Stone Harbor Investment Partners LP Breakfast Seminar London 28 - PowerPoint PPT Presentation

Stone Harbor Investment Partners LP Breakfast Seminar London 28 January 2016

Today’s Agenda 1. Understanding the Current Cycle 2. Interest Rates – The Major Secular Call 3. Cyclical Economic Overview 4. Headwinds − Energy and Commodities − Corporate Growth and Profitability − Productivity 2

1. Understanding the Current Cycle

Sample Target Asset Allocation History 100% Treasuries/Cash 90% IG Corporates 80% Securitized 70% Bank Loans 60% 50% EMD - Corporate 40% U.S. High Yield 30% European High Yield 20% EMD - Hard 10% EMD - Local 0% Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Duration (years) 4.00 3.50 3.00 2.50 2.00 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 As of 31 December 2015 The information above is intended to illustrate how a Multi-Asset Credit portfolio may be constructed at various points in a market cycle. There is no assurance that target allocations would have been 4 achieved. Sample portfolio information has been provided for illustrative purposes only.

Credit Returns Have Been Highly Differentiated Across Asset Classes 2015 Excess Returns (%) 18 12 6 0.8 0.3 0.1 % 0 -0.1 -0.7 -1.6 -6 -6.0 -12 -16.0 -18 1 1 1 Eur HY EM Sov EM Corp Securitized 1 Loans U.S. IG U.S. HY 1 EM Sov HC 1 Corp LC 1 1 As of 31 December 2015 Sources: Barclays, BofA Merrill Lynch, J.P. Morgan, S&P/LSTA 500, Stone Harbor Investment Partners LP 1 For full description of the Barclays Capital U.S. Aggregate Corporate Index, Barclays Capital U.S. Securitized Index, BofA Merrill Lynch European Currency Non Financial High Yield 2% Constrained Index, BofA Merrill Lynch High Yield Master II Index, J.P. Morgan EMBI Global Diversified Index, J.P. Morgan CEMBI Broad Diversified Index, J.P. Morgan GBI EM Global Diversified Index and S&P/LSTA 500 Leveraged Loan Index, please refer to the endnotes. 5 For illustrative purposes only.

High Yield Bear Market Extended but not Deep Excess Securitized 1 U.S. IG Corp 1 Loans 1 U.S. HY 1 Eur HY 1 EM Corp 1 EM HC 1 EM LC 1 Returns 1996 1.21% 1997 -0.29% 2.17% 1998 -0.86% -2.24% 0.44% -4.76% -6.87% -16.85% 1999 1.14% 1.75% -0.54% 6.17% 17.19% 22.48% 2000 -0.61% -4.40% -0.99% -14.01% -15.32% 0.31% 2001 -0.52% 2.48% 0.12% -3.41% -13.14% 2.89% 2002 1.56% -2.33% 0.31% -12.23% -15.04% -2.01% 1.63% 2003 0.31% 5.66% 8.67% 24.74% 23.96% 15.58% 21.82% 14.58% 2004 1.37% 1.59% 3.95% 7.52% 10.02% 7.27% 8.28% 20.55% 2005 -0.30% -1.13% 2.00% 0.52% 2.86% 3.68% 7.30% 4.60% 2006 1.17% 1.23% 1.90% 7.94% 7.94% 3.85% 7.54% 11.35% 2007 -2.04% -4.91% -2.55% -6.83% -4.82% -4.68% -3.24% 8.40% 2008 -5.72% -17.47% -30.39% -34.45% -38.03% -25.51% -25.34% -15.10% 2009 6.99% 23.28% 51.38% 59.06% 62.47% 40.77% 41.22% 23.75% 2010 3.08% 2.04% 9.99% 9.09% 9.68% 8.10% 5.39% 9.74% 2011 -0.93% -3.48% 1.45% -3.29% -7.03% -6.56% -5.31% -7.91% 2012 1.32% 7.10% 9.58% 13.25% 20.11% 13.61% 15.63% 14.74% 2013 1.01% 3.02% 5.24% 9.62% 9.99% 2.94% -0.48% -7.61% 2014 0.41% -0.46% 1.56% -1.31% 1.31% 0.21% 0.13% -8.09% 2015 -0.09% -1.64% -0.71% -5.97% 0.78% 0.13% 0.31% -15.99% As of 31 December 2015 Sources: Barclays, BofA Merrill Lynch, J.P. Morgan, S&P/LSTA 500, Stone Harbor Investment Partners LP 1 For full description of the Barclays Capital U.S. Aggregate Corporate Index, Barclays Capital U.S. Securitized Index, BofA Merrill Lynch European Currency Non Financial High Yield 2% Constrained Index, BofA Merrill Lynch High Yield Master II Index, J.P. Morgan EMBI Global Diversified Index, J.P. Morgan CEMBI Broad Diversified Index, J.P. Morgan GBI EM Global Diversified Index, and S&P/LSTA 500 Leveraged Loan Index, please refer to the endnotes. 6 For illustrative purposes only.

Spreads are Potentially in Value Territory Barclays U.S. Aggregate Corporate Index Credit Suisse High Yield Index 35% 10% Current Level Current Level 9% 30% Sep 2008 - May 2009 8% Sep 2008 - March 2009 Sep 2002 - Oct 2002 25% 7% 1 Jan 1973 - Nov 2015 Oct 1990 - Jan 1991 6% 20% 1 Jan 1986 - Nov 2015 5% 15% 4% 3% 10% 2% 5% 1% 0% 0% 0 150 225 300 375 450 525 600 675 750 825 900 975 1050 1125 1200 1275 1350 1425 1500 1575 1650 1725 1800 1875 1950 75 0 75 150 225 300 375 450 525 600 675 750 825 900 975 1050 1125 1200 1275 1350 1425 1500 1575 1650 1725 1800 1875 1950 J.P. Morgan EMBI / J.P. Morgan EMBI Global Diversified Credit Suisse Leveraged Loan Index Discount Margin (4-year life) 10% 10% EMBI G D - Current Level Current Level 9% 9% EMBI G D (Aug 1998 - Oct 1998) Sep 2008 - Aug 2009 8% 8% EMBI (Dec 1994 - Dec 1995) 1 Jan 2000 - Nov 2015 7% 7% EMBI (Dec 1990 - Jan 1991) 6% 6% EMBI / EMBI G D (Dec 1990 - Nov 2015) 1 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% 0 75 150 225 300 375 450 525 600 675 750 825 900 975 1050 1125 1200 1275 1350 1425 1500 1575 1650 1725 1800 1875 1950 0 75 150 225 300 375 450 525 600 675 750 825 900 975 1050 1125 1200 1275 1350 1425 1500 1575 1650 1725 1800 1875 1950 As of 31 December 2015 1 Represents entire history of spreads for this period, minus the spread history represented by other periods described above. Sources: Barclays, Credit Suisse, J.P. Morgan, Stone Harbor Investment Partners LP The EMD benchmark uses J.P. Morgan EMBI G D from January 1998 forward, and J.P. Morgan EMBI prior to 1998. For full description of the Barclays Capital U.S. Aggregate Corporate Index, Credit Suisse High Yield Index, Credit Suisse Leveraged Loan Index, J.P. Morgan EMBI and J.P. Morgan EMBI Global Diversified Index please refer to the endnotes. 7 For illustrative purposes only.

Late Cycle Issuance Behaviour M&A activity has risen sharply although LBO issuance remains subdued U.S. High Yield New Issuance Use of Proceeds by QTR 1 100% Acquisition 80% Capex Dividend/recap Exit Financing 60% Other 2 General Corporate Purposes 40% Leveraged Buy Outs Repay bank debt Refinance 20% Redeem notes 0% Q1/2001 Q2/2001 Q3/2001 Q4/2001 Q1/2002 Q2/2002 Q3/2002 Q4/2002 Q1/2003 Q2/2003 Q3/2003 Q4/2003 Q1/2004 Q2/2004 Q3/2004 Q4/2004 Q1/2005 Q2/2005 Q3/2005 Q4/2005 Q1/2006 Q2/2006 Q3/2006 Q4/2006 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Q1/2015 Q2/2015 Q3/2015 Q4/2015 As of 31 December 2015. Source: The Prospect News High Yield Daily. 1 The tables include all dollar-denominated offerings sold as public or Rule 144A deals reported to Prospect News. Offerings are included in the time period in which they price. Issues maturing in 397 days or less are excluded. Convertibles, trust preferreds, capital securities and preferred stock are excluded. Fixed rate medium-term notes with a face value above 100 million are included. All other MTNs are excluded. Deals rated investment grade by either Standard & Poors or Moody's Investors Services are excluded, but deals not rated by both are included. Amounts are based on the total sales price (face amount multiplied by the offering price). Units made up of a bond and a warrant are included; other units are excluded. Each tranche is counted as a separate deal. Pass-throughs, collateral trust and equipment trust certificates are included. 2 Multiple uses in different categories without one dominating (75%) category, spinoffs, and issuance with no information on use of proceeds. 8 For illustrative purposes only.

M&A Issuance Likely to Weigh on Returns Higher M&A or LBO issuance tends to be associated with lower subsequent credit returns Use of Proceeds % (2001 - 2014) 80% Current Current LBO M&A Subsequent 12 Month U.S. HY Excess Return (2002-2015) 60% 40% 20% 0% -20% -40% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% % LBO % Acquisition As of 31 December 2015 Source: The Prospect News High Yield Daily 9 For illustrative purposes only.

Late Cycle Leverage Corporate leverage is high and rising U.S. HY Net Leverage Ratio 8 7 6 5 Leverage Ratio 4 3 2 1 0 Mar-98 Jun-99 Sep-00 Dec-01 Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13 Jun-14 Sep-15 U.S. HY U.S. HY Ex. Energy, Metals & Mining As of 30 September 2015 Sources: BofA Merrill Lynch For full description of the BofA Merrill Lynch U.S. High Yield Master II Index, please refer to the endnotes. 10 For illustrative purposes only.

Limited Recognition of Leverage in Spreads Spreads have only partially recognized this U.S. High Yield Spread per Turn of Net Leverage 500 450 400 350 Spread per Turn of Net Leverage 300 250 200 150 100 50 0 Mar-98 May-99 Jul-00 Sep-01 Nov-02 Jan-04 Mar-05 May-06 Jul-07 Sep-08 Nov-09 Jan-11 Mar-12 May-13 Jul-14 Sep-15 U.S. HY U.S. HY Ex. Energy, Metals & Mining As of 30 September 2015 Sources: BofA Merrill Lynch For full description of the BofA Merrill Lynch U.S. High Yield Master II Index, please refer to the endnotes. 11 For illustrative purposes only.