Neuberger Berman Senior Floating Rate Loans - …

1 Neuberger Berman Senior Floating Rate Loans May 2014 FOR PROFESSIONAL CLIENT USE ONLY For Professional Client Use Only Table of Contents loan PRIMER ENVIRONMENT Berman NON-INVESTMENT GRADE TEAM AND INDEX DEFINITIONS BANK loan PRIMER For Professional Client Use Only What are Bank Loans ? Bank Loans , also known as Floating rate secured Loans or leveraged Loans , are Loans arranged by banks to non-investment grade companies to finance mergers and acquisitions, leveraged buyouts (LBOs), recapitalizations, capital expenditures and general corporate purposes The Loans are then syndicated, or sold, to institutional investors The Loans are Floating rate, earning a base rate (typically LIBOR)

2 Plus a spread Bank Loans are secured and hold the Senior -most position in the capital structure They hold a first priority lien on the assets of the borrower, including receivables, inventory and property, plant and equipment They must be repaid before other debt obligations, and before bondholders or stockholders Transaction Type: Private transaction Lenders: Banks, Institutional investors Coupon: Floating rate coupon of LIBOR (reset quarterly/semi-annually/annually) + spread Typical Maturity: 5-7 years Collateral and Security: Backed by specific pledged assets and most-secured claim on assets ( Senior priority) Capital Structure: Most Senior position Ratings: Typically 2 credit rating positions above subordinated high yield debt Bank Loans hold the most Senior debt position within a firm s capital structure Highest Senior Secured Debt High Yield Debt (Unsecured or Subordinated) Lowest Priority of Payment GENERAL Floating RATE loan CHARACTERISTICS Common Stock Preferred Stock Sample Capital Structure _____ Illustration only of the typical characteristics of Floating rate Loans .

3 1 For Professional Client Use Only Components of Bank loan Returns LIBOR Floor The minimum base rate of LIBOR, even if LIBOR falls below the level Credit Spread The amount of interest paid over LIBOR to compensate an investor for the associated credit risk Discount The amount a loan is priced below par in the primary or secondary market. if a loan is priced at 98 this equals a 2% discount Returns on Bank Loans are typically comprised of a LIBOR floor, the credit spread and a discount _____ Illustration only of the drivers behind the yield in current markets. Credit Spread ~ Discount ~ LIBOR Floor ~ + + 2 For Professional Client Use Only Comparison of Bank Loans and High Yield Bonds Bank Loans High Yield Bonds Security: Secured by stock and assets Generally unsecured Seniority: Structurally Senior Subordinate to secured Loans Interest Rate/Coupon: Floating rate Fixed rate Tenor: Typically 5-7 years Longer-dated, typically 8-10 years Amortization: Required quarterly principal payments + residual at maturity Bullet payment at maturity Optional Prepayments: Typically prepayable at par without penalty Call protected Mandatory Prepayments.

4 Most credit agreements require an issuer to prepay Loans with proceeds from: Debt and equity issuance Asset sales Excess free cash flow Typically, the indenture contains some provisions for mandatory prepayments once Loans are fully repaid if proceeds are not reinvested during specified period Principal Covenants: Maintenance-based financial covenants Other covenants generally more restrictive than bonds (restricted payments, additional debt, etc.) Incurrence-based financial covenants Other covenants generally less restrictive than Loans (restricted payments, additional debt, etc.) Facility Ratings: Typically higher than corporate and unsecured rating Typically lower than Senior secured facility rating Expected Recovery: Higher given seniority and security Lower given subordination Governing Document: Credit agreement Indenture Lenders: Banks, institutional investors Institutional investors Minimum Assignment: $250,000 None Settlement: T+7 T+3 Registered Security: No Yes Comparison of a typical bank loan and high yield bond _____ Illustration only of the typical characteristics of Floating rate Loans and high yield bonds.

5 3 For Professional Client Use Only Capital Preservation The Bank loan market has typically preserved a very high level of capital _____ Source: Moody s Investors Service report dated February 2014. Preservation of capital shown above is 100% minus the loss ratio. Loss ratio is the issuer weighted corporate default rate for speculative grade Global speculative Loans taken from that report multiplied by 100% minus the average recovery rates for Global first lien Loans taken from the same report. These are broadly representative of the assets the Company has invested in. 0%10%20%30%40%50%60%70%80%90%100%1990199 1199219931994199519961997199819992000200 1200220032004200520062007200820092010201 120122013 OVER THE LAST 24 YEARS THE MARKET HAS PRESERVED AN AVERAGE OF OF CAPITAL (1990-2013) 4 For Professional Client Use Only Diversification Benefits YIELD-TO-WORST VERSUS DURATION1 Bank Loans deliver higher yields at lower duration, and offer potential risk reduction through portfolio diversification _____ : Barclays, S&P/LSTA.

6 As of March 31, 2014. Bank Loans are represented by the S&P/LSTA Leveraged loan Index. Yield to Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer. Indices are unmanaged, include reinvestment of any dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Investors cannot invest directly in an index. For the S&P/LSTA Leveraged loan Index we have used the Yield to Maturity.

7 : Standard & Poor s, as of Decembert 31, 2013. Bank Loans are represented by the S&P/LSTA Leveraged loan Index; High Yield is represented by the Bank of America-Merrill Lynch US High Yield Master II Constrained Index; US Treasuries is represented by Bank of America-Merrill Lynch 10-Year Treasury Index; Equities are represented by the S&P 500 Index; and High Grade Corporates are represented by the Bank of America-Merrill Lynch High Grade Corporates Index. Past performance is not indicative of future results. Indices are unmanaged, include reinvestment of any dividends, capital gain distributions or other earnings and do not reflect any fees or expenses.

8 Investors cannot invest directly in an index. 1997 DECEMBER 2013 CORRELATION MATRIX2 Bank Loans have the potential to provide diversification benefits. They typically display: a low correlation to traditional equity securities a low or negative correlation to traditional fixed income securities Barclay s US 1-3M T-BillsB arclays US A ggBarclay s US TreasuryBarclay s Muni BondBarclay s US Corporate IGBarclay s US Corp. HYBarclay s US 1-3 Year T-BillsS&P/LSTA Lev eraged loan 0%2%4%6%8%012345678 Duration (Years)Yield To Worst (%) As demonstrated above, few fixed income investments offer an attractive yield and limited duration Bank Loans High Yield 10yr US Treasuries S&P 500 High Grade Corp Bank Loans - - - - High Yield - - - 10yr US Treasuries - - S&P 500 - High Grade Corp 5 MARKET ENVIRONMENT For Professional Client Use Only 2013 Fixed Income Performance _____ Past performance is not indicative of future results.

9 You cannot invest directly in an index. 1. Source: Barclays POINT. Floating -Rate Loans represented by S&P/LSTA Leveraged loan Index. High Yield represented by Barclays High Yield 2% Issuer Cap Index. US Treasuries represented by Barclays Treasury Index. Investment-Grade Corporate represented by Barclays Investment Grade Corporate Index. 2. Source: Bloomberg, POINT. Benchmarks used were the S&P/LSTA Leveraged loan Index, Barclays US High Yield 2% Issuer Cap Index, Barclays Global Treasury Index, Barclays US Treasury Index, Barclays US Credit Index and Barclays European Credit Index. TOTAL RETURN (9 MAY 2013 31 DECEMBER 2013)1 During 2013, Bank Loans produced attractive total returns relative to other fixed income assets -13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13N ov -13 Dec-13U S Bank LoansU S H igh YieldU S TreasuriesU S IG C BankLoansUS High YieldGlobalTreasuriesUSTreasuriesUS IG CreditEuropean IGCreditTOTAL RETURN (1 JANUARY 2013 31 DECEMBER 2013)

10 2 6 For Professional Client Use Only Bank LoansUS High YieldGlobal TreasuriesUS TreasuriesUS IG CreditEuropean IG CreditEuropean EquitiesUS EquitiesIncome Generation & Relative Value Dividend Yield Yield to Maturity ASSET CLASS YIELD COMPARISON1 Yield to Worst _____ Data as at March 31, 2014. Past performance is not indicative of future results. You cannot invest directly in an index. : Bloomberg, POINT. Benchmarks used were the S&P/LSTA Leveraged loan Index, Barclays US High Yield 2% Issuer Cap Index, Barclays Global Treasury Index, Barclays US Treasury Index, Barclays US Credit Index, Barclays European Credit Index, Euro STOXX Index and S&P 500 Index.