2013 investment forum materials / not for public...

2013 Investment Forum Materials / Not for Public Distribution

Global Corporate Credit Markets

.

ERIC TAKAHA, CFASenior Vice PresidentDirector of Corporate/High Yield Credit, Portfolio ManagerFranklin Templeton Fixed Income Group

Franklin Advisers, Inc.

June 5, 2013


The Leverage/Credit Cycle

DEBT GROWING FASTER THAN PROFITS

EquitiesCredit

DEBT REDUCTION

EquitiesCredit

PROFITS GROWING FASTER THAN DEBTS

EquitiesCredit

THE BUBBLE BURSTS

EquitiesCredit

Source: Citigroup, as of 12/31/10.Charts are for illustrative and discussion purposes only.

Where Are We in the Cycle?

3


Corporate Balance Sheet Liquidity

Source: Federal Reserve as of 12/31/12. US Common Equity Capital/Assets

Corporate Liquidity/Credit Trends

Source: FIDC, 1944-2011 Charts are for illustrative and discussion purposes only.4


0%

1%

2%

3%

4%

5%

6%

7%

'89 '95 '01 '07

Options-Adjusted Spread Average Spread

Average Spread Last 23+ Years 134 Bps

3/31/13

Investment Grade CorporatesSpread Valuations versus Treasuries

Source: Barclays (U.S. Corporate Investment Grade Index), as of 3/31/13. National Bureau of Economic Research. There were three recessionary periods from June 1989-March 2013. The first recessionary period occurred from July 1990-March 1991; the second recessionary period occurred from March 2001-November 2001; the third recessionary period occurred from December 2007-June 2009. Shaded areas represent approximate recessionary periods. Historical Option-Adjusted Spreads to U.S. Treasuries.

5


Default Rate Outlook

0%

2%

4%

6%

8%

10%

12%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-

94

Dec-

95

Nov-

97

Oct-9

9

Sep-

01

Aug-

03

Jul-0

5

Jun-

07

May-

09

Apr-1

1

Mar-1

3

Default rate

Perc

ent o

f dist

ress

ed d

ebt

Distressed debt Default rate

Distress Leads Default Rate – Distress Remains Low

6

Lower Rated New Issue Volume, Excluding Refinancings

Source for both charts: J.P. Morgan, as of 3/31/13. Charts are for illustrative and discussion purposes only.

YTD

(3/31

/13)

2013 Investment Forum Materials / Not for Public Distribution 7

0%

4%

8%

12%

16%

20%

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06 1/08 1/10 1/12

High Yield Spread LTM% Issuers Default Leveraged Bank Loan Discount %

High Yield & Leverage Loan Spreads vs. Default Rates

Source: Credit Suisse (High Yield Index Spread to Worst), as of 3/31/13; Moody's Investors Service. Last twelve month default rate based on % of issuers. Monthly data as of 3/31/13; NationalBureau of Economic Research, Inc. (Recessionary Periods). There were three recessionary periods from January 1986-March 2013. The first recession lasted from July 1990-March 1991; thesecond recession lasted from March 2001-November 2001; the third recession lasted from December 2007-June 2009. Shaded areas represent approximate recessionary periods.Source: Credit Suisse (Leveraged Loan Index). Data as of 3/31/13; National Bureau of Economic Research, Inc. (Recessionary Periods). Discount margin assuming five-year loan life. There were two recessionary periods from January 1992-March 2013. The first recession lasted from March 2001-November 2001; the second recession lasted from December 2007-June 2009.


Negative Convexity in High YieldHigh Yield Index Price at All-Time Highs and Increasingly “Call Constrained”

High Yield Cash Price and the Call Constraint

Source: Morgan Stanley, The Yield Book, Bloomberg, 2013. BofA Merrill Lynch Global Research (High Yield Loans in 2013: Against All Odds, 12/26/12 edition). Chart data as of March 31, 2013..

3/31/131991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 3/31/13

110

100

90

80

70

60

50

40

Pric

e


High Yield and Leveraged Loan Correlations

Leverage Loan Index Correlation versus Treasuries, LIBOR & High Yield

High Yield Index Correlation with S&P500 & Treasuries

Source: Credit SuisseCharts are for illustrative and discussion purposes only. Averages in the above chart are for the periods represented, 1/31/86-1/31/13 and 8/31/93-2/28/13 respectively.


Corporate Bond Liquidity…Implications

Source: Wells Fargo Securities, LLC, Bloomberg. As of 3/31/13.Charts are for illustrative and discussion purposes only.

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Corporate Bond Growth Outside North America

2 5 9 12 21 30 36 3748

27 22 18 20 15 23 30 4051

76 80

6

1525 33

4157 59 61 60 61

58

78

114

143

207

238

0

50

100

150

200

250

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(1Q)

Mark

et Si

ze €B

illion

s

$US Mkt Size Non‐$US Mkt Size

1 5.4

8.8

13.6

27.0

45.3

61.1

69.6

88.9

84.2

81.4 79.0

80.1 76.6

81.3

108.4

154.4

193.7

282.8 318.1

Source: Credit Suisse/Ed Altman. As of March 31, 2013. Includes non-investment grade straight corporate debt of issuers with assets located in or revenues derived from Western Europe,or the bond is denominated in a Western European currency. Floating-rate and convertible bonds and preferred stock are not included.

Western European High Yield Market Size

Asian Credit Issuance Trends in Corporate Credit Quality

Deutsche Bank

11

(1Q)


Fixed Income Performance Variation

-40%

-20%

0%

20%

40%

60%

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Barclays U.S. Government Index Barclays U.S. Corporate Investment Grade IndexJP Morgan Government Bond Index Global (GBI Global) JP Morgan Emerging Market Bond Index Global (EMBI Global)Credit Suisse High Yield Index

Relative Fixed Income Returns,1996-2012

Sources: © 2013 Morningstar (Barclays U.S. Government Index, Barclays U.S. Corporate Investment Grade Index, JP Morgan Government Bond Index Global (GBI Global), JP Morgan Emerging Market Bond Index (EMBI Global)), Credit Suisse High Yield Index. Indexes are unmanaged, and one cannot invest directly in an index. As of 12/31/12.Past performance does not guarantee future results.

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Important Information

The information provided during this conference is not a complete analysis of every material fact regarding any market, industrysector, security, or portfolio. Statements of fact cited by the presenters have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. Because market and economic conditions are subject to rapid change, opinions provided are valid only as of the date of the material and are subject to change without notice. The manager’s opinions are intended solely to provide insight into how the manager analyzes securities and are not intended as a recommendation or individual investment advice for any particular security, strategy, or investment product. Indexes are for illustrative purposes only. One cannot invest directly in an index. For more information on Franklin Templeton products or services, please contact your local Franklin Templeton representative at (800) 321-8563.

This presentation is provided by Franklin Templeton Institutional for informational purposes only. This information is considered proprietary and shall be treated as confidential. It shall not be distributed or otherwise communicated to third parties. While every effort has been made to ensure the accuracy of the information contained within these materials, we do not guarantee such accuracy.

© 2013 Franklin Templeton Investments. All rights reserved.13


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