Refinancing Activity Pushes out the Maturity Wall Record capital - PowerPoint PPT Presentation

Investing in a “Low Rates for Longer” Environment

Refinancing Activity Pushes out the Maturity Wall Record capital market conditions improved corporate liquidity and minimized the immediate need to access capital • 67% of new issuance over the last three years was used to refinance existing debt • The healthy new issue market should remain strong and continue to fuel refinancing • High yield debt due in 2013 is $48 billion • Both high yield bonds and bank loans set to mature through 2014 were reduced by $587 billion since the beginning of 2009 • High Yield Bond and Institutional Loan Maturities Change in Combined High Yield Bond and Loan Maturity Schedules Since December 2008 350 300 241 294 222 300 218 200 168 250 104 100 $ billions 200 $ billions 16 168 160 149 140 141 143 0 150 130 109 98 100 -100 78 66 48 46 35 50 -151 -200 12 3 0 -202 0 -234 -300 2012 2013 2014 2015 2016 2017 2018 2019 2020 or later 2012 2013 2014 2015 2016 2017 2018 2019 2020 or later HY Bonds Inst. Leveraged Loans Notes: Change is measured between December 2008 and November 2011 Source: JP Morgan 2

High Yield Correlation Analysis 20-Year Correlation of Asset Classes Russell January 1992- December 2012 US Govt 5-7 Years US Govt 10+ Years ML Mortgage 2000 U.S. Intermediate Term Government U.S. Long Term Government 0.88 Merrill Lynch Mortgage 0.84 0.73 Merrill Lynch ABS 0.59 0.45 0.65 Merrill Lynch Corporate 0.64 0.63 0.70 Barclays US Agg Bd USD 0.90 0.85 0.91 Barclays AAA Corp 0.81 0.83 0.74 S&P 500 -0.16 -0.17 0.02 Russell 2000 -0.26 -0.24 -0.10 JPM Emerging Markets 0.23 0.23 0.40 0.46 MSCI EAFE -0.18 -0.19 -0.01 0.71 Gold 0.16 0.07 0.19 0.10 US Inflation -0.17 -0.23 -0.14 0.02 FTSE NAREIT All REITs -0.06 -0.07 0.04 0.66 Credit Suisse High Yield Index -0.15 -0.13 0.08 0.63 Credit Suisse Leveraged Loan Index -0.32 -0.31 -0.13 0.43 Source: Credit Suisse 3

High Yield and Interest Rate Sensitivity 12 Month Holding Period - Annualized Returns a/o 12/31/2012 Aggregate Int. Aggregate Corp/Gov Int. Corp/Gov Opportunistic Defensive BB Short Duration ML US ML US ML US ML US ML US HY ML US HY ML US HY ML US HY Yield Change Broad Market Dmstc Mstr 7-10yrs Corp/Gov Mstr Corp/Gov 7-10yrs Master II Cons BB-B ND BB Sr CPC BB-B CP 1-3yrs (bps) US00 D4A0 B0A0 B4A0 HUC0 H4ND J0AC J1A4 -150 9.01 13.18 10.69 13.18 12.30 11.53 11.27 5.58 -100 6.52 9.55 7.65 9.55 10.22 9.36 9.00 4.82 -50 4.04 5.92 4.62 5.92 8.15 7.19 6.73 4.07 -25 2.79 4.11 3.10 4.11 7.11 6.11 5.60 3.69 0 1.55 2.29 1.58 2.29 6.07 5.02 4.46 3.31 25 0.31 0.48 0.06 0.48 5.03 3.94 3.33 2.93 50 -0.94 -1.34 -1.46 -1.34 4.00 2.85 2.19 2.56 100 -3.42 -4.97 -4.49 -4.97 1.92 0.68 -0.08 1.80 150 -5.91 -8.60 -7.53 -8.60 -0.15 -1.49 -2.35 1.05 200 -8.39 -12.23 -10.56 -12.23 -2.23 -3.66 -4.62 0.29 250 -10.88 -15.86 -13.60 -15.86 -4.31 -5.83 -6.89 -0.47 300 -13.36 -19.49 -16.63 -19.49 -6.38 -8.00 -9.16 -1.22 350 -15.85 -23.12 -19.67 -23.12 -8.46 -10.17 -11.43 -1.98 400 -18.33 -26.75 -22.70 -26.75 -10.53 -12.34 -13.70 -2.73 450 -20.82 -30.38 -25.74 -30.38 -12.61 -14.51 -15.97 -3.49 500 -23.30 -34.01 -28.77 -34.01 -14.68 -16.68 -18.24 -4.24 Duration 4.970 7.260 6.070 7.260 4.150 4.340 4.540 1.510 For each index the current yield to worst as of 12/31/2012 was used as the base case annualized return. The annualized return sensitivity to a uniform increase or decrease in the yield curve was calculated by taking the index’s modified duration to worst as of 12/31/2012multiplied by the percentage point change in the yield curve (basis point change divided by 100) and then appropriately adding or subtracting this implied percentage change in the value of the index (due to the shift in the yield curve) to the base case annualized return. This is a rough approximation of the annual return sensitivity to parallel shifts in the yield curve. 4

Institutional Leveraged Loans Versus High Yield Bonds Leveraged Loans Versus Bonds Pros Cons Floating coupon offers protection against rising rates Lower coupon and lower total return potential Higher quality Longer settlement Stronger covenants Not call protected Provides diversification of credits versus bond index More concentrated set of underwriters and larger trade lot sizes Senior & Secure Double-B & High Quality Bias Single-B Triple-C & Lower Non-Rated Higher First Lien 95% Second Lien 4% Leveraged Loans 54% 38% 2% 6% Other 1% High Yield 41% 42% 17% 0% Covenant-lite 27% Price vs. Yields Avg. Price Avg. Coupon Avg. Maturity Yield to Maturity Current Yield Leveraged Loans $100 5.2% 4.8 years 5.3% 5.2% High Yield Bonds $104 7.8% 6.5 years 6.7% 7.5% Leveraged Loans: CS Inst LL Index High Yield Bonds: BofA MLHY Master II Constrained Index 5

PRR – PENN Risk Rating Forward Metrics BB/> B CCC/< Step 1: Probability of Default 0-10% 10-25% >25% Map quantitative Challenge: Net Leverage <3x 3-5x >6x forward metrics to Rating agencies are unreliable Interest Coverage >3x 2-3x <2x the appropriate PRR Backward-looking - Recurring FCF/Debt >10% 5% 0% Reactive, not proactive - Requires conviction in liquidity sources and management execution Infrequent updates - Step 2: Opportunity: Notch PRR up/down Recovery BB/> B CCC/< Inaccurate ratings can lead to mispriced for underlying asset Notch the PRR 80 cents 50 cents 20 cents securities value PENN Solution: Step 3: PENN’s proprietary credit rating Qualitative Factors and Bond Specific Characteristics Notch PRR up/down process • • Strength of covenants Event risk for qualitative factors • • Maturity schedule Cyclicality • • or bond specific Company liquidity Corporate structure • • Bond liquidity Equity cushion/sponsor characteristics Value Added: PENN’s forward looking process identifies misrated and mispriced Agency Rating Mkt. PRR PENN Attractive? securities value Expectation Step 4: CCC+/ Split- B BB Spread Tightening Yes Verify attractiveness Rated of relative value BB B CCC+/ Split- Spread Widening No Rated 6

Liquidity Advantage  Larger asset managers often ignore below average size issues Approximately 65% of all high yield issues are $500 million or less in size*  Two of the largest high yield ETFs (HYG and JNK) exclude issues below $600 and $400 million, respectively   PENN’s strict capacity constraints enable: Freer movement into and out of positions  Participation in the entire high yield universe  Example: 1% Position on a $500 Million Issue Manager 1 Manager 2 High Yield Manager Assets ($ billions) $20 $5 Issue Size ($ millions) $500 $500 Position Size 1% 1% Amount of Issue Owned ($ millions) $200 $50 Percentage of Issuance Owned 40% 10% Liquidity Risk Relative Liquidity Advantage *(Source: BofA Merrill Lynch) 7