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11

Thank you for joining Western Asset’s

Trusting Our Convictions webcast

featuring Deputy CIO Michael Buchanan.

The presentation will begin shortly.

Our new Q&A discusses the

merits of US Core and the

new US Core Constrained

strategy.

www.westernasset.com/CoreQandA

Follow us on social media!

2

Michael BuchananDeputy Chief Investment Officer

Trusting Our Convictions March 21, 2019

3

Outlook for Fixed-Income Spread Sectors

Pessimism and fear held markets hostage for most of 2018. After a strong rebound year to date, what’s next?

Global growth and credit cycle prospects are not as dire as some would suggest

In our view, “carry” will be the theme in 2019

We are maintaining our overweight to spread products and looking to take advantage of relative value

opportunities across:

– Bank loans and collateralized loan obligations (CLOs)

– BBB rated investment-grade credit

– USD emerging markets

4

4

5

6

7

8

9

EM USD Sovereign US Loans US High-Yield

Percent

Spread Sectors – Historical Yield Range (3 Years Ending February 2019)

Source: Bloomberg Barclays, J.P. Morgan, S&P Global Market Intelligence, a division of S&P Global Inc. As of 28 Feb 19

1

2

3

4

5

Mortgage-Backed US Investment-Grade

Per

cent

28 Feb 1931 Dec 18

Strong Rebound in Risk Assets After Disappointing 2018

Historical Annual Excess Returns (bps)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019³

US Agency -110 238 72 19 97 -10 55 8 39 69 -6 9

US MBS -232 495 225 -106 91 98 40 -5 -11 52 -59 39

US ABS -2,223 2,496 169 52 246 24 53 44 95 92 13 38

US CMBS -3,274 2,960 1,501 47 841 97 108 -28 236 158 -39 114

US Investment-Grade Credit -1,786 1,990 192 -322 693 226 -18 -169 442 335 -280 222

US High-Yield Credit -3,832 5,955 974 -240 1,394 923 -112 -577 1,573 610 -358 590

US Bank Loan¹ -3,233 5,183 1,003 116 932 514 -119 -540 1,004 303 -177 374

Emerging Markets Local Currency² -2,037 2,506 768 -1,283 1,364 -538 -1,055 -1,690 864 1,334 -765 274

Source: Bloomberg Barclays, J.P. Morgan, S&P Global Market Intelligence, a division of S&P Global Inc.

Sectors represented by Bloomberg Barclays U.S. indices unless otherwise noted; all figures shown in basis points

¹S&P/LSTA Leveraged Performing Loan Index vs. 3-Month LIBOR.

²J.P. Morgan GBI-EM Global Diversified Index USD Unhedged.

³As of 28 Feb 19

Source: Bloomberg Barclays, J.P. Morgan, S&P Global Market Intelligence, a division of S&P Global Inc.

US Investment-Grade represented by Bloomberg Barclays US Credit Index

US High-Yield represented by Bloomberg Barclays US High-Yield Index

EM USD Sovereign represented by J.P. Morgan Emerging Market Bond Index Global (EMBI Global)

Mortgage-Backed represented by Bloomberg Barclays US MBS Index

US Loans represented by S&P/LSTA US Leveraged Loan Index

As of 28 Feb 19

5

Markets Continue to Shrug Off Credit Cycle Concerns

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

US

D

Growth of a Dollar

Bloomberg Barclays US Credit Index

Bloomberg Barclays US High Yield 2% Issuer Cap Index

J.P.Morgan GBI-EM Diversified Index (USD Unhedged)

S&P/LSTA Performing Loans Index

S&P 500 Index

Source: Bloomberg Barclays, J.P.Morgan, S&P. As of 28 Feb 19

Annualized

Total Return

13.98%

11.51%

9.06%

5.63%

3.79%

6

OECD

Euro AreaUS

China

93

95

97

99

101

103

105

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Com

posi

te L

eadi

ng In

dica

tor

OECD Composite Leading Indicator

Amplitude adjusted, long-term average = 100, Jan 2004 – Jan 2019Source: OECD (2019), Composite leading indicator (CLI) (indicator). doi: 10.1787/4a174487-en (Accessed on 19 March 2019). As of 31 Jan 19

Global Growth Turned Lower in 2018, but What’s Next?

OECD

Euro AreaUS

China

93

95

97

99

101

103

105

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Com

posi

te L

eadi

ng In

dica

tor

OECD Composite Leading Indicator

Amplitude adjusted, Long-term average = 100, Jan 2004 – Jan 2019Source: OECD (2019), Composite leading indicator (CLI) (indicator). doi: 10.1787/4a174487-en (Accessed on 19 March 2019). As of 31 Jan 19

7

-0.5

0.0

0.5

1.0

1.5

40

45

50

55

60

65

70

2011 2012 2013 2014 2015 2016 2017 2018

PercentIn

dex

Eurozone Impacted by Trade Woes and Brexit

Eurozone QoQ GDP (right)

Eurozone Composite PMI (left)

Source: IHS Markit, Haver, Western Asset. As of 31 Dec 18

Caixin Manufacturing PMI

Caixin Non-Manufacturing PMI

46

48

50

52

54

56

Feb 16 Aug 16 Feb 17 Aug 17 Feb 18 Aug 18 Feb 19

Inde

x

China Growth Supported by Fresh Stimulus Measures

Source: Bloomberg, Markit Economics. As of 28 Feb 19

98

99

100

101

2014 2015 2016 2017 2018 2019

Inde

x Le

vel

Financial Conditions Index

Source: Bloomberg. As of 28 Feb 19

Goldman SachsFinancial Conditions Index

Drivers of Global Growth – Are We at an Inflection Point?

-0.5

0.0

0.5

1.0

1.5

40

45

50

55

60

65

70

2011 2012 2013 2014 2015 2016 2017 2018

PercentIn

dex

Eurozone Composite PMI vs. QoQ GDP

Eurozone QoQ GDP (right)

Eurozone Composite PMI (left)

Source: IHS Markit, Haver, Western Asset. As of 31 Dec 18

Eurozone Impacted by Trade Woes and Brexit US Financial Conditions Moderating

Tighter

Looser

8

100

102

104

106

108

110

112

114

116

118

Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

Inde

x

Tariff Fears Weighing on Global Trade ActivityMerchandise World Trade Volume Index (2013=100)

Source: CPB Netherlands Bureau of Policy Analysis. As of 31 Dec 18

Tariff Fears Weighing on Global Trade Activity

100

102

104

106

108

110

112

114

116

118

Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

Inde

x

Tariff Fears Weighing on Global Trade ActivityMerchandise World Trade Volume Index (2013=100)

Source: CPB Netherlands Bureau of Policy Analysis. As of 31 Dec 18

9

US (left)

China (left)

Germany (right)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

Mar 18 Jun 18 Sep 18 Dec 18 Mar 19

Yield (%

)Yie

ld (

%)

10-Year Government Bonds – US, China, Germany

Source: Bloomberg. As of 19 Mar 19

Markets Are Reflecting Continued Policy Accommodation to Support Growth

10

Evidence of Late-Cycle Behavior

Stripping Collateral

J Crew (Dec ‘16): Sent all intellectual property to an unrestricted subsidiary, removed from the collateral package

Radio One (Dec ‘16): Company’s stake in MGM was never restricted but viewed as a credit enhancer, but now that stake is

rumored to be taken away

Petsmart (Jun ‘18): Subsidiary Chewy.com–growth part of the business, 40% of Chewy.com sent through restricted payment

basket as dividend to the equity sponsor

Neiman Marcus (Sep ‘18): Subsidiary My Theresa–fastest growing platform, was made into an unrestricted subsidiary, then

sent as a dividend to parent company and no longer part of the loan collateral package

Refinitive (Sep ‘18): New syndicated loan deal whereby the company can sell 40% of assets without being required to pay

down debt

Envision (Sep ‘18): Newly syndicated deal had a clause allowing assets to be sent as dividends without paying back

noteholders

Rentpath (Oct ‘18): Apartment rental company with a strong online presence–rumored to be making web domain names

unrestricted subsidiaries to be used as collateral for subordinated debt or as a dividend

Power Solutions (Mar ‘19): High-profile LBO transaction that allows sponsors to transfer intellectual property to unrestricted

subsidiaries. EBITDA definition includes add-back for expected revenue from contract renegotiation

Questionable use of lines of credit/revolvers:

Parexel (Sep ‘17): Company paid equity sponsors a $300mm dividend that was funded by drawing on the revolver which is

unusual

Most equity-sponsored deals allow generous use of the restricted payment basket to take assets.

Considering how loose the EBITDA adjustment language has gotten, there is elevated risk of assets

being removed from collateral packages.

11

Credit Suisse Leveraged Loan Index

Credit Suisse High Yield Index

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19

Per

cent

Credit Suisse Leveraged Loan Index and High Yield Index – Historical Yield to Worst

Source: Credit Suisse. As of 28 Feb 19

Bank Loan Valuations Look Attractive Relative to High-Yield

Since 1992, high-yield has historically had a YTW with 110 bps premium over leveraged loans and 106 bps spread

over loans driven by a higher risk profile due to unsecured, subordinated position in capital structure relative to loans

Loans currently

yield 11 bps

premium to

high-yield

bonds

12

-30

-20

-10

0

10

20

30

40

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Per

cent

Steady Quarterly EBITDA Growth

Source: S&P/LSTA, LCD. As of 31 Dec 18

Leveraged Loans: Fundamental Backdrop Has Remained Steady

-30

-20

-10

0

10

20

30

40

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Per

cent

Steady Quarterly EBITDA Growth

Source: S&P/LSTA, LCD. As of 31 Dec 18

13

Average

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016 2017 2018 2019

Bas

is P

oint

s

Difference Between BB CLO and High-Yield Spreads

Source: Bloomberg, J.P. Morgan. As of 28 Feb 19

CLOs Now Offer Value Relative to High-Yield

Spreads 03 Oct 18 31 Dec 18 28 Feb 19 Q4 Chg YTD Chg Retracement¹

CLO AAA 110 145 137 35 -8 23%

IG Corp 99 143 114 44 -29 66%

CMBS AAA 72 106 90 34 -16 47%

CLO BBB 295 407 373 112 -34 30%

CLO BB 601 748 703 147 -46 31%

Bank Loans 355 468 399 113 -69 61%

High Yield 303 526 379 223 -147 66%

CMBS BBB 240 420 300 180 -120 67%


¹Compares spread changes during 4Q18 period and YTD 28 Feb 19.

Average

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016 2017 2018 2019

Bas

is P

oint

s

Difference Between BB CLO and High-Yield Spreads


14

2018 "BBB Glut" to 2019 "Debt Diet"30 Largest BBB Issuers

Source: Bloomberg, Western Asset. As of 18 Mar 19

Ticker Company Name Index Rating

Total IG Index Debt,

(USD, billions)

US IG Index

Weight (%) Industry Leverage Trend

Management Explicitly

Stated Leverage Target

1 T AT&T Baa2 $99.6 1.6 Wireline Lower Yes

2 VZ Verizon Communications Baa1 $73.1 1.2 Wireline Stable Yes

3 CVS CVS Health Baa2 $66.2 1.1 Health Care Lower Yes

4 ABIBB Anheuser-Busch Inbev Baa1 $64.1 1.0 Food & Beverage Lower Yes

5 GE General Electric Baa1 $45.4 0.7 Diversified Manufacturing Lower Yes

6 GM General Motors Baa2 $41.2 0.7 Automotive Stable No

7 CHTR Charter Communications Baa3 $37.7 0.6 Cable Satellite Stable Yes

8 ABBV Abbvie Baa2 $33.2 0.5 Pharmaceuticals Stable No

9 F Ford Motor Baa2 $33.1 0.5 Automotive Higher No

10 CI Cigna Baa2 $32.7 0.5 Health Care Insurance Lower No

11 ETP Energy Transfer Baa3 $29.9 0.5 Midstream Lower Yes

12 UTX United Technologies Baa1 $29.3 0.5 Aerospace/Defense Lower No

13 KMI Kinder Morgan Baa2 $26.6 0.5 Midstream Lower Yes

14 AMGN Amgen Inc Baa1 $25.0 0.4 Pharmaceuticals Stable No

15 BATSLN Bristish American Tobacco Baa2 $24.9 0.4 Tobacco Lower Yes

16 DWDP DowDupont Baa2 $24.5 0.4 Chemical Stable No

17 EPD Enterprise Products Partners Baa1 $23.9 0.4 Midstream Lower Yes

18 MO Altria Group Baa2 $22.0 0.3 Tobacco Lower No

19 UNP Union Pacific Baa1 $21.6 0.3 Railroad Higher No

20 KHC Kraft Heinz Baa3 $21.5 0.3 Food & Beverage Lower Yes

21 WMB Williams Cos Baa2 $20.8 0.3 Midstream Lower Yes

22 CELG Celgene Baa2 $19.6 0.3 Pharmaceuticals Lower No

23 VOD Vodafone Group Baa1 $17.9 0.3 Wireless Higher No

24 MCD McDonald's Baa1 $17.9 0.3 Restaurants Stable No

25 AGN Allergan Baa3 $16.7 0.3 Pharmaceuticals Lower Yes

26 DELL Dell Technologies Baa3 $16.3 0.3 Technology Stable No

27 ANTM Anthem Baa2 $16.1 0.3 Health Care Insurance Higher No

28 TACHEM Takeda Pharmaceutical Baa2 $16.0 0.3 Pharmaceuticals Stable Yes

29 ABT Abbott Laboratories Baa2 $15.1 0.3 Pharmaceuticals Lower Yes

30 AVGO Broadcom Baa3 $14.8 0.2 Technology Stable No

15

0

-4

-28

-2

-1

-4

0

-4

-4

-14

-32

-20

-35

-67

-68

-69

-74

94

64

70

20

9

10

3

6

2

9

17

3

16

23

8

0

0

-100 -80 -60 -40 -20 0 20 40 60 80 100 120

US Banks

Energy

Non-US Banks

Basic Industries

Property/Real Estate

Insurance

Automotive

Finance Companies

Media/Entertainment

Transportation

Utilities

Retail

Technology

Healthcare/Pharma

Consumer

Capital Goods

Telecoms

2018 Upgrades Concentrated in Banks, Energy and Metals

Downgrades (incl Fallen Angels)

Upgrades (incl Rising Stars)

USD (billions)Source: J.P. Morgan. As of 31 Dec 18

Where Do We See Value Within Corporate Credit?

0

-4

-28

-2

-1

-4

0

-4

-4

-14

-32

-20

-35

-67

-68

-69

-74

94

64

70

20

9

10

3

6

2

9

17

3

16

23

8

0

0

-100 -80 -60 -40 -20 0 20 40 60 80 100 120

US Banks

Energy

Non-US Banks

Basic Industries

Property/Real Estate

Insurance

Automotive

Finance Companies

Media/Entertainment

Transportation

Utilities

Retail

Technology

Healthcare/Pharma

Consumer

Capital Goods

Telecoms

2018 Upgrades Concentrated in Banks, Energy and Metals

Downgrades (incl Fallen Angels)

Upgrades (incl Rising Stars)

USD (billions)Source: J.P. Morgan. As of 31 Dec 18

16

3M Hedging Cost (left)

3.01%

IG Hedged Yield Spread (right)

83 bps

-80

20

120

220

320

420

520

620

720

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

2009 2011 2013 2015 2017 2019

IG H

edged Yield S

pread (bps)

Hed

ge C

ost –

Eur

o

US IG Credit Hedged Back to EUR



2.84%


89 bps

0

50

100

150

200

250

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2013 2014 2015 2015 2016 2016 2017 2017 2018 2019

IG H

edged Yield S

pread (bps)

Hed

ge C

ost –

JPY

US IG Credit Hedged Back to JPY


Investment-Grade Credit: Hedging-Cost Headwinds Expected to Diminish


3.01%


83 bps

-80

20

120

220

320

420

520

620

720

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

2009 2011 2013 2015 2017 2019

IG H

edged Yield S

pread (bps)

Hed

ge C

ost –

Eur

o

US IG Credit Hedged Back to EUR



2.84%


89 bps

0

50

100

150

200

250

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2013 2014 2015 2015 2016 2016 2017 2017 2018 2019

IG H

edged Yield S

pread (bps)

Hed

ge C

ost –

JPY

US IG Credit Hedged Back to JPY


17

EM Local

EM USD

5.0

5.5

6.0

6.5

7.0

7.5

Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18 Mar 19

Per

cent

EM USD vs. Local Market Yields

Source: J.P. Morgan. As of 19 Mar 19EM USD represented by J.P. Morgan Emerging Markets Bond Index Global (EMBI Global)EM Local represented by J.P. Morgan Government Bond-Emerging Market Index (GBI-EM) Global Diversified

Fundamentals and Valuations Support the Case for Emerging Markets Debt

Developed Markets

Emerging Markets

49

50

51

52

53

54

55

56

57

Mar 16 Aug 16 Jan 17 Jun 17 Nov 17 Apr 18 Sep 18 Feb 19

Inde

x Le

vel

Manufacturing PMI

Source: Bloomberg, IHS Markit. As of 28 Feb 19

18

Corporate Gross Leverage¹

Household Financial Obligations Ratio²

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1997 2000 2003 2006 2009 2012 2015 2018

Mul

tiple

*

Source: BAML, Federal Reserve, Western Asset. As of 30 Sep 18¹Non-financial gross debt/EBITDA.²Household debt to total disposable income in the United States.*Multiple of long-term average.

Consumer vs. Corporate LeverageConsumers Have Reduced Debt While Corporations Have Increased Borrowing

19

0

200

400

600

800

1,000

1,200

Commercial RealEstate Transitional

Loan Mezz

Non-AgencyResidential MBS

B

Non-AgencyResidential MBS

CCC

Non-AgencyCommercial MBS

BBB-

High-YieldIndices

B

High-YieldIndices

BB

2 6 8 10 5 6

Spr

ead

(bps

)

28 Feb 19 24-Month Minimum 24-Month Maximum

Commercial and Residential Credit Bonds Offer Attractive Spreads and Diversification

Source: BofA Merrill Lynch Global Research, Markit Partners, Western Asset. As of 28 Feb 19

¹WAL = Weighted Average Life

WAL (yrs)¹ 2 5 8 610 5

20

Outlook for Fixed-Income Spread Sectors

Pessimism and fear held markets hostage for most of 2018. After a strong rebound year to date, what’s next?

Global growth and credit cycle prospects are not as dire as some would suggest

In our view, “carry” will be the theme in 2019

We are maintaining our overweight to spread products and looking to take advantage of relative value

opportunities

21

Questions & Answers

22

Thank you.

23

Risk Disclosure

© Western Asset Management Company, LLC 2019. This publication is the property of Western Asset and is intended for the sole use of its clients,

consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary

information. This material may not be reproduced or used in any form or medium without express written permission.

Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western

Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation

with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment

advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into

account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your

objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.

Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores

Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial

Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for

fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments

Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by

the Financial Conduct Authority (“FCA”). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in

the UK and EEA countries as defined by the FCA or MiFID II rules.

thank you for joining western asset’s trusting our ......mar 21, 2019 · 5 markets continue to...

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