Equity Perspective

• Our day to day involvement in the high yield debt market provides us with an additional universe of information utilized by our team.
• Companies that are de-levering their balance sheets, improving their liquidity and lowering their cost of capital are creating equity value. Our day to day involvement in the high yield market provides a system of early identification.

High Yield Perspective

• Similar to how high yield research augments our equity process, our equity research augments our traditional credit research processes.
• Most publicly traded high yield companies are in the micro to mid capitalization range. Our involvement in the equity of many of these companies improves our accessibility to management. Assessing managements’ ability to execute their business plans is a key part of our process.

Capital Structure Catalysts

PENN views a capital structure catalyst as a change in a company’s capital structure that enhances equity value. This is typically a de-leveraging strategy in which the company is able to lower the debt value of the enterprise, thus transferring enterprise value to the equity portion of the balance sheet. Typical de-leveraging strategies include:

• debt refinancing
• debt recapitalization
• debt for equity swaps
• utilizing free cash flow to pay down debt
• credit quality upgrades leading to future debt refinancing
• open market discounted debt purchases
• secondary equity offerings utilized to pay down debt

Balance sheet de-leveraging can create equity valuation improvement due to lower interest expense, lower costs of capital, and more favorable corporate debt ratios.

PENN utilizes its fully integrated credit and equity process to execute early identification of capital structure catalysts.