MML Whitepaper

Why Buy Middle Market Loans? A Churchill Financial Special Report "Midd le market loans are just like other loans," a long- time observer of the space enjoys noting. "Only more so." Whatever the truth to that observation, investors in the loan markets have their clear opinions about the virtues of smaller deals relative to their broadly syndicated cousins. But it's also evident from the dislocation of the credit markets over the past 30 months how dysfunctionally that larger family of assets has behaved. Indeed, the supposed benefits of big deals turned out to be major stumbling blocks, leading private equity sponsors and financing sources to "go small." Suddenly, after years at the kiddie table, middle market firms were sitting with the grownups. Indeed, most of the adults were sidelined with indigestion. Institutional investors were supplant- ed by traditional buy-and-holders. Players like regional banks, BDC's, mi d cap fin anc e compan ies , and cre dit opport uni ty funds jumped up the league tables. With any real CLO creation at least a couple quarters away, the outlook is good for smaller deals to hold onto more than their fair share of the leveraged market. So it seems like an appropriate time to puncture some myths about middle market loans. Let's start with: Myth #1 - Middle market loans (MMLs) are less liquid than broadly syndicated loans (BSLs). Institutional investors traditionally eschewed MMLs, saying ‘I can't trade out if I need to; there's no market for them.' And it was true that for years leading up to mid-2007, when every BSL was trading at par, it was easy finding buyers and sellers. But the Great Credit Crunch revea led that lar ge, on-th e-run names wer e liq uid …un til the y wer en' t. When hed ge fun ds dumped Georgia Gulf – to pick a name – in the low 70's to meet redemptions, the fact that it had been one of the most credit- worthy, highly-traded names in the LCDX didn't help. Large cap liquidity turned out to be an illusion. There's no question that MMLs are less ‘liquid' in the sense that there aren't hundreds of accounts holding them. There are two reasons for this. First, the deals are small. If you define MML as a credit facility less than, say, $150MM, you're probably going to have only a dozen or so holders. And the majority of MMLs have only a handful. Secondly, MML names trade infrequently because lenders want to hold the paper. They've put a lot of time, effort, and resources into underwriting the credit. They've visited the company, met management, kicked tires. They like the asset, and the spread. They may even have a relationship with the issuer . Y ou can't buy them out, even at par. After all, does the number of people at a wedding prove how long the marriage will last? Beginning in February 2010 On The Left published a series of articles discussing the relative merits of investing in middle market senior debt and their broadly syndicated counterparts. This report consolidates those articles. Copyright 2010 Churchill Financial LLC, All Rights Reserved Churchill Financial 400 Park Ave - Suite 1510 New York, NY 10022 www.churchillnet.com Randy Schwimmer Senior Managing Director - Head of Capital Markets [email protected] (212) 763-4646 Source: S&P LCD, Credit Pro Middle Market Loans (MML’s) have outperformed Broadly Syndicated Loans (BSL’s) in several key metrics . Exhibit 1

MML Whitepaper

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