North America Credit Research

26 March 2020

High Yield & Leveraged Loans

Dislocations & Opportunities In Relative Pricing
Across Asset Classes
 The assembly line has hit a snag. Loan and CLO markets have been in a negative Head of US High Yield Research
feedback loop. CLO investors look at price moves (and rating downgrades) in loans
Tarek Hamid AC
to set benchmarks, while loan participants look at distressed CLO liability pricing
(1-212) 834-5468
(and warehouses out of the money). It's nearly 20 business days with no new CLOs.
tarek.x.hamid@jpmorgan.com
At time of writing, CLO AAAs in secondary had started easing from a post crisis
J.P. Morgan Securities LLC
high ~400bps to a range of 275-425bp (primary AAAs usually 120-150bp in
'normal' times). Secondary will need to normalize for origination to kickstart. High Yield Strategy
 Which has impacted "raw material”. Leveraged loan prices are down nearly $19 Peter Acciavatti
(1-212) 270-9633
since Feb 21 and spreads are now 1,236bp, their highest levels since the financial
peter.acciavatti@jpmorgan.com
crisis. March’s -17.49% total return for loans is easily the worst on record,
J.P. Morgan Securities LLC
surpassing Oct-2008’s -13.87%. The loan market is now pricing in a default rate of
18-30%, depending on recovery rate assumptions (50% or 70%, or somewhere in Nelson Jantzen, CFA
between). While it is probably too soon to say the market has reached its bottom, (1-212) 270-1169
given the widespread sell off, pockets of value are certainly beginning to emerge nelson.r.jantzen@jpmorgan.com
J.P. Morgan Securities LLC
 Part intellectual curiosity, part opportunity hunting. Our fundamental analyst
team has assembled a cohort of same obligor bond and loan relationships across CLO Research
sectors. Note bond issuing loan borrowers are now a minority in the loan market, Rishad Ahluwalia
and our cohort therefore skews to larger companies vs. the broader loan market. (44-20) 7134-0254
Additionally, for simplicity’s sake our analyst team avoided “obvious” default rishad.ahluwalia@jpmorgan.com
candidates. Nonetheless, the relative relationships are an interesting and useful J.P. Morgan Securities plc
commentary as investors broadly search for the best risk-adjusted opportunities in
broadly dislocated credit markets.
 Mastery of the obvious. Markets are truly dislocated when same obligor risk at the
secured level trades close to or inside of unsecured obligor risk. While that appears
to be a rarity from a yield standpoint, on a price standpoint that is extremely
prevalent. Certainly both yield and price are ultimately critical to the final return
calculus. However, the opportunity to create senior secured risk at substantial
discounts to par and prices approximating unsecured risk represent a unique, likely
temporary moment in time.
 Considerations beyond structure. Maintenance covenants are now a rarity (only
18% of the names in our cohort have maintenance covenants). But the actuality of
potential “Zero revenue” months in the near-term means that covenants are likely to
be tripped. That offers an opportunity for lenders to capture additional compensation
in the form of consent fees or remarking coupons to market. Additionally, LIBOR
floors are also far less prevalent than a few years ago; but given the direction of rates
seem especially attractive.
 Guilty of burying the lede. With the obvious caveat that both loan and security
prices are exceptionally volatile currently, secured loans in our cohort trade $5.68pts
cheap to pari passu secured bonds, and yield 119bp more. That discount certainly
seems large; particularly given potential additional consent fees and prepayments at
par. More interestingly, secured loans trade $0.91 below unsecured bonds (average
loan price of $85.41), and yield just 58pp less. Given similar dollar prices, the upside
total return potential is likely quite similar in loans vs. bonds. More importantly,
structurally senior loans should have less downside potential than unsecured bonds.
The relative aggregate upside/downside in loans, therefore, seems quite interesting.
See below for our loan-bond cohorts, as well as the relevant industry fundamental
credit analyst for additional name specific insights and thoughts.

See page 4 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of Ashish Sinha at WATERFALL ASSET MANAGEMENT LLC.
 Tarek Hamid North America Credit Research
(1-212) 834-5468 26 March 2020
tarek.x.hamid@jpmorgan.com

Figure 1: Select Senior Secured Bond vs. Secured Loan Relationships

Secured Benchmark Bond Benchmark Loan Difference
Sector Analyst Company Ticker Coupon Maturity Ratings Price Yield Coupon Floor (Y/N) Maturity M. Cov (Y/N) Ratings Price Yield (3yr) Price Yield Quick Rationale
A&D Abebe TransDigm TDG 6.250% 2026 Ba3/B+ $99.38 6.38% L+225 N 2025 Y Ba3/B+ $88.00 7.71% $11.38 -1.33% ■ Adequate liqidity with $2.3bn of cash on balance sheet
■ Potential benefits from Aerospace supplier stimulus
■ 37% of sales Defense related
Auto Steiner Navistar NAV 6.625% 2025 B3 / B- $82.00 11.02% L+350bp N 2024 N Ba2 / BB- $85.00 10.83% -$3.00 0.19% ■ CV Market tough pre CV but cost actions was already underway
■ Cash and borrowing capacity ~$1.5Bn as of last disclosure
■ Traton/VW owns 167% stake, made $35 offer for NAV pre CV19
Cable/Sat Pace Telesat TELSAT 4.625% 2027 Ba3/BB- $94.25 5.87% L+275bp N 2026 N Ba3/BB- $88.50 $5.75 5.87% ■ FSS satellite operator, large North America customer base
■ Long-term contracts, low econ slowdown risk
■ Strong FCF/Liquidity (~5x total/4x sec'd levg; gross)
Food Casella Retaurant Brands BCULC 4.250% 2024 Ba2/BB+ $95.00 5.07% L+175 N 2026 Y Ba2/BB+ $90.00 6.30% $5.00 -1.23% ■ Owns restaurant chains Tim Horton's Burger King, and Popeye's
■ Defensive nature of the franchise businesses, and will
Benefit from drive through and delivery capabilities during COVID-19
Gaming Pace Scientific Games SGMS 5.000% 2025 B1/B+ $82.00 9.22% L+275bp N 2025 N B1/B+ $76.00 14.10% $6.00 -4.88% ■ Global Slot/Lotto/Social/Digital company
■ ~60% Gaming (some recurring), ~30% Lotto; pre-Corp
■ ~$650 liquidty (ex-SciPlay); 6.5x total/4.5x sec'd Levg YE19
Healthcare Common Endo ENDP 7.250% 2027 B1/B+ $92.00 9.07% L+425bp Y 2024 N B1/B+ $84.50 11.71% $7.50 -2.64% ■ Pharma sector has relatively less COVID-19 exposure
■ Low secured leverage
■ Likely opioid settlement, given MNK and quick OK resolution
Media Steiner iHeart IHRT 6.375% 2026 B1 / BB- $90.50 8.40% L+300bp N 2026 N B1 / BB- $81.00 11.47% $9.50 -3.07% ■ $650mm of availability w/levers to preserve liquidity w/ad decl.
■ No maintenance covenant given draw amount
■ Liberty Media owns 4.8% equity stake; sought DOJ app. to inc.
Power Kwan Talen Energy TLN 7.250% 2027 Ba3/BB $83.75 10.54% L+375bp N 2026 N Ba3/BB $83.00 11.40% $0.75 -0.86% ■ PJM and ERCOT focused power producer
■ 2020 trough year, but capacity payments increase in 2021
■ PJM auction changes are potential positive catalyst
Services Abebe ADT ADT 5.750% 2026 Ba3/BB- $89.50 7.97% L+325 Y 2026 N Ba3/BB- $85.00 10.07% $4.50 -2.10% ■ Highly recurring revenue stream
■ Significant discretionary capex
■ Strong discretionary FCF profile

Tech Egan CommScope COMM 5.500% 2024 Ba3/B+ $92.00 7.91% L+325 N 2026 N Ba3/B+ $86.00 10.10% $6.00 -2.19% ■ Notes and TL are pari

Tech Egan Dell DELL 5.450% 2023 Baa3/BBB- $100.125 5.40% L+200 Y 2025 N Baa3/BBB- $91.00 6.24% $9.13 -0.84% ■ Notes and TL issued by Dell Int'l LLC and EMC Corp
Source: Company reports and J.P. Morgan estimates. Note: The term “Secured Benchmark Bond” refers to the most liquid bond in the issuer’s capital structure and is not necessarily associated with JP Morgan Credit rating.

This document is being provided for the exclusive use of Ashish Sinha at WATERFALL ASSET MANAGEMENT LLC.
 Tarek Hamid North America Credit Research
(1-212) 834-5468 26 March 2020
tarek.x.hamid@jpmorgan.com

Figure 2: Select Unsecured Bond vs. Secured Loan Relationships

Unsecured Benchmark Bond Benchmark Loan Difference
Sector Analyst Company Ticker Coupon Maturity Ratings Price Yield Coupon Floor (Y/N) Maturity M. Cov (Y/N) Ratings Price Yield (3yr) Price Yield Quick Rationale
A&D Abebe TransDigm TDG 5.500% 2027 B3/B- $82.00 8.78% L+225 N 2025 Y Ba3/B+ $88.00 7.71% -$6.00 1.08% ■ Adequate liqidity with $2.3bn of cash on balance sheet
■ Potential benefits from Aerospace supplier stimulus
■ 37% of sales Defense related
Cable/Sat Pace Altice USA CSCHLD 5.250% 2024 B3/B $94.00 6.93% L+225bp N 2025 N Ba3/BB $89.00 7.74% $5.00 -0.81% ■ U.S. broadband/video providor (ramping wireless)
■ Subscription based business model (SMBs at risk)
■ Strong FCF/Liquidity; (low-5x total/mid-3x sec'd levg
Cable/Sat Pace Telesat TELSAT 6.500% 2027 B3/B $94.00 7.56% L+275bp N 2026 N Ba3/BB- $88.50 8.02% $5.50 -0.46% ■ FSS satellite operator, large North America customer base
■ Long-term contracts, low econ slowdown risk
■ Strong FCF/Liquidity (~5x total/4x sec'd levg; gross)
Chemicals Schubert Chemours CC 7.000% 2025 Ba3/B $80.00 12.38% L+175bp N 2026 N Ba3/BB $81.00 10.46% -$1.00 1.92% ■ Lowest cost TiO2 producer globally
■ Net Leverage through top of structure of 0.3x
■ Bottom of structure weighed by potential PFAS liabilities
Chemicals Schubert Hexion HXN 7.875% 2026 B3/B $82.00 11.59% L+350bp N 2026 N Ba3/B+ $84.00 11.09% -$2.00 0.50% ■ Free Cash Flow generative at sub $300 million EBITDA
■ Capital allocation targeting BS improvements
■ Management undertaking strategic asset review
Food Casella Aramark ARMK 5.000% 2028 Ba3/BB- $87.25 7.16% L+175 N 2027 Y Ba1/BBB- $88.00 7.13% -$0.75 0.03% ■ ARMK is a global provider of food, facilities, and unifrom services
■ Diversified across geographic regions
■ ~50% in more defensive industries with a long-term target leverage of ~3.5x
Gaming Pace Red Rock Resorts RRR 4.500% 2028 Caa1/B- $64.00 11.59% L+225bp N 2027 N B1/BB- $81.00 10.63% -$17.00 0.96% ■ Las Vegas local casino operator
■ Owns all underlying real estate and has unused land
■ Good liquidity ($1.2bn pf cash following RCF draw)
■ Gross Levg: ~6x total/mid-3x sec'd YE19 pf
Gaming/Leisure
Pace Cedar Fair FUN 5.375% 2027 B2/B $82.00 8.87% L+225bp N 2024 N Ba1/BB $88.00 7.61% -$6.00 1.26% ■ U.S. Regional Theme park operator
■ Vast majority of revenues Memorial Day - Summer
■ >$400m liquidity (incl RCF); 4.3x total/1.5x sec'd Levg YE19
Healthcare Common Select Medical SEM 6.250% 2026 B3/B- $89.00 8.52% L+250bp N 2025 Y Ba2/BB- $86.50 8.90% $2.50 -0.39% ■ LTACs & IRFs relatively insulated against COVID-19 disruption
■ Decline at Concentra would be mitigated by reduced put liability to JV partners
■ Low maintenance CX of $75-100mm/yr
Housing Chandar Realogy RLGY 4.875% 2023 B3/B $73.00 16.03% L+225 N 2025 Y Ba2/BB $75.00 10.15% -$2.00 5.88% ■ National portfolio of brokerages and residential RE franchisees
■ 4.75x net leverage maintenance test in RCF, $1.4bn liquidity
■ FCF breakeven at $250m EBITDA (LTM EBITDA ~$600m)
Power Kwan Talen Energy TLN 10.500% 2026 B3/B $81.00 15.85% L+375bp N 2026 N Ba3/BB $83.00 11.40% -$2.00 4.45% ■ PJM and ERCOT focused power producer
■ 2020 trough year, but capacity payments increase in 2021
■ PJM auction changes are potential positive catalyst
Retail Casella Sally Beauty SBH 5.625% 2025 Ba3/BB- $79.75 10.44% L+225 N 2024 N Ba1/BB+ $79.00 11.80% $0.75 -1.36% ■ Beauty supply retailer for consumers and salon professionals + direct sales
■ Less fixed overhead (low rent, small stores) than most retailers
■ Generates solid FCF; expanding supply chain infrastructure thru automated DC
Services Abebe ADT ADT 6.250% 2028 B3/B- $84.25 9.12% L+325 Y 2026 N Ba3/BB- $85.00 10.07% -$0.75 -0.96% ■ Highly recurring revenue stream
■ Significant discretionary capex
Note: 6.25% 2028 is 2L ■ Strong discretionary FCF profile

Tech Egan CommScope COMM 5.500% 2024 B3/B- $87.00 9.30% L+325 N 2026 N Ba3/B+ $86.00 10.10% $1.00 -0.80% ■ Loan has HoldCo gty & is "split lien" with ABL Facility

Tech Egan Dell DELL 7.125% 2024 Ba2/BB $99.63 7.23% L+200 Y 2025 N Baa3/BBB- $91.00 6.24% $8.63 0.99% ■ HY notes issued for Dell's acquisition of EMC

Tech Egan Western Digital WDC 4.750% 2026 Baa3/BB+ $93.50 6.08% L+175 N 2023 N Baa2/BBB- $92.00 5.61% $1.50 0.47% ■ 1L loan with unsecured guarantee from SNDK

Tech Egan NCR Corp NCR 6.375% 2023 B2/BB $88.50 10.17% L+250 N 2026 N Ba2/BBB- $86.00 8.80% $2.50 1.37% ■ 1L ex. U.S. manufacturing property >2% NTA

Tech Egan CDW Corp CDWC 5.500% 2024 Ba2/BB- $97.50 6.12% L+175 N 2026 N Baa3/BBB- $87.70 7.21% $9.80 -1.09% ■ 1L TL "split lien" with ABL Facility

Telecom Egan CenturyLink CTL 6.750% 2023 B2/B+ $94.00 8.69% L+225bp N 2027 N Ba3/BB $77.25 12.31% $16.75 -3.62% ■ Loan is secured by equity of main operating companies

Telecom Egan Cicinnati Bell CBB 7.000% 2024 B3/B- $94.25 8.62% L+325bp Y 2024 N Ba3/BB- $93.50 7.05% $0.75 1.57% ■ CBB is being acquired by P; COC expected

Telecom Egan Altice International ALTICE 7.625% 2025 Caa1/CCC+ $86.25 11.38% L+275bp N 2025 N B2/B $84.25 10.22% $2.00 1.16% ■ Bonds are at Altice Finco; Loan at Altice Financing
Source: Company reports and J.P. Morgan estimates. Note: The term “Secured Benchmark Bond” refers to the most liquid bond in the issuer’s capital structure and is not necessarily associated with JP Morgan Credit rating.

This document is being provided for the exclusive use of Ashish Sinha at WATERFALL ASSET MANAGEMENT LLC.
 Tarek Hamid North America Credit Research
(1-212) 834-5468 26 March 2020
tarek.x.hamid@jpmorgan.com

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Overweight Neutral Underweight
Global Credit Research Universe 26% 56% 18%
IB clients* 66% 63% 60%
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tarek.x.hamid@jpmorgan.com

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"Other Disclosures" last revised March 08, 2020.

Copyright 2020 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
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