2021 LSTA VIRTUAL ASIA INVESTOR CONFERENCE

INVESTING IN THE U.S. LOAN MARKET

2021 LSTA VIRTUAL ASIA INVESTOR CONFERENCE

INVESTING IN THE U.S. LOAN MARKET

Lending & Investing in aPost-Pandemic Loan Market

Moderator: Lee Shaiman, LSTASpeakers:Jeff Bakalar, Voya Investment ManagementScott Baskind, InvescoJason Duko, Ares ManagementDavid Golub, Golub CapitalJohn Popp, Credit Suisse Asset Management

Secondary Market Loan Prices Recovered Quickly as Compared to the Great Financial Crisis

60

65

70

75

80

85

90

95

100

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Jan

-19

Jan

-20

Jan

-21

Avg. Secondary Loan Market Bid Level

Source: LSTA/Refinitiv MTM Pricing

The Amount of Loans Outstanding Began Increasing Once Again in 2021, Rising $29 Billion Year-to-Date

$900B

$950B

$1000B

$1050B

$1100B

$1150B

$1200B

$1250B

Jan-18 Jan-19 Jan-20 Jan-21

S&P/LSTA Leveraged Loan Index Outstandings

Source: S&P Global LCD

After Returning 3.1% Last Year, 2021 Loan Returns are on Target to Surpass That Level by the End of Second Quarter 2021

3.1% 2.6%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

S&P/LSTA Leveraged Loan Index: Historical Return

Source: S&P/LSTA Leveraged Loan Index

2,0002,5003,0003,5004,0004,500

Jan

-17

Jan

-18

Jan

-19

Jan

-20

Jan

-21

S&P 500 Index

Source: Federal Reserve Bank and Bloomberg

US Markets are Seemingly Looking Past the COVID-19 Pandemic as the Vaccine Rollout Stokes Optimism for 2021

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

-17

Jan

-18

Jan

-19

Jan

-20

Jan

-21

10YR Treas. (%) 3-MO Treas. (%)

0

1

2

3

4

5

Jan

-17

Jan

-18

Jan

-19

Jan

-20

Jan

-21

Consumer Price Index (%)

Consumer Prices Rose 4.2% Year-Over-Year in April 2021 as Consumer Price Inflation Accelerated in March and April 2021

Consumer Price Index: Year-Over-Year Growth

Consumer Price Index: Annualized Month-Over-Month Change

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1.2%

2.4% 2.4%

3.7%

4.9%

7.4%

9.6%

0%1%2%3%4%5%6%7%8%9%

10%11%

Source: Bloomberg

The Rise and Eventual Fall of LIBOR

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.03-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar, Percent

Source: Bloomberg

LIBOR Transition: What to Expect

Speaker: Meredith Coffey, LSTA

• LIBOR: Things to Know

• Comparing the potential replacement rates

• Implication of LIBOR transition for CLOs

Topics

• The USD LIBOR transition is bifurcated. Most USD LIBOR rates will be published through June 2023, but banks will not be permitted to enter into new LIBOR contracts after YE 2021.

• Therefore:o USD LIBOR Origination by banks ends on December 31, 2021

o USD LIBOR Transition for most legacy contracts not required until June 30, 2023

o This bifurcation of dates may have implications for CLOs

• Several Replacement Rates are in play in the US syndicated loan market, including Term SOFR, Daily Compounded SOFR, Daily Simple SOFR and Credit Sensitive Rates (CSRs)o ARRC and market have made significant progress toward developing a Forward Looking Term SOFR

o CSR loans (most recently BSBY) are beginning to emerge

• There are economic and operational implications for the different replacement rates

LIBOR Transition: Things to Know

Characteristics of LIBOR vs Potential Replacement Rates

Rate/Characteristic

Known in Advance of Interest Period?

Significant Calculation Required ?

Credit Sensitivity? Current Use Cases Strengths/ Weaknesses

LIBOR Y N Y Nearly all Floating Rate Products Fragile; LIBOR loan origination ends at 12/31/21

Credit Sensitive Rate (CSR) Y N Y Loans, potentially FRNs

Nearly seamlessly substitutes for LIBOR in loan & CLO systems; May be less robust than SOFR; May be impacted by Money Market Reforms

Forward Looking Term SOFR Y N N

Used as top step and "flip forward" in Hardwired waterfalls; Used as "flip forward" in Daily SOFR loan agreements

Easily substitutes for LIBOR in loan & CLO systems; CME Term SOFR has been launched, which ARRC will recommend once all indicators have been met; Economically different from LIBOR.

SOFR Compounded in Advance Y N NMortgages; RMBS; possibly ABS generally; some business loans

Robust and easily substitutes for LIBOR in loan & CLO systems; Viewed as stale and arbitragable by loan borrowers.

Daily Simple SOFR N N N Some business loans; some FRNs

Robust and relatively easily hedged. Does not substitute easily for LIBOR in CLO & loan systems and conventions, but more implementable than Daily Compounded SOFR.

Daily Compounded SOFR N Y N Derivatives; most FRNsRobust, very hedgeable. Viewed as challenging substitute for LIBOR in loan & CLO systems and conventions.

• USD LIBOR is a credit sensitive, forward-looking term rate with 1M/3M tenors.• Credit Sensitive Rates (CSRs) are calculated using inputs such as CP, CD, bank deposit rates and bank bonds and are correlated to LIBOR.• SOFR is an overnight nearly risk-free rate based on overnight treasury repo. A 1M/3M “tenor” rate is developed by either averaging the

rate (in advance or in arrears) or by using a term curve developed by futures trading.

• The LIBOR and CSR curve should be higher and steeper than SOFR because LIBOR and CSRs have credit risk and SOFR does not

• All the SOFRs should be very similar, because they are all built around SOFR. Specifically, they reference:o Where SOFR is in the current calculation period (Daily

Simple/Daily Compounded)

o Where SOFR was in the prior calculation period (SOFR Compounded in Advance)

o Where Daily Compounded SOFR is expected to be at the end of the calculation period (Forward Looking Term SOFR)

Interest Rate Comparisons for LIBOR, SOFR & CSRs

0

5

10

15

20

25

1M 3M 6M

Bp

s

Fig. 1: Comparing LIBOR, BSBY and SOFRs(April 2021)

LIBOR CME Term SOFRBSBY SOFR In Advance

Source: St. Louis Fed, CME, Bloomberg

• LIBOR origination ends 18 months before LIBOR transition for legacy assets; this has implications for existing CLOs

• Before the liabilities in existing (pre-2022) CLOs transition from LIBOR to a replacement rateo These CLOs typically will have liabilities based on LIBOR and will hold many pre-2022 loans originated on LIBOR; thus,

assets and liabilities are initially both based on LIBOR and there’s limited basis risk

o However, beginning Jan 2022, new loans should reference a CSR or SOFR; thus liabilities and assets increasingly will be on different reference rates

o If new loans are based on CSRs, they would be correlated to LIBOR and would introduce less basis risk into CLOs

o If new loans are based on SOFR, they may be less correlated to LIBOR and could introduce more basis risk into legacy CLOs

• What happens when existing pre-2022 CLOs transition from LIBOR to replacement rate?o CLOs may transition i) early through an Asset Replacement Trigger or ii) at LIBOR cessation in June 2023

o If an “Asset Replacement Trigger” exists in the CLO, it is possible that when the CLO transitions away from LIBOR, liabilities might transition to SOFR or to the rate on the majority of the assets in the CLO

o If there is no “Asset Replacement Trigger”, then after June 2023, CLO liabilities are likely to transition to SOFR and assetsmay be on i) SOFR, ii) a mix of CSR and SOFR, or iii) mostly CSR

LIBOR Transition: Rate Implications for Existing CLOs

• New CLOs issued after 2022 may or may not follow the reference rate adopted by loans

• If loan market adopts Term SOFR, the CLO liabilities are likely to adopt SOFR as wello In this scenario, the liabilities are aligned with other securitized products and there is no basis risk for CLO equity

• If the loan market adopts a CSR and CLO liabilities adopt SOFRo There potentially is more basis risk that CLO equity must absorb or CLOs must have more robust hedging language

o CLO liabilities should be aligned with other securitized products (assuming they adopt SOFR)

• If the loan market adopts a CSR and CLO liabilities also adopt a CSRo There is limited basis risk between assets and liabilities

o CLO liabilities may be on a different reference rate from other securitized products (assuming other ABS adopt SOFR)

LIBOR Transition: Rate Implications for New CLOs

• LIBOR transition is coming

• It is not yet clear what the ultimate LIBOR replacement rate will be for loans, though it is likely to be Term SOFR or a CSR

• Clarity on the US loan replacement rate should emerge in the next few months

• The bifurcated LIBOR transition timeline in the US will have implications for CLOs

• It is important to understand the fallback language in your existing CLOs to know how your CLO may transition

• The LSTA can be a helpful resource, with many publications, webcasts and member calls that discuss key issues around LIBOR transition

LIBOR Transition: Key Takeaways

LSTA Resources: LIBOR Call, Podcasts, Documents & News

Actively Positioning Loan Portfolios During and After the Pandemic

Moderator: Theodore Basta, LSTASpeakers:Brian Goldberg, Shenkman CapitalFrank Longobardi, AlcentraMatthew Maxwell, BlackRockDaniel McMullen, Blackstone CreditChristopher Remington, Eaton Vance Management

The Loan Market Proved to be Resilient Through the Pandemic

5.1%

3.1%

-30% -20% -10% 0% 10% 20% 30% 40% 50%

Median

200920162010200320122019199720062013199820042005200020012017199920202007200220142011201820152008

Annual Loan Return

88

90

92

94

96

98

100

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

AVG Trade Price Median Trade Price

Source: The LSTA Trade Data Study and S&P/LSTA Leveraged Loan Index

2020 Secondary Loan Trading Volume Surged to a Record $720 Billion, and is on Target to Surpass $800 Billion in 2021

$76

$119

$0B

$25B

$50B

$75B

$100B

$125B

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

Ap

r-2

1

Monthly Secondary Trading Volume

Source: The LSTA Trade Data Study

0

50

100

150

200

250

300

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

Ap

r-2

1

Bid-Ask Spread (in basis points)

Visible Flows Into the Loan Asset Class are Robust as Index Outstandings Increase Above $1.2 Trillion in 2021

-$20B

-$10B

$0B

$10B

$20B

$30B

$40B

$50B

$60B

1Q20 2Q20 3Q20 4Q20 1Q21

Loan Mutual Fund/ETF Flows CLO Issuance

Source: Refinitiv & S&P/LSTA Leveraged Loan Index (LLI)

$1150B

$1170B

$1190B

$1210B

$1230BS&P/LSTA Lev. Loan Index Outstandings

CLOs (64%) and Loan Mutual Funds/ETFs (9%) Combine to Represent 73% of Total Loans Outstanding

25%

9%

43%

64%

0%

10%

20%

30%

40%

50%

60%

70%

Loan Mutual Fund/ETF % CLO %

$172 $112

$296

$775

$0B

$200B

$400B

$600B

$800B

$1000B

$1200B

$1400B

LLI Outstandings

Loan Mutual Fund/ETF AUM

CLO AUM

Source: Refinitiv & S&P/LSTA Leveraged Loan Index (LLI)

The Leveraged Loan Default Rate Has Steadily Declinedas Downgrades Have Shifted to Upgrades

0%

2%

4%

6%

8%

10%

12%Loan Default Rate

Source: S&P Global & JP Morgan as of 4/30/21.

0.0x

1.0x

2.0x

3.0x

4.0x

-200

-150

-100

-50

0

50

100

Up

grad

e/D

ow

ngr

ade

rati

o

Nu

mb

er o

f Is

suer

s

Upgrades Downgrades Ratio

Lower Rated Credits Have Outperformed Over the Last 12-Months

Source: S&P/LSTA Leveraged Loan Index (LLI)

20.7%

0%

10%

20%

30%

40%

50%

Index BBB BB B CCC

Index BBB BB B CCC

Trailing 12-Month Loan Return% of Loan

IndexBid Level Spread (bps)

Index -- 97.8 L+435

BBB 8% 99.6 L+218

BB 21% 99.1 L+305

B 61% 99 L+443

CCC 8% 91.9 L+871

The Relative Value Profile of the Loan Market has Strengthened

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8 9 10

Yie

ld (

%)

Duration (years)

US Bank LoansUS High Yield

EM Bonds

US Investment Grade

US Agg

US Treasury Bonds

Municipal

Bonds3-Month US Treasury Bill

2.4%

-6%

-4%

-2%

0%

2%

4%

Loans HY Bond HG Bond 10 YearTreas

YTD April 2021 Fixed Income Total Returns

Source: Barclays, Bloomberg, S&P LCD. “US Bank Loans”=S&P Leveraged Loan Index, “US Treasury Bonds”=BarCap US Government Bond Index, “US Agg”=BarCap US Aggregate Index, “US Investment Grade”=BarCap US Investment Grade Corporate Index, “Municipal Bonds”=BarCap Municipal Bond Index, “US High Yield Bonds”=BarCap US High Yield Index, “EM Bonds”=Barclays Emerging Market USD Bond Index. As of 4/30/2021. Indices are unmanaged and one cannot invest directly in an index.

29

CLOs: Where We’ve Been, Where We’re Going

Moderator: Meredith Coffey, LSTASpeakers:David Moffitt, Investcorp Credit ManagementKonstantin Kulev, MUFG SecuritiesHimani Trivedi, NuveenThomas Wong, Oak Hill Advisors

30

• Financial Crisis vs Covid-19: CLO Resilience and Manager Strategies

• Market Trends & Outlook I: Volumes & Issuance

• Market Trends & Outlook II: Spreads & Returns

• Market Trends & Outlook III: Investors

Topics

31

Financial Crisis vs Covid-19:CLO Resilience & Manager Strategies

32

Rating Agencies Downgraded Rapidly During Pandemic, But Loans Are Now Being Upgraded

05

101520253035404550

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

Rat

io (

DG

R:U

GR

)

Rating Agencies Downgraded Aggressively in Pandemic (Downgrade:Upgrade Ratio)

Source: S&P

• In May 2020, there were 43 downgrades for every upgrade

• In April 2021, there were 2 upgrades for every downgrade

33

Share of CLOs with Defaulted Loans Rose in Pandemic, Then Declined Sharply

0%

20%

40%

60%

80%

100%

Feb-20 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Apr-21

Share of U.S. CLOs with <1% Defaults Fell Below 50% in Sept '20, Recovered to 86% by April '21

0 Defaults <1% >=1%Source: Refinitiv LPC Collateral

• In February 2020, 78% of CLOs had less than 1% of defaulted assets

• By Sept 2020, only 47% of CLOs had less than 1% defaulted assets

• But by April 2021, 86% of CLOs had less than 1% defaulted assets

34

In Pandemic, Loan Prices Fell Sharply, But Have Recovered All of Their Losses Since Then

80

85

90

95

100

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

bid

(%

)

Avg Bid on Loans in US CLOs

Source: Refinitiv LPC Collateral

• Prices of loans held in CLOs declined sharply at the beginning of the Covid-19 Pandemic

• After falling to an average of in the low 80s in March 2020, prices have since recovered to pre-Pandemic levels

35

Self-Healing? Share of CLOs Failing Jr OC Test Rises in Pandemic, Then Declines

• As loans were downgraded (and some defaulted) and loan prices dropped, some CLOs failed their Jr OC test

• But by April 2021, Jr OC test failure rate was < 1%

0%2%4%6%8%

10%12%14%16%18%20%

% o

f U

S C

LOs

in R

PJunior OC Test Fail Rate

Source: BofA Securities

36

In Pandemic, Rating Agencies Downgraded a Number of CLO Tranches; Many Ratings Were Subsequently Affirmed

% with any rating action

Currently on watch

On Watch, then Downgraded

On Downgrade Watch, then

Affirmed

On Watch for Upgrade/ Upgraded

AAA - - - - -

AA 1% 0% 0.3% 0.3% 8%

A 7% 0% 2.4% 3.9% 9%

BBB 42% 1% 14% 27% 8%

BB 59% 1% 35% 24% 3%

B 85% 2% 61% 23% 5%

• Anticipating near-record default rates, rating agencies took quick rating actions on CLO tranches

• Actions primarily affected tranches rated BBB and below

• No AAA tranches were downgraded

• Some tranches have been upgraded or are on now watch for upgrade

Source: BofA

37

1. How did the Covid-19 crisis compare to the 2008 financial crisis for CLOs?

2. What strategies did managers use to manage through Covid-19?

3. How did flexibility help managers manage through the pandemic? What other tools

would or will be helpful?

4. What would have happened to CLOs if the US government hadn’t stepped in with rescue

programs for many (other) markets?

5. Did the CLO asset class actually benefit as a result of the Covid 19 crisis?

6. Do you think CLO reputations are improving to where they should be? Why or why not?

CLO Performance, Resilience & Manager Strategy: Panel Questions

38

Market Trends & Outlook I: Volumes & Issuance

39

U.S. CLO Issuance, Refinancings & Resets Have Recovered

0

10

20

30

40

50

60

Jul 2020 Aug2020

Sep2020

Oct2020

Nov2020

Dec2020

Jan 2021 Feb2021

Mar2021

Apr2021

$B

illio

ns

US CLO Issuance, Refinancings, Resets

Reset

Refinance

New issue

Source: S&P/LCD

40

1. Where does U.S. CLO activity (new issue, refi, reset) go in 2021? Why?

2. How should managers approach the market as an issuer?

3. How has the pace of activity changed; what are the logjams?

4. What does new issue pace (and logjams) mean for investment

opportunities?

5. How would you explain the syncopated issuance volumes in first and

second quarters?

Market Trends & Outlook I: Volumes & IssuancePanel Questions

41

Market Trends & Outlook II: Spreads & Returns

42

US CLO AAA New Issue Spreads

-

50

100

150

200

250

300Ja

n-1

6

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

US CLO AAA Spreads

Source: Refinitiv LPC Collateral

• In the pandemic, CLO spreads widened significantly, and significant manager dispersion appeared

• By 1Q21, spreads had tightened significantly; April 2021 saw a bit of widening off the bottom

43

CLO New Issue Spreads Across Capital Stack

50

100

150

200

250

300

350

Spre

ad (

bp

s)

US CLO Liability Spreads (AAA-A)

AAA

AA

A

Source: S&P/LCD

200

300

400

500

600

700

800

Spre

ad (

bp

s)

US CLO Liability Spreads (BBB-BB)

BB…

Source: S&P/LCD

44

1. Explain where spreads have gone and why? Where are they going?

2. Discuss dispersion between managers

3. What is rich/cheap in the cap stack?

4. How can managers best approach the market to optimize new issue pricing?

Market Trends & Outlook II: Spreads & ReturnsPanel Questions

45