HIGH YIELD BONDS

Mark Vaselkiv

Portfolio Manager of the High Yield Fund and Institutional High Yield Strategy

2015 Global Market Outlook Press Briefing

2

High Yield Bonds: Summary

ENVIRONMENT

U.S. high yield has enjoyed an impressive multiyear run, resulting

in somewhat stretched valuations today.

An expanding high yield market into European and emerging

market regions is creating additional opportunities.

LOOKING AHEAD

A favorable credit environment remains, especially within the

context of low global interest rates.

Amid record-low yields from U.S. issuers, growing international

markets offer potentially greater value.

Potential to profit from near-term volatility and technical

dislocations, particularly within less mature markets of European

high yield and emerging corporates.

3

Today’s U.S. High Yield Market Permits

Less Compensation for Risk

0

5

10

15

20

25

Perc

en

t

BARCLAYS U.S. HIGH YIELD INDEX

As of 30 September 2014

Coupon Yield to Worst

Source: Barclays.

Post-2008, a strong market run within an improving credit environment has promoted

complacency and inappropriate pricing of risk evidenced by declining coupons.

4

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Rela

tiv

e M

ark

et

Siz

e (

%)

0

100

200

300

400

500

600

Hig

h Y

ield

Mark

et

Siz

e (€ b

illio

ns)

The high yield asset class historically had been dominated by U.S. issuers; that composition is changing.

Financial disintermediation has more than tripled the size of the European high yield market, creating more

liquidity, depth, and diversity.

Sources: UBS, Credit Suisse, and T. Rowe Price.

The Market is Expanding Globally—

European High Yield

Expected Market Size by End of 2015: €500 Billion

RELATIVE SIZE OF THE EUROPEAN HIGH

YIELD MARKET VS. U.S. HIGH YIELD MARKET

2013

Record €83 billion

new issuance

38% first-time issuers

As of 30 September 2014 As of 30 September 2014

GROWTH OF THE EUROPEAN HIGH

YIELD MARKET

5

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Mark

et

Siz

e (

$ b

illio

ns)

0

50

100

150

200

250

300

350

New

Issu

an

ce (

$ b

illio

ns)

Sources: BIS and Bank of America/Merrill Lynch.

The Market is Expanding Globally—

Emerging Market Corporate Debt

Emerging markets corporates represent another area of tremendous growth, now

comparable with the size of U.S. high yield.

EMERGING MARKET CORPORATE

DEBT GROWTH

1996 Through June 2014

EMERGING MARKET CORPORATE

NEW ISSUANCE

1996 Through August 2014

6

Expanding Global Opportunity Set

Sources: BIS and Credit Suisse.

0

1,000

2,000

3,000

4,000

5,000

6,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sept.2014

Billio

ns (

$)

MARKET GROWTH—1996 THROUGH SEPTEMBER 2014

U.S. High Yield European High Yield Emerging Market Corporate Debt

U.S. Leveraged Loans European Leveraged Loans

Credit markets have significantly grown as increasingly complex and interwoven

markets create compelling opportunities.

7

2004

North America Africa and Middle East

Europe Latin and South America

Pacific

Source: Bank of America/Merrill Lynch.

Global Benchmarks are Evolving

In recognition of broadening international markets, today’s global indices are

incorporating more exposure outside of North America (representing almost 45%),

an allocation that was approximately 15% 10 years ago.

2014

North America Africa and Middle East

Europe Latin and South America

Asia Pacific

BANK OF AMERICA/MERRILL LYNCH GLOBAL HIGH YIELD

As of 30 September 2014

8

Different Regions Produce

Divergent Results

Sources: Bank of America/Merrill Lynch, J.P. Morgan, and T. Rowe Price.

U.S. High Yield represented by the Bank of America/Merrill Lynch U.S. High Yield Index hedged to EUR, European High Yield represented by the

Bank of America/Merrill Lynch European Currency High Yield ex. Sub. Fin. 2% Constrained Index hedged to EUR, and Emerging Market Corporate

Debt represented by the J.P. Morgan CEMBI Broad Diversified Index hedged to EUR.

0

50

100

150

200

250

Gro

wth

of €100

GROWTH OF €100

As of 30 September 2014

U.S. High Yield European High Yield Emerging Market Corporate Debt

While credit markets are more interconnected today, different regional cycles

produce performance dispersion.

9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Yie

ld t

o W

ors

t (%

)

Altice 9.875 12/15/2020

CHTR 6.5 4/30/2021

Altice—CHTR

Cable operator with a diverse geographic footprint given its operations in Israel, the Caribbean,

and Western Europe

Market cap is approximately €11 billion with total debt of €20 billion

Came to the market in the second quarter with the largest-ever below investment-grade debt deal

Management continues to improve operating efficiencies to grow EBITDA and free cash flow,

targeting lower leverage

Source: Barclays, Altice, and T. Rowe Price.

Case Study #1—Altice

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50

100

150

200

250

300

350

400

450

2011 2012 2013 LTM 6/14

FC

F in

€ M

illio

ns

FCF FCFS/Sales EBITDA %

ALTICE FREE CASH FLOW GROWTH ALTICE AND CHTR BENCHMARK BONDS—

YIELD TO WORST (%)

EB

ITD

A %

10

Partially state-owned Argentine energy company involved in the exploration, production,

and refining of Argentina’s sizable oil and gas reserves

Market cap of roughly $20 billion and outstanding debt of $5 billion

New management team has stabilized and grown oil production with a reserve base of

more than one billion barrels of oil and production of nearly 300,000 barrels of oil

equivalents a day

Sovereign-related volatility expected to moderate in 2015 with upcoming elections and

more pragmatic policymaking

Sources: J.P. Morgan and T. Rowe Price.

* Yield to Worst for YPF 8.75 due 2024 minus J.P. Morgan Domestic HY index YTW.

Case Study #2—YPF

2.0

2.5

3.0

3.5

4.0

Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14

Yie

ld t

o W

ors

t (%

)

YPF Yield Premium Relative to U.S. HY Index*

0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2014(est)

2015(est)

2016(est)

Millio

ns o

f B

arr

els

of

Oil

Eq

uiv

ale

nts

a D

ay

Oil Production (Mboe/d) NGL Production (Mboe/d)

Gas Production (Mboe/d)

11

Largest bank in Russia and Eastern Europe, with a history of operations dating back to 1841

– Market cap of $40 billion with $18 billion of bonds outstanding

Strong balance sheet liquidity and capitalization with modest debt levels and large deposit base to help

manage operations in the event of a protracted sanctions environment

Dominant market share in Russia, with nearly a third of country’s banking sector assets; benefits from

domestic flight to quality during times of stress and funding advantage from low-cost retail deposits

Sources: T. Rowe Price, J.P. Morgan, and Sberbank financials.

Case Study #3—Sberbank

-150

-100

-50

0

50

100

150

200

Sp

read

Dif

fere

nce (

bp

s)

SBERBANK ’22 SENIOR BOND

VS. U.S. HY BB INDEX

Sberbank Senior Bond vs. U.S. HY BB

SBERBANK: LIQUIDITY PROFILE

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1Q14 2014 2015 2016 2017 2018 After

RU

B m

m

Cash & Equivalents

Broad Liquidity

Bonds

Loans

12

Evolution of the High Yield Asset Class

Should Incorporate a Global Perspective

Long-term sustainable demand for income-oriented credit

strategies in a low interest rate world.

Overvalued U.S. credit markets caused by an influx of new

investors and limited supply of quality issuers.

Expanding international opportunity set from the maturation of

leveraged loan, European high yield, and emerging markets

corporate asset classes.

Meaningful potential to profit from dislocations and volatility

driven by economic and geopolitical uncertainties.

13

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