EFTA01385943

27 March 2015 US Fixed Income Weekly The top portion on the graph reflects industry sectors, and bottom portion shows a breakout by leverage category. Left side displays current average spread-per-turn (SPT) in basis points, while the right-hand side shows percentile ranking score of current SPT vs history since Dec 2009. On a sector level, the interesting conclusions are: everything is trading to a certain degree of tightness, with an average percentile ranking score of 20%, which perhaps is not an eye opener for most experienced market participants. Specifically on sectors, autos and telecoms look relatively interesting here, while tech and gaming are the most overvalued based on this metric. We note that autos also came out as the most undervalued sector on our equity- reaction-to-oil screen in January. Auto equities have outperformed S&P 500 by 5.5% since that publication date, and we continue to believe, reinforced by today's findings, that there is more to go in capturing autos outperformance in both equities and credit. The sector that came out most overvalued in equities in January - utilities - has proceeded to underperform S&P 500 by 12.5% since then. It did not make it to our HY SPT screen due to a low issuer count, but the original equity signal pointed towards a 30% overvaluation, so perhaps more to go there too. We excluded energy from the above SPT sector analysis for the obvious reason that the sector is too distressed at this point to be meaningfully judged against the rest of the market through the lenses of a single valuation framework. Here, we think a better approach would be to look at debt-to-enterprise-values as a factor for bond dollar prices. As a reminder, we have previously shown this indicator to have strong predictive power over future defaults (names trading over 65% D/EV have experienced a 1:3 subsequent default probability). Here, in Figure 4 we are showing US energy single-Bs and CCCs bond prices (average by ticker, y-axis), plotted against each issuer's total debt/EV. The scatter plot shows a nice and tight fit between the two (78% r-squared), and on Figure 5 we go on to highlight the largest divergences from regression line. Top portion here shows names that are too far below the regression line, i.e. bond dollar prices are too low given where the 0/EV ratio stands; the bottom portion shows the opposite extremes. Figgie 4: Energy single•BsieCCs jFigure 5: Energy single-BS/CCCs, largest gaps to D/EV Bond dollar prices (y-axis) vs Debt'EV (x-axis) 110 MIN Tkker Cpn Alga Rating • FA/46 * 10° • to • CPtHIG 4.. largest Undeivalluatbn Gap In gongs UCE.4 ♦ tf • OAS • • •• 4 •,•• SW U5182410Ar58 GOP 8/375 2019 CCC2 90 KOS UMW • it , •1 006 •V• US427093AE98 HERO 10.25 2019 83 US205768.6130 CRK 9.5 2020 83 80 ♦PKO ♦UNE • • PL5GLE ` a • NU. US76116A4.844 REN 8.5 2020 CCC2 70 U5049196A036 ARP 7.75 2021 CCCI • ARP • • 'NUS US70108IAY70 NED 7.5 2020 81 80 50 K16 e *tall• • ♦ xco • y• 01364' • 0 7953x • 092/14 WIG U592922PAC0S WTI 8.5 2019 83 Merle 8' • D.7781 40 • GOP • CM% Wiest Ovenketion Gips In lends US6S0677AB94 NKR 6.5 2019 CCC2 30 REH U56762516167 VIG 7.5 2019 83 111R0 US707882AE64 PVA ELS 2020 CCCI 20 US06846NAC83 BIG 7.625 2019 83 10 20 30 40 SO 60 70 80 90 100 US405370A068 HKUS 9.75 2020 COC2 US536022A155 UNE 6.25 2019 82 U5665533ABS4 NOG 8 2020 CCC1 Average Saga DOMSCht BY* Page 30 Source Punch* BM* Bond Dollar Price OetatiEv Estimate Actual Est-Act 80 66 45 •21 95 43 30 *13 87 56 42 *14 94 43 30 .14 69 80 67 *13 59 89 82 Al 78 69 62 47 80 66 51 613 92 97 69 67 84 72 65 t 8 S t 8 4 t 8 t• t 8 t 4 8 -28 -18 -15 -13 -a 78 69 SO -11 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00233595 DB-SDNY-0087411 EFTA01385943