Utilizing Corporate Yield Benchmarks 14-Oct-2014 FINAL

Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQTM.Not for distribution to the public. Copyright © 2014 by Standard & Poor’s Financial Services LLC (S&P). All rights reserved.

Rick Kanungo, CFA, FRM Senior Director, Enterprise Solutions, S&P Capital IQ

Sean DineenPrincipal, Valuation Services Deloitte Transactions and Business Analytics LLP

Greg CarlinVice President, Product and Content, S&P Capital IQ(Moderator)

October 14, 2014

Utilizing Corporate Yield BenchmarksTo Meet Challenges In Valuation

2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

Speakers

Sean DineenPrincipal, Valuation Services

Deloitte Transactions andBusiness Analytics LLP

Rick Kanungo, CFA, FRMSenior Director, Enterprise Solutions

S&P Capital IQ

Greg CarlinVice President, Product and Content

S&P Capital IQ(Moderator)

Please note: The views and opinions expressed by Mr. Dineen do not necessarily reflect the opinion of S&P Capital IQ and its affiliates.


Topics Of Discussion

• Debt Capacity

• Capital Structure Efficiency

• Convertible Debt Instrument

• High Yield Debt

Statements by persons who are not S&P Capital IQ employees represent their own views and opinions, and are not necessarily the views of S&P Capital IQ.


Methodology Overview

• Approaches to valuing debt instruments

– Quantitatively derive credit estimates

– Retrieve comparable instruments to derive yields

• Assumption development

– Conduct search for comparable instruments

Term, size, rating, seniority, etc.


Debt Capacity

• Case study

– A subsidiary issued $250 million of senior notes maturing on 2022

– Repayment of the debt is guaranteed by the subsidiary’s parent company (“Parent”)

• Challenge

– On a retrospective basis, the Issuer seeks to analyze whether the subsidiary could have raised $250 million without a Parent guarantee, considering the subsidiary’s credit worthiness

• Approach


– Retrieve comparable instruments to estimate yields

– Reconcile value indications


Quality Input Data

Constructing Corporate Yield Curves

*Formerly known as CMA Bonds. S&P Capital IQ Quote is a service provided by Standard & Poor’s Securities Evaluations, Inc., which is a registered investment adviser with U.S. Securities and Exchange Commission and part of S&P Capital IQ.

• Standard & Poor’s Ratings Services

Credit Quality

Candidate Sources:

• FINRA TRACE

• Trax (formerly Xtrakter)

• S&P Capital IQ Quote*

Quotes, Trades

• Includes parsed quotes frombuy-side firms

• Higher consistency of prices for individual bonds

• GICS® Sectors(10 sectors + non-financial composite)

• Currency

• Maturity

Reference Data ScreenedInput Data

• Calibration based on indicative pricing of credits actively quoted by bond traders

Market Activity Grade:

# of quotes

• <4: not considered• 8 and above: 100% weight: • 4-8: linearly weighted

(e.g. 6: 50% weight)

Term Structure

• Rich term structure coverage


Robust Methodology

• Each curve represents the best fit for a group of credits specified by the sector and rating

• The systems of curves is analytical and arbitrage-free by design

• List of indicative input prices and spreads’ dispersion is provided for each curve

Modular Curve Construction

Bond issues with frequent daily price updates

Credits with rich term structure

coverage• Standard & Poor’s Ratings Services*

• Indicative quotes

• S&P Capital IQFixed IncomeTerms & Conditions

• GICS® Sectors

Combined Spot Curves

1. Curve Shape

Convertible to:

• Credit Spread

• Full Yield Curves

• Market Risk VaR and Conditional Scenarios

FILTERING AGGREGATION

2. Curve Level

INPUT

*Standard & Poor’s Ratings Services credit ratings. Standard & Poor’s Ratings Services is analytically and editorially independent from any other group at McGraw Hill Financial, Inc.


CUSIP Issue Rating Issuer Description Coupon (%) Maturity Date Issue Date Yield (%) Volume Transaction type

780099CE5 BB+ ROYAL BK SCOTLAND GROUP PLC 6.125 15-DEC-2022 04-DEC-2012 4.796 896,000 Dealer to Dealer Trade

90261AAB8 BBB UBS AG STAMFORD BRH 7.625 17-AUG-2022 17-AUG-2012 4.607 2,125,000 Dealer Buy

31620RAF2 BBB- FIDELITY NATL FINL INC NEW FORMERLY FIDELITY NAT 5.5 01-SEP-2022 28-AUG-2012 4.253 50,000 Dealer Buy

34540TDQ2 BBB- FORD MTR CR CO LLC MEDIUM TERM NTS BOOK ENTRY 3.75 20-NOV-2022 16-NOV-2012 3.866 100,000 Dealer Buy

6174824M3 BBB+ MORGAN STANLEY 4.875 01-NOV-2022 23-OCT-2012 3.811 5MM+ Dealer to Dealer Trade

093662AE4 BBB BLOCK FINL LLC FORMERLY BLOCK FINL CORP TO 12/31 5.5 01-NOV-2022 25-OCT-2012 3.71 90,000 Dealer Sell

172967GK1 BBB+ CITIGROUP INC 4.05 30-JUL-2022 08-FEB-2013 3.685 610,000 Dealer Sell

712704AA3 BBB+ PEOPLES UTD FINL INC 3.65 06-DEC-2022 06-DEC-2012 3.473 25,000 Dealer Sell

45685EAB2 BBB- ING U S INC 5.5 15-JUL-2022 15-JUL-2013 3.408 700,000 Dealer Sell

74251VAE2 BBB+ PRINCIPAL FINL GROUP INC 3.3 15-SEP-2022 10-SEP-2012 3.338 30,000 Dealer Buy

416518AB4 BBB HARTFORD FINL SVCS GROUP INC DEL 5.125 15-APR-2022 05-APR-2012 3.078 125,000 Dealer Sell

025816BD0 BBB+ AMERICAN EXPRESS CO 2.65 02-DEC-2022 03-DEC-2012 3.051 3,000,000 Dealer Buy

05531GAA9 BBB+ BB&T CORP SUB MEDIUM TERM NTS BOOK ENTRY 3.95 22-MAR-2022 22-MAR-2012 3.018 650,000 Dealer Sell

Financial – 8 Years

• Yield differences between ratings grades within IG not as pronounced as in IG to HY

• TRACE data on June 30, 2014 shows trades with yield range: 3.0% - 4.8%

Note: All references to ratings pertain to Standard & Poor’s Ratings. For illustrative purposes only.Source: Curve data: S&P Capital IQ On-Demand Pricing. TRACE prices: FINRA through the S&P Capital IQ Valuations portal.

Currency USD

Valuation Date 6/30/2014

Creditworthiness ‘A’, ‘BBB’, ‘BB’

Compounding Compounded Semi-Annually

A BBB BB

3.3% 3.8% 5.45%


Capital Structure Efficiency

• Case study

– Company seeks to lower its cost of capital by exploring increased debt scenarios

• Challenge

– Calculate the impact of the increased debt on both the company’s projected credit rating and cost of capital at various levels to identify an efficient balance for credit rating/cost of capital

• Approach

– Quantitatively derive credit rating estimates at increasing levels of debt

– Retrieve comparable instruments to derive yields for a range of credit estimates

– Check market for similar recent debt issuances

– Identify an efficient balance for credit rating/cost of capital


CUSIP Issuer Description Coupon (%) Maturity Date Issue Date Yield Volume Transaction type

22160KAF2 COSTCO WHOLESALE CORP NEW 1.7 15-DEC-2019 07-DEC-2012 1.947 3,545,000 Dealer Sell

87612EBB1 TARGET CORP 2.3 26-JUN-2019 26-JUN-2014 2.115 5MM+ Dealer Sell

872540AM1 TJX COS INC NEW 6.95 15-APR-2019 07-APR-2009 2.136 25,000 Dealer Sell

931142CP6 WAL MART STORES INC 4.125 01-FEB-2019 23-JAN-2009 1.728 400,000 Dealer Sell

Consumer Discretionary – 5 Years

• TRACE data on June 30, 2014 for Standard & Poor’s Rating between ‘A-’ and ‘AA+’ shows only four trades with yield range: 1.73% (Walmart, ‘AA’) - 2.14% (TJX, ‘A+)

• Spread between ‘BBB’ and ‘BB’ increases with maturity

Currency USD




A BBB BB

2.14% 2.62% 3.99%



Convertible Debt Instrument

• Case study

– Convertible debt instrument issued June 30

– Convertible debt instrument transaction yield is 2%

– The issuer (“Issuer”) is not rated and has no public debt

• Challenges

– For financial reporting purposes, the issuer is required to estimate the value of the conversion feature at issuance

• Approach

– Utilize with and without approach using lattice model

– Quantitatively derive credit rating estimates


– Reconcile value indications


Healthcare – 3 Years

TRACE

CUSIP Issuer Description Coupon Maturity Date S&P Rating Issue Date Yield Volume Transaction type Date/Time (EST)

14170TAL5 CAREFUSION CORP 1.45 15-MAY-2017 BBB+ 22-MAY-2014 1.45 5MM+ Dealer Sell 30-JUN-2014 08:44 AM

441060AJ9 HOSPIRA INC 6.05 30-MAR-2017 BBB- 23-MAR-2007 2.169 5,000Dealer to Dealer

Trade30-JUN-2014 10:33 AM

74834LAM2 QUEST DIAGNOSTICS INC 6.4 01-JUL-2017 BBB+ 22-JUN-2007 1.625 300,000 Dealer Sell 30-JUN-2014 02:22 PM

92277GAC1VENTAS RLTY LTD

PARTNERSHIP1.25 17-APR-2017 17-APR-2014 1.223 75,000 Dealer Sell 27-JUN-2014 10:49 AM

• TRACE data on June 30, 2014

• Few trades and wide dispersion in Yields and Trade Sizes

Currency USD




A BBB BB

1.29% 1.54% 3.47%



High Yield Debt

• Case study– Relatively early stage company

– Debt is not publicly traded

• Challenge

– Estimate range of yields for instruments

• Approach



– Lower credit ratings may require broader market view of comparables


CUSIP Issuer Description Coupon (%) Maturity Date Issue Date Price Yield Volume Transaction type

879369AA4 TELEFLEX INC. 3.875 01-AUG-2017 09-AUG-2010 173.87 -ve 15,000 Dealer to Dealer

Healthcare ‘B’ – 3 Years

Currency USD


Creditworthiness ‘BB’, ‘B’, ‘CCC’


• TRACE data for all of June 2014 shows no trades for Biotechnology firms with Standard & Poor’s Rating between ‘B-’ and ‘B+’ for any maturity

• Need to broaden industry to sector level: Healthcare

• Why was Teleflex trading at a significant premium?

• Teleflex is a convertible bond with conversion price: 61.32 and June 30, 2014 stock price was 105.6

BB B CCC

3.47% 3.65% 10.81%



Takeaways

• Valuation approach

– Check and balance of multiple approaches

– Selection and evidence for input assumptions

– Lower credit ratings typically require additional analysis

• Benchmark curve

– TRACE data is insufficient to assess valuation even for investment grade bonds. Trade data can be sparse and many trades are odd-lot

– The increase in yields from ‘BBB’ to ‘BB’ rated bonds is significantly higher than the increase from ‘A’ to ‘BBB’

– Yield difference between ‘BBB’ and ‘BB’ increases with maturity – hence a complete term structure is critical


Q&A

Sean DineenDeloitte Transactions

and Business Analytics LLP

Rick Kanungo, CFA, FRMS&P Capital IQ

Greg CarlinS&P Capital IQ(Moderator)

Please note: The views and opinions expressed by Mr. Dineen do not necessarily reflect the opinion of S&P Capital IQ and its affiliates.


Speaker Biographies

Greg CarlinVice President, Product and Content, S&P Capital IQ

With more than twenty-five years experience in the fixed income market including the development of a proprietary evaluation system, Greg is currently responsible for product development and management. Greg is active in many industry groups and currently serves on the Executive Committee of The Software and Information Association’s Financial Information Services Division.

Sean DineenPrincipal, Valuation Services, Deloitte Transactions and Business Analytics LLP

Mr. Dineen is a Principal in the New York City Valuation Services practice of Deloitte Transactions and Business Analytics LLP (“Deloitte DTBA”) with over 19 years of valuation experience. Mr. Dineen has performed valuations of businesses, financial instruments and intangible assets held by entities ranging in size from small, closely held businesses to divisions of Fortune 500 companies. Mr. Dineen has extensive experience in providing valuation and financial consulting to companies for purposes of tax planning, financing, litigation support and financial reporting. Mr. Dineen leads the DTBA National Valuation Group’s Complex Securities valuation practice and specializes in the development of model input assumptions, selection of valuation models, including Black Scholes, lattice and Monte Carlo, and valuation of employee incentive awards for compliance and compensation planning purposes for public and private companies across a variety of industries. In addition, Mr. Dineen values warrants, convertible instruments, receivables, deposits, swaps, debt and allocates enterprise value across classes of equity.

Rick Kanungo, CFA, FRMSenior Director, Enterprise Solutions, S&P Capital IQ

Rick has 19 years of industry experience and has been with the firm for seven years. Currently, he is responsible for Strategy, Thought Leadership and Go-To-Market activities for Enterprise Solution products at S&P Capital IQ, a McGraw Hill Financial brand. Enterprise Solutions is the data feed and content licensing business for S&P Capital IQ. Previously, Rick managed a global team of subject matter experts responsible for lending pre-sales expertise on analytical products and for delivering thought leadership. He was also a product manager for two analytical products with responsibility for development and commercial strategy. His prior industry experience includes credit analysis at S&P Ratings, private equity at Credit Suisse and prime brokerage at Chase, Lehman and Merrill. Rick holds an MBA from the Yale School of Management with concentrations in Finance and Investment Management. He is a member of the CFA Institute where he is a registered Chartered Financial Analyst and the Global Association of Risk Professionals (GARP) where he is a certified Financial Risk Manager.


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Utilizing Corporate Yield Benchmarks 14-Oct-2014 FINAL