income strategies in the global loan market -...

For investment professionals only 17/139

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Income Strategies in the Global Loan Market

MODERATOR: Dan McGee

Managing Director, Head of U.S. Retail

SPEAKER: Tom McDonnell

Managing Director, High Yield Portfolio Manager


2

Overview Senior secured loans Considerations for expanding into global loans Potential benefits of senior secured loans Risks associated with senior secured loans Todays market environment Question and answers



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Issued by corporations Rated below investment grade (high yield) Typically secured in capital structure Floating rate coupon Predominantly U.S. issuers but opportunistic issuers

in Western Europe

What is a Senior Secured Loan


4

Who Are High Yield Issuers

Some of the most recognizable brands and leaders within their respective industries have high yield bond and loan facilities outstanding

The above is for illustrative purposes only and is not intended to be taken by any person as investment advice, or a recommendation to buy, hold or sell any security or other investment, or an offer to sell or a solicitation of offers to purchase any security.

24 Hour Fitness Worldwide Cengage Learning Hanesbrands Michaels

Ace Hardware Charter Communications Harbor Freight Tools Netflix

American Airlines Chesapeake Energy HCA Neiman Marcus

Aramark Cole Haan Heinz Pilot Travel Center

Avis Budget Group Dave & Busters The Hertz Corp. Raycom Media

Bass Pro Group Davids Bridal Hilton Worldwide Revlon Consumer Products

Booz Allen Hamilton Dell Hudsons Bay Company Rite Aid

Brand Energy Del Monte Foods J. Crew Toys R Us

Burger King Dollar Tree Level 3 Communications Travelodge

California Pizza Kitchen Four Seasons Hotels Lionsgate The Weather Channel

CBRE Group Getty Images McGraw-Hill Education Wendys

Cedar Fair Goodyear Tire & Rubber MGM Records Wynn Resorts


5

Where to Invest in High Yield Companies

Source: Barings. For illustrative purposes only.

Senior Secured Loans1 50%

ASSETS

BANK LOANS 40%-50%

Cash Assets Cash Accounts Receivable Property Plant Equipment Intangibles Subsidiary Stock

HIGH YIELD BONDS

15%-25%

EQUITY 25%-50%

PLEDGED TO

SENIOR

SUBORDINATE

Representative Capital Structure


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Issuers Below Investment grade/high yield companies

Asset Type Privately held loan; not a security, not exchange traded

Seniority Senior secured, senior to high yield bonds and equity

Security Secured by tangible assets, PP&E, inventory, accounts receivable

Rating Most are rated by at least one of the major rating agencies

Coupon Floating rate, adjusts based upon the duration of the underlying

LIBOR contracts Quarterly interest payments

Covenants/Tests

Restricted payments, including dividends Incurrence: The incurrence of additional debt Maintenance: Performance based debt to EBITDA ratios1

Required cash sweep to reduce loan principal outstanding

Call Period Callable at par at any time May include call protection through a call premium

Senior Secured Loan Characteristics

1. The absence of which is generally defined as Covenant-Lite.


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Floating Rate Coupon

Libor 50bps

Issuer Spread 400bps

Effective Coupon 450bps

Declining Rates

Libor 100bps



Current State

Libor 50bps



Rising Rates

This illustration assumes no Libor Floor and current 3-month Libor is 100bps. For illustrative purposes only.


8

Why Global Loans

Global portfolios increase the opportunity-set Ability to take advantage of price discrepancies

between issuers offering debt in different currencies without adding any additional credit risk (we hedge all currency)

Flexibility to adjust geographic weights to reflect the changing dynamics of the global markets


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What Global Means for Loans

1. Credit Suisse Western European Leveraged Loan Index, Non-$US-Denominated Loans. As January 31, 2017.

U.S. and Western Europe are the only developed markets for institutional loan issuance

Not a homogenous market: jurisdictional issues exist which require large, experienced research teams

Occasionally, peripheral countries tend to be debtor friendly

Western European Leveraged Loan Index Country Breakdown (%)1

= Creditor Friendly = Debtor Friendly

0

5

10

15

20


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Global Relative Value Different Currencies ( vs $)

1. U.S. Machinery Manufacturer Provider price. As of January 31, 2017. The current price is the average of the bid/ask spread. For illustrative purposes only. This analysis is intended to demonstrate only the specific elements discussed, particularly the disparity that exists in transactions at a specific point in time, may no longer exist or be significant at the time, may no longer exist or be significantly changed since the dates referenced above. This analysis does not represent all the elements and variables that would factor into the total costs of such a transaction. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to illustrate a particular investment strategy. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Exploiting Relative Value on the Same Issuer Across Loans and $ Loans1 (3-Year Discount Margin)

Stated Coupon Spread (bps) Libor Floor (%) Original Issue Price Current Price1

European Term Loan (B) 375 1.00 99.5 99.77

U.S. Term Loan (B) 325 1.00 99.5 98.78

3.75%

4.75%

5.75%

6.75%

7.75%

8.75%

9.75%

10.75%

11.75%

European Term Loan U.S. Term Loan


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Potential Benefits of Loans

Senior secured loans should be considered as part of the asset allocation in an overall portfolio because they offer the potential for: Return consistency Low correlation Income generation Low duration / interest rate risk


12

Consistent Returns

SOURCE: Credit Suisse Leveraged Loan Index (U.S.); Credit Suisse Western European Leveraged Loan Index (Europe). As of December 31, 2016.

~ ~

U.S and European Loan Market Returns


13

CS Leveraged

Loan Index

CS WE Leveraged

Loan Index1

Barclays U.S.

Treasury

Barclays U.S.

Aggregate

Barclays Pan-Euro

Aggregate1

Barclays U.S. Corp. High Yield

BAML Euro Currency High

Yield1 S&P 500

STOXX Europe

6001 CS Leveraged Loan Index 1.00

CS WE Leveraged Loan Index 0.89 1.00

Barclays U.S. Treasury -0.15 -0.20 1.00

Barclays U.S. Aggregate 0.08 0.01 0.94 1.00

Barclays Pan-Euro Aggregate 0.02 -0.02 0.74 0.79 1.00

Barclays U.S. Corp. High Yield 0.83 0.70 0.03 0.28 0.19 1.00

BAML Euro Currency High Yield 0.71 0.73 -0.09 0.18 0.28 0.82 1.00

S&P 500 0.55 0.50 -0.33 -0.12 0.01 0.65 0.63 1.00

STOXX 600 0.56 0.58 -0.15 0.06 0.19 0.66 0.77 0.77 1.00

Correlations 5 Years (1/2012 1/2017)

Loans had low or negative correlations with U.S. treasuries and the Aggregate indices over the past 5 years

Historically Lower Correlation to Other Fixed Income Assets

Source: Barclays, Credit Suisse, Bank of America Merrill Lynch, Bloomberg, from February 1, 2012 January 31, 2017. 1. For this comparison, hedged to USD returns are used for European indices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.


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Income Generation

SOURCE: Credit Suisse. As of December 31, 2016.

0 bps

200 bps

400 bps

600 bps

800 bps

100 0 bps

1200 bps

1400 bps

1600 bps

1800 bps

20 00 bps

'92 '94 '96 '98 '0 0 '02 '04 '06 '08 '10 '12 '14 '160bps

500bps

1000bps

1500bps

2000bps

2500bps

'98 '00 '02 '04 '06 '08 '10 '12 '14 '16

U.S. EUROPE

AVERAGE= 518 BPSAVERAGE= 463 BPS

U.S. and European Loan Spreads


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Reduced Interest Rate Sensitivity

1. Source: Credit Suisse; non-U.S. indices are hedged to USD. 2. Global Leveraged Loan Index is the weighted average of the Credit Suisse Leveraged Loan Index and the Credit Suisse Western European

Leveraged Loan Index. 3. Source: Barclays; non-U.S. indices are hedged to USD. 4. Source: Bank of America / Merrill Lynch; non-U.S. indices are hedged to USD. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Feb. 1994- Feb. 1995

Jun. 1999-May 2000

Jun. 2004-Jun. 2006

CS Global Leveraged Loan1,2 n/a +4.40% +13.58%

CS Leveraged Loan1 +10.38% +3.93% +12.64%

Barclays U.S. Aggregate3 +0.01% +2.11% +6.54%

Barclays U.S. Corp. IG3 -0.99% -0.04% +6.22%

Barclays U.S. Corp High Yield3 +1.55% +3.21% +17.85%

Oct. 1999 Oct. 2000

Nov. 2005 Jun. 2007

CS Global Leveraged Loan1,2 +5.62% +12.88%

CS Western European Leveraged Loan1 +8.56% +14.28%

Barclays Pan-Euro Aggregate3 +6.86% +2.41%

Barclays Pan-Euro Corp. IG3 +6.33% +3.20%

BAML Euro Currency High Yield4 -3.95% +17.21%

Cumulative Market Returns During Periods of Rising Rates in the U.S.

Cumulative Market Returns During Periods of Rising Rates in Europe


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Risks of Loans

While senior secured loans offer many potential advantages, there are also associated risks: Credit risk risk of a borrower not repaying a loan Liquidity risk risk of not being able to buy or sell

quickly enough to prevent or minimize a loss


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Todays Market Environment

We believe the global loan market remains attractive relative to other fixed income asset classes Historically low interest rates and Fed Fund rates Economic growth is stable Corporate balance sheets are stronger than pre-crisis Corporate default rates continue to remain low Strong loan market technicals including fund flows

and new issue volume

The above represents Barings views as of March 7, 2017 and are subject to change at any time without notice.


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Low Interest Rate Environment

1. Source: FactSet.

1

U.S. Fed and ECB Policy Rates1


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Interest Coverage1 Debt/LTM EBITDA1

Revenue and EBITDA Y/Y Growth (%)1 Revenue and EBITDA Y/Y Growth Ex-Commodities (%)1

Stable U.S. High Yield Credit Fundamentals

1. Source: J.P. Morgan data. As of September 30, 2016.

4.2x4.1x

4.0x4.0x

3.9x3.9x3.9x3.9x3.9x3.9x

4.0x4.1x4.0x4.1x

4.1x4.2x4.1x4.0x

4.1x4.1x4.1x

4.2x4.3x

4.4x4.3x

3.5x

4.0x

4.5x

5.0x

5.5x

3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

EBITDA-Capex/Int Exp EBITDA/Int Exp

10

4

9

2 26

25 6 6

89 10

6

-2 -3-4 -3

-1 -1

2

13

1

9

3

-11

21

5

14

9 8 9

22

17

74 5

-5

0

-4-1

-20

0

20

40

3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

Revenues

EBITDA

8

7

32 2

23

4

6

13 12

11 11

14

1211

6 6

0

20

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Revenues Ex-Commodities

EBITDA Ex-Commodities


20

-45.0%

-35.0%

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%

55.0% Revenue Growth EBITDA Growth

European High Yield Interest Coverage1 Issuer Net Leverage1

Revenue and EBITDA Y/Y Growth(%)1

Stable Eurozone High Yield Corporate Fundamentals

1. Source: J.P. Morgan data. As of September 30, 2016.

0

1

2

3

4

5

6

0

1

2

3

4

5

6

7

8


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1.1

2.3

0.8

1.6

0.1

2.2

6.8

4.6

1.0

7.7

3.3 3.4

0.6 0.5

0.0

2.0

4.0

6.0

8.0

10.0

CS Western European Leveraged Loan Index Default Rate

Stable Fundamentals Low Default Rates

1. Credit Suisse Leveraged Finance Strategy Update. As of December 31, 2016 (trailing 12 months). Defaulted loans defined as missed coupon, chapter 11 filing, distressed exchange, or cross-defaults.

2. Moodys Corporate Default & Recovery Rates. As of February 2016.

U.S. Loan Default History (%)1 European Loan Default History (%)1

Global Avg. Corporate Debt Recovery Rates Measured by Ultimate Recoveries (%)2

Market Average = 3.1%

Market Average = 2.6%

5.3

6.8

8.1

3.8

1.01.6

0.4 0.2

2.9

9.6

2.5

0.7

1.91.5

3.0

1.61.3

0.0

2.0

4.0

6.0

8.0

10.0

Credit Suisse Leveraged Loan Index Default Rate

80.4

63.3

48.8

28.2

0.0

20.0

40.0

60.0

80.0

100.0

Loans Sr. Secured Bonds Sr. Unsecured Bonds Subordinated Bonds

1987 - 2015


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Strong Technicals Modest New Issuance

1. Source: Credit Suisse, Leveraged Finance Strategy Monthly. As of December 31, 2016. 2. S&P Global Interactive Volume Report. As of December 31, 2016.

U.S. Institutional Loan Market Size ($B)1 Western European Institutional Loan Market Size (B)1

European Institutional Loan New-Issue Volume (B)2 U.S. Institutional Loan New-Issue Volume ($B)2

7 1116 21

2639

81

138

207223

213

189

168

147 144 144162 168

0

50

100

150

200

250

5 16 23 3453

88126145141141

188

307

408

617

841856

779

642613628

751

906960964

0

100

200

300

400

500

600

700

800

900

1000

8 811 11

22

56

82

109

28

3

1322

14

38

49

40

57

0

20

40

60

80

100

120

45 3558

91

154184

323

384

7139

158

231

295

455

377

257

337

0

50

100

150

200

250

300

350

400

450

500


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European CLO Issuance ($B)1 U.S. CLO Issuance ($B)1

Strong Technicals - Global Loan Market Capital Flows

1. J.P. Morgan. As of January 31, 2016.

U.S. Leveraged Loan Retail Fund Flows ($B)1

3.6 2.85.1

8.3

13.8

41.9 40.9

20.5

3.4 1.8 0.0 0.0

10.3

19.215.4

22.5

1.9

0

10

20

30

40

50

3.6 6.918.1 21.5

16.619.013.518.7

29.1

52.0

94.190.0

21.4

1.3 3.813.6

55.7

87.1

131.4

109.6111.8

8.7

0

20

40

60

80

100

120

140

1.05.8 2.3 4.4

-0.8-5.6

4.9

17.9 13.9 12.2

62.8

-23.1 -21.7

6.9 3.3

-30-20-10010203040506070


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Global loans can add diversification and at times better relative value than U.S. only portfolios

Some benefits of senior secured loans include the potential for:

Return consistency Low correlation Income generation Low duration / interest rate risk

Some risks associated with investing in senior secured loans:

Credit risk Liquidity risk



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Biographies

Managing Director Daniel McGee is a member of Barings Global Business Development Group and Head of U.S. Retail. Dan is responsible for U.S. wealth distribution and managing some of the firms key distribution relationships. Dan worked in the industry since 1992. Prior to joining the firm in 2013, he spent 20 years at Principal Financial Group in a variety of sales and sales management roles, most recently managing Principals Alliance Management Group. Dan holds a B.B.A. in Marketing from the University of Iowa.

Managing Director Thomas McDonnell is a member of Barings U.S. High Yield Investments Group and the U.S. High Yield Investment Committee. His responsibilities include portfolio management for a number of high yield total return portfolios, including global loan and global multi- strategy portfolios. He is also a portfolio manager for the firms high yield 1940 act retail funds. Thomas has worked in the industry since 1996 and his experience has encompassed leveraged loans, distressed credit and management of total return focused strategies. Prior to joining the firm in 2005, he was a Managing Director at Patriarch Partners, LLC, where he had active involvement with portfolio company management teams, crisis managers and attorneys to effectuate turn around and recovery plans. Before Patriarch, he worked at Bank of America in the Corporate Finance Group and at Bank One in various risk management and corporate finance positions, specializing in credit risk management and structuring of off balance sheet special purpose entities. Thomas holds a B.S. in Business Management, an M.B.A. in Accounting from the State University of New York at Buffalo, and is a Certified Public Accountant (inactive).

Daniel McGee

Thomas McDonnell


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Important Information Baring SICE (Taiwan) Limited, an independently operated business (Business license number: 2008 FSC- SICE- Xin- 030; Address: 21 F, No.333, Sec. 1 Keelung Road, Taipei 11012; Taiwan Contact telephone number: 0800 062 068); or Baring Asset Management Korea Limited, which is authorized by the Korean Financial Services Commission to engage in collective investment business and is registered with the Korean Financial Services Commission to engage in privately placed collective investment business for professional investors, discretionary investment business and advisory business. Copyright Copyright in this document is owned by Barings. Information in this document may be used for your own personal use, but may not be altered, reproduced or distributed without Barings consent. FOR PERSONS DOMICILED IN THE US: This document is not an offer to sell, nor a solicitation of offers to buy, limited partnership interests, shares or any other security, nor does it purport to be a description of the terms of or the risks inherent in an investment in the private investment fund (Fund) described therein. The offer and sale of interests in the Fund is restricted by law, and is not intended to be conducted except in accordance with those restrictions. In particular, no interest in or security of any of the Fund has been or will be registered under the Securities Act of 1933 (the Act). All offers and sales thereof are intended to be non-public, such that interests in and securities of the Fund will be and remain exempt from having to be so registered. By accepting delivery of this document, the person to whom it is delivered (a) agrees to keep the information contained in the attached document confidential and (b) represents that they are an accredited investor as defined in Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933. FOR PERSONS DOMICILED IN THE EUROPEAN UNION and the EUROPEAN ECONOMIC AREA (EEA): This information is only made available to Professional Investors, as defined by the Markets in Financial Instruments Directive. FOR PERSONS DOMICILED IN AUSTRALIA: This publication is only made available to persons who are wholesale clients within the meaning of section 761G of the Corporations Act 2001. This publication is supplied on the condition that it is not passed on to any person who is a retail client within the meaning of section 761G of the Corporations Act 2001. FOR PERSONS DOMICILED IN CANADA: This confidential marketing brochure pertains to the offering of a product only in those jurisdictions and to those persons in Canada where and to whom they may be lawfully offered for sale, and only by persons permitted to sell such interests. This material is not, and under no circumstances is to be construed as, an advertisement or a public offering of a product. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the product or its marketing materials, and any representation to the contrary is an offence. FOR PERSONS DOMICILED IN SWITZERLAND: This material is aimed at Qualified Investors, as defined in article 10, paragraph 3 of the Collective Investment Schemes Act, based in Switzerland. This material is not aimed at any other persons. For UCITS The Swiss representative and paying agent for the Funds where the investment manager is Barings (UK) Limited is UBS Fund Management (Switzerland) AG, Aeschenplatz 6, CH-4052 Basel. For QIFs The Swiss representative and paying agent for the Funds where the investment manager is Barings Global Advisers Limited is UBS Fund Management (Switzerland) AG, Aeschenplatz 6, CH-4052 Basel. The Swiss representative and paying agent for Funds where the investment manager is Baring Asset Management Limited is BNP Paribas Securities Services, Paris, succursdale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland.

FOR PERSONS DOMICILED IN HONG KONG: The Fund is a collective investment scheme but is not authorised under Section 104 of the Securities and Futures Ordinance of Hong Kong by the Securities and Futures Commission of Hong Kong. Accordingly, the distribution of this document, and the placement of shares in Hong Kong, is restricted. This document may only be distributed, circulated or issued to persons who are professional investors under the Securities and Futures Ordinance and any rules made under that Ordinance or as otherwise permitted by the Securities and Futures Ordinance. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. FOR PERSONS DOMICILED IN SOUTH KOREA: Neither this document nor Barings is making any representation with respect to the eligibility of any recipients of this document to acquire interests in the Fund under the laws of Korea, including but without limitation the Foreign Exchange Transaction Act and Regulations thereunder. The Fund may only be offered to Qualified Professional Investors, as such term is defined under the Financial Investment Services and Capital Markets Act, and this Fund may not be offered, sold or delivered, or offered or sold to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to applicable laws and regulations of Korea. FOR PERSONS DOMICILED IN SINGAPORE: This document has been prepared for informational purposes only, and should not be considered to be an advertisement or an offer for the sale or purchase or invitation for subscription or purchase of interests in the Fund. This document has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. This document or any other material in connection with the offer or sale, or invitation for subscription or purchase of interests in the Fund, may not be circulated or distributed to persons in Singapore other than (i) to an institutional investor pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA"), (ii) to a relevant person pursuant to Section 305 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. FOR PERSONS DOMICILED IN TAIWAN: The Shares are being made available in the R.O.C. on a private placement basis only to banks, bills houses, trust enterprises, financial holding companies and other qualified entities or institutions (collectively, Qualified Institutions) pursuant to the private placement provisions of the R.O.C. Rules Governing Offshore Funds. No other offer or sale of the Shares in the R.O.C. is permitted. R.O.C. purchasers of the Shares may not sell or otherwise dispose of their holdings except by redemption, transfer to a Qualified Institution, transfer by operation of law or other means approved by the R.O.C. Financial Supervisory Commission. FOR PERSONS DOMICILED IN JAPAN: This material is being provided for information purposes only. It is not an offer to buy or sell any Fund interest or any other security. The Fund has not been and will not be registered pursuant to Article 4, Paragraph 1 of the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948) and, accordingly, it may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit, of any Japanese person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese person except under circumstances which will result in compliance with all applicable laws, regulations and guidelines promulgated by the relevant Japanese governmental and regulatory authorities and in effect at the relevant time. For this purpose, a Japanese person means any person resident in Japan, including any corporation or other entity organized under the laws of Japan.


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