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Global High Yield and Leveraged Loan Research

June 30, 2011

Default Monitor

High Yield and Leveraged Loan Research


There were two defaults in June totaling $627mn in high-yield bonds and institutional bank loans. This follows no defaults in May and only one default in both March and April. Since the default rate peaked in November 2009, an average of three companies and $1.3bn in bonds and institutional loans has defaulted per month. This trend of low defaults is even more evident over the last six months, when a monthly average of just two companies and $417mn defaulted. Year to date, ten companies have defaulted (5 bond-only issuers, 4 loan-only borrowers, and 1 company with bonds and loans outstanding), affecting $2.5bn (high-yield bonds total $1.6bn and institutional loans total $925mn). By comparison, 22 companies and $7.7bn defaulted during the first half last year. This months defaults included two retail companies, Nebraska Book and Deb Shops. Nebraska Book, which sells books in college and university bookstores, reached an agreement to restructure its debt load as part of a Chapter 11 filing. The default affected $452mn in high-yield bonds. Deb Shops, which sells junior and plus-size womens apparel, also filed Chapter 11, affecting a $110mn first-lien term loan and a $65mn second-lien term loan. The par-weighted high-yield default rate increased slightly to 0.81% from 0.79%, the highest level since October. That said, the default rate has remained relatively unchanged since October, hovering between 0.75% and 0.81% for the last eight months. More importantly, the default rate is down from 2.92% a year ago and remains well below the 25-year average of 4.27%. The issuer weighted default rate for bonds remained unchanged at 2.25%. For loans, the par-weighted default rate decreased marginally to 1.01% from 1.02%, its 19th decline in the last 20 months and the lowest level since February 2008. The default rate is down from 4.93% a year ago and remains well below the longterm average of 3.85%. The issuer-weighted loan default rate declined to 1.51%.
High-yield bond and loan default rates remain low
16.0% Par-weighted default rate 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Jun-11 0.81%

Peter D. AcciavattiAC Tony Linares

(1-212) 270-9633 peter.acciavatti@jpmorgan.com (1-212) 270-3285 tony.linares@jpmorgan.com

Nelson Jantzen, CFA Alisa Meyers

(1-212) 270-1169 nelson.r.jantzen@jpmorgan.com (1-212) 834-9151 alisa.meyers@jpmorgan.com

Rahul Sharma

J.P. Morgan India Private Limited rahul.z.sharma@jpmorgan.com J.P. Morgan Securities LLC.

Bonds Loans

Nov-09 14.18% Nov-09 10.98% Jun-11 1.01%

Dec-09

Source: J.P. Morgan

See page 18 for analyst certification and important disclosures.

JPMorgan 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.

Dec-10

www.morganmarkets.com

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Low default activity continued in June


18 16 Number of defaults 14 12 10 8 6 4 2 Apr-09 Aug-09 0 Dec-08 Feb-09 Jun-09 Oct-09
15 16 17 17 Loan-only defaults Bond-and-loan defaults Bond-only defaults 11 10 9 9 Average number of defaults Last 6 months = 1.7 6-months ending Jun-10 = 3.7 6-months ending Jun-09 = 13.5

10

8 5 3 5 4 4 4 5 3 3 3

Apr-10

Aug-10

Dec-09

Dec-10

Feb-10

Feb-11

Apr-11

Jun-10

Source: J.P. Morgan

Going forward, strong liquidity conditions over the past several years have clearly left few default candidates on the horizon. We expect the high-yield bond and loan default rates to remain below their 4.3% and 3.9% long-term averages in each of the next 3 years. Specifically, for high-yield bonds we forecast the default rate to be 1.0% in 2011, 1.5% in 2012, and 2.0% in 2013. For loans, we forecast 1.5% in 2011 and 2.0% in both 2012 and 2013.
High-yield bond and loan default rates to remain low for the next 3 years
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1998 1999 2000 2001 2002 2003 2004 2005
5.0% 4.1% 4.2% 1.7% 1.5%

High-yield bond default rate Loan default rate


9.1%

12.8%

Par-weighted default rates

8.0% 6.3% 6.0% 3.3%

Long-term average default rate High-yield bonds: 4.3% Leveraged loans: 4.0%

10.3%

6.6%

2.3%

2.8%3.0% 0.9%

3.9% 2.3% 0.5% 0.2% 0.4% 1.8% 1.5% 1.5% 1.0% 2.0% 2% 2%

1.1% 1.0%

0.8%

2011E

2012E

Source: J.P. Morgan

The average high-yield bond price (excluding defaults) decreased to $101.59 from $103.33 month-over-month, while the median bond price also decreased, falling to $102.59 from $104.00. Amidst a volatile market, the size of the distressed bond market increased for the second straight month in May. Bonds that trade at or below 50% of par now total $4.9bn, up from $3.9bn last month and the highest total in the last eight months. However, this total still only accounts for a mere 0.48% of the total US high-yield bond market. Bonds trading at or below 70% of par increased to $17.6bn, or 1.7% of the market, from $12.6bn last month (1.2%). Another proxy for distressed debt, bonds with spreads greater than 1000bp, increased to $58.9bn, or 5.8% of the market, from $46.4 billion or 4.5% at the end of May. Meanwhile, for loans, the average bid price, according to S&P LCDs US Performing Loan Index decreased to $95.80 from $96.55 at the end of May. From a distressed perspective, 5.80% of the institutional loan market traded below $80 as of June 29, down from 6.03% at the end of May. Meanwhile, 1.34% of the institutional loan market traded below $60, up from 1.04% month over month.
2

2013E

2006

2007

2008

2009

2010

Jun-11

Oct-10

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Distressed bonds remains negligible


250.0 Distressed bonds ($bn) 200.0 150.0 100.0 50.0 0.0 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Oct-02 $84.7 bn Nov-08 $233.1 bn

29-Jun-11 $4.9bn

Source: J.P. Morgan

Recovery rates for bonds are below historical averages thus far in 2011, while those for loans are slightly above historical averages. For all bonds, the average recovery is 33.4%, compared with 40.9% last year and the long-term average of 41.4%. Senior secured bonds recovered 49.4%, while senior unsecured bonds recovered 22.7%, compared with Moodys Investors Services long-term average of 50.8% and 36.7%, respectively. For first-lien loans, average recoveries are 70.1%, compared with 71.2% last year and Moodys long-term average of 65.8%. Credit trends remained positive in June, as the number of upgrades outpaced the number of downgrades for a 22nd consecutive month. In total, 31 companies were upgraded totaling $20.7bn, compared with 19 downgrades totaling $11.1bn. While the trend remained positive, this months volume of upgrades was the lowest since September of last year. Year to date, 229 upgrades total $301.9bn, and 142 downgrades total $132.2bn, which equates to an upgrade-to-downgrade ratio by issuer of 1.61:1 and by volume of 2.28:1. Meanwhile, there were four rising stars totaling $3.5bn and one fallen angel totaling $1.3bn in June. Year to date, 18 rising stars total $17.6bn and six fallen angels total $16.7bn.
Upgrades have outnumbered downgrades for 22 consecutive months
Number of upgrades and downgrades 120 100 80 60 40 20 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 Jan-09 Feb-09 Mar-09 Apr-09 May-11 Jun-11 0
Upgrades Downgrades

2009: 212 upgrades and 481 downgrades 2010: 387 upgrades and 258 downgrades YTD: 229 upgrades and 142 downgrades

Note: Upgrades and downgrades are based on the number of issuers affected. Source: J.P. Morgan

Jan-11

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

High-yield bond defaults


LTM default rate
18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

based on par amount


Default rate Nov-09 16.32%
(incl. dist.exch.)

LTM default rate


14.0% 12.0% 10.0% Default rate 8.0% 6.0% 4.0% 2.0% 0.0%

based on number of issuers


Mar-02 12.24%

Par-weighted default rate

Default rate including distressed exchanges

Jan-02 10.24%

Nov-09 10.98% Jun-11 0.81%

Jun-11 2.25%

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09
11

Source: J.P. Morgan

Source: J.P. Morgan

Default volume
94.6 100 90 80 70 56.0 55.6 60 50 28.3 40 22.0 24.9 22.9 22.922.0 30 19.4 15.1 20 8.6 7.3 10.3 8.2 8.0 7.2 7.9 4.7 3.4 4.85.2 3.6 5.0 3.2 2.5 10 1.6 0.30.11.10.61.0 0

Number of defaults
160 140 120 100 80 60 40 20 0
8 10 23 17 18 28 23 27 33 86 49 51 62 31 20 16 37 26 47 18 138 116 87 61 29 21 18 70 42 21 6

($bn)

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Sources: J.P. Morgan; Moodys Investors Service

Sources: J.P. Morgan; Moodys Investors Service

Recent default activity


April 2011 May 2011 June 2011 Monthly average 3-year 5-year 10-year 25-year

Volume ($ mn) 322.0 0.0 452.0

Number 1 0 1

LTM default rates by dollar by issuer 0.80% 0.79% 0.81% 2.38% 2.25% 2.25%

Default rate vs high-yield spreads


16.0% 14.0% 12.0% Default rate 10.0% 8.0% 6.0% 4.0% 2.0% Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 0.0%
High-yield default rate High-yield spreads High-yield spreads 580bp High-yield defaults 0.81%

22-year average= 593bp 25-year average= 4.3%

2008

2000 1750 1500 1250 1000 750 500 250 0 Spread to worst

Sources: J.P. Morgan; Moodys Investors Service

3,235.5 2,181.8 2,281.4 1,573.1

3 3 4 4

4.33% 3.01% 3.80% 4.27%

5.09% 3.78% 4.99% 5.27%

Note: Default rate is par-weighted. Sources: J.P. Morgan; Moodys Investors Service

2010

Jan-10

Jan-11

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

High-yield bond defaults


May high-yield defaults
Date 27-Jun-11 Issuer Nebraska Book

(contd)
Industry Retail Avg. rating 12 mo. prior B2 Rating at last issuance B1

Source: J.P. Morgan Note: Includes only US dollar-denominated debt from domestic high-yield issuers.

Debt ($ mn) 452.0

Default rates by industry


Automotive Broadcasting Cable and Satellite Chemicals Consumer Products Diversified Media Energy Financial Food and Beverages Gaming Lodging Leisure Healthcare Housing Industrials Metals and Mining Paper and Packaging Retail Services Technology Telecommunications Transportation Utility HY Default Rate

Source: J.P. Morgan Note: Ten-year average is as of December 31, 2010.

0.91% 0.79% 0.00% 1.32% 0.85% 19.96% 1.40% 3.60% 3.97% 7.87% 0.00% 10.19% 0.63% 0.00% 1.39% 2.98% 0.00% 0.00% 1.04% 2.51% 0.00% 2.25%

2008

36.69% 9.85% 25.02% 7.44% 7.48% 71.32% 1.43% 33.28% 1.94% 10.23% 0.00% 6.68% 1.30% 4.04% 19.08% 0.53% 2.17% 10.13% 1.67% 2.64% 0.00% 10.27%

2009

0.00% 0.00% 2.27% 0.00% 0.00% 8.36% 0.00% 1.49% 0.43% 0.81% 1.32% 0.73% 0.24% 0.61% 0.00% 2.72% 0.46% 0.00% 0.00% 0.00% 0.00% 0.80%

2010

0.00% 0.00% 2.29% 0.00% 0.00% 6.87% 0.00% 1.45% 1.93% 0.77% 1.03% 0.00% 0.23% 0.00% 0.44% 3.70% 0.85% 0.00% 0.00% 0.00% 0.00% 0.81%

LTM

10-yr Avg. 7.71% 1.63% 6.84% 1.99% 3.25% 10.61% 0.83% 9.78% 2.43% 2.58% 1.26% 2.48% 2.01% 3.89% 3.02% 2.68% 1.27% 2.35% 7.91% 6.26% 3.01% 3.89%

Default rate: by rating 12 months prior to default


BB B CCC or below HY Default Rate 0.00% 3.35% 6.47% 2.25% 2008 2.11% 12.72% 28.17% 10.27% 2009 0.00% 0.59% 2.48% 0.80% 2010

Source: J.P. Morgan Note: Ten-year average is as of December 31, 2010.

0.00% 0.63% 2.70% 0.81%

LTM 10-yr Avg. 1.26% 4.18% 9.49% 3.89%

Default rate: by rating at issuance


BB B CCC or below HY Default rate 0.80% 3.73% 2.94% 2.25% 2008

Source: J.P. Morgan Note: Ten-year average is as of December 31, 2010.

4.03% 12.90% 16.67% 10.27%

2009

0.00% 1.32% 0.40% 0.80%

2010

0.00% 1.21% 0.42% 0.81%

LTM 10-yr Avg.

2.34% 4.56% 7.44% 3.89%

Average number of years to default


2006 2004 2007 2003 2000 2005 2008 2002 2010 1996 2009 1997 1998 2001 1999 0.00 1.00 2.00 4.56 5.12 6.18

Fallen angel volume and default rates


Number of companies Volume ($ bn) Fallen angels 476 919.2

Fallen angel defaults 41 118.9

Cumulative default rate 8.61% 12.94%

Avg. annual default rate 0.52% 0.78%

2.73

3.22 3.16 3.04

4.14 3.92 3.85 3.74 3.71 3.69 3.69 3.50

16-year average = 3.8 years

Source: J.P. Morgan Note: Based on fallen angel and default data from January 1995.

Source: J.P. Morgan Note: The average number of years to default is the number of years since a defaulted issuer last issued new debt in the primary market.

3.00 4.00 Seasoning period (years)

5.00

6.00

7.00

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Leveraged loan defaults


LTM default rate
16.0% 14.0% 12.0%

based on par amount


Default rate
(including dist.exch.)

LTM default rate


Nov-09 14.61%

based on number of issuers


9.0% Issuer-weighted default rate 7.5% 6.0% 4.5% 3.0% 1.5% Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 0.0%
Jun-11 1.51% Dec-00 8.23%

Default rate including distressed exchanges Jun-00 7.50%

Nov-09 14.18%

Default rate

10.0%

8.0% 6.0% 4.0% 2.0% Dec-98 0.0%

Jun-11 1.01%

Dec-08

Dec-09
31

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Sources: J.P. Morgan; S&P LCD

Dec-10

Sources: J.P. Morgan; S&P LCD

Default volume
100 90 80 70 60 50 40 30 20 10 0
90.1

Number of defaults
100 90 80 70 60 50 40 30 20 10 0
93

60 33 9

($bn)

29.7 3.2 7.1 8.1 7.9 3.0 5.9 11.9

26

23

0.6

1.5

1.2

1.2

0.9

12

11

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

Sources: J.P. Morgan; S&P LCD

Sources: J.P. Morgan; S&P LCD

Recent default activity


April 2011 May 2011 June 2011 Annual average 3-year 5-year 7-year Historical

Volume ($ mn) 0.0 0.0 175.0

Number 0 0 1

LTM default rates by dollar by issuer 1.05% 1.02% 1.01% 1.71% 1.60% 1.51%

Default rate vs leveraged loan spreads


2400bp 2000bp Spread over Libor 1600bp 1200bp 800bp 400bp Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 0bp
Loan spread Def. rate by volume

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Default rate by volume

Sources: J.P. Morgan; S&P LCD

40,456.1 26,831.7 20,192.6 13,182.2

54 39 30 24

5.73% 3.81% 3.23% 3.85%

4.47% 3.26% 2.73% 3.41%

Note: Default rate is volume-weighted and spreads are based on an estimated three-year average life spread on the S&P/LSTA Performing Loans Index. Sources: J.P. Morgan; S&P LCD

YTD

Dec-10
5

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Recovery rates
Senior unsecured bond issuer-weighted recovery rates
70
60 49 51 64 45 45 49 37 37 37 54 48 40 38 24 22 30 63

First-lien leveraged loan issuer-weighted recovery rates


100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
Average = 65.6% 72 68 61 68 53 75 86 88 74 57 69 65 73 59

Average (Moody's) = 36.6%

Recovery (cents on the dollar)

Recovery (cents on the dollar)

60 50 40 30 20 10 0
36

53

56 42

52

55 55

53 34 43 37 23

79

84 84 69 58 62

71 70

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

High-yield bond default and issuer-weighted recovery rates


1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009 Adj. 2010 2011 Average Def. rate 3.4% 1.6% 2.1% 3.8% 3.5% 6.9% 2.8% 7.2% 10.9% 11.5% 4.4% 2.3% 1.4% 2.8% 1.6% 1.4% 1.7% 4.0% 4.9% 8.6% 7.5% 3.1% 1.1% 2.7% 0.9% 0.4% 2.2% 10.3% 0.8% 0.8% 4.3% All bonds 35.3 44.5 45.5 43.6 47.4 51.3 38.8 32.3 25.5 35.5 45.9 43.1 45.6 43.3 41.5 48.8 38.3 33.8 25.3 21.8 29.7 40.4 58.5 56.0 55.0 54.7 27.60 21.89 35.47 40.95 33.35 41.35 Recovery rates Snr. sec. Snr. unsec. 72.5 35.8 40.0 52.7 na 49.4 83.6 60.2 59.2 51.1 71.0 63.8 55.4 45.2 46.5 45.1 33.8 37.0 48.4 36.7 62.1 49.2 na 37.1 69.3 53.7 62.0 47.6 47.6 62.8 75.5 56.1 46.8 39.5 36.0 38.0 38.7 24.2 35.0 21.5 49.0 29.5 66.3 41.9 73.3 52.1 71.9 54.9 74.6 55.0 80.5 53.2 28.27 33.70 30.07 22.92 41.07 42.98 51.85 36.51 49.38 22.67 50.8 36.7

Note: Recoveries in 2009 were 22.9 based on prices 30-days post default and were 43.0 based on year-end prices. Sources: Moodys Investors Service; J.P. Morgan

Note: Recoveries in 2009 were 49.7 based on prices 30-days post default and were 62.5 based on year-end prices. Sources: Moodys Investors Service; J.P. Morgan

Snr. Sub. 48.1 43.5 67.9 29.6 46.8 46.5 33.4 34.6 25.6 41.8 49.4 51.9 29.6 34.3 43.8 44.7 45.0 26.9 20.8 19.8 21.4 37.2 42.3 26.1 41.4 54.5 18.32 20.88 26.12 22.17 na 30.7

Sub. 30.0 41.1 44.3 39.7 41.4 46.9 33.8 26.4 19.1 24.4 38.0 44.1 38.0 41.5 22.6 33.1 18.2 35.6 31.9 15.9 24.5 12.3 94.0 51.3 56.1 na 10.25 5.38 4.75 na na 31.3

Notes: Recovery rates are issuer-weighted and based on price 30 days after default date. 2009 Adj. recoveries are based on year-end prices. Sources: Moodys Investors Service; J.P. Morgan

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Leveraged loan default and recovery rates


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009 Adj. 2010 2011 Average Def. rate 1.5% 4.2% 6.6% 6.3% 6.0% 2.3% 1.0% 3.0% 0.5% 0.2% 3.9% 12.8%

1.8% 1.0% 4.0%

First-Lien Second-Lien 72.0 67.9 60.6 53.4 67.6 75.4 85.5 78.8 56.7 73.5 68.8 64.9 58.8 73.4 87.7 83.8 83.6 68.6 58.09 32.78 49.74 26.98 62.47 31.83 71.18 13.33 70.07 na 65.8 29.1

Notes: Recovery rates are issuer-weighted and based on price 30 days after default date. 2009 Adj. recoveries are based on ye prices. Sources: Moodys Investors Service; J.P. Morgan; S&P LCD; Markit

2011 Sr. Sec. Term All loans 70.07 Loan-only issuers 56.00 Loan & bond issuers 98.21

Leveraged loan issuer-weighted recovery rates


Second-lien na na na

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Distressed debt (high-yield bonds)


Distressed debt
250.0

Distressed debt
Percent of the high-yield market 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Default rate 0.0%
29-Jun-11 0.48%

Par amount ($ bn)

200.0 150.0 100.0 50.0 0.0


29-Jun-11 $4.9 bn

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Source: J.P. Morgan Note: Distressed debt is defined as bonds trading at or below 50% of par or accreted value.

Jan-10

Jan-11

Source: J.P. Morgan Note: Distressed debt is defined as bonds trading at or below 50% of par or accreted value.

Distressed debt by industry


as of June 29, 2011 50% of par and below ($ bn) % of total 0.00 0.09 0.30 1.75 0.09 0.19 1.01 0.34 0.11 0.06 0.94 4.87 0.0% 0.0% 0.0% 0.0% 1.8% 6.2% 36.0% 1.8% 3.9% 0.0% 0.0% 0.0% 0.0% 0.0% 20.7% 6.9% 2.2% 0.0% 0.0% 1.2% 19.4% 70% of par and below ($ bn) % of total 0.00 0.73 0.09 0.67 2.05 1.74 0.19 0.97 0.82 1.26 0.76 0.84 0.33 0.06 7.14 17.63 0.0% 4.1% 0.0% 0.0% 0.5% 3.8% 11.6% 9.9% 1.1% 5.5% 0.0% 4.7% 0.0% 0.0% 7.1% 4.3% 4.8% 1.8% 0.0% 0.3% 40.5%

Distressed debt vs default rate


35.0% Percent of distressed debt 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0.0% Distressed debt Default rate

Automotive Broadcasting Cable and Satellite Chemicals Consumer Products Diversified Media Energy Financial Food and Beverages Gaming Lodging Leisure Healthcare Housing Industrials Metals and Mining Paper and Packaging Retail Services Technology Telecommunications Transportation Utility Total
Source: J.P. Morgan

Source: J.P. Morgan Note: Distressed debt is defined as bonds trading at or below 50% of par or accreted value.

Distressed debt

Distressed debt by rating


as of June 29, 2011 ($bn) 0.5 47.6 316.5 364.6 Upper-tier % 0.0% 0.0% 0.1% 13.1% 86.8% ($bn) 0.3 0.6 102.9 338.2 442.1 Middle-tier % 0.0% 0.1% 0.1% 23.3% 76.5% ($bn) 0.5 4.1 11.7 102.7 93.5 212.4 Lower-tier % 0.2% 1.9% 5.5% 48.4% 44.0%

Par Percent of par ($ bn) <= 25% 0.5 25% < par <= 50% 4.4 50% < par <= 70% 12.8 70% < par <= 100% 253.3 > 100% 748.2 Total 1,019.1

as of June 29, 2011

0.0% 0.4% 1.3% 24.9% 73.4%

Percent of Par <= 25% 25% < par <= 50% 50% < par <= 70% 70% < par <= 100% > 100% Total

Source: J.P. Morgan Notes: Includes only US dollar-denominated high-yield securities, and excludes defaulted debt. Median market price = 102.59, down from 104.00 as of May 31, 2011.

No. issuers 3 4 10 292 667 976

Avg. Change in vol. price 1 mo. 6 mo. 12 mo. 15.3 -0.1 0.4 -1.0 40.7 1.0 1.6 -1.1 62.4 4.1 -3.1 -13.7 93.9 114.6 48.1 -122.6 105.7 -123.5 -3.5 262.7 101.59 -3.9 43.5 124.2

Source: J.P. Morgan Note: Upper-tier includes bonds rated Split-BBB and BB; Middle-tier includes bonds rated Split-BB and B; and Lower-tier includes bonds rated Split-B, CCC, D, and NR. 8

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Distressed debt (bank loans)


Distressed debt Distressed debt vs default rate
90.0%
Nov-08 81.00%

Percent of institutional loan market

90.0% Percent of distressed loans 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
29-Jun-11 5.80%

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

Distress Ratio

Default rate

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Default rate

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Sources: S&P LCD; J.P. Morgan Notes: Distressed debt is defined as bonds trading below $80. Data from May 2009 to present is based on all priced institutional term loans in our database, while the distressed ratio prior to that is the S&P LSTA Index Distress Ratio.

Sources: S&P LCD; J.P. Morgan Notes: Distressed debt is defined as bonds trading below $80. Data from May 2009 to present is based on all priced institutional term loans in our database, while the distressed ratio prior to that is the S&P LSTA Index Distress Ratio.

Distressed debt by industry


as of June 29, 2011 Trading below $60 ($ bn) 0.03 0.05 5.37 0.63 0.41 0.12 0.28 0.39 7.28 % of total 0.0% 0.0% 0.0% 0.5% 0.7% 73.7% 0.0% 0.0% 0.0% 8.6% 5.6% 1.7% 3.8% 0.0% 0.0% 0.0% 5.3% 0.0% 0.0% 0.0% 0.0% Trading below $80 ($ bn) 0.04 0.03 0.25 7.91 0.08 1.85 0.37 0.79 0.60 0.51 0.44 0.69 2.03 0.08 0.23 15.50 31.43 % of total 0.1% 0.0% 0.0% 0.1% 0.8% 25.2% 0.2% 5.9% 1.2% 2.5% 1.9% 1.6% 1.4% 0.0% 2.2% 0.0% 6.5% 0.0% 0.3% 0.7% 49.3%

Distressed debt
Price $ < 60 60 <= $ < 70 70 <= $ < 80 80 <= $ < 90 90 <= $ < 100 $ >= 100 Total

as of June 29, 2011

Automotive Broadcasting Cable and Satellite Chemicals Consumer Products Diversified Media Energy Financial Food and Beverages Gaming Lodging Leisure Healthcare Housing Industrials Metals and Mining Paper and Packaging Retail Services Technology Telecommunications Transportation Utility Total

Source: J.P. Morgan Notes: Includes only US dollar-denominated, domestic institutional term loans, and excludes defaulted debt. Median market price = 99.00.

Par ($ bn) 7.3 2.1 22.0 40.4 363.9 106.3 542.0

1.3% 0.4% 4.1% 7.5% 67.1% 19.6%

No. issuers 16 6 15 37 515 203 792

Avg. Change in vol. price 1 mo. 6 mo. 12 mo. 41.3 1.7 -0.1 -1.4 66.8 -1.8 -4.1 -3.9 76.0 -0.8 -6.1 -20.6 86.0 13.6 5.3 -71.1 97.8 53.8 120.5 104.8 100.6 -59.4 29.9 90.7 96.0 7.1 145.5 98.5

Distressed debt for second-lien loans


as of June 29, 2011 Price $ < 60 60 <= $ < 70 70 <= $ < 80 80 <= $ < 90 90 <= $ < 100 $ >= 100 Total Par ($ bn) 0.8 1.5 2.9 2.7 10.0 7.8 25.7 No. issuers 10 6 11 11 64 36 138 Avg. Change in vol. price 1 mo. 6 mo. 12 mo. 33.8 -1.0 -2.5 -3.8 64.1 1.2 0.4 -0.1 73.7 0.4 1.4 0.6 85.7 0.2 -0.7 -4.3 95.9 -0.9 -0.8 0.1 101.5 1.4 6.2 6.6 88.7 1.3 4.1 -0.8

3.2% 5.9% 11.1% 10.5% 38.8% 30.5%

Source: J.P. Morgan Note: Includes only US dollar-denominated, domestic institutional term loans, and excludes defaulted debt.

Source: J.P. Morgan Notes: Includes only US dollar-denominated, domestic second-lien loans, and excludes defaulted debt. Median market price = 95.46.

Feb-11

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Credit trends
Upgrade-to-downgrade ratio
Issuer
27-Jun-11 1.57

Upgrade-to-downgrade ratio
Par amount
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
27-Jun-11 2.02

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09
366

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Source: J.P. Morgan

Dec-09

Dec-10

Source: J.P. Morgan

Upgrades and downgrades


Issuer
700 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Upgrades and downgrades


Par amount
586 597 439 330 280 301 287

Upgrades

600.0
547 496 392 376 470 481

Downgrades

500.0
387 258 229

Upgrades

425

446

400.0 ($ bn) 300.0 200.0

Downgrades

391 245 222 227 197 167

352 268

446 334 267

507 419

139 147 114 95 135 93 72

259 223

237

230

194

214

238

212

242 148

216 132

142

100.0 40 39 46 25 0.0 1996 1997

80 69

98

109 127 97 95

73

119

YTD

2010

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: J.P. Morgan

Source: J.P. Morgan

Fallen angels and rising stars


Issuer
70 60 50 40 37 30 20 10 1995 1996 0
20 44 31 17 6 18 18 39 27 23 23 29 13 13 49 63

Fallen angels and rising stars


Par amount
Rising stars
43 26 22 58

150.0 125.0 ($ bn) 100.0 75.0 50.0


6

Fallen angels
36 25 27 22 24

Rising stars

142 113

Fallen angels

30

25

27 15

66 29 11 10 40 16 13 37 38 31 3030

20

13

18

51 19

2009
56

25.0 16 0.0

1512 16 6 3

24

14

25 24

27

2010
150

13

33 28

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: J.P. Morgan

Source: J.P. Morgan

10

2010

YTD

YTD

YTD
1817

Dec-10
302

1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00

LTM upgrade-to-downgrade ratio

LTM upgrade-to-downgrade ratio

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

High-yield new-issue trends


New issue volume vs defaulted debt
rolling twelve months
80.0
Ltm lower rated new-issue volume Ltm defaulted debt

Lower rated new-issue volume vs defaulted debt


120.0 100.0 80.0 60.0 40.0 20.0 0.0 Ltm defaulted debt ($ bn) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
Lower rated new issuance Defaulted debt

94.6

Ltm new issuance ($ bn)

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Leads to increased defaults

($ bn)

Increased lower rated new issuance

56.0 55.6 31.1

53.6 32.6 24.9

54.4 32.9

31.0 5.97.2 7.94.8 17.7 5.2

22.0

28.3 3.4

8.0 7.6

7.6

15.3 2.3

8.6

22.9 18.5

7.3

3.2

19.4 19.4 13.7

7.9

1.6

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
19.4 0.5%

Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Source: J.P. Morgan

Note: Lower rated issuance includes bonds rated Split B or lower. Source: J.P. Morgan

Lower rated new-issue volume as a percent of total issuance


Lower rated issuance % of total issuance

Lower rated new-issue volume


60.0 50.0
53.6 54.4

40% 35% 30% 25% 20% 10% 15% 12.4% 5% 1995 1996

15-year average= 15.7%

36.3% 26.0%

14.0% 10.7%

16.1% 7.6%

($ bn)

20.5%

20.9% 20.6% 17.4% 10.1% 3.6% 3.4%

18.3% 18.0% 10.7%

40.0 30.0 20.0 10.0


5.9 7.9 17.7

2010
1.4%

31.0 15.3 7.6 7.6 3.4 2.3

32.6 18.5

31.1

13.7

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: J.P. Morgan

Source: J.P. Morgan

Refinancing as a percent of lower rated issuance


Refinancing as a % of lower-rated issuance 80% 70% 60% 50% 40% 30%
32.9% 33.9% 26.3% 72.2% 71.7% 54.4% 33.8% 17.5% 72.0% 67.8%67.8%

Lower rated new-issue volume, excluding refinancings


6.0% Percent of the market 5.0% 4.0% 3.0% 2.0% 1.0% 1995 1996 1997 1998 0.0%
Aggressive issuance from 1996 to 1999 accounted for 7.9% of 1998's year-end market size

59.9%

3.6%

Aggressive issuance from 2004 to 2007 accounts for 10.3% of 2007's year-end market size

5.0%

2.7% 1.8% 1.9% 0.9% 1.0% 0.1% 0.1% 0.5% 1.7% 1.3%

2.7% 1.3%

20% 13.5%16.0% 10% 1995 1996 1997 1998 1999 0%

16.9%

9.0% 8.1%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: J.P. Morgan

Source: J.P. Morgan

2010

YTD

2010

YTD
0.8%

0%

0.0

YTD
32.9

11

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

High-yield new-issue trends


Aggressive issuance
$60.0 $50.0
Wireline Telecommunications Lower rated, nonrefinancing issuance

(contd)
Aggressive issuance

48.8

7.0% 6.0% Percent of the market 5.0% 4.0% 3.0% 2.0% 1.0% 1995 1996 1997 0.0%
1.8% 2.7% 3.8%

5.7%

Wireline Telecommunications

Lower rated, nonrefinancing issuance

($ bn)

$40.0 $30.0 $20.0 $10.0 $0.0


5.4 9.5

5.0%

32.3 17.0 18.6 6.3 1.0 4.3 25.7 14.9 12.2 12.6 5.4 17.5 10.6

2.9% 1.7% 0.1% 0.1% 0.5% 1.3%

2.7% 1.0% 1.3% 0.5% 1.4%

0.9

0.8%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: J.P. Morgan Note: Aggressive issuance includes lower rated securities, excluding refinancings, plus Wireline Telecommunications issuance.

Source: J.P. Morgan Note: Aggressive issuance includes lower rated securities, excluding refinancings, plus Wireline Telecommunications issuance.

Refinancing as a percent of total issuance


100% 91% 90% 78%77%75% 76% 80% 72% 70%73% 66% 70% 59% 57% 54% 60% 53% 50% 50% 50% 50%48% 45%44% 50% 46% 41% 38% 41% 35% 34% 40% 30% 20% 10% 0%

Acquisition financing/LBO as a percent of total issuance


60% 50% 40% 30% 20% 10% 0%
0% 3% 4% 3% 46% 41% 39% 37% 29% 28%27% 26% 22%22% 52% 46%

38% 30%

44%

16%

15%16% 13% 5%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD

Source: J.P. Morgan

Source: J.P. Morgan

New-issue volume
300.0 275.0 250.0 225.0 200.0 175.0 150.0 125.0 100.0 75.0 50.0 25.0 0.0
302

Number of new issues


700 600
151 100 47 95 152 158 149 181 148 180 667 694 583 408 653

500 400 300 200 100 0


175 189 131

($ bn)

126 46 69 43 47 73

106 68

31 29

53

1 10

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD

Source: J.P. Morgan Note: Includes only US dollar-denominated securities.

Source: J.P. Morgan Note: Includes only US dollar-denominated securities.

12

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD
504 402 250 238 139 48 389 378 300 375 260 335 321 387 95 115

2010

YTD
18% 16%

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High Yield and Leveraged Loan Research Default Monitor June 30, 2011

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Leveraged loan new-issue trends


Ramp up in loan issuance reminiscent of late 90s bond market
400 350 300 250 200 150 100 50
10 46 69 43 47 74 126 151 100 47 60 95 4746 34 6859 152 158153 91 387 302

Easy credit availability leads to an increase in defaults


180 160 140 120 100
Number of Loan Deals Total Bond and Loan defaults Number of Bond Deals

Number of bond and loan defaults

High-Yield Issuance Institutional Loan Volume

321

183

149 148 71 53

181

155

180 170

106

38

1991

1992 1993

1994

1995 1996

1997

1998 1999

2000

2001 2002

2003

2004 2005

2006

2007 2008

Sources: J.P. Morgan; S&P LCD

2009

2010 YTD

Sources: J.P. Morgan; S&P LCD

Deals by use of proceeds (as a percent of total volume)


80.0% 70.0% 60.0% 50.0% 30.0% 20.0% 10.0% 0.0%
51.8%
Acquisition finance/LBO Refinancing

Lower rated loan new-issue volume(as a percent of total volume)


70.6%

74.1% 56.1% 63.7% 45.2% 39.9% 35.3% 29.2% 18.6% 18.6% 10.8%

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
0.0% 1.8% 0.0% 0.0% 0.0% 0.2% 2.0% 1.8% 1.9% 2.9% 1.3% 6.2%

50.2%

40.0% 32.5%

29.4%

41.0% 35.3%

46.8%

26.8%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD
8.2%

80 60 40 20 0

1000 900 800 700 600 500 400 300 200 100 0

19.1%

2.1% 0.9%

Number of deals

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
$7.2

Note: LBO issuance from 2005 through 2007 accounts for more than 50% of the institutional leveraged loan market, compared with 10% in the bond market. Sources: J.P. Morgan; S&P LCD

Note: Lower rated issuance includes loans rated Split B or CCC. Sources: J.P. Morgan; S&P LCD

Second-lien loan new-issue volume


$35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0
$3.1 $12.0 $3.0 $4.2 $5.0 $16.3 $28.3 $30.1

Covenant-lite loan new-issue volume


$120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0
$1.3 $2.9 $0.3 $0.3 $0.0 $0.0 $0.5 $0.1 $2.4 $24.0 $2.5 $2.5 $41.9 $99.1

$0.3 $0.7 $0.4 $0.1 $0.1 $0.6

$1.5

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sources: J.P. Morgan; S&P LCD

Sources: J.P. Morgan; S&P LCD

YTD

YTD

13

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Default data by new-issue year


Default rate (per new-issue year)
1996 1997 $73.4 $126.0 $19.1 $45.6 26.1% 36.2% 555 199 35.9% 1998 $150.8 $56.0 37.1% 548 223 40.7% 1999 $99.8 $34.7 34.8% 324 103 31.8% 2000 $47.3 $21.9 46.2% 114 44 38.6% 2001 $94.7 $16.8 17.8% 252 32 12.7% 2002 $67.9 $5.9 8.6% 238 18 7.6% 2003 $151.6 $13.2 8.7% 421 34 8.1% 2004 $158.2 $15.2 9.6% 432 43 10.0% 2005 $106.1 $5.9 5.6% 302 26 8.6% 2006 $149.1 $17.0 11.4% 250 25 10.0% 2007 $147.9 $7.7 5.2% 321 16 5.0% 2008 $52.9 $3.1 5.9% 115 7 6.1% 2009 $180.7 $1.5 0.8% 323 4 1.2%

New issue volume Defaulted debt Default rate

Number of issuers 337 Number of defaulted issuers 91 Default rate 27.0% by par amount Split BBB BB Split BB B Split B CCC Not rated by par amount

Default rate by rating (per new-issue year)


1996 12.2% 14.4% 34.1% 28.8% 17.6% 0.0% 42.3% 1997 34.7% 25.5% 11.0% 39.1% 37.0% 40.7% 61.3% 1998 2.2% 13.6% 22.0% 45.1% 39.8% 60.4% 74.8% 1999 32.2% 28.4% 45.5% 35.0% 31.5% 46.3% 44.1% 2000 22.2% 11.1% 19.2% 56.5% 87.1% 81.0% 57.6% 2001 16.8% 17.6% 24.0% 17.7% 0.0% 35.8% 0.0% 2002 0.0% 4.8% 2.1% 13.4% 15.3% 0.0% 0.0% 2003 0.0% 3.2% 2.9% 12.2% 19.9% 4.3% 5.0% 2004 4.6% 3.3% 5.9% 13.2% 5.0% 10.1% 75.2% 2005 4.5% 2.0% 0.5% 7.4% 7.6% 6.0% 21.5% 2006 0.0% 4.9% 6.1% 15.9% 17.5% 13.5% 4.7% 2007 0.0% 0.0% 0.0% 7.5% 5.6% 8.3% 31.0% 2008 0.0% 0.0% 0.0% 17.0% 5.2% 0.0% 0.0% 2009 0.0% 0.0% 0.0% 1.8% 0.0% 5.0% 0.0%

Default rate by industry (per new-issue year)


1996 Automotive 30.1% Broadcasting 4.4% Cable and Satellite 40.4% Chemicals 59.1% Consumer Products 43.4% Diversified Media 0.0% Energy 8.2% Financial 10.0% Food and Beverages 30.3% Gaming Lodging and Leisure39.8% Healthcare 45.5% Housing 10.5% Industrials 26.1% Metals and Mining 35.2% Paper and Packaging 25.4% Retail 25.8% Services 37.2% Technology 0.0% Telecommunications 25.1% Transportation 22.2% Utility 13.8% by par amount 1997 53.9% 1.8% 48.5% 53.0% 48.5% 14.2% 24.3% 28.6% 49.5% 14.9% 35.2% 24.0% 29.0% 69.2% 40.2% 21.2% 18.4% 42.0% 52.4% 41.6% 8.8% 1998 68.1% 13.0% 59.2% 47.8% 44.8% 20.2% 18.2% 12.8% 45.4% 24.7% 24.1% 2.9% 34.1% 63.5% 4.5% 10.0% 24.5% 41.3% 55.9% 59.9% 7.3% 1999 42.1% 0.0% 56.3% 7.5% 44.7% 0.0% 9.4% 32.3% 26.2% 8.0% 0.0% 7.8% 34.4% 54.9% 27.4% 46.7% 26.2% 8.2% 53.6% 10.6% 19.1% 2000 0.0% 0.0% 73.7% 0.0% 47.1% 0.0% 19.8% 0.0% 100.0% 0.0% 0.0% 13.9% 0.0% 0.0% 58.1% 0.0% 100.0% 0.0% 72.3% 0.0% 19.0% 2001 47.4% 0.0% 35.7% 0.0% 0.0% 9.7% 1.7% 34.7% 9.6% 4.3% 6.2% 0.0% 0.0% 0.0% 16.7% 50.2% 7.2% 0.0% 17.4% 44.4% 58.0% 2002 37.5% 0.0% 36.0% 10.3% 8.5% 0.0% 6.8% 0.0% 12.5% 5.8% 2.8% 14.6% 6.8% 8.3% 22.6% 0.0% 0.0% 0.0% 0.0% 27.8% 0.0% 2003 13.4% 19.5% 0.0% 1.2% 16.4% 45.5% 0.0% 5.2% 8.7% 16.2% 0.0% 0.0% 0.9% 0.0% 15.4% 0.0% 3.4% 0.0% 0.0% 0.0% 24.9% 2004 23.1% 0.0% 14.4% 0.0% 2.7% 28.3% 0.0% 16.0% 8.7% 14.5% 2.7% 16.4% 5.5% 0.0% 19.5% 29.3% 0.0% 10.5% 0.0% 14.0% 19.4% 2005 0.0% 0.0% 0.0% 16.8% 1.5% 61.3% 2.8% 7.4% 13.9% 10.8% 3.1% 11.7% 0.0% 0.0% 17.9% 7.3% 3.2% 3.2% 7.0% 23.0% 0.0% 2006 6.7% 0.0% 4.8% 14.8% 0.0% 71.8% 0.0% 25.6% 0.0% 23.6% 5.4% 8.6% 9.9% 27.4% 0.0% 12.4% 2.4% 12.2% 0.0% 6.1% 0.0% 2007 2.5% 0.0% 27.8% 14.8% 0.0% 50.1% 4.2% 0.0% 12.9% 12.4% 0.0% 0.0% 0.0% 0.0% 42.7% 0.0% 3.4% 8.7% 3.4% 0.0% 0.0% 2008 15.8% 0.0% 3.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 26.3% 0.0% 0.0% 31.9% 0.0% 0.0% 31.0% 64.7% 0.0% 0.0% 2009 0.0% 0.0% 0.0% 0.0% 0.0% 8.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Default rate by use of proceeds (per new-issue year)


1996 31.4% 25.6% 22.9% 1997 31.2% 50.3% 31.5% 1998 34.9% 46.5% 32.8% 1999 27.2% 44.4% 34.3% 2000 50.4% 55.8% 31.6% 2001 12.1% 31.6% 17.2% 2002 1.7% 5.5% 10.3% 2003 12.1% 7.0% 8.2% 2004 6.8% 4.9% 12.1% 2005 4.8% 10.3% 5.0% 2006 14.5% 3.7% 11.4% 2007 2.7% 8.3% 8.0% 2008 2.3% 0.0% 12.0% 2009 0.0% 0.0% 1.1%

Acquisition Finance General Corporate Refinancing

14

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Appendix A
2011 high-yield defaults
Date 11-Jan-11 01-Feb-11 15-Feb-11 01-Mar-11 01-Apr-11 27-Jun-11 Issuer

Source: J.P. Morgan Notes: 1) Recovery rate is the weighted average price of all bonds in the capital structure 30 days after default. 2) * indicates a grace-period default

Constar International Sbarro Ahern Rentals Harry & David Perkins & Marie Callender's Nebraska Book

Debt ($ mn) 220.0 150.0 236.7 198.4 322.0 452.0

Paper and Packaging Food and Beverages Services Food and Beverages Food and Beverages Retail

Industry

Moodys rating at last issue B2 Caa1 B3 Ca NR B1

WA recov. 51.25 28.00 47.50 24.00 16.00 na

2010 high-yield defaults


Date 01-Jan-10 20-Jan-10 03-Feb-10 01-Apr-10 17-May-10 01-Jun-10 01-Jul-10 04-Aug-10 01-Aug-10 23-Sep-10 01-Oct-10 01-Oct-10 19-Oct-10 31-Oct-10 01-Nov-10 01-Nov-10 17-Nov-10 17-Nov-10 17-Nov-10 01-Dec-10 13-Dec-10

Issuer

Source: J.P. Morgan Notes: 1) Recovery rate is the weighted average price of all bonds in the capital structure 30 days after default. 2) * indicates a grace-period default

Neenah Foundry Uno Restaurant Holdings Spheris Operating US Concrete Neff Rental Network Communications Truvo USA LLC FGIC Corp Penhall International Blockbuster Angiotech Pharmaceuticals* Loehman's Capital TerreStar Networks Wolverine Tube Ambac Financial Group Indianapolois Downs American Media Operations Local Insight Regatta Holdings Vertis Holdings Insight Health Services Great Atlantic & Pacific Tea Company

Debt ($ mn) 225.0 142.0 125.0 272.6 34.3 175.0 200.0 261.9 175.0 930.0 575.0 110.0 995.6 131.1 1,247.2 447.6 387.3 210.5 736.1 293.5 272.8

Metals and Mining Food and Beverages Healthcare Housing Services Diversified Media Diversified Media Financial Services Retail Healthcare Retail Cable and Satellite Industrials Financial Gaming Lodging and Leisure Diversified Media Diversified Media Diversified Media Healthcare Retail

Industry

Moodys rating at last issue B2 B3 Caa2 B3 Caa2 B2 Caa1 Aa2 Caa1 B1 B2 B3 NR NR Aa3 B3 NR B2 NR B2 B3

WA recov.

51.00 55.38 15.50 53.00 9.50 50.00 3.38 na 61.75 34.87 na 25.00 101.50 52.50 18.05 73.72 39.19 4.00 17.22 24.00 88.50

2010 high-yield bond distressed exchanges/tenders


Date 11-Jan-10 21-Jan-10 10-Mar-10 03-May-10 Issuer Ahern Rentals Builders FirstSource Catalyst Paper Securus Technologies

Debt ($ mn) 53.0 270.0 38.2 42.7

Sources: J.P. Morgan; Moodys Investors Service.

Distressed exchange Distressed exchange Distressed exchange Distressed exchange

Transaction

Services Housing Paper and Packaging Services

Industry

15

Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com

High Yield and Leveraged Loan Research Default Monitor June 30, 2011

Nelson Jantzen (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmorgan.com

Appendix B
Date 19-Jan-11 25-Jan-11 01-Feb-11 16-Feb-11 26-Jun-11

2011 leveraged loan defaults


Issuer Appleseed's Intermediate Holdings Summit Business Media Sbarro Borders Group DEB Shops

Debt ($ mn) 323.3 214.5 154.8 57.2 175.0

Industry

Retail Diversified Media Food and Beverages Retail Retail

WA Recov. 67.00 45.00 98.21 na na

Source: J.P. Morgan Notes: 1)Recovery rate is the weighted average price of all senior secured loans 30 days after default (second-liens are excluded), 2) * indicates a grace-period default

2010 leveraged loan defaults


Date 01-Jan-10 05-Jan-10 05-Jan-10 07-Jan-10 22-Jan-10 27-Jan-10 03-Feb-10 03-Feb-10 10-Feb-10 19-Feb-10 24-Feb-10 10-Mar-10 30-Mar-10 30-Mar-10 16-Apr-10 11-May-10 17-May-10 01-Jun-10 10-Jun-10 02-Jul-10 09-Jul-10 28-Jul-10 18-Aug-10 04-Aug-10 31-Aug-10 30-Sep-10 19-Oct-10 17-Nov-10 17-Nov-10 17-Nov-10 13-Dec-10 Issuer Thomas Nelson* International Aluminum Regent Broadcasting Gateway Casino (New World Gaming)* Jacuzzi Brands Natural Products Movie Gallery Spheris Operating Penton Media Mega Brands White Birch Paper Company EnviroSolutions Holdings Electrical Components International Xerium Technologies Green Valley Ranch Chem Rx Neff Rental Network Communications National Envelope Medical Staffing Network Oriental Trading American Safety Razor Boston Generating FGIC Corp Graceway Pharmaceuticals Workflow Management TerreStar Networks American Media Operations Local Insight Regatta Holdings Vertis RHI Entertainment

Debt ($ mn) 161.5 98.8 105.8 1,104.8 175.0 565.0 540.9 100.0 869.0 248.3 542.2 188.5 286.4 298.8 763.5 114.0 377.9 68.2 110.0 106.3 565.0 384.3 1,975.1 46.0 330.0 251.4 100.0 430.6 310.9 395.0 250.0

Industry

Source: J.P. Morgan Notes: 1)Recovery rate is the weighted average price of all senior secured loans 30 days after default (second-liens are excluded), 2) * indicates a grace-period default

Diversified Media Housing Broadcasting Gaming Lodging and Leisure Industrials Consumer Products Retail Healthcare Diversified Media Consumer Products Paper and Packaging Services Technology Paper and Packaging Gaming Lodging and Leisure Healthcare Services Diversified Media Consumer Products Services Consumer Products Consumer Products Utility Financial Healthcare Services Cable and Satellite Diversified Media Diversified Media Diversified Media Broadcasting

WA Recov. na 58.00 na na 15.00 23.67 17.00 na na 67.71 33.36 80.00 76.00 93.63 77.63 49.50 95.33 67.00 na 55.00 92.25 91.30 95.07 na na 92.50 na 99.35 35.50 93.00 41.00

2010 leveraged loan distressed exchanges/tenders


Date 8-Jan-10 United Site Services Total Issuer

Debt ($ mn) 265.0 265.0

Dedy for equity exchange

Transaction

Services

Industry

Sources: J.P. Morgan; Moodys Investors Service.

16

J.P. Morgan North American Credit Research


383 Madison Avenue, 3rd Floor, New York, NY 10179

JOYCE CHANG Head of Global Credit and Emerging Markets Research (212) 834-4203

H I G H G R A D E S T R AT E G Y A N D C R E D I T D E R I VAT I V E R E S E A R C H ERIC BEINSTEIN


eric.beinstein@jpmorgan.com . . . . . . . (212) 834-4211, dominique.d.toublan@jpmorgan.com . (212) 834-2370 miroslav.j.skovajsa@jpmorgan.com . (212) 834-5154 anna.x.cherepanova@jpmchase.com . (212) 834-3220

GLOBAL HIGH YIELD

AND

L E V E R A G E D L O A N S T R AT E G Y

PETER D. ACCIAVATTI
peter.acciavatti@jpmorgan.com . . . (212) 270-9633, tony.linares@jpmorgan.com . . . . . . (212) 270-3285 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . nelson.r.jantzen@jpmorgan.com . . . (212) 270-1169 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . alisa.meyers@jpmorgan.com . . . . . (212) 834-9151

ARUN N. KUMAR NORTH AMERICAN HIGH GRADE RESEARCH

AND

DAVID COMMON NORTH AMERICAN HIGH YIELD RESEARCH

Co-Heads of Credit ResearchHigh Grade and High Yield


AUTOMOTIVE eric.j.selle@jpmorgan.com . . . . . . . . . . (212) 270-9624, jenna.l.giannelli@jpmorgan.com . . . (212) 270-9455 BASIC INDUSTRIES Chemicals and Metals & Mining robin.levine@jpmorgan.com . . . . . . (212) 270-1536, svetlana.x.goldenberg@jpmorgan.com . (212) 270-9453 Home Builders susan.berliner@jpmorgan.com . . . . .(212) 270-3085, richard.j.degaetani@jpmorgan.com . (212) 834-9524 Paper/Forest Products, Packaging tarek.x.hamid@jpmorgan.com . . . . . (212) 834-5468, kevin.p.tomassetti@jpmorgan.com . (212) 834-4079 AUTOMOTIVE eric.j.selle@jpmorgan.com . . . . . . . . . . (212) 270-9624, jenna.l.giannelli@jpmorgan.com . . . (212) 270-9455 BASIC INDUSTRIES Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . tarek.x.hamid@jpmorgan.com . . . . . (212) 834-5468, kevin.p.tomassetti@jpmorgan.com . (212) 834-4079 Home Builders susan.berliner@jpmorgan.com . . . . .(212) 270-3085, richard.j.degaetani@jpmorgan.com . (212) 834-9524 Metals & Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . dave.adam.katz@jpmchase.com . . . (212) 270-4593, bayina.bashtaeva@jpmchase.com . (212) 270-1372 Paper/Forest Products, Packaging tarek.x.hamid@jpmorgan.com . . . . . (212) 834-5468, kevin.p.tomassetti@jpmorgan.com . (212) 834-4079 BANKS, FINANCE AND SECURITIES COMPANIES kabir.x.caprihan@jpmorgan.com . . . (212) 834-5613, matthew.hughart@jpmorgan.com . . (212) 270-4584 CONSUMER PRODUCTS, FOOD AND RESTAURANTS, RETAIL virginia.chambless@jpmorgan.com . (212) 834-5481, james.r.stone@jpmchase.com . . . . . (212) 270-1682 ELECTRIC UTILITIES AND POWER GENERATION susan.voorhees@jpmorgan.com . . . (212) 834-5200 ENERGY, PIPELINES, MLPS robin.levine@jpmorgan.com . . . . . . (212) 270-1536, svetlana.x.goldenberg@jpmorgan.com . (212) 270-9453 HEALTHCARE, INSURANCE arun.n.kumar@jpmorgan.com . . . . . (212) 834-5423, brett.g.gibson@jpmchase.com . . . . (212) 270-7484 MANUFACTURING, SERVICES Aerospace/Defense, Industrials, Services virginia.chambless@jpmorgan.com . (212) 834-5481, james.r.stone@jpmchase.com . . . . . (212) 270-1682 REITS, GAMING, LODGING REITs mark.streeter@jpmorgan.com . . . . . (212) 834-5086,, nicholas.j.northington@jpmorgan.com .(212) 834-5237 Gaming, Lodging susan.berliner@jpmorgan.com . . . . .(212) 270-3085, richard.j.degaetani@jpmorgan.com . (212) 834-9524 TECHNOLOGY/TELECOMMUNICATION, CABLE AND MEDIA Technology/Telecommunication Services brian.m.turner@jpmchase.com . . . . .(212) 834-4035 Cable/Satellite michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 Broadcasting/Publishing . . . . . . . . . . . . . . . . . . . . . . avi.a.steiner@jpmorgan.com . . . . . . (212) 270-5512, kenneth.r.norden@jpmchase.com . . (212) 270-1564 TRANSPORTATION Airlines/EETCs/Aircraft/Rails/Freight/Shipping mark.streeter@jpmorgan.com . . . . . (212) 834-5086, nicholas.j.northington@jpmorgan.com .(212) 834-5237 FINANCE AND SECURITIES COMPANIES dave.adam.katz@jpmchase.com . . . (212) 270-4593, bayina.bashtaeva@jpmchase.com . (212) 270-1372 CONSUMER PRODUCTS, FOOD AND RESTAURANTS, RETAIL carla.casella@jpmorgan.com . . . . . . (212) 270-6798, paul.a.simenauer@jpmorgan.com . . (212) 270-6861 ELECTRIC UTILITIES AND POWER GENERATION dave.adam.katz@jpmchase.com . . . (212) 270-4593, bayina.bashtaeva@jpmchase.com . (212) 270-1372 ENERGY gregg.w.brody@jpmorgan.com . . . . (212) 834-5997, jason.homler@jpmorgan.com . . . . . (212) 834-9405 HEALTHCARE, INSURANCE david.common@jpmorgan.com . . . . (212) 270-5260, jared.a.feeney@jpmorgan.com . . . . .(212) 270-0699 MANUFACTURING, SERVICES Aerospace/Defense, Industrials, Services yilma.abebe@jpmorgan.com . . . . . . (212) 270-3265, ryan.p.dean@jpmorgan.com . . . . . . (212) 270-9566 GAMING, LODGING, LEISURE Gaming, Lodging susan.berliner@jpmorgan.com . . . . .(212) 270-3085, richard.j.degaetani@jpmorgan.com . (212) 834-9524 Leisure michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 TECHNOLOGY/TELECOMMUNICATION, CABLE AND MEDIA Technology/Telecommunication Services thomas.j.egan@jpmorgan.com . . . . . (212) 270-2149, lina.p.kabaria@jpmorgan.com . . . . . (212) 834-5669 Cable/Satellite michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 Broadcasting/Publishing avi.a.steiner@jpmorgan.com . . . . . . (212) 270-5512, kenneth.r.norden@jpmchase.com . . (212) 270-1564 TRANSPORTATION Airlines/EETCs/Aircraft/Rails/Freight/Shipping mark.streeter@jpmorgan.com . . . . . (212) 834-5086, nicholas.j.northington@jpmorgan.com .(212) 834-5237

North America Credit Research

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