Testimony Before the ABI Chapter 11 Reform

CommissionField Hearing17th Annual LSTA ConferenceNew YorkOctober 17, 2012

Ted BastaSVP, Analysis and DataThe Loan Syndications

and Trading Association (LSTA)

The Size and Importance of

the Leveraged Loan andHigh Yield Bond Markets

Leveraged Loans and High Yield Bonds RepresentMore than 6% of U.S. Fixed Income Assets

Treasury 25%

Municipal 10%

Fed Agencies 6%

Money Market 7%

High Yield Bonds 3%

Leveraged Loans 3%

High Grade Bonds 18%

Mortgage-Related 23%

Asset Backed 5%

Total Size of Fixed Income Market $38 Trillion3

In 2001 the Wall Street Journal Began Covering the Leveraged Loan Market - Today the Leveraged Loan Market Provides Funding to Almost 1,500 Individual Companies

Source: Wall Street Journal

0

500

1,000

1,500

2,000

Number of Companies Accessing Leveraged Loan Market

Source: LSTA/Thomson Reuters LPC MTM Pricing

4

There is More Than $1.5 Trillion in Total Leveraged Debt Outstanding (HY Bonds & Institutional Loans) - With an Estimated $2.7 Trillion Traded Annually by Year-End 2012

Leveraged Debt OutstandingLeveraged Debt Secondary Trading Volume

20

06

20

07

20

08

20

09

20

10

20

11

20

12

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Institutional First Lien LoansSecond-Lien LoansSr Secured BondsSr Unsecured Bonds

Bil

lions

20

06

20

07

20

08

20

09

20

10

20

11

20

12

...

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Leveraged Loans HY Bonds

Bil

lions

5

Source: S&P Capital IQ LCD Source: Thomson Reuters & LSTA Trade Data Study

Since 2010, The Leveraged Loan and High Yield Bond MarketsHave Provided Corporate Borrowers With $1.7 Trillion in Funding

2005 2006 2007 2008 2009 2010 2011 YTD-9/12

$-

$100

$200

$300

$400

$500

$600 Leveraged Loans High-Yield Bonds

Len

din

g V

olu

me (

Bil

lion

s)

6Source: S&P Capital IQ LCD

Senior Secured Loans sit Atop the Capital Structure andOffer Corporate America a Private and Cheaper Source of Funding

Pay

men

t S

enio

rity

High

Low

Senior Secured LoansHigh Yield Bonds

Convertible Securities

Preferred Stock

Common Stock

Oct

-09

May-

10

Nov-

10

May-

11

Nov-

11

May-

12

0%

2%

4%

6%

8%

10%

12%

6%

8%

Loans Bonds

Primary Market Yields for B-Rated Unsecured Bonds and Institutional Loans

7Source: S&P Capital IQ LCD

The Last Three Default Cycles (1,000 Corporate Defaults)Illustrate the Significance of Capital Structure

Historical US Spec. Grade

Default Rate

3 3 3 3 3 3 3 3 3 3 3 3 3 4

0%

2%

4%

6%

8%

10%

12%

14%

16%

Average Default Level

Average Recoveries in Three Default Cycles

Avg. 12/89 - 12/92

9/99 - 2/04

1/09 - 8/10 

0%

25%

50%

75%

100%

80%

88%

76% 79%

Leveraged LoansSenior Unsecured BondsSubordinated Bonds

Source: Moody’s Investor Services

Leveraged loans are typically the most senior debt in a company’s capital structure and often have first-lien claim to the company’s assets in the event of bankruptcy.

8

The Distribution of Recoveries Over the Past Two Years AcrossBoth Markets Illustrates the Importance of Senior Security

0-1

0

>1

0-2

0

>2

0-3

0

>3

0-4

0

>4

0-5

0

>5

0-6

0

>6

0-7

0

>7

0-8

0

>8

0-9

0

>9

0-

10

0+

0%

10%

20%

30%

40%

50%

60%

70%

80%

Distribution of High Yield Bond Recoveries (2010-2012)

Distribution of Leveraged Loan Recoveries (2010-2012)

9Source: Fitch Ratings

As the Leveraged Loan and HY Unsecured Bond Markets Seized upin 2009, the Secured Bond Market Became a Major Source of Funding

2005 2006 2007 2008 2009 2010 2011 YTD-9/12

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

Secured HY Bonds

Len

din

g V

olu

me (

Bil

lion

s)

10Source: S&P Capital IQ LCD

The Leveraged Loan Market

Liquidity and the Lender Base

11

Over the Past 12 Years, The Primary Source of LeveragedLending has Been the Institutional Lender Base

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

0%

25%

50%

75%

100%

13%

87%

Banks Non-banks (institutional lenders)

0

50

100

150

200

250

300

350

235

Total Institutional Loan Lend...

12

Source: S&P Capital IQ LCD

Secondary Trading Liquidity Levels Remained MostlyConstant Before, During and After the US Recession

YE

YE

YE

Ma

Jun

-10

Se

De

Jun

-11

Se

De

Ma

Jun

-12

$-

$100

$200

$300

$400

$500

$600

$700

-5%

0%

5%

10%

15%

20%

25%

30%

Amount of Outstanding Leveraged LoansAmount in Payment Default or Bankruptcy

Bil

lions

20

07

20

08

20

09

20

10

20

11

20

1

$-

$100

$200

$300

$400

$500

$600

$700

0%

25%

50%

75%

100%

Annual Trade VolumeSize of S&P/LSTA LLIAnnual Turnover

Bil

lions

13Source: S&P Capital IQ LCD Source: S&P/LSTA LLI & LSTA Trade

Data Study

The Secondary Leveraged Loan Market Allows Managersto Actively Trade in Order to Shift Around Risk Allocation

30

40

50

60

70

80

90

100

BB Rated LoansSingle B Rated LoansCCC Rated Loans

Ave

rage S

econ

dary

Bid

leve

l

$-

$25,000,000,000

$50,000,000,000

$75,000,000,000

$100,000,000,000

$125,000,000,000

$150,000,000,000

$175,000,000,000

Trade Prices (<80)Trade Prices (>=80)

Sec

onda

ry T

rade

Vol

um

e

14Source: LSTA Trade Data StudySource: S&P/LSTA LLI & LSTA/TR LPC

MTM

As Market Conditions Change so Doesthe Lender Base for Leveraged Loans

Share of Non-Bank Leveraged Primary Lending

-10%

0%

10%

20%

30%

40%

50%

60%52%

6%

41%

19%

2008 2009 2010 2011

CLO Retail Loan

Funds

Hedge, Dis. &

HY Funds

Finance & Insur.

Co.-10%

0%

10%

20%

30%

40%

50%

60%

40%

23%

3Q11 4Q11 1Q12 2Q12 3Q12

Source: S&P Capital IQ LCD

15

Hedge, Dis. & HY Funds are Critical in theEffective and Efficient Transfer of Risk

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q120%

25%

50%

75%

100%75%

68%

87% 86%

63%

94%

64%

Secondary Loan Price Advancers Secondary Loan Price Decliners

16Source: S&P Capital IQ LCD & LSTA/TR LPC MTM Pricing

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q120%

10%

20%

30%

40%

26%29%

40%

33%

22%25%

23%

Hedge, Dis. & HY Fund Share of Primary ...

Case Studies on Liquidity and Performance in

Bankruptcy

17

Idearc (Orig. Deal Size = $6.5B) & Masonite (Orig. Deal Size = $1.5B) Filed For Bankruptcy in March 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

June

-09

$-

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

Combined Secondary Trade Volume of Both

Companies

0

10

20

30

40

50

0

1

2

3Idearc-TLB-Avg. Bid Idearc-TLB-Bid-Ask Spread

18

Dec-0

8

Dec-0

8

Dec-0

8

Jan-

09

Jan-

09

Feb-0

9

Feb-0

9

Mar

-09

Mar

-09

Mar

-09

Apr-0

9

Apr-0

9

May

-09

May

-09

Jun-

09

Jun-

09

Jun-

090

102030405060

0

1

2

3

4

Masonite -TLB-Avg. BidMasonite-TLB-Bid-Ask Spread

Source: LSTA Trade Data Study & LSTA/TR LPC MTM

Chrysler Corp. (Orig. Deal Size = $9.5B) & General Growth Prop.(Orig. Deal Size = $2B) Filed For Bankruptcy in April 2009- Post Bankruptcy, Trade Volumes Subsided as Bid Levels, which Reflect Enterprise Value, Increased & Bid-Ask Spreads Tightened

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

June

-09

Jul-0

9

$-

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

Combined Secondary Trade Volume of Both

Companies

05

101520253035

01234567

Chrysler Corp-TLB-Avg. BidChrysler Corp-TLB-Avg. Bid-Ask Spread

19

Jan-

09

Jan-

09

Jan-

09

Feb-0

9

Feb-0

9

Feb-0

9

Mar

-09

Mar

-09

Mar

-09

Apr-0

9

Apr-0

9

May

-09

May

-09

May

-09

Jun-

09

Jun-

090

102030405060

0123456

General Growth Properties-TLA-Avg. BidGeneral Growth Properties-TLA-Avg. Bid-Ask Spread

Source: LSTA Trade Data Study & LSTA/TR LPC MTM

Delphi Automotive Corporation Filed for Bankruptcy October, 2005~Hedge Funds Recapitalize the Companyto Allow it to Re-Organize Despite Heavy Volatility

20

Source: LSTA/TR LPC MTM

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

0

20

40

60

80

100

120

140

Bond Avg. BidLoan Avg. Bid: TLB

Oct

-09

Jan

-10

Mar-

10

Jun

-10

Sep

-10

Dec-

10

Mar-

11

Jun

-11

Au

g-1

1N

ov-

11

Feb

-12

May-

12

Au

g-1

2

$-

$5

$10

$15

$20

$25

$30

$35

Equity Price

Hedge FundsRecap Company

Filed for Bankruptcy 10/05

Completed its Post-Re-OrgIPO on 11/11 at $22

Debtor-In-Possession(DIP) Financing

Liquidity and Performance

21

The LSTA Has Tracked 56 Companies That Have Accessed the DIP Market Since 2006, Providing Them With the Liquidity Needed to Operate and Restructure While in Bankruptcy ~ Only 2 Companies Liquidated

22

Borrower Name Borrower Name Borrower NameAES Corp Delta Airlines NewPage Corp

Aleris International Inc Eagle-Picher Industries Inc Northwest AirAmerican Safety Razor Eastman Kodak Oneida

ATP Oil & Gas Corp Federal-Mogul Oriental TradingAtrium Companies General Growth Properties Philadelphia Media HoldingsBicent Power LLC Great Atlantic & Pacific Tea Co Quebecor Media

BlockBuster Greektown Casino Readers Digest AssociationBuffets Inc Hawker Beechcraft Remy International Inc

Calpine Corp Hayes Lemmerz International Residential Capital CorpCCS Medical Houghton Mifflin Sbarro Inc

Champion Home Builders Insight Pharmaceuticals Inc. Smurfit-Stone ContainerChemtura Corp Interstate Bakeries Corp Solutia Inc

Cinram Ion Media Tower AutomotiveCoach America Lake Las Vegas Resort Tribune CoCooper Standard Lear Corp Tronox Inc

Crescent Resources Lyondell Chemical True Temper SportsDana Corp Medical Staffing Network White Birch Paper LtdDeb Shops Nebraska Book Winstar Communications

Delphi Automotive Systems Newark Group Xerium (BTR Paper)

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

$-

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

DIP Lending VolumeDIP Trading Volume

60

70

80

90

100

110

DIP Mkt: Avg. Bid

Ave

rage B

id

23

DIP Lending is Critical to the Preservationand Subsequent Appreciation of Enterprise Value

Source: LSTA Trade Data Study & LSTA/TR LPC MTM