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1111Dr. Edward AltmanNYU Stern School of BusinessAre We Nearing the End of the Benign Credit Cycle & Is a Bubble Building In Credit?CIFR SeminarMacQuarie UniversitySydney, AustraliaNovember 19, 2015

11Is It a Bubble?2 Or, Just Opportunistic Debt Financing? Focus on Default Rates in Credit Markets Length of Benign Credit Cycles Coincidence with Recessions: U.S. & European Scenarios Comparative Health of High-Yield Firms (2007 vs. 2012/2014) High-Yield and CCC New Issuance LBO Statistics and Trends Liquidity Concerns (Markets & Dealers) Maturity Schedule of Leveraged Debt (Impact?) Large Increase in the Distress Ratio Possible Timing of the Bubble BurstStraight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, (US$ millions), 1971 2015 (10/15))Historical H.Y. Bond Default Rates3YearPar Value Outstandinga ($)Par Value Defaults ($)Default Rates (%)2014 1,496,81431,5892.11020131,392,21214,5391.04420121,212,36219,6471.62120111,354,64917,9631.32620101,221,56913,8091.13020091,152,952123,87810.74420081,091,00050,7634.65320071,075,4005,4730.5092006993,6007,5590.76120051,073,00036,2093.3752004933,10011,6571.2492003825,00038,4514.6612002757,00096,85512.7952001649,00063,6099.8012000597,20030,2955.0731999567,40023,5324.1471998465,5007,4641.6031997335,4004,2001.2521996271,0003,3361.2311995240,0004,5511.8961994235,0003,4181.4541993206,9072,2871.1051992163,0005,5453.4021991183,60018,86210.2731990181,00018,35410.1401989189,2588,1104.2851988148,1873,9442.662a Weighted by par value of amount outstanding for each year.YearPar Value Outstanding* ($)Par Value Defaults ($)Default Rates (%)1987129,5577,4865.778198690.2433,1563.497198558,0889921.708198440,9393440.840198327,4923011.095198218,1095773.186198117,115270.158198014,9352241.500197910,356200.19319788,9461191.33019778,1573814.67119767,735300.38819757,4712042.731197410,8941231.12919737,824490.62619726,9281932.78619716,602821.242Standard Deviation (%)Arithmetic Average Default Rate (%)1971 to 20143.1173.0971978 to 20143.3403.2731985 to 20143.8433.416Weighted Average Default Rate (%)*1971 to 20143.4911978 to 20143.4961985 to 20143.513Median Annual Default Rate (%)1971 to 20141.664Source: Authors compilation and Citigroup/Credit Suisse estimates2015 (10/15)1,595,83935,4142.2193Quarterly Default Rate and Four-Quarter Moving Average1989 2015 (3Q - Preliminary) Source: Authors CompilationsDefault Rates on High-Yield Bonds

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4Filings for Chapter 115Number of Filings and Pre-petition Liabilities of Filing Companies1989 2015 (10/09)Note: Minimum $100 million in liabilitiesSource: NYU Salomon Center Bankruptcy Filings DatabaseMean 1989-2014: 74 filingsMedian 1989-2014: 54 filings

5Energy/Mining Company Chapter 11 Filings*6January October 09, 2015CompanyLiabilities ($MM)DateSICAllied Nevada Gold Corp.6643/10/20151040Alpha Natural Resources, Inc.7,1008/3/20151221American Eagle Energy Corp.2155/8/20151311Black Elk Energy Offshore Operations, LLC4329/1/20151311BPZ Resources, Inc.2753/9/20151311Cal Dive International, Inc.4113/3/20151389Dune Energy, Inc.1443/8/20151389ERG Intermediate Holdings, LLC2504/30/20151311Hercules Offshore, Inc.1,3078/13/20151381Hovensa, LLC1,0009/15/20151382Magnetation, Inc.7505/5/20151011Milagro Oil & Gas, Inc.4687/15/20151311Miller Energy Resources, Inc.33710/1/20151311Molycorp., Inc.1,7866/25/20151081Patriot Coal Corp.1,0005/12/20151221Quicksilver Resources, Inc.2,3523/17/20151311Sabine Oil & Gas Corp.2,9067/15/20151311Samson Resources Corp.5,3699/16/20151311Saratoga Resources, Inc.2196/18/20151382Walter Energy, Inc.5,0057/15/20151221Xinergy Ltd.2504/6/20151221Number of Energy/Mining Companies21Total Number of Filings (1/1 10/09)51Percent Energy/Mining Companies41%Total Energy/Mining Company Liabilities ($MM)$32,242*Liabilities of $100mm or more at time of filing.Source: NYU Salomon Center Bankruptcy Filings DatabaseEnergy/Mining Company Bond Defaults7January October 09, 2015CompanyLiabilities ($MM)DateSICAlpha Natural Resources, Inc.4434/1/151221Alpha Natural Resources, Inc.2,2688/3/151221American Eagle Energy Corp.1755/8/151311American Energy-Woodford, LLC3406/22/151311Black Elk Energy Offshore Operations, LLC1399/1/20151311Cliffs Natural Resources6753/30/151000Connacher Oil and Gas Ltd.5503/4/151311Dune Energy, Inc.683/8/151389Goodrich Petroleum Corp.15810/1/151311Gran Colombia Gold Corp.791/10/151221Halcon Resources Corp.2524/14/151311Halcon Resources Corp.1,5669/10/151311Hercules Offshore, Inc.1,2048/13/151381Lightstream Resources Ltd.4647/2/151311Magnetation, Inc.4255/5/151011Midstates Petroleum Co., Inc.6285/21/151311Molycorp, Inc.6506/25/151081Patriot Coal Corp.2825/12/151221Quicksilver Resources, Inc.1,1733/17/151311RAAM Global Energy Co.2385/1/151311Sabine Oil & Gas Corp.1,1507/15/151311SandRidge Energy, Inc.495/19/151311SandRidge Energy, Inc.5258/19/151311SAExploration Holdings, Inc.108/26/151382Samson Resources Corp.2,2509/16/151311Saratoga Resources, Inc.1806/12/151382Venoco, Inc.1924/10/151311Walter Energy, Inc.2,1027/15/151221Warren Resources, Inc.705/26/151311Xinergy Corp.1954/6/151221Total of Energy/Mining Company Defaults $18,497Total Defaults (1/1 10/09) $35,011Percent Energy/Mining Companies53%Default Rate5.54%Source: NYU Salomon Center Master Default DatabaseNote: 3Q15 is LTMSource: Credit SuisseHistorical Annual European High-Yield Default Rates

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33.91%8Historical Default Rates and Recession Periods in the U.S.9Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 12/01, 12/07 - 6/09*All rates annual, except 3Q 2015 which is the LTM.Source: E. Altman (NYU Salomon Center) & National Bureau of Economic ResearchHigh-Yield Bond Market (1972 2015 (3Q - Preliminary))

June 01, 2007 October 13, 2015Sources: Citigroup Yieldbook Index Data and Bank of America Merrill Lynch.10YTM & Option-Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes

12/16/08 (YTMS = 2,046bp, OAS = 2,144bp)10/13/15 (YTMS = 603bp, OAS = 624bp)YTMS = 540bp, OAS = 545bp6/12/07 (YTMS = 260bp, OAS = 249bp)11Comparative Health of High-Yield Firms (2007 vs. 2012/2014)12Z-Score Component Definitions and WeightingsVariable DefinitionWeighting FactorX1 Working Capital1.2 Total AssetsX2 Retained Earnings1.4 Total AssetsX3 EBIT3.3 Total AssetsX4 Market Value of Equity0.6 Book Value of Total LiabilitiesX5 Sales1.0 Total Assets1213Z Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market CreditsZ = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 +3.25X1 = Current Assets - Current Liabilities Total AssetsX2 = Retained Earnings Total AssetsX3 = Earnings Before Interest and Taxes Total AssetsX4 = Book Value of Equity Total Liabilities1314Median Z-Score by S&P Bond Rating for U.S. Manufacturing Firms: 1992 - 2013Sources: Compustat Database, mainly S&P 500 firms, compilation by NYU Salomon Center, Stern School of Business.Rating2013 (No.)2004-20101996-20011992-1995AAA/AA4.13 (15)4.186.20*4.80*A4.00 (64)3.714.223.87BBB3.01 (131)3.263.742.75BB2.69 (119)2.482.812.25B1.66 (80)1.741.801.87CCC/CC0.23 (3)0.460.330.40D0.01 (33)-0.04-0.200.05*AAA Only.1414Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012/201415YearAverage Z-Score/ (BRE)*Median Z-Score/ (BRE)*Average Z-Score/ (BRE)*Median Z-Score/ (BRE)*20071.89 (B+)1.81 (B)4.58 (B+)4.61 (B+)20121.66 (B)1.59 (B)4.60 (B+)4.60 (B+)20142.03 (B+)1.80 (B)4.67 (B+)4.56 (B+)Difference in Means Test (2007 vs. 2012/2014)ModelAverage Difference(2012/2014)Standard Deviation (2007/2012/2014)t-test(2012/2014)Significance Level(2012/2014)Significant at .05?(2012/2014)Z-Score-0.23/+0.141.29 / 1.15/1.78-2.38/+1.300.88%/9.70%Yes /NoZ-Score+0.02/+0.092.50 / 2.07/2.65+0.13/+0.5644.68%/28.78%No/No*Bond Rating EquivalentSource: Authors calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ.Number of FirmsZ-ScoreZ-Score200727738320124044882014558760Debt/EBITDA & Net Debt/EBITDA: U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014*)16Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.*Bond Rating Equivalents (BRE) based on Aggregate S&P StatisticsDebt/Debt + Equity & Debt/MV Equity : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014)17Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.EBITDA/Interest Expense : U.S. High-Yield (HY) and Investment Grade (IG), (Median Levels, 2004-2014)18Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.Distribution of Credit Ratios for U.S. High-Yield Bonds, (2007 vs. 2014)19Sources: S&P Capital IQ and Ratings Direct and NYU Salomon Center calculations.Debt/EBITDAEBITDA/Interest Expense2014BRE2007BRE2014BRE2007BREDecile10%1.36xA+0.87xAA+1.03xCCC0.91xCCC20%2.23xBBB1.75xA-1.93xB-1.59xCCC+30%2.90xBB+2.40xBBB2.55xB2.05xB-40%3.56xBB3.07xBB3.36xB+2.57xB50%4.43xB+3.84xBB-4.14xBB-3.24xB+60%5.05xB+4.70xB+5.23xBB4.21xBB-70%5.94xB5.70xB6.64xBBB-6.06xBB+80%7.08xCCC+7.01xB-9.84xBBB+9.07xBBB90%10.16xCCC-9.38xCCC-17.86xAA-19.35xAASource: Bank of America Merrill Lynch2005 2015 (3Q) New Issuance: U.S. High-Yield Bond Market ($ millions)RatingsAnnualTotal BBBCCC (CCC % H.Y.)NR200581,541.818,615.045,941.215,750.9(19.3%)1,234.72006131,915.937,761.267,377.325,319.2(19.2%)1,458.22007132,689.123,713.255,830.849,627.6(37.4%)3,517.5200850,747.212,165.025,093.111,034.4(21.7%)2,454.62009127,419.354,273.562,277.410,248.4(8.0%)620.02010 229,307.474,189.9116,854.735,046.8(15.3%)3,216.12011 184,571.054,533.8105,640.421,375.0(11.6%)3,021.82012 280,450.371,852.1153,611.148,690.2(17.4%)6,297.02013 (1Q)73,492.331,953.129,534.211,480.0(15.6%)525.0 (2Q)62,135.024,380.023,665.013,790.0(22.2%)300.0 (3Q)73,770.822,964.232,610.018,196.6(24.7%)0.0 (4Q)60,936.824,050.022,686.814,175.0(23.3%)25.0 2013 Totals270,334.8103,347.3108,495.957,641.6(21.3%)850.0 2014 (1Q)51,634.717,585.025,792.27,842.5(15.2%)415.0 (2Q)74,629.623,893.730,852.319,363.6(25.9%)520.0 (3Q)59,777.325,537.322,550.010,875.0(18.2%)815.0 (4Q)52,721.121,975.028,906.11,840.0(3.5%)0.0 2014 Totals238,762.788,991.0108,100.639,921.1(16.7%)1,750.0 2015 (1Q)76,059.523,184.244,785.38,090.0(10.6%)0.0 (2Q)74,048.021,219.040,656.812,052.1(16.3%)120.0 (3Q)31,740.014,770.012,675.04,295.0(13.5%)0.0 ytd Totals181,847.559,173.398,117.124,437.1(13.4%)120.02020New Issuance: European High-Yield Bond MarketFace Values (US$)21RatingsCurrencyAnnualTotalBBBCCC (CCC % HY)NRUSDEURGBP200519,935.61,563.311,901.05,936.6(29.8%)534.82,861.015,080.31,668.3200627,714.65,696.216,292.15,020.5(18.1%)705.97,657.819,935.7121.1200718,796.75,935.311,378.5562.0(3.0%)920.94,785.512,120.91,890.320081,250.01,250.025,093.11,250.0200941,510.318,489.416,697.44,771.3(11.5%)1,552.212,315.028,696.9498.32010 57,636.522,751.329,050.52,170.7(3.8%)3,663.912,775.043,147.71,403.32011 60,435.824,728.929,919.74,108.7(6.8%)1,678.616,720.033,758.08,842.42012 65,516.127,001.729,013.07,186.7(11.0%)2,314.628,198.032,270.42,929.32013 (1Q)27,954.56,783.815,008.45,160.61,001.710,050.012,380.74,837.4 (2Q)30,335.36,860.219,295.13,724.1455.99,913.014,149.96,074.0 (3Q)16,558.43,375.39,609.62,721.8851.75,310.08,644.02,604.4 (4Q)16,655.92,588.010,657.62,366.41,043.95,210.09,086.52,359.42013 Totals91,504.119,607.354,435.213,972.9(15.3%)3,353.230,483.044,125.615,875.32014 (1Q)27,169.212,565.711,685.21,230.0(4.5%)1,688.37,315.016,352.83,501.4 (2Q)65,671.413,730.145,808.34,111.1(6.2%)2,021.923,150.036,009.06,096.7 (3Q)15,980.53,586.310,593.21,241.3(7.8%)559.72,750.08,216.24,744.6 (4Q)10,646.93,893.74,288.8654.5(6.1%)1,810.06,305.04,341.9 2014 Totals119,468.033,775.872,375.47,236.9(5.1%)6,080.039,520.064,919.914,342.7 2015 (1Q)30,535.515,387.810,054.6938.7(3.1%)4,154.310,225.017,149.02,622.0 (2Q)25,838.711,282.611,633.72,334.6(9.0%)587.812,465.011,124.81,782.2 (3Q)12,605.52,068.110,125.9411.5(3.2%)5,850.05,170.11,585.4 ytd Totals68,979.828,738.631,814.23,684.8(5.3%)4,742.128,540.033,443.95,989.6Source: BoAML2005 2015 (3Q) Sources: S&P Capital IQ LCD and NYU Salomon Center calculations.1998 2014 High-Yield Bond Market Proportional Outstandings by Seniority2222*Weighted by par value amount outstanding in each seniority category, for each year.Sources: S&P Capital IQ LCD and NYU Salomon Center calculations.Default Rates by Seniority: 1998-201423Default Rate (%)YearAll Seniorities (%)Senior Secured (%)Senior Unsecured (%)Subordinated (%)19981.603.151.671.0219994.1515.602.615.6220005.0718.822.477.4120019.8043.439.295.77200212.7950.6812.741.8720034.6614.304.132.2020041.254.440.780.1620053.3713.462.200.4920060.761.350.690.5520070.512.100.270.6320084.6512.143.874.61200910.7412.1010.748.7720101.132.290.791.4820111.333.220.830.5320121.623.111.171.5120131.042.640.630.6020142.115.511.370.74Arithmetic Average Annual Default Rate (%)3.9212.263.312.59Standard Deviation (%)3.6613.883.732.66Weighted Average Annual Default Rate *(%)3.526.702.972.56Median Annual Default Rate (%)2.115.511.671.48Excluding Outlier Years of 2001 and 2002Arithmetic Average Annual Default Rate (%)2.937.622.282.42Standard Deviation (%)2.585.812.532.70Weighted Average Annual Default Rate *(%)2.805.442.262.40Median Annual Default Rate (%)1.624.441.371.0223Source: Bank of America Merrill Lynch2005 2015 (3Q) U.S. & European High-Yield Bond Market: New Issuance ($ millions)2424Source: Bank of America Merrill Lynch2005 2015 (3Q) U.S. & European High-Yield Bond Market:CCC Rated New Issuance (%)25n/a25New Issues Rated B- or Below, Based on the Dollar Amount of Issuance(1993 2015 (3Q))Source: S&P Capital IQ LCD26

2627All Rated Corporate Bonds*1971-2014 Mortality Rates by Original Rating*Rated by S&P at IssuanceBased on 2,847 issuesSource: Standard & Poor's (New York) and Author's CompilationYears After Issuance

2728*All High-yieldSource: Standard & Poors LCD & Credit Suisse CCC New Bond Issuance by Purpose2015 (3Q) U.S.Europe (2Q)* Refinancing40.62%51%M&A29.65%37%LBO26.51%Recap/Dividends3.23%12%Corporate Purpose0.00%Project Financing0.00%Total100%100%2829Maturity Profile of Leveraged Debt As of 12/31/14Source: S&P Capital IQ LCDDistribution of Years to Default from Original Issuance Date: 1991 3Q 1530Source: NYU Salomon Center

31Source: S&P Capital IQ LCD Purchase Price Multiple excluding Fees for LBO TransactionsPurchase Price Multiples

N/A(# obs.)N/A3132Average Total Debt Leverage Ratio for LBOs: Europe and US with EBITDA of /$50M or More Source: S&P Capital IQ LCD

LBO Statistics & Ratios: 2007 vs. 2014 (update 3Q 15) 20072014 1Q-3Q15M&A/LBO as a % of Total Issuance62%47%56%Purchase Multiple9.1-9.9x9.7-9.8x9.7-11.6xDebt to EBITDA @ Inception6.2x5.8x5.7xEBITDA to Cash Interest2.1x3.4x3.0xEquity Contribution31%37%41%Source: Guggenheim Investments and S&P Capital IQ 33Share of Large LBOs with Leverage More than 7x*2004 3Q 201534* Issuers with EBITDA >$50mm.Source: S&P Capital I.Q. N/AN/ALenders Leave the Lite On

2003 2Q 201435Chart10.02350.0260.0120.17280.33910.12430.01970.00970.00530.010.0160.06560.01060.0320.00970.0070.01020.0069

European High-Yield Default RateDefault Rate

Sheet1European High-Yield Default Rate19982.35%19992.60%20001.20%200117.28%200233.91%200312.43%20041.97%20050.97%20060.53%20071.00%20081.60%20096.56%20101.06%20113.20%20120.97%20130.70%20141.02%3Q150.69%