                                   “sugar high”
  driven sell-off                  600                                                   distracted the market       -8%
                                     Oct-08 Jan-09 Apr-09       Jul-09   Oct-09          from painful de-              Oct-08   Jan-09   Apr-09     Jul-09   Oct-09
                                                                                         leveraging still to
                                                            Source: Bloomberg                                                                     Source: Bloomberg
                                                                                         come?

                                                                                   4
The Past to Revisit Us in 2011 and 2012 - Bank Facility and Bond Maturity
Profile      Estimated Bank Facility Maturity Profile – Total Universe ($ in millions)

Value of all bank facilities    120,000
maturing from Jan. 2009                                                                                $3.1 trillion of maturing facilities
                                110,000
through Dec. 2014 totals
                                100,000
$3.1 trillion
                                 90,000
Facilities mature as follows:    80,000
                                 70,000
  2009 – $349BN (11.4%)
                                 60,000
  2010 – $406BN (13.2%)
                                 50,000
  2011 – $654BN (21.3%)
                                 40,000
  2012 – $811BN (26.4%)          30,000
  2013 – $484BN (15.7%)          20,000
  2014 – $368BN (12.0%)          10,000
                                      0
                                                              11                     11                     11                     11                     11                     11
                                           1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 910 12
                                          2009         2009      2010       2010        2011      2011         2012     2012          2013      2013         2014        2014
                                Basic Materials       Communications         Consumer, Cyclical       Consumer, Non-cyclical         Diversified    Energy       Industrial      Technology      Utilities

Value of all bonds maturing       Estimated Bond Maturity Profile – Total Universe ($ in millions)
from Jan. 2009 through Dec.
2014 totals $1.3 trillion
                                50,000
                                                                                                        $1.3 trillion of maturing bonds
Bonds mature as follows:        45,000
  2009 – $156BN (11.8%)         40,000
  2010 – $149BN (11.3%)         35,000
  2011 – $242BN (18.3%)         30,000
  2012 – $234BN (17.7%)         25,000
  2013 – $324BN (24.5%)         20,000
  2014 – $218BN (16.5%)         15,000
                                10,000
                                 5,000
                                     0
                                                             11                      11                      11                      11                      11                      11
                                           1 2 3 4 5 6 7 8 910 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12
                                                       2009                     2010                 2011                         2012                       2013                       2014
                                Basic Materials      Communications         Consumer, Cyclical    Consumer, Non-cyclical           Diversified     Energy     Industrial      Technology    Utilities
                                 Source: Bloomberg, Standard & Poor‟s, Moodys, RBS Estimates



                                                                                                  5
High Grade Bank Market Update
The High Grade Market
Massive government intervention                                                         Current Bank Market Dynamics
has calmed the markets to some
extent and banks are gradually
                                                                                         • The last 2-3 months have seen a distinct improvement in the overall loan market.
finding liquidity to finance their                                                            Banks have increasingly become willing to commit to facilities for key relationships
balance sheets, albeit at a price                                                             and some facilities have even been oversubscribed and seen an upsizing at
                                                                                              closing
                                                                                          •   Cautiousness with regard to capital will however continue to be a key feature of
   Indicators of bank market liquidity                                                        banks when considering committing to a transaction
                                                                                                – Capital allocation decisions are made by weighing the returns against the
                                            Oct 2008             Tues 11/10                        strength of the overall relationship
   TED Spread                                     4.64%                 0.22%             •   Total bank-market volume has picked up in 3Q2009 but was still down a full 40%
                                                                                              vs the same period in 2008
   Overnight LIBOR                                2.47%                 0.18%
                                                                                                – Last year's bank failures/mergers (BoA/Merrill, Barclays/Lehman,
   3-Month LIBOR                                  4.82%                 0.27%                      PNC/NatCity, RBS/ABN) have led to an estimated 20-30% of total bank-
                                                                                                   capacity having been eliminated
                                                                                          •   Most facilities year-to-date have been refinancings with a select number of (large)
 Historical I-Grade Volume                                                                    acquisition facilities
               800                                                                        •   Bond-for-loans and "amend-and-extend" have been two other main themes
               700
               600                                                                        •   364day tenors continue to dominate transactions for A rated companies with 3-
 (USD in bn)




               500                                                                            year tenors having made a "come-back" for BBB rated borrowers
               400                                                                              – In 3Q2009, 364day facilities comprised 57% of the market, which is down
               300                                                                                 from 68% in 2Q2009 and 75% in 4Q2008
               200                                                                              – 3-year tenors have expanded to 28% of the total market in 3Q2009 after
               100
                                                                                                   dropping to 2% in 1Q2009
                 0
                                                                                                – 5-year tenors have not been seen for syndicated facilities for Investment
                                                                               1-3Q09
                     2001

                            2002

                                    2003

                                           2004

                                                  2005
                                                          2006

                                                                 2007

                                                                        2008




                                                                                                   Grade facilities so far
                                                                                          •   Covenants have generally been firmed up to some extent (for example several
                                   Old Money             New Money
                                                                                              transactions which previously had one financial covenant now have two), however
                                           Source: Thompson Reuters LPC                       the nature/number/levels are very company/sector specific

                                                                                                             7
Investment Grade Pricing Trend

• Pricing (Drawn and Undrawn) increased significantly            364-Day Average Undrawn Pricing                                                                                       Multi-Year Average Undrawn Pricing
  across the ratings-spectrum for the first 6 months of the
  year; during 3Q2009 there has been a stabilization and on                            70                                                                                                                     70
  a case-by-case basis even a decrease




                                                                 Undrawn Fees (bps)




                                                                                                                                                                                         Undrawn Fees (bps)
                                                                                       60                                                                                                                     60
    – Drawn margins are usually the same for a 364day or                               50                                                                                                                     50
                                                                                                                                                                                                                                                                   Not enough data for
      3-year tenors, however the difference in undrawn fees                            40                                                                                                                     40                                                      full A and AA
      has widened out for the different maturities                                                                                                                                                                                                                   representation
                                                                                       30                                                                                                                     30
• CDS based pricing for A rated companies, and/or for                                  20                                                                                                                     20
  back-up facilities which are not expected to be drawn, are                           10                                                                                                                     10
  most common. For BBB rated borrowers, and/or facilities                              0                                                                                                                       0




                                                                                            Q107
                                                                                                       Q207
                                                                                                                Q307
                                                                                                                         Q407
                                                                                                                                 Q108
                                                                                                                                         Q208
                                                                                                                                                 Q308
                                                                                                                                                         Q408
                                                                                                                                                                 Q109
                                                                                                                                                                         Q209
                                                                                                                                                                                Q309




                                                                                                                                                                                                                   Q107
                                                                                                                                                                                                                            Q207
                                                                                                                                                                                                                                     Q307
                                                                                                                                                                                                                                             Q407
                                                                                                                                                                                                                                                     Q108
                                                                                                                                                                                                                                                            Q208
                                                                                                                                                                                                                                                                     Q308
                                                                                                                                                                                                                                                                            Q408
                                                                                                                                                                                                                                                                                   Q109
                                                                                                                                                                                                                                                                                          Q209
                                                                                                                                                                                                                                                                                                 Q309
  where some utilization is expected, fixed-margin grids
  have re-entered the market
• Upfront-fees are very transaction specific, however a
                                                                                                                       AA                 A                BBB                                                                              AA               A                BBB
  certain decrease during the last couple of months has
  been seen                                                                                                              Source: Loan Pricing Corporation                                                                               Source: Loan Pricing Corporation
    – Upfront fees are usually tiered nowadays
    – There is a distinct difference in fees for a 364day        364-Day Average Drawn Pricing                                                                                         Multi-Year Average Drawn Pricing
      tenor and 3-years
                                                                                       300                                                                                                                    300
    – Fees for refinancings have been lower than new-




                                                                                                                                                                                        Drawn Fees (L+bps)
                                                                  Drawn Fees (L+bps)
      money transactions                                                               250                                                                                                                    250                                                  Not enough data for
                                                                                                                                                                                                              200                                                     full A and AA
    – Likewise, fees for facilities where there has been a                             200
                                                                                                                                                                                                                                                                     representation
      bond-issue done close to the bank-transaction, have                              150                                                                                                                    150
      seen lower levels than otherwise would have been                                 100                                                                                                                    100
      expected
                                                                                        50                                                                                                                    50
• Pricing for acquisition facilities is following a different
                                                                                            0                                                                                                                  0
  structure, e.g. with step-ups in margin over time, duration-




                                                                                                                                                                                                                     Q107
                                                                                                                                                                                                                              Q207
                                                                                                                                                                                                                                      Q307
                                                                                                                                                                                                                                              Q407
                                                                                                                                                                                                                                                     Q108
                                                                                                                                                                                                                                                            Q208
                                                                                                                                                                                                                                                                     Q308
                                                                                                                                                                                                                                                                            Q408
                                                                                                                                                                                                                                                                                   Q109
                                                                                                                                                                                                                                                                                          Q209
                                                                                                                                                                                                                                                                                                 Q309
                                                                                                Q107
                                                                                                         Q207
                                                                                                                  Q307
                                                                                                                          Q407
                                                                                                                                  Q108
                                                                                                                                          Q208
                                                                                                                                                  Q308
                                                                                                                                                          Q408
                                                                                                                                                                  Q109
                                                                                                                                                                         Q209
                                                                                                                                                                                Q309
  fees, arrangement/upfront fees paid at initial commitment
  and the remainder at funding
                                                                                                                       AA                   A                   BBB                                                                         AA                A                BBB

                                                                                                                         Source: Loan Pricing Corporation                                                                                   Source: Loan Pricing Corporation



                                                                                                              8
High Grade Bank Market Outlook
Market Outlook for the Remainder of the Year and Early 2010

• Although still not completely healthy, and barring any unforeseen events, we would expect the trend of improving loan market capacity to
    continue
• 364-day tenors will remain attractive, especially to large higher rated borrowers, however 3-year tenors will continue to increase its share of
    the market
        – At some point in time 5-year tenors could be expected to make a re-entry, but at least at the outset most likely for select A rated
            companies only
        – The significant jump in Basel II capital requirements for 5-year tenor deals (vs 3-year deals) for BBB rated borrowers will slow the
            migration
•   While pricing will remain elevated compared to historic levels, we expect to see competitive pressure gradually tighten grids and upfront fees
    over time
        – As noted, we have recently already seen Investment Grade Undrawn Fees tighten from market highs
        – Tiered upfront fees for larger facilities will remain
        – The level of Upfront fees will continue to be highly borrower specific
•   CDS based pricing for true CP back-up facilities, will in all likelihood still be a common mechanism, but with an increasing number of deals
    done with a traditional ratings-grid
•   A majority of transactions will continue to be refinancings with a sprinkling of acquisition facilities
        – The concept of "amend-and-extend" will be seen for BBB- and cross-over companies, but will probably decrease in importance overall
        – Term out of financing in the bank-market if the capital market is an alternative, will continue to be adversely looked upon by banks
        – Letter of Credit facilities, or l/c sub-tranches, will still be difficult to structure for larger syndicated facilities in view of bank fronting risk
            issues
•   Even though already the case, Relationship Banks will increasingly form the base for any bank-facility
•   Timing-wise companies will look at opportunities to refinance a bit earlier than they might prefer, albeit subject to market developments
        – With the major refinancing "towers" in 2H2011 and 2012, as well as taking into account potential ratings-aspects of "going current," we
            think several companies will consider refinancing in 1H2010 (for 2011 maturities) and 2H2010 (for 2012 maturities), even if it means
            that favorable existing pricing will have to be given up
        – For the remainder of 2009, activity is expected to slow down the closer to the end of the year we are, albeit the end-of-year
            sensitivities do not seem as severe as the market previously had expected




                                                                              9
High Grade Bond Market Update
Capital Markets Macro Backdrop
Volatility is holding well           Volatility has broken through 30...                  S&P Up 60% from Low...                                                           Positive 3Q Earnings
below the 30 point level             90                                                 1,300
and is at the lowest level                                                                                                                                                                          Negative         Positive
                                     80                                                 1,200
since Lehman’s collapse                                                                                                                                                 100%




                                                                                                                                            S&P 500 Earnings Surpises
                                     70
                                                                                        1,100
                                                                                                                                                                                   80%
                                     60
The S&P is up 60% from                                                                  1,000




                                                                                  SPX
                               VIX
                                     50                                                                                                                                            60%         58      9       29
its March intraday low of                                                                                                                                                                                                52      33
                                                                                          900
666                                  40
                                                                                                                                                                                   40%
                                     30                                                   800

                                                                                          700                                                                                      20%
The majority of 3Q                   20
                                                                                                                                                                                               16      3       10
                                                                                                                                                                                                                         11       4
earnings results                     10                                                   600                                                                                            0%
exceeded expectations                Nov-08 Feb-09 May-09 Aug-09 Nov-09                    Nov-08 Feb-09 May-09 Aug-09 Nov-09                                                                 Cons. Energy     Fin     Ind. & TMT
                                                                                                                                                                                                                      Materials
                                                              Source: Bloomberg                                      Source: Bloomberg                                                            Source: Bloomberg using Best EPS
Rates have reversed
despite the increase in
equities (as investors
continue to demonstrate              Rates Move Wider                                      IG Index at Lows of the Year                                                     YTD 2009 vs. 2008 Supply
demand for the safety of
government debt)                                    5yr                                                                                                                                  80
                                     5%             10yr                                   300                                                                                                             2008                 2009
                                                                                                                                                                                         70
                                                    30yr




                                                                                                                                                                 Issuance Volume ($bn)
Credit Spreads (IG Index)                                                                  250                                                                                           60
                                     4%
are right around their                                                                                                                                                                   50
lowest levels since 2008                                                                   200
                             Yield




                                                                                                                                                                                         40
                                                                                    bps

                                     3%
                                                                                           150                                                                                           30
Investment grade new
                                     2%                                                                                                                                                  20
issue volume is                                                                            100
substantially outpacing                                                                                                                                                                  10
that of 2008                         1%                                                     50                                                                                            0
                                      Nov-08 Feb-09 May-09 Aug-09 Nov-09                         J   F M A   M   J     J   A   S O     N                                                      J   F M A M J           J A       S O N

                                                              Source: Bloomberg                                            Source: Markit                                                                                 Source: RBS



                                                                                           11
Very Strong Executions
New issue premiums       Investment Grade Corporate Issuance                                                                New Issue Premiums
have declined
significantly in 2009,                      80
                                            70                                                                                                        120
with average
premiums currently                          60                                                                                                        100
below 10 bps                                50                                                                                                         80




                          $ bln
                                            40




                                                                                                                                     bps
                                                                                                                                                       60
                                            30
Improvement in                                                                                                                                         40
                                            20
liquidity and investor                                                                                                                                 20
demand has resulted                         10
                                                                                                                                                        0
in 2009 YTD issuance                         0




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                                                          Feb
                                                          Mar
                                                          Apr
                                                          May
                                                          Jun
                                                          Jul
                                                          Aug
                                                          Sep
                                                          Oct
                                                          Nov
already surpassing
2008 totals                                                                                                                                                 New Issue Premiums    Pre-Lehman
                                                                  AAA   AA   A     BBB

                                                                                                Source: RBS                                                                                Source: RBS
We have seen some
of the strongest
demand on record         IG New Issue Spread Levels                                                                         Orderbook Oversubscription Levels
(i.e. orderbook
                                                        800                                     300
oversubscription)                                                                                                                                     6.0
over the course of                                      700




                                                                                                                               Times Oversubscribed
                                                                                                      Spread to UST (bps)
                                                                                                250
                                  Spread to UST (bps)




                                                                                                                                                      5.5
the past several                                        600                                                                                           5.0
months                                                  500                                     200
                                                                                                                                                      4.5
                                                        400                                     150                                                   4.0
                                                        300                                     100                                                   3.5
                                                        200                                                                                           3.0
                                                        100                                     50                                                    2.5
                                                          0                                     0                                                     2.0




                                                                                                                                                            Jan
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                                                              Jul
                                                              Sep
                                                              Nov
                                                              Jan
                                                              Mar
                                                              May
                                                              July
                                                              Sep
                                                              Nov




                                                              A     BBB          Differential                                                                 Orderbook Oversubscription Level


                                                                                                Source: RBS                                                                                Source: RBS



                                                                                      12
Where do we go from here?
• Treasuries
      – Treasuries have sold off 1%-2% from the all-time lows of late 2008, however, still remain meaningfully lower than the
        historical average
      – While rates have stayed in a 50bp holding pattern since May, we are forecasting a sharp sell-off in Q4/Q1, with rates
        steadily going higher through 2011
• Spreads
      – Over the past 2 months, the Investment Grade Credit market has rallied significantly (150-200bps+)
      – Supported by positive market technicals, spreads may have been driven too tight (based on the fundamental backdrop),
        and we‟ve seen periods of risk unwinding, albeit short-lived
      – While we expect there is only marginal room for further tightening, the cash inflows into Corporate bonds and heavy reliance
        on the asset class, should keep spreads within a narrow band in the near term.
• Supply
      – Amidst the extended rally in UST Rates and spreads, there has been an abundance of Corporate supply in 2009 (+$420bn,
        ex-FIG), which slowed in recent weeks given earnings season
      – However, as we come out of issuer blackout, real-money accounts should continue to demonstrate insatiable demand for
        investment grade Corporate paper, and we expect healthy issuance volumes through the rest of the year (~$50bn-$75bn)
      – If rates sell off, as forecasted, the November/December window will be a focus for issuers looking to minimize reoffer yields
        and prefund 2010/2011 maturities
• New Issue Premium
      – The corporate new issue premium has returned to pre-Lehman levels despite some hiccups in the first half
      – High-quality issuance currently require as little as zero premium, while lower-rated credits have paid 25-30bps(+)
• Investors
      – The notable real-money accounts have remained the most active in high-quality new issues
      – The pool of BBB-buyers is very similar and continues to buy in large size, especially given higher yields


                                                                  13
Leveraged Bank Market Update
Leveraged Loan Market Update
After a devastating 2nd half of 2008, the loan market has rallied substantially through YTD 2009
  • Waves of “forced selling” seen in late 2008 have abated
             – BWIC activity has totalled $5.1 billion this year vs $11.0 billion during the same period last year
             – BWIC activity for 2008 totalled $12.4 billion
  • Loan flow names are 89.3 on Nov. 5th after reaching a 15-month high of 92.0 on Sep. 17th
  • The LBO backlog has been largely eliminated through selling, restructuring and deals being terminated
  • The New Issue Calendar continues to be dominated by asset backed financings, DIPs and refinancings
             – Many banks, except for regionals, continue to suffer from capital constraints, and remain selectively active
             – Refinancings are typically smaller, with shorter tenors and higher spreads
             – Several large A-rated acquisition financings have absorbed a great deal of investor demand at spreads of L+275-300

 LCD Loan Flow Names                                                              Institutional Loan New Issuance Volume

                                                                                                       $450
    100                                                                                                $400
                                                                      89.3                             $350




                                                                                     ($ in billions)
        80                                                                                             $300
                                                                                                       $250
        60                                                                                             $200
 Bids




                                                      63.5
                                                                                                       $150
        40                                                                                             $100
                                                                                                        $50
                                                                                                         $0
        20




                                                                                                            09

                                                                                                            09

                                                                                                            09
                                                                                                           98

                                                                                                           99

                                                                                                           00

                                                                                                           01

                                                                                                           02

                                                                                                           03

                                                                                                           04

                                                                                                           05

                                                                                                           06

                                                                                                           07

                                                                                                           08
                                                                                                         1Q

                                                                                                         2Q

                                                                                                         3Q
                                                                                                         19

                                                                                                         19

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20

                                                                                                         20
        0
         9/05      5/06     1/07     9/07     5/08     1/09    9/09                                                Refis   New Money Inst. Iss.
 Source: LCD                                                                      Source: LPC




                                                                             15
Leveraged Loan Market Update (cont‟d)
• Non-existent in 1Q09, the institutional loan market has               Weekly Loan Mutual Fund Flows
  grown increasingly more active as we seen several                                                $300
  transactions hit the market recently
    – Within the couple weeks, we have seen the launch of                                          $200
                                                                                                                               2/09     4/09     6/09                11/09
      leveraged M&A loans (Warner Chilcott, Reynolds                                                                        1/09            5/09
                                                                                                                                                     7/09
                                                                                                                                                                10/09
                                                                                                   $100




                                                                                 ($ in millions)
      Packaging) and two large LBO loans (Skype, GenTek),                                                     11/08                                      8/09 9/09

      the upsizing of a 2nd-ln loan (Realogy), as well as                                             $0
      multiple add-on TLBs (Harrah‟s, Delta, Laureate                                                               12/08
      Education)                                                                                   ($100)                            3/09

    – Institutional demand has increased as windfalls from                                         ($200)
                                                                                                            10/08
      repayments, mainly due to bond-for-loan exchanges,
      and massive inflows from retail funds have put cash                                          ($300)
      back in the hands of institutional investors                      Source: LCD

        – Cash flows to/from loan mutual funds have posted
                                                                        Selected Benchmark Levels
          $2.4 billion in net inflows over a 33-week rally, with
          $109 million coming in last week                                                                                         10/22/2009      10/29/2009       11/5/2009
                                                                        Cablevision (BB/Ba2)                                                95.5          95.0               94.3
        – YTD loan mutual funds have posted $2.9 billion in
                                                                        Community Health (B1/B+)                                            93.3          92.8               91.3
          net inflows vs $4.2 billion in net outflows for the
                                                                        First Data (B3/B)                                                   86.1          85.8               84.6
          same period in 2008
                                                                        Ford (Caa3/CCC+)                                                    89.0          88.5               89.3
• The credit-based bifurcation between loan spreads has                 Georgia-Pacific (Ba3/BB-)                                           96.9          96.0               95.3
  narrowed dramatically as lower rated credits been bid up
                                                                        Harrah's (Caa3/CCC+)                                                80.8          79.4               78.5
  substantially. Spreads by ratings as of Nov. 5th are as
                                                                        TXU (B3/B-)                                                         79.3          76.8               76.3
  follows:
    – Ba3/BB- – Bid 95.36 / YTM is 4.29%
    – B1/B+ – Bid is 94.24 / YTM is 4.66%
                                                                        Source: LCD
    – B2/B – Bid is 92.96 / YTM is 5.35%

                                                                   16
High Yield Bond Market Update
High Yield Market Conditions

The high yield market has continued to rally through the late summer and fall, buoyed by strong equity markets, improving
economic data and strong third quarter earnings:


• Secondary markets have rallied approximately 12 points since July 15 and 6 points since the labor day holiday
      – Yields have dropped in all rating categories:
                                         Index Yields by Rating             Index Yields by Rating
                                                           11/6/2009                            8/2/2009
                                         BB                    7.65%        BB                    8.45%
                                         B                     9.04%        B                    10.29%
                                         Index                 9.64%        Index                11.39%
                                         CCC/Split            14.09%        CCC/Split            16.90%

• The new issue market continues to be extremely robust:
      – $121 billion has been raised by high yield issuers in 271 transactions so far this year

      – $19 billion was raised in September, the best September on record, followed by $15.1 billion in October

      – $2.9 billion has been raised so far in November



• As the bank market has shrunk, borrowers have increasingly turned to the bond market as a source of liquidity
      – 79% of YTD issuance has been refinancings and bank debt redemptions

      – 52% of YTD issuance has come from BB rated issuers

      – 10% of YTD issuance has come from split CCC+ split rated issuers


                                                                       18
High Yield Market Conditions – Outlook for November / December 2009

We believe that the new issue market is likely to remain attractive into December, but that investors may “shut down
early” for the holiday break because of this year’s strong returns
• The pace of defaults is slowing and default forecasts are being lowered
    – From December 2008 to April 2009 high yield defaults averaged $11.5 billion monthly; from May – September 2009 the
      average dropped to $4.5 billion monthly
    – Some strategists have cut default forecasts to as low as 4% for 2010; current index spreads would indicate a 12-month
      future default rate of 6%
• Economic data are improving
    – Existing home sales were better than expected; GDP rose 3.5% for the third quarter vs. street consensus of 3.1%; Case
      Shiller home price index was better than expected
    – 75% – 80% of companies reporting earnings through late October beat street expectations
• Investors continue to have cash to put to work
    – $18 billion of cash has flowed into weekly reporting mutual funds during 2009; the past 10 weeks have see consecutive
      inflows totaling $3.0 billion
• Issuers are still confronting large 2011 – 2012 maturity towers
    – Many frequent issuers / large companies have completed their financing needs for the year
    – The calendar has shifted to smaller issues from less frequent issuers
    – As the calendar has shifted to less frequent issuers, the “road show” has returned; during the first half of 2009 66% of the
      calendar was “drive by” issuance; during third quarter 2009 this dropped to 56%
• However, returns to the high yield sector have been strong; as the year comes to an end investor appetite may wane as portfolio
  managers seek to protect gains for the year


                                                                    19
Secondary Market Returns

The High Yield market has outperformed many other sectors during 2009, including both equities and investment grade
bonds




 2009 YTD Returns                                                                                                                                2009 YTD Returns by Rating

                                                                                                                                                              96.6%

         67.6%       65.0%
                                                                                                                                                                            68.1%
                                52.0%                                                                                                                                                  61.6%
                                           47.0%
                                                                                                                                                                                                      52.0%
                                                     35.3%                                                                                                                                                             42.1%   41.4%
                                                                                                                                                                                                                                       36.5%          34.3%
                                                              25.8%
                                                                           20.6%    20.4%           17.7%   15.5%
                                                                                                                         6.4%




                                                                                                                                                                                                                                       BB
                                                                                                                                                                                                                               B
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                                                                                                                                            20
New Issue Market Conditions

New Issue Volume 2004 – YTD 2009                                                                                                      YTD New Issue by Rating

                                                                                                                                                                           B
 200.0
                                                                                                                                                                         27.6%
 175.0




                                         175.5
 150.0
                 154.5




                                                                                                                                                    Split BB




                                                           145.1
 125.0                                                                                                                                               22.8%                       Split B
                                                                                                       109.2
                                                                                                                                                                                 6.2%
                           111.9




 100.0

  75.0                                                                                                                                                                           CCC
                                                                                     51.0                                                                                        4.0%
  50.0
                                                                                                                                                                                         NR


                                                                         52.1




                                                                                                                        15.1
  25.0                                                                                                                                                                                  0.1%
                                                                                                                                                                            Split BBB
   0.0                                                                                                                                                                       10.0%
                                                                                                                                                                 BB
                 2004




                           2005




                                         2006




                                                           2007




                                                                         2008




                                                                                     1st 3 Q's




                                                                                                      1st 3 Q's




                                                                                                                        Oct-09
                                                                                       2008




                                                                                                        2009
                                                                                                                                                                29.4%



YTD New Issue by Industry                                                                                                             YTD New Issue by Use of Proceeds


  14%      13%
                 12% 12%
  12%
  10%
                                                                                                                                                                              General
                           9%
                                   8%   8%                                                                                                                                   Corporate
   8%
                                                 6%   6%                                                                                                                       15%
   6%                                                          5%
                                                                    4%
                                                                         4%
   4%                                                                           3%   3%
                                                                                                 2%
                                                                                                      2%      2%
                                                                                                                                                                                   Acquisition
   2%                                                                                                              1%       1%
                                                                                                                                                                                 Finance / LBO
   0%                                                                                                                                                                                 5%
                                                                                                                                                 Refinancing
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                                                                                                                                 21
Key High Yield Market Indices

Historical Context                            Treasuries vs. 3 month LIBOR                                                New Issue Volume
                                                                                                                 200.0
                                                      10-Year Treasury Rates            3-Month LIBOR Rates
                                                                                                                 175.0




                                                                                                                                                 175.5
                                 6%                                                                              150.0




                                                                                                                               154.5




                                                                                                                                                         145.1
                                                                                                                 125.0                                                              109.2
                                                                                                                 100.0




                                                                                                                                        111.9
                                 4%
                                      Yield                                                                        75.0
                                                                                                                                                                        51.0
                                                                                                        3.51%      50.0




                                                                                                                                                                                                15.1
                                                                                                                                                                 52.1




                                                                                                                                                                                                         2.6
                                                                                                                   25.0
                                 2%
                                                                                                                    0.0




                                                                                                                                                                                                         Nov-09
                                                                                                                               2004


                                                                                                                                        2005


                                                                                                                                                 2006


                                                                                                                                                         2007


                                                                                                                                                                 2008




                                                                                                                                                                                                Oct-09
                                                                                                                                                                        1st 3 Q's


                                                                                                                                                                                    1st 3 Q's
                                                                                                        0.27%




                                                                                                                                                                          2008


                                                                                                                                                                                      2009
                                 0%
                                   2004                2005         2006     2007      2008      2008
                               Source: Bloomberg                                                                Source: RBS Syndicate


                                              High Yield Index Spread to Treasuries                                       Defaults

                                                                                                                      14%                       Principal Amount
                                              2,500                                                                                             # of Issuers                                        13.20%
                                                                                                                      12%                       Forecast (# of issuers)
                     Spread to Worst (bps)




                                                          1652
                                              2,000                                                                                             Historical Average (# of issuers)
                                                                                                                      10%                                                  9.75%
                                              1,500                                                                    8%
                                                                                                                                                                              7.17%
                                                                                                         754
                                                                                                                       6%
                                              1,000
                                                                                                                       4%
                                               500
                                                                                                                       2%

                                                  0                                                                    0%
                                                   4/09      5/09    6/09    7/09     8/09    9/09   10/09




                                                                                                                          7




                                                                                                                          8




                                                                                                                          9




                                                                                                                          0
                                                                                                                         08

                                                                                                                         08

                                                                                                                         08



                                                                                                                         09

                                                                                                                         09

                                                                                                                         09



                                                                                                                         10

                                                                                                                         10

                                                                                                                         10
                                                                                                                        /0




                                                                                                                        /0




                                                                                                                        /0




                                                                                                                        /1
                                                                                                                      2/

                                                                                                                      5/

                                                                                                                      8/



                                                                                                                      2/

                                                                                                                      5/

                                                                                                                      8/



                                                                                                                      2/

                                                                                                                      5/

                                                                                                                      8/
                                                                                                                     11




                                                                                                                     11




                                                                                                                     11




                                                                                                                     11
                                                             HY Master Index Spread (bps)
                                                                                                                    Source: Moody's Speculative Grade Defaults




                                                                                                22
Key High Yield Market Indices

Recent Market               CDX HY12                                                                                                 High Yield New Issue Volume
Performance
                                                                                                                                                     10.0




                                                                                                                           New Issue Volume ($bn)
                                  98.0
                                                                                                                                                      9.0
                                  96.0                                                           92.50                                                8.0     6.7
                                                                                                                                                      7.0
                                  94.0                                                                                                                6.0               4.9                                          4.7
                    Closing Bid                                                                                                                                                                                                  4.4
                                                                                                                                                      5.0
                                  92.0      91.12                                                                                                     4.0                         2.8
                                                                                                                                                                                               3.4
                                                                                                                                                                                                           2.7                           2.6
                                  90.0        5                                                                                                       3.0
                                                                CDX rolls to                                                                          2.0
                                  88.0                          CDX 13                                                                                1.0
                                                                                                                                                      0.0
                                  86.0




                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09


                                                                                                                                                              09
                                  84.0




                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20


                                                                                                                                                            20
                                                                                                                                                          8/


                                                                                                                                                          5/


                                                                                                                                                          2/


                                                                                                                                                          9/


                                                                                                                                                          6/


                                                                                                                                                          3/


                                                                                                                                                          0/


                                                                                                                                                          6/
                                  82.0




                                                                                                                                                        /1


                                                                                                                                                        /2


                                                                                                                                                        /0


                                                                                                                                                        /0


                                                                                                                                                        /1


                                                                                                                                                        /2


                                                                                                                                                        /3


                                                                                                                                                        /0
                                                                                                                                                     09


                                                                                                                                                     09


                                                                                                                                                     10


                                                                                                                                                     10


                                                                                                                                                     10


                                                                                                                                                     10


                                                                                                                                                     10


                                                                                                                                                     11
                                   08/14/2009   09/04/2009   09/25/2009        10/16/2009   11/06/2009


                                                                                                            Source: RBS Syndicate
                Source: RBS Credit Trading


                            High Yield Master Index                                                                                  Mutual Fund Flows


                                   94                                                                                                      $1,100                              1/09                 4/09
                                                                                               91.99                                                                                                              6/09
                                                                                                                                                    $900                                                   5/09
                                                                                                                                                                                      2/09                                      8/09
                                   92                                                                                                               $700
                                                                                                                                                                                                                                         10/09
                                                                                                                                                    $500                                                                 7/09




                                                                                                         ($ in millions)
                                   90                                                                                                                              11/08                                                          9/09
                    Closing Bid




                                                                                                                                                    $300               12/08
                                                                                                                                                    $100                                                                                   11/09
                                   88
                                                                                                                                                    ($100)
                                   86                                                                                                               ($300) 10/08
                                                                                                                                                    ($500)
                                   84    85.6                                                                                                       ($700)
                                                                                                                                                                                             3/09

                                   82                                                                                                                  Source: AMG
                                   08/14/2009   09/04/2009   09/25/2009         0/1
                                                                               1 6/2009      1
                                                                                            1 /06/2009




                                                                                                  23
Q&A
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                                                                                                   25

								
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