Where Are We? A Market Assessment Presentation to Columbia Business - PowerPoint PPT Presentation

Where Are We? A Market Assessment Presentation to Columbia Business School’s Program for Financial Studies November 2014 Trade Secret and Strictly Confidential | 0

 This presentation has been prepared by Centerbridge Partners, L.P. (“Centerbridge”) in connection with Columbia University’s Fourth Annual Program for Financial Studies Conference, for general informational purposes only, and contains a general overview on Centerbridge’s view of the current market environment. It should not be used or relied upon for any purpose.  In preparing the information presented, Centerbridge has relied without independent verification on certain information prepared or provided by third parties or otherwise obtained from published sources, including, without limitation, certain economic, market and other information, and in certain cases such information has not been updated through the date hereof. Centerbridge is under no obligation to update the information presented herein.  This presentation does not constitute an offering of interests in any Centerbridge-sponsored fund.

Today – How Historic Global Yields are at Historically Low Levels Source: Global Financial Data Absolute yields have only been this low after crises and wars 1 Trade Secret and Strictly Confidential | 2

US Yields Have Only Been Lower after WWII Today – How Historic 10% 12% 14% 16% 0% 2% 4% 6% 8% What is extraordinary about the movement in bond yields is the length of time for which Jan 1850 Feb 1853 they have been falling and, as a result, the huge returns that they have generated Mar 1856 Apr 1859 May 1862 Jun 1865 Jul 1868 Aug 1871 Sep 1874 Oct 1877 Nov 1880 Dec 1883 Jan 1887 Feb 1890 Mar 1893 Apr 1896 May 1899 Jun 1902 Jul 1905 Aug 1908 Sep 1911 Oct 1914 Nov 1917 US Long Bond Yields Dec 1920 Jan 1924 Feb 1927 Modern Private Equity Mar 1930 2 Apr 1933 May 1936 Jun 1939 Jul 1942 Aug 1945 Sep 1948 Oct 1951 Nov 1954 Dec 1957 Jan 1961 Feb 1964 Mar 1967 Apr 1970 May 1973 Jun 1976 Trade Secret and Strictly Confidential | 3 Jul 1979 Source: Credit Suisse Aug 1982 Sep 1985 Oct 1988 Nov 1991 Dec 1994 Jan 1998 Feb 2001 Mar 2004 Apr 2007 May-10 Jun-13

Bond Returns Have Outpaced Equities Today – How Historic 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x Dec 1849 Jan 1853 Feb 1856 Mar 1859 Apr 1862 Bond outperformance of last 15 years is rivaled only by Great Depression May 1865 Jun 1868 Jul 1871 Aug 1874 Sep 1877 Oct 1880 Nov 1883 Dec 1886 Jan 1890 Feb 1893 Ratio of Equity Return to Bond Returns Mar 1896 Apr 1899 May 1902 Jun 1905 Jul 1908 Only twice in recent memory Aug 1911 have bonds out performed equities on total return! Sep 1914 Oct 1917 Nov 1920 Dec 1923 Jan 1927 Feb 1930 3 Mar 1933 Apr 1936 May 1939 Jun 1942 Jul 1945 Aug 1948 Sep 1951 Oct 1954 Nov 1957 Dec 1960 Jan 1964 Feb 1967 Mar 1970 Apr 1973 May 1976 Trade Secret and Strictly Confidential | 4 Jun 1979 Source: Credit Suisse Jul 1982 Aug 1985 Sep 1988 Oct 1991 Nov 1994 Dec 1997 Jan 2001 Feb 2004 Mar 2007 Apr 2010 May 2013

Today – How Historic The Role of Growth Recovery around the corner? Job market finally recovered? Source: Bureau of Economic Analysis, Calculated Risk trend… 4 Trade Secret and Strictly Confidential | 5

Today – How Historic In Most Cycles, Equities and Rates are Positively Correlated 2,000 7.0% 1,800 6.0% 1,600 5.0% 1,400 1,200 4.0% 1,000 3.0% 800 600 2.0% 400 1.0% 200 0 0.0% SPX 10Yr Source: Bloomberg This relationship persisted through mid-2010...but then ended. Why? 5 Trade Secret and Strictly Confidential | 6

Today – How Historic The Role of the Fed… $4.5 2,000 QE3 1,900 $4.0 Twist QE1 QE2 1,800 $3.5 1,700 Fed Balance Sheet ($tn) 1,600 $3.0 1,500 1,400 S&P 500 $2.5 1,300 1,200 $2.0 1,100 $1.5 1,000 900 $1.0 800 700 $0.5 600 500 $0.0 S&P FED BS Source: Bloomberg 6 Trade Secret and Strictly Confidential | 7

Today – How Historic … And Its Impact on Rate Expectations 4,500,000 2,000.0 QE3 1,900.0 4,000,000 QE1 QE2 Twist 1,800.0 5.5% 3,500,000 1,700.0 1,600.0 3,000,000 1,500.0 4.6% 1,400.0 2,500,000 1,300.0 1,200.0 2,000,000 1,100.0 1,500,000 1,000.0 900.0 1,000,000 800.0 700.0 500,000 600.0 500.0 0 S&P 5Y5Y FED BS Source: Bloomberg Rate expectations have plummeted, which has given investors confidence to reach for long duration yield and equities 7 Trade Secret and Strictly Confidential | 8

Market Reaction The Expectation of Low Long-Term Rates Has Created Demand for New Asset Classes that only Work in an Environment of Low Rates Source: Citibank Lower rates leading to new products 8 Trade Secret and Strictly Confidential | 9

Market Reaction Frac Sand MLPs - HiCrush $80 7.0% $70 6.0% 40% equity price $60 5.0% decline $50 4.0% $40 3.0% $30 2.0% $20 1.0% $10 $0 0.0% 8/15/2012 9/15/2012 10/15/2012 11/15/2012 12/15/2012 1/15/2013 2/15/2013 3/15/2013 4/15/2013 5/15/2013 6/15/2013 7/15/2013 8/15/2013 9/15/2013 10/15/2013 11/15/2013 12/15/2013 1/15/2014 2/15/2014 3/15/2014 4/15/2014 5/15/2014 6/15/2014 7/15/2014 8/15/2014 9/15/2014 10/15/2014 Share Price Net Income Dividend Yield (R2) Source: Bloomberg Frac sand pricing is highly correlated with oil prices and end-market demand — bond-like? 9 Trade Secret and Strictly Confidential | 10

Market Reaction High Income ETFs - PGP $35 35% $30 30% $25 25% $20 20% $15 15% $10 10% $5 5% $0 0% 5/27/2005 5/27/2006 5/27/2007 5/27/2008 5/27/2009 5/27/2010 5/27/2011 5/27/2012 5/27/2013 5/27/2014 Share Price NAV Dividend Yield Source: Bloomberg PGP — dividend maintained through additional leverage and NAV premium goes up? 10 Trade Secret and Strictly Confidential | 11

Market Reaction European High Yield Tighter than US Since Draghi “Put” 12.0% 10.0% European tighter than US! 8.0% 6.0% 4.0% 2.0% 0.0% Baml HY OAS European HY OAS Source: Bank of America, Bloomberg Since 2009, US GDP growth has outperformed Europe by 14% 11 Trade Secret and Strictly Confidential | 12

Future Markets Could be Right; Equities and Bonds are Tracking Global Growth and Inflation 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 1/1/2012 2/1/2012 3/1/2012 4/1/2012 5/1/2012 6/1/2012 7/1/2012 8/1/2012 9/1/2012 10/1/2012 11/1/2012 12/1/2012 1/1/2013 2/1/2013 3/1/2013 4/1/2013 5/1/2013 6/1/2013 7/1/2013 8/1/2013 9/1/2013 10/1/2013 11/1/2013 12/1/2013 1/1/2014 2/1/2014 3/1/2014 4/1/2014 5/1/2014 6/1/2014 7/1/2014 8/1/2014 9/1/2014 10/1/2014 Global IP SPX US CPI HY Source: Bloomberg Growth in the face of low inflation means low rates can coincide with significant valuations 12 Trade Secret and Strictly Confidential | 13

Future But Also Worth Noting that Markets are Rarely Right about Future Rates… 9.000 8.000 7.000 6.000 5.000 4.000 3.2% 3.000 2.000 1.000 -- 5yr 5yr5yr - 5yrs Later Today Source: Bloomberg What happens to MLPs if rates rise? 13 Trade Secret and Strictly Confidential | 14

And When Markets Reset Expectations, It Happens Fast Future 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 6/30/1992 7/31/1992 8/31/1992 In 1994, Greenspan raised rates much faster than anticipated by the market 9/30/1992 10/31/1992 11/30/1992 12/31/1992 1/31/1993 2/28/1993 3/31/1993 4/30/1993 5/31/1993 Fed Funds 6/30/1993 7/31/1993 8/31/1993 9/30/1993 14 10/31/1993 5Y 11/30/1993 12/31/1993 S&P 1/31/1994 2/28/1994 3/31/1994 4/30/1994 5/31/1994 6/30/1994 Trade Secret and Strictly Confidential | 15 Source: Bloomberg 7/31/1994 8/31/1994 9/30/1994 10/31/1994 11/30/1994 12/31/1994 360 380 400 420 440 460 480 500

Future We Have Already Seen Violent Market Selloffs in this Cycle 140% 7.0% 6.8% 120% 6.6% 100% 6.4% 6.2% 80% 6.0% 60% 5.8% 5.6% 40% 5.4% 20% 5.2% 0% 5.0% Rate Volatility (LHS) HY Yield Source: Bloomberg Moves happen quickly, and HY underperforms 15 Trade Secret and Strictly Confidential | 16

Future If Rates Did Change Quickly, Changes to Bond Market Could Exacerbate Price Moves Dealer Inventories not keeping up with market size ETF credit ownership ($tn) Source: Deutsche Bank, EPFR This time is different in one respect; low liquidity means the exit could be bumpy 16 Trade Secret and Strictly Confidential | 17

Future The Price of Liquidity Puerto Rico General Obligation Prices 110 100 90 80 70 Cross-over buyers emerge 60 50 3/8/2012 4/8/2012 5/8/2012 6/8/2012 7/8/2012 8/8/2012 9/8/2012 10/8/2012 11/8/2012 12/8/2012 1/8/2013 2/8/2013 3/8/2013 4/8/2013 5/8/2013 6/8/2013 7/8/2013 8/8/2013 9/8/2013 10/8/2013 11/8/2013 12/8/2013 1/8/2014 2/8/2014 3/8/2014 4/8/2014 5/8/2014 6/8/2014 7/8/2014 8/8/2014 9/8/2014 10/8/2014 Source: Bloomberg This isn’t theoretical; Puerto Rico provides an interesting example 17 Trade Secret and Strictly Confidential | 18