State  of  the  Capital  Markets:  

Presentation  to:

Third  Quarter  2017  Review  and  Fourth  Quarter  2017  Outlook

Your Tour Guide to the Middle Market

Capital  Markets  Review  – Third  Quarter  2017

2

Public markets remain buoyed; economic growth up 3%

Fed rate hike expectations soften; loan funds saw in-­‐‑flows reverse

Overall leveraged loan volume up YTD over 2016; repricings slow

Covenant-­‐‑lite structures expand into larger middle market

Overall middle market loan volume remains strong; sponsored activityup from 2Q

Conditions  remain  constructive  for  credit  across  the  board  

Capital  Markets  Review  – Third  Quarter  2017

3

Default rates remain low; moderate economic growth maintainsconstructive backdrop for all varieties of credit issuance

Short-­‐‑term rate pressure slowed, causing reversal of fund flows – nowinto high-­‐‑yield accounts and out of loan funds

Market volatility at relative lows; low yields in liquid instrumentscontinues to generate investor interest in private credit

Bank arrangers using market conditions to push larger middle marketdeals into institutional market, eroding structures and yields

What’s  the  setting  for  debt  and  equity  INVESTORS?

Capital  Markets  Review  – Third  Quarter  2017

4

Strong liquidity in broadly syndicated loans pushes volume to recordlevels; emphasis on repricings slow as large cap spreads contract

Larger middle market issuers benefit from arrangers and sponsorspushing large cap terms down-­‐‑market

Sponsors toggle between club execution and syndicated market,depending on whether relationships or tightest terms are favored

Leverage has risen slowly, spreads are range-­‐‑bound, and covenantsbeing eroded for better credits; arranger competition is keen

How  about  debt  and  equity  ISSUERS?

Institutional  investor  market  share                    Source:    S&P  LCD,  Capital  IQ

Capital  Markets  – Behind  the  Scenes

CLOs  remain  a  significant  share  of  the  institutional  market

5

CLO59.8%

Finance Co.1.3%

Hedge, Distressed & High-Yield Funds

10.3%

Insurance Co.7.2%

Loan Mutual Funds21.4%

Institutional investor market share

Institutional  investor  market  share        Source: Wells  Fargo,  S&P  LCD  Capital  IQ

Capital  Markets  – Behind  the  Scenes

Banks’  share  of  loans  is  only  10%  of  the  overall  market

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Banks & Sec. Firms Non-Banks (institutional investors and finance companies)

Primary Investor Market: Banks vs Non-Banks

Fundraising  still  hot:  3Q  2017  saw  most  capital  raised  since  2Q  2014

Capital  Markets  – Behind  the  Scenes

7

Source:  PitchBook;  data  for  United  States

$17

$14

$23

$18

$31

$22

$18

$18

$28

$32

$23 $2

8

$37

$68

$28

$65

$52

$63

$28

$56

$55

$39

$41

$60

$57

$59

$43

$55

$57

$59

$62

-­‐

10  

20  

30  

40  

50  

60  

70  

80  

90  

100  

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2010 2011 2012 2013 2014 2015 2016 2017*

$0

$10

$20

$30

$40

$50

$60

$70

$80

Capital  Raised  ($B) #  of  Funds  Closed

Final  3Q  value  expected  to  reflect  big  jump,  in-­‐‑line  with  prior  3Qs

Capital  Markets  – Behind  the  Scenes

8

Source:  PitchBook;  data  for  United  States

$85

$83

$75

$93

$79

$78

$77

$138

$80

$103

$101

$157

$128

$121

$144

$138

$129

$119

$170

$132

$131

$134

$185

$127

$123

$116

$135

859

959

0

200

400

600

800

1,000

1,200

$0  

$20  

$40  

$60  

$80  

$100  

$120  

$140  

$160  

$180  

$200  

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2011 2012 2013 2014 2015 2016 2017

Deal  Value  ($B) Estimated  Deal  Value  ($B) #  of  Deals  Closed

Source:  S&P/LCD,  Lipper

The  year-­‐‑long  trend  of  cash  flowing  into  loan  funds  has  reversed

Capital  Markets  – Behind  the  Scenes

9

Prime-fund flows (weekly reports only)

-­‐1.19

0.51 0.39

-­‐1.17

0.25

-­‐2.89

-­‐2.11

-­‐0.75

-­‐2.12

-­‐4.66

-­‐2.49 -­‐2.54

0.17

-­‐0.50

0.38

-­‐0.52

0.170.64

1.49 1.652.23

6.04

3.77 3.584.04

1.71

0.840.22

0.55

-­‐0.76 -­‐0.51

-­‐$5B

-­‐$3B

-­‐$1B

$1B

$3B

$5B

$7B

Mar  15

Apr  15

May  15

Jun  15

Jul  15

Aug  15

Sep  15

Oct  15

Nov  15

Dec  15

Jan  16

Feb  16

Mar  16

Apr  16

May  16

Jun  16

Jul  16

Aug  16

Sep  16

Oct  16

Nov  16

Dec  16

Jan  17

Feb  17

Mar  17

Apr  17

May  17

Jun  17

Jul  17

Aug  17

Sep  17

New  CLO  formation  already  ahead  of  full  year  2016  volume

Capital  Markets  – Behind  the  Scenes

Source:  S&P/LCD

10

9.38

16.24

10.18

5.66

12.74

7.35

6.025.57

7.33

4.81

7.46

0.83

2.55

4.86

5.915.44

6.645.76 5.86

8.24 8.41

10.64

7.16

0.98

8.537.87

10.249.84

15.02

8.35

12.42

8.51

$0B

$2B

$4B

$6B

$8B

$10B

$12B

$14B

$16B

CLO Volume

Capital  Markets  Metrics  – Loan  Volume

Source:  Thomson  Reuters  LPC

11

Sponsored Middle Market Volume

Middle  market  sponsored  activity  softened  from  last  quarter

0

5

10

15

20

25

30

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Issu

ance

($B

.)

Source:  Thomson  Reuters  LPC

MM  LBO  leverage  remains  below  that  for  large  cap  deals

Capital  Markets  Metrics  – Leverage

12

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1-3Q

17

LBO

Deb

t to

EB

ITD

A (x

)

Institutional MM Large Corp.

20%

25%

30%

35%

40%

45%

50%

55%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1-3Q

17

Equi

ty C

ontr

ibut

ions

Institutional MM Large Corp.

Source:  Thomson  Reuters  LPC

Large  cap  yields  off  despite  cash  coming  out  of  mutual  funds

Capital  Markets  Metrics  – Pricing

13

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

Sep-

14N

ov-1

4Ja

n-15

Mar

-15

May

-15

Jul-1

5Se

p-15

Nov

-15

Jan-

16M

ar-1

6M

ay-1

6Ju

l-16

Sep-

16N

ov-1

6Ja

n-17

Mar

-17

May

-17

Jul-1

7Se

p-17

Sing

le B

-yie

lds

(3 y

ears

)

Loan

fund

flow

s ($

B)

Loan fund flows Single- B loan yields

Capital  Markets  Metrics  – Pricing

Source:  Thomson  Reuters  LPC

Middle  market  illiquidity  premium  narrowed  to  about  100  bps  

14

3%

4%

5%

6%

7%

8%

9%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

All-

in-y

ield

(3-y

ear)

Middle market and large corporate quarterly average yields

Large Corp

MM

LIBOR+ Spread+OID (3-year)

Source:  Thomson  Reuters  LPC;  all-­‐‑in  middle  market  institutional  yields  (3  year)

Middle  market  leveraged  loan  yields  remain  in  historic  range

Capital  Markets  Metrics  – Pricing

15

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

2008

1Q-3

Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

All-

in-y

ield

(3-y

ear)

LIB/LIB Floor LIB Spread Spread due to OID

Source:  Thomson  Reuters  LPC

Covenant-­‐‑lite  loans  persist  for  larger  middle  market  borrowers

Capital  Markets  Metrics  – Covenants

16

Middle market covenant-lite volume

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

Cov

. Lite

% o

f iss

uanc

e

Cov

-lite

issu

ance

($B

ils.)

MM Cov Lite Volume

% of MM Volume

% of MM Institutional Vol.

US middle market covenant counts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

LTM

3Q

17

Mar

ket

shar

e

1 cov 2 cov's 3 cov's 4+ cov's

Source:  S&P  LCD

Capital  Markets  Review  – Credit  Quality

Default  rates  stable  with  sector-­‐‑specific  problems  well-­‐‑defined  

17

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jan  04

May  04

Sep  04

Jan  05

May  05

Sep  05

Jan  06

May  06

Sep  06

Jan  07

May  07

Sep  07

Jan  08

May  08

Sep  08

Jan  09

May  09

Sep  09

Jan  10

May  10

Sep  10

Jan  11

May  11

Sep  11

Jan  12

May  12

Sep  12

Jan  13

May  13

Sep  13

Jan  14

May  14

Sep  14

Jan  15

May  15

Sep  15

Jan  16

May  16

Sep  16

Jan  17

May  17

Sep  17

Lagging 12-month leveraged loan default rate by number

43.48%

30.43%

13.04%

4.35%

4.35%

4.35%

Services/Retail

Oil  &  Gas

Telecom

Entertainment  &  Leisure

Computers  &  Electronics

Healthcare

Composition of defaults

Capital  Markets  – Fourth  Quarter  2017  Outlook

18

Little  change  expected  in  credit  conditions  or  market  liquidity

Expectations are that borrower-­‐‑friendly market will persist through year-­‐‑end

Direct lenders hoping for improved M&A activity, but also some credit discipline

Sponsored middle market volume should improve from 3Q; spreads steady

Competition for lead-­‐‑arranged deals will continue to erode structures

Senior leverage of 3.5-­‐‑4x; total of 5-­‐‑5.5x for traditional middle market; 4.0-­‐‑4.5xsenior/5.5-­‐‑6.0x total for larger mid caps; >4.5x senior/6.0x total for BSL

Our Partners

19

Your Tour Guide to the Middle Market

About The Lead Leftwww.theleadleft.com

What is The Lead Left?The Lead Left is Churchill Asset Management’s weeklynewsletter reviewing deals and trends in the capitalmarkets. Our publication has a unique focus on the mid-market space and is read by thousands of influentialindustry participants.

When you subscribe to The Lead Left, you become amember of an exclusive club of readers. As an experiencedprofessional and decision maker in the capital markets,investment banking, and corporate finance sectors, you willhave access to the leading one-stop provider of middlemarket deals and data. You will also receive insightfulmarket trend commentary and analysis, and exclusiveinterviews with thought leaders. The Lead Left also givesyou world-class content from top market research partnersincluding Thomson Reuters LPC, S&P/LCD, IHS Markit,PitchBook, Preqin, SPP Capital Partners, Debtwire, andCovenant Review.

Since 2008, The Lead Left has become the premier sourcefor information on trends in the middle market space.Distributed weekly to over 40,000 readers, this newsletter isthe only publication of its kind in the industry. Produced byChurchill Financial's Head of Capital Markets, we give youan insider's perspective, supported by over thirty years ofinvesting and market experience. The

Lead Left is your no-spin, media noise suppression deviceand tour guide for today's complex and challengingmarkets.

Original commentary backed by thirty years of capital markets experience

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Contact

Randy SchwimmerSenior Managing DirectorHead of Origination & Capital MarketsChurchill Asset Management T (212) 478-9203 M (646) 584-1362randy.schwimmer@churchillam.com

20

Your Tour Guide to the Middle Market

Data and commentary from four of the leading global capital market research firms

Detailed information on deals in the market

Plus our popular Charts and Quotes of the Week