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Credit Suisse Asset Management 

John G. Popp

Global Head and Chief Investment Officer, Credit Investments Group

November 20 WHITE PAPER

Fixed Income Outlook: The Search for Yield

Executive Summary

The ongoing slowdown in developed markets—characterized by muted growth in the US and the European debt crisis—has led governments and central banks to develop a series of expansionary policies seeking to stimulate economic growth. For example, the US Federal Reserve has decided to hold short-term interest rates near zero until at least mid-2013, while the European Central Bank (ECB) recently cut interest rates by 25 bps to 1.25% on expectations of slow growth in the Eurozone.

In this low-yield environment, many institutional investors in developed nations—specifically defined-benefit plan sponsors—are faced with an uncomfortable predicament: lower yields on their assets and rising liability values due to falling discount rates. As a result, investors are intensifying their efforts to bolster returns in order to fund increasing plan obligations. In this paper, we review various fixed-income investment options—with a particular focus on the non-investment grade credit sector—that, we believe, can help mitigate these current challenges by potentially offering more attractive risk-adjusted returns.

Specifically, we believe that the current strength in credit fundamentals—including below-average default rates, current attractive valuations and inflated concerns over the near-term maturity wall—may warrant increased exposure to credit instruments, especially those on the higher-yielding end of the spectrum.

Lastly, we discuss how to integrate non-investment grade credit into a broader fixed income portfolio. We provide a case study in which we: a) identify an optimal mix of high-yield and senior-loan exposures, and b) incorporate a non-investment grade credit basket to a traditional core fixed income portfolio and assess its impact on total risk-adjusted returns.

Asset Management

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 Credit Suisse Asset Management

The Search for Yield

The recent global economic slowdown has prompted US and European central banks to set low rates over the short to medium term, pressuring fixed-income yields across government securities and corporates bonds.

Recent declines in US fixed income yields are, in fact, emblematic of a longer-term, secular downward trend in yields (Display 1, next page). As of November 14, 2011, the benchmark 7-10-year US Treasury yield-to-worst had fallen to record lows of 1.75%.1 After accounting for inflation (3.9% “headline” number year-over-year; 2.0% “core”),2 traditional fixed income investors are effectively experiencing negative real yields, while assuming significant duration risk.

In this light, where can investors look for yield opportunities without taking on excessive risk?

Display 2 (next page) shows the yield spectrum across a range of liquid fixed income and equity investments. On a relative and absolute basis, non-investment grade credit—defined as high yield bonds and senior loans—offers, as of this writing, significantly higher returns than both US large-cap equities

(from a dividend-yield perspective) and investment-grade corporate bonds. Within fixed income, the current yield spread between US investment-grade and non-investment grade credit is in the range of 358–466 bps, versus a lower historical average of 280–412 bps.3

From a risk/return perspective, both high yield bonds and senior loans offer potentially attractive risk-adjusted performance. In the period from 2001 to 2010, high yield bonds delivered an average annual return of 9.0% with 8.9% volatility,4 while senior loans delivered an average annual return of 6.5% with 5.8% volatility.

When comparing senior loans to high yield bonds, we note that, on an absolute basis, the current swap-adjusted senior loan yield of 7.26%5 is slightly lower than the yield-to-worst of high yield bonds at 8.34%. However, historically speaking, the current difference in yield between the two sectors is near its lowest levels. As such, while both investments offer compelling yields relative to other asset classes, investors may not be getting sufficient compensation to move down the capital structure to the subordinated and unsecured bond tranches.

(1) Yield-to-worst is the lowest possible yield from owning a bond considering all potential call dates prior to maturity.

(2) As measured by the US Consumer Price Index (CPI) in October 2011. “Headline” inflation accounts for total price increases. “Core” excludes food and energy. (3) As of Nov. 14, 2011. Historical average is from Jan. 1, 1992 to Nov. 14, 2011.

(4) As measured by the standard deviation of the following: Credit Suisse Leveraged Loan Index Three-Year Swap-Adjusted Yield and the Credit Suisse High Yield Index Yield-to-Worst.

(5) The 3-year swap-adjusted yield is used for the floating rate component (LIBOR) of senior loans to yield a comparable fixed rate. (6) Moody’s Investors Service

(7) Bank of America Merrill Lynch

What are Senior Loans?

Senior loans are floating-rate instruments that are originated by banks and/or other financial entities for large corporations that typically have below investment-grade credit ratings. The loan’s interest comprises of an adjustable base rate component, typically tied to the London Interbank Offered Rate (LIBOR), plus an additional credit spread. As LIBOR rises or falls, the base rate adjusts accordingly, usually on a quarterly basis.

Senior loans are the senior-most debt obligations of a company, and are usually secured with collateral. In the event of bankruptcy or default, loan holders are better positioned to recoup their interest and principal relative to bondholders and other unsecured creditors, as evidenced by long-term historical ultimate recovery rates of 80% for loans versus 40% for unsecured bonds.6

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Credit Suisse Asset Management  2.37 1.75 4.03 0 2 4 6 8 Ja n -0 1 M ay -0 1 S e p -0 1 Ja n -0 2 M ay -0 2 S e p -0 2 Ja n -0 3 M ay -0 3 S e p -0 3 Ja n -0 4 M ay -0 4 S e p -0 4 Ja n -0 5 M ay -0 5 S e p -0 5 Ja n -0 6 M ay -0 6 S e p -0 6 Ja n -0 7 M ay -0 7 S e p -0 7 Ja n -0 8 M ay -0 8 S e p -0 8 Ja n -0 9 M ay -0 9 S e p -0 9 Ja n -1 0 M ay -1 0 S e p -1 0 Ja n -1 1 M ay -1 1 S e p -1 1

Barclays US Aggregate Yield-to-Worst Barclays US Treasury 7-10 Year Yield-to-Worst Barclays Long Government/Credit Index Yield-to-Worst

US CPI 3.5% YoY

US CORE CPI 2.1% YoY

4.3 3.0 2.4 2.0 1.4 0.5 1.8 4.8 6.7 3.7 8.3 7.3 0 2 4 6 8 10 3-M LI B O R U S AB S U S La rg e C ap Eq ui ty U S Tr ea su ry 7-10 Ye ar U S Fi xe d In co m e C or e USM B S U S R EI TS U S In ve st m en t G ra de U S Lo ng -D at ed G ov er nm en t/C re di t U S H ig h D iv id en d EM S ov er ei gn D eb t (lo ca lc cy ) U S Pr ef er re d S to ck Le ve ra ge d Lo an s H ig h Yi el d 1.83 0.32 0 4 8 12 16

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

% % % 0 50 100 150 200 250 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 October 2011 6.5 3.7

Note: All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. Please refer to “Glossary and Definitions” at the end of this paper for information on proxies used. Data as of November 14, 2011

Source: Bloomberg and Credit Suisse

Display 2: Non-investment grade credit offer high returns on an absolute and relative basis Cross-asset-class yield spectrum

Display : Traditional fixed income yields have had a long-term decline 2.37 1.75 4.03 0 2 4 6 8 Ja n -0 1 M ay -0 1 S e p -0 1 Ja n -0 2 M ay -0 2 S e p -0 2 Ja n -0 3 M ay -0 3 S e p -0 3 Ja n -0 4 M ay -0 4 S e p -0 4 Ja n -0 5 M ay -0 5 S e p -0 5 Ja n -0 6 M ay -0 6 S e p -0 6 Ja n -0 7 M ay -0 7 S e p -0 7 Ja n -0 8 M ay -0 8 S e p -0 8 Ja n -0 9 M ay -0 9 S e p -0 9 Ja n -1 0 M ay -1 0 S e p -1 0 Ja n -1 1 M ay -1 1 S e p -1 1

Barclays US Aggregate Yield-to-Worst Barclays US Treasury 7-10 Year Yield-to-Worst Barclays Long Government/Credit Index Yield-to-Worst

US CPI 3.5% YoY US CORE CPI 2.1% YoY

4.3 3.0 2.4 2.0 1.4 0.5 1.8 4.8 6.7 3.7 8.3 7.3 0 2 4 6 8 10 3-M LI B O R U S AB S U S La rg e C ap Eq ui ty U S Tr ea su ry 7-10 Ye ar U S Fi xe d In co m e C or e USM B S U S R EI TS U S In ve st m en t G ra de U S Lo ng -D at ed G ov er nm en t/C re di t U S H ig h D iv id en d EM S ov er ei gn D eb t (lo ca lc cy ) U S Pr ef er re d S to ck Le ve ra ge d Lo an s H ig h Yi el d 1.83 0.32 0 4 8 12 16

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

% % % 0 50 100 150 200 250 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 October 2011 6.5 3.7

Note: All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. Please refer to “Glossary and Definitions” at the end of this paper for information on proxies used. Data as of November 14, 2011

Source: Bloomberg and Credit Suisse

Historical yields of traditional fixed income assets

Barclays US Aggregate Yield-to-Worst Barclays US Treasury 7-10 Year Yield-to-Worst Barclays Long Government/Credit Index Yield-to-Worst

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 Credit Suisse Asset Management

Aggressive corporate balance sheet restructuring since the 2008 credit crisis;

Increasing corporate cash balances;

Prolonged period of corporate earnings growth; and Improving rating trends, with credit upgrades considerably outpacing downgrades in 2011 (as of Q3 2011).9 It is worth noting that Standard & Poor’s is forecasting defaults in the range of 1.5% to 2% for loans over the next 12 to 24 months. In contrast, the market’s spread-implied default rate—which is derived using a mathematical formula based on current trading levels of a loan or bond—currently exceeds the forecasted default rate, with the spread-implied default rates for senior loans and high yield at 15% and 7%, respectively (as of November 14, 2011). Given what we anticipate to be a low default environment in the intermediate term, we believe loans are currently trading at attractive levels.

In this context, we believe certain sectors remain vulnerable to negative consumer sentiment in today’s volatile markets (i.e., retail and restaurants). Accordingly, we believe it is incumbent upon managers to navigate these challenges through selective positioning within the non-investment grade space.

The Shrinking “Maturity Wall”

The “maturity wall” refers to the roughly $154 billion amount of debt maturing in the senior loan market from now until 2014, which has prompted concerns as to whether over-leveraged issuers will be able to refinance their debt. We believe the situation today is significantly less concerning than was originally anticipated in 2008. A combination of restructurings, refinancings and maturity extensions have allowed corporate management teams to aggressively restructure their balance sheets, pushing out the maturities on their debt, and reducing the pressure to refinance (Display 4, next page).

While 2014 still has $115 billion in debt outstanding, this is just half of the $224 billion outstanding as of 2009. Moreover, out of roughly 300 companies that have loans maturing in 2014, 10 names account for more than 20% of the maturing debts, suggesting that managers should be able to identify and avoid these credits, if warranted.

   

Positive Fundamentals Despite Recent Pullback

Ongoing global macroeconomic concerns and the European sovereign debt issues have driven down non-investment grade credit prices, as with most asset classes, over the past few months. This pullback reflects the concern among some investors about a prolonged global slowdown and its potential impact on the performance of non-investment grade credit. To better understand the current investing environment, however, we believe it is important to highlight how high yield bonds and senior loans have behaved across different market cycles since the recession of the early 2000s, as well as key structural differences that may affect the performance of these asset classes going forward.

During the 2000–02 period, both high yield and loan prices fell, but loans dropped significantly less (-6.89% versus -15.67%). By contrast, in 2008, both markets declined to a similar degree, in line with the broader markets (-34.08% versus -34.49%). A significant difference between the two periods was the rapid increase in “market value-based financing” to purchase loans post the 2000 recession. In 2008, the decline in senior loans was primarily driven by dramatic deleveraging of the investor base, as a significant portion of the prevailing loan market demand was dependent on investors using total return swaps and other financing mechanisms subject to margin calls. Should we experience another market downturn, we would expect loan prices to behave more in line with the 2000–02 period, as there is less market-level leverage supporting investment in the asset class today.

Notwithstanding their differences, we believe that both high yield bonds and senior loans are well-positioned to weather a muted economic growth environment over the next 12 to 24 months. Some reasons include:

Low Default Rates

Despite recent market uncertainty, trailing 12-month loan senior default rates are currently at their lowest in over four years.8 High yield default rates are also low, and we expect them to remain below their historical average in the short to medium term (Display 3, next page). In our view, continued low default rates are supported by a number of factors:

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Credit Suisse Asset Management  Note: All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable.

Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.

Data as of October 2011 Source: S&P LCD 2.37 1.75 4.03 0 2 4 6 8 Ja n -0 1 M ay -0 1 S e p -0 1 Ja n -0 2 M ay -0 2 S e p -0 2 Ja n -0 3 M ay -0 3 S e p -0 3 Ja n -0 4 M ay -0 4 S e p -0 4 Ja n -0 5 M ay -0 5 S e p -0 5 Ja n -0 6 M ay -0 6 S e p -0 6 Ja n -0 7 M ay -0 7 S e p -0 7 Ja n -0 8 M ay -0 8 S e p -0 8 Ja n -0 9 M ay -0 9 S e p -0 9 Ja n -1 0 M ay -1 0 S e p -1 0 Ja n -1 1 M ay -1 1 S e p -1 1

Barclays US Aggregate Yield-to-Worst Barclays US Treasury 7-10 Year Yield-to-Worst Barclays Long Government/Credit Index Yield-to-Worst

US CPI 3.5% YoY

US CORE CPI 2.1% YoY

4.3 3.0 2.4 2.0 1.4 0.5 1.8 4.8 6.7 3.7 8.3 7.3 0 2 4 6 8 10 3-M LI B O R U S AB S U S La rg e C ap Eq ui ty U S Tr ea su ry 7-10 Ye ar U S Fi xe d In co m e C or e USM B S U S R EI TS U S In ve st m en t G ra de U S Lo ng -D at ed G ov er nm en t/C re di t U S H ig h D iv id en d EM S ov er ei gn D eb t (lo ca lc cy ) U S Pr ef er re d S to ck Le ve ra ge d Lo an s H ig h Yi el d 1.83 0.32 0 4 8 12 16

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

% % % 0 50 100 150 200 250 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 October 2011 6.5 3.7 Display 4: Significant declines in senior loan maturity wall since 2008 Year-by-year changes in senior loan maturity profile

Par Amount of Loans Maturing ($ billions)

Note: Par-weighted default rates representative of LTM. All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.

Data as of October 31, 2011 Source: S&P LCD and Credit Suisse

2.37 1.75 4.03 0 2 4 6 8 Ja n -0 1 M ay -0 1 S e p -0 1 Ja n -0 2 M ay -0 2 S e p -0 2 Ja n -0 3 M ay -0 3 S e p -0 3 Ja n -0 4 M ay -0 4 S e p -0 4 Ja n -0 5 M ay -0 5 S e p -0 5 Ja n -0 6 M ay -0 6 S e p -0 6 Ja n -0 7 M ay -0 7 S e p -0 7 Ja n -0 8 M ay -0 8 S e p -0 8 Ja n -0 9 M ay -0 9 S e p -0 9 Ja n -1 0 M ay -1 0 S e p -1 0 Ja n -1 1 M ay -1 1 S e p -1 1

Barclays US Aggregate Yield-to-Worst Barclays US Treasury 7-10 Year Yield-to-Worst Barclays Long Government/Credit Index Yield-to-Worst

US CPI 3.5% YoY US CORE CPI 2.1% YoY

4.3 3.0 2.4 2.0 1.4 0.5 1.8 4.8 6.7 3.7 8.3 7.3 0 2 4 6 8 10 3-M LI B O R U S AB S U S La rg e C ap Eq ui ty U S Tr ea su ry 7-10 Ye ar U S Fi xe d In co m e C or e USM B S U S R EI TS U S In ve st m en t G ra de U S Lo ng -D at ed G ov er nm en t/C re di t U S H ig h D iv id en d EM S ov er ei gn D eb t (lo ca lc cy ) U S Pr ef er re d S to ck Le ve ra ge d Lo an s H ig h Yi el d 1.83 0.32 0 4 8 12 16

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

% % % 0 50 100 150 200 250 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 October 2011 6.5 3.7 Display 3: Default rates are expected to remain below average in the next 2-to-24 months 12-month rolling par-weighted default rates

High Yield Defaults Leveraged Loan Defaults

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 Credit Suisse Asset Management Display 5: Loan spreads remain elevated, offering potential opportunity

50% LL +

50% HY

75% LL +

25% HY

100% LL

100% HY

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

7

5

6

8

9

10

0 400 800 1,200 1,600 2,000

Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

CS Leveraged Loan Index 3-Year Discount Margin CS High Yield Index Spread-to-Worst Loan Average: 443 High Yield Average: 581

Historical spreads of leveraged loan and high yield indices

Note: All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.

Data as of November 14, 2011 Source: Credit Suisse

Average Spread (bps) 1,799 (Dec 2008) 1,816 (Nov 2008) 271 (May 2007) 230 (Feb 2007) Should the financial system experience another prolonged

shock, similar to that of the 2008 crisis, we believe refinancings could prove to be more challenging. However, our view is that most companies that have been able to service their debt will be able to refinance.

Spreads Remain Elevated

High yield spreads over US Treasuries and senior loan discount margins remain above their historical averages (Display 5). In addition, the spread differential between loans

and high yield bonds has narrowed in the post-2008 period, which reflects elevated loan spreads compared to historical levels. As such, the senior secured market appears to be providing excess compensation to investors relative to historical levels. For investors looking for higher potential returns, we view the current environment as an attractive entry point for loans.

Average High Low Jul. 20 Sep. 20 Nov. 4, 20

443 562 722 642

581 580 811 731

CS Leveraged Loan Index Three-Year Discount Margin CS High Yield Index Spread-to-Worst

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Credit Suisse Asset Management 7 The next question investors may ask is: What does an optimal

non-investment grade credit basket look like, and what proportion should be allocated to high yield versus loans? To answer this, we perform a historical risk/return analysis and assess the trade-off between returns and volatility for different non-investment grade portfolios. Our analysis shows that an allocation of 75% to senior loans and 25% to high yield bonds offers the highest risk-adjusted returns (Display 6).

Next, we add the optimized non-investment grade credit basket to a traditional core fixed-income portfolio. As shown in Display 7 (next page), incorporating a 33% allocation of non-investment grade credit increases returns, reduces volatility and significantly improves the Sharpe ratio of the fixed-income portion of the portfolio.

Display 6: Optimizing a non-investment grade credit basket Sample portfolios

Note: Data based on historical returns from December 31, 2000 to December 31, 2010. Indices were used as proxies for asset classes above: Leveraged Loans (Credit Suisse Leveraged Loan Index); High Yield (Barclays Capital US Corporate High Yield Index). For illustrative purposes only.

Past performance is not a guarantee or an indication of future results. All data was obtained from publicly available information, internally

developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. Source: Bloomberg and Credit Suisse

50% LL + 50% HY 75% LL + 25% HY 100% LL 100% HY 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 7 5 6 8 9 10 0 400 800 1,200 1,600 2,000

Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 CS Leveraged Loan Index 3-Year Discount Margin CS High Yield Index Spread-to-Worst

Loan Average: 443 High Yield Average: 581

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 Credit Suisse Asset Management

Conclusion

In an overall low-yield environment, we believe non-investment grade credit offers a viable alternative for investors seeking attractive absolute and relative yields. Additionally, non-investment grade credit, specifically senior secured loans, can offer compelling risk-adjusted returns and incremental diversification, in our view.

Despite recent market dislocations, we have a relatively benign credit outlook due to improving corporate balance sheets and increasing cash balances. Moreover, our view is that current market conditions present an attractive entry point for investors in the space. We believe investors can take advantage of the distinctive characteristics that both high yield and loans offer within a well-designed portfolio allocation framework. Display 7: Non-investment grade can increase the efficiency of a fixed income portfolio

50% LL +

50% HY

75% LL +

25% HY

100% LL

100% HY

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

7

5

6

8

9

10

0 400 800 1,200 1,600 2,000

Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

CS Leveraged Loan Index 3-Year Discount Margin CS High Yield Index Spread-to-Worst Loan Average: 443 High Yield Average: 581

Representative fixed income portfolio

Portfolio Characteristics

Historical Return 4.74%

Standard Deviation 5.30%

Sharpe Ratio 0.89

Note: Data based on historical returns from December 31, 2000 to December 31, 2010. Indices were used as proxies for asset classes above: Leveraged Loans (Credit Suisse Leveraged Loan Index); High Yield (Barclays Capital US Corporate High Yield Index) and US Aggregate (Barclays US Aggregate Index). For illustrative purposes only. Past performance is not a guarantee or an indication of future results. All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.

Source: Bloomberg and Credit Suisse

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Credit Suisse Asset Management 

Glossary

Spread-to-Worst: Spread between the yield to worst and the interpolated US Treasury yield curve at the bond’s redemption date.

Yield-to-Worst: The lowest possible yield from owning a bond considering all potential call dates prior to maturity. 3-Year Discount Margin: The yield-to-refunding of a loan facility less the current month LIBOR rate, assuming a 3-year average life for the loan.

3-Year Swap-adjusted Yield: Fixed equivalent yield. LIBOR Floor: A feature sometimes used in pricing debt instruments whose interest payments are linked to LIBOR, especially loans. Loans with a LIBOR floor pay an interest rate of LIBOR plus the applicable margin so long as LIBOR remains above the specified floor level. If, however, LIBOR falls below the floor, the interest rate is the floor level plus the applicable margin. LIBOR floors have been commonly used in the low LIBOR environment which started in early 2008.

Definitions and Proxies

US ABS: Barclays Capital US Floating-Rate ABS Index Yield-to-Worst

US Large Cap Equity: S&P 500 Index Dividend Yield US Treasury 7-10 Year: Barclays Capital US Treasury 7-10 Year Index Yield-to-Worst

US Fixed Income Core: Barclays Capital US Aggregate Index Yield-to-Worst

US MBS: Barclays Capital US MBS Index Yield-to-Worst US REITS: MSCI US REITS Index Dividend Yield US Investment Grade: Barclays Capital US Corporate Investment Grade Index Yield-to-Worst

US Long-Dated Government /Credit: Barclays Capital Long Government/Credit Index Yield-to-Worst

US High Dividend: Dow Jones US Dividend 100 Index Dividend Yield

EM Debt (local ccy): JPMorgan Government Bond Index-Emerging Markets Yield-to-Worst

US Preferred Stock: S&P US Preferred Stock Index Dividend Yield

Leveraged Loans: Credit Suisse Leveraged Loan Index 3-Year Swap-Adjusted Yield

High Yield: Credit Suisse High Yield Index Yield-to-Worst Credit Suisse Leveraged Loan Index: Index designed to mirror the investable universe of the $US-denominated                   

leveraged loan market. The index inception is January 1992.

Credit Suisse High Yield Bond Index: Index is designed to mirror the investable universe of the $US-denominated high yield debt market. The index inception is

January 1986.

Barclays Capital Long Government/Credit Index: Index measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities longer than 10 years. Barclays Capital US Aggregate Index: Broad-based bond index comprised of government, corporate, mortgage and asset-backed issues rated investment grade or higher. Barclays Capital US Treasury 7-10 Year Index: Index measures the performance of U.S. Treasury securities that have a remaining maturity of at least seven years and less than 10 years.

S&P 500 Index: An index of 500 stocks of American Large-Cap corporations chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the US large cap universe.

Barclays Capital US Floating-Rate ABS Index: The US Floating-Rate Asset-Backed Securities (ABS) Index covers floating-rate ABS with the following collateral types: home equity, credit card, auto (retail and wholesale loans), and student loans. To be included in the index, an issue must have a floating-rate coupon structure, have an average life greater than or equal to one year, and be ERISA-eligible. The index was introduced in May 2005 with history available from January 2005.

Inflation: Percentage rise in the Consumer Price Index, which is reported monthly by the Bureau of Labor Statistics (BLS).

Core Inflation: A measure of inflation which excludes certain items that face volatile price movements, notably food and energy

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10 Credit Suisse Asset Management

Dow Jones US Dividend 100 Index: Index designed to measure the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. The 100-component index is a subset of the Dow Jones U.S. Broad Market Index, excluding REITs, master limited partnerships, preferred stocks and convertibles. It is modified market capitalization weighted.

JPMorgan Government Bond Index-Emerging Markets: A comprehensive emerging market debt benchmark that tracks local currency bonds issued by Emerging Market governments. The index was launched in June 2005 and is the first comprehensive global local Emerging Markets index.

S&P US Preferred Stock Index: The S&P U.S. Preferred Stock Index is designed to serve the investment

community’s need for an investable benchmark representing the U.S. preferred stock market. Preferred stocks are a class of capital stock that pays dividends at a specified rate and has a preference over common stock in the payment of dividends and the liquidation of assets. 

 1, 2008. 20-year securities were added in July 2000. On

April 1, 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index. Hybrid ARMs are eligible until 1 year prior to their floating coupon date.

MSCI US REITS Index: The MSCI US REIT Index is a free float-adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe.

Barclays Capital US Corporate Investment Grade Index: The US Corporate Investment Grade Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements.

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Credit Suisse Asset Management 11 Asset Management’s Q4 Alternatives Quarterly

October 2011—In this edition of the Alternatives Quarterly, we discuss drivers of recent volatility, especially the ongoing European debt crisis. Additionally, our leading strategists and alternatives portfolio managers review select opportunities in their respective strategies, in light of the challenging environment. Hedge Fund Investing: How to Optimize Your Portfolio October 2011—In a post financial-crisis environment, how can investors address potential risks associated with hedge fund investing? The paper discusses how hedge fund replication can help address these challenges while potentially providing alternative-like returns.

Robert Parker, Credit Suisse Senior Advisor October 20 Market Update

October 2011—The improvement in production and exports should lead to an uplift in US growth over the next 6 months to 2-2.5% annualised. However, European growth will struggle to reach 1% annualised over the next 12 months, while the speed of Japan’s recovery from the earthquake/tsunami has also clearly slowed.

The Way Forward: Measuring the Impact of Short- Term and Structural Growth Drivers on Emerging Market Investing

September 2011—In the aftermath of the 2008 global financial crisis, many emerging countries were able to recover more quickly than their developed counterparts. Can this scenario be repeated during the current slowdown?

Real Assets: Inflation Hedge Solution Under a Modified Risk Framework

September 2011—In the “new-normal” environment, what is the right mix for a real assets portfolio? The ISS team presents a modified risk framework with which to optimize the benefits of the asset class.

Commodities Outlook: Increased Volatility, Increased Opportunity?

August 2011—The paper examines the recent rise in the volatility of commodity prices within the context of a longer-term, secular trend of increasing volatility and how investors can best position their portfolios in this environment going forward.

Credit Suisse Asset Management Publications

Commercial Real Estate: Has the Tide Turned? June 2011—After suffering through the credit crisis, US commercial real estate macro indicators are starting to improve. But how sustainable is this turnaround? The paper addresses this question, and examines how institutional investors can manage their exposure to this asset class during still uncertain times.

Managing Fixed Income Investments in a Rising Inflation and Interest-Rate Environment

March 2011—This paper addresses key challenges facing fixed income investors today: How to achieve higher returns in a still low-yield environment while mitigating the rising threats of inflation and interest-rate risks? The ISS team’s analysis suggests that diversifying fixed income exposure into specific instruments as well as adding inflation hedges may present an efficient way to manage these challenges. A full case study helps to illustrate the team’s findings.

How Commodities Can Help Investors Face the Uncertainty of the Inflation/Deflation Debate

December 2010—In this paper, our Commodities Team argues that uncertainty about the consumer-price outlook in developed economies creates challenges for capital markets to properly price in inflation expectations. The Commodities Team’s research suggests that exposure to real assets can help investors cushion the impact on the portfolio of unexpected changes in the inflationary environment in the long run.

The Anatomy of a Modern Emerging Markets Portfolio November 2010—This paper examines the quickly evolving emerging markets investment landscape and argues that the proliferation of sophisticated investment vehicles in these markets presents an opportunity for investors to augment the efficiency of their emerging markets portfolios.

Liquid Alternative Beta: Enhancing Liquidity in Alternative Portfolios

June 2010—How to increase a portfolio’s liquidity without sacrificing returns, especially in a post-crisis, low-yield

environment? The paper illustrates how institutional investors can use Liquid Alternative Beta to seek to enhance portfolio liquidity, increase portfolio transparency, short hedge fund sectors and gain hedge-fund-like exposure when investment policies restrict direct hedge fund investments.

The views and opinions expressed within these publications are those of the authors, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

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Important Legal Information

This material has been prepared by the Asset Management division of Credit Suisse (“Credit Suisse”) and not by Credit Suisse’s Research Department. It is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. This material is provided for informational and illustrative purposes and is intended for your use only. It does not constitute an invitation or offer to the public to subscribe for or purchase any of the products or services mentioned. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated financial service. It does not take into account the financial objectives, situation or needs of any persons which are necessary considerations before making any investment decision. The information provided is not intended to provide a sufficient basis on which to make an investment decisionn and is not a personal recommendation or investment advice. It is intended only to provide observations and views of the said individual Asset Management personnel at of the date of writing without regard to the date on which the reader may receive or access the information. Observations and views of the individual Asset Management personnel may be different from, or inconsistent with, the observations and views of Credit Suisse analysts or other Credit Suisse Asset Management personnel, or the proprietary positions of Credit Suisse and may change at any time without notice and with no obligation to update. To the extent that these materials contain statements about future performance, such statements are forward looking and subject to a number of risks and uncertainties. Information and opinions presented in this material have been obtained or derived from sources believed by Credit Suisse to be reliable, but Credit Suisse makes no representation as to their accuracy or completeness. Credit Suisse accepts no liability for loss arising from the use of this material. If nothing is indicated to the contrary, all figures are unaudited. All valuations mentioned herein are subject to Credit Suisse valuation policies and procedures. It should be noted that historical returns and financial market scenarios are no guarantee of future performance.

Every investment involves risk and in volatile or uncertain market conditions, significant fluctuations in the value or return on that investment may occur. Investments in foreign securities or currencies involve additional risk as the foreign security or currency might lose value against the investor’s reference currency. Alternative investments products and investment strategies (e.g. Hedge Funds or Private Equity) may be complex and may carry a higher degree of risk. Such risks can arise from extensive use of short sales, derivatives and leverage. Furthermore, the minimum investment periods for such investments may be longer than traditional investment products. Alternative investment strategies (e.g., Hedge Funds) are intended only for investors who understand and accept the risks associated with investments in such products.

This material is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Credit Suisse and/or its subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. Materials have been furnished to the recipient and should not be re-distributed without the expressed written consent of Credit Suisse.

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