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The Case for Bank Loans in a

Rising Rate Environment


Executive Summary
We believe that investors should have exposure to Bank Loans in their
portfolio, especially in rising rate environments. Bank Loans have offered:
A hedge against rate increases – Unlike traditional fixed rate bonds, the coupons of Bank
Loans reset with increases in interest rates. Consequently, the sensitivity of a Bank Loan
portfolio’s market value to changes in interest rates is small.
Low correlation to other asset classes – Bank Loans held their value and generated
added income in rising interest rate environments when the prices of fixed rate bonds
declined.
Downside protection – Bank Loan’s senior position in the capital structure may help
manage downside risk if the economy takes a turn for the worse. Recovery rates for Bank
Loans during the most recent downturn in 2008 was 62% vs. 34% for High Yield Bonds.
Lower risk High Yield exposure – The risks typically associated with traditional High Yield
products are mitigated since Bank Loans are high in the capital structure and usually
have had higher recovery rates.

What are Bank Loans?


Bank Loans, commonly referred to as “floating rate loans,” are privately structured debt
obligations issued by corporations, often rated below Investment Grade, that seek to raise
capital. The most important feature of Bank Loans is their seniority in the capital structure
(see Exhibit 1). Loans are primarily composed of first lien and senior-secured debt that
takes precedence over other debt claims in the case of default or bankruptcy. Bank Loan
coupons in general reset in line with the 1-, 3- or 6-month London Interbank Offered Rate
(Libor). This floating rate feature lowers the interest rate risk of Bank Loans compared to
other fixed income products. Also, many Bank Loan documents contain highly restrictive
covenants that prevent companies from issuing additional debt if financial ratios would be
pushed over certain predetermined levels.

EXHIBIT 1: Priority of Bank Loans Across the Capital Spectrum

Bank Loans

Senior-Secured Debt Subordinated Debt Unsecured Debt Preferred Stock Common Stock
HIGHEST PRIORITY LOWEST PRIORITY
CAPITAL SPECTRUM

The Case for Bank Loans in a Rising Rate Environment june 2010
How have bank loans performed in
rising rate environments?
In an effort to stabilize and reinvigorate the economy, the Federal Reserve Board has recently
kept key short-term interest rates at or near zero. As the economy recovers, interest rates are
likely to increase.

While the price of traditional fixed rate bonds decline when interest rates rise, Bank Loans
have held their value. Exhibit 2 illustrates that in periods of rising interest rates, Bank Loans
have generally outpaced other fixed income sectors. We believe this performance in rising rate
environments makes Bank Loans an attractive opportunity for investors who seek diversification
within their fixed income portfolios.

EXHIBIT 2: Cumulative Returns of Bank Loans vs. Other Fixed Income Sectors in Periods
of Rising Interest Rates
1993-1995 — A Rising Rate Environment
As the economy recovers, 130
■ Credit Suisse Leveraged Loan Index
interest rates are likely to ■ Barclays Capital U.S. Corporate High Yield
Cumulative Return (%)

■ Barclays Capital U.S. Intermediate Credit


increase. 120
■ Barclays Capital U.S. Treasury: 7-10 Year
■ Citigroup 3-month T-bill

Unlike with fixed rate bonds 110


in periods of rising rates,
Bank Loans tend to hold 100
their value.
90

80
Dec March June Sept Dec March June Sept Dec
1993 1994 1994 1994 1994 1995 1995 1995 1995

Performance 1995-1997 — A Rising Rate Environment


As of 3/31/10 130
■ Credit Suisse Leveraged Loan Index
■ Barclays Capital U.S. Corporate High Yield
Cumulative Return (%)

n Credit Suisse Leveraged Loan Index ■ Barclays Capital U.S. Intermediate Credit
120
■ Barclays Capital U.S. Treasury: 7-10 Year
1 YEAR 3 YEARS 5 YEARS 10 YEARS ■ Citigroup 3-month T-bill
41.06% 2.43% 4.14% 4.69%
110

n Barclays Capital U.S. Corporate High Yield


1 YEAR 3 YEARS 5 YEARS 10 YEARS 100
56.18% 6.65% 7.78% 7.45%
90
n Barclays Capital U.S. Intermediate Credit
1 YEAR 3 YEARS 5 YEARS 10 YEARS
80
18.71% 6.21% 5.49% 6.51% Dec March June Sept Dec March June Sept Dec
1995 1996 1996 1996 1996 1997 1997 1997 1997

n Barclays Capital U.S. Treasury 7-10 Year


1998-2000 — A Rising Rate Environment
1 YEAR 3 YEARS 5 YEARS 10 YEARS 130
-3.31% 6.87% 5.69% 6.54% ■ Credit Suisse Leveraged Loan Index
■ Barclays Capital U.S. Corporate High Yield
Cumulative Return (%)

■ Barclays Capital U.S. Intermediate Credit


120
n Citigroup 3-Month T-bill ■ Barclays Capital U.S. Treasury: 7-10 Year
■ Citigroup 3-month T-bill
1 YEAR 3 YEARS 5 YEARS 10 YEARS
0.13% 1.80% 2.76% 2.70% 110

Past performance is no
100
guarantee of future results.

90

80
Dec March June Sept Dec March June Sept Dec
1998 1999 1999 1999 1999 2000 2000 2000 2000

Bank Loans are represented by the Credit Suisse Leveraged Loan Index.
Source: Zephyr Associates

The Case for Bank Loans in a Rising Rate Environment Page 2


What if the economy experiences a double dip?
Despite signals that the U.S. economy is recovering and interest rates may rise, there is always
the possibility of a double dip because we continue to face headwinds ­­— high unemployment,
consumer retrenchment and global debt woes. A downturn could negatively affect Bank Loan
issuers and lead to an increase in defaults.

During the most recent downturn, default rates rose dramatically starting in 2008. Rates began
to turn down in 2009, but remain relatively high in 2010 (see Exhibit 3). Historically, default rates
for Bank Loans have been lower than those for High Yield bonds. In 2009 and 2010, though, the
two rates have been comparable.

Exhibit 3: High Yield Bond vs. Bank Loan Default Rates Since 1992
18 There is always the
■ Bank Loans
■ High Yield Bonds possibility of a double dip
15 15
recession.
12
Default Rate (%)

A downturn could increase


10
9 9 9
Bank Loan default rates.
8

6
7
6
7
6
In the event of default,
5 Bank Loans have had
4 4 4 4 4
18
3 3 3 3 relatively high recovery
2■ Bank Loans
2 2 2 2
■ High1Yield Bonds
1 1 1 1 1 1 1 1 1 1 rates.
0

15
0

0
0 15
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 March
2010 Higher recovery rates can
Source:
12 Credit Suisse
Default Rate (%)

be attributed to Bank Loans’


10
In the9 event of a default, Bank Loans have historically9 experienced higher recovery rates than 9
seniority in the capital
High100Yield Bonds (see Exhibit 4). This has certainly 8been true during the recent recession. At a
■ Bank Loans 7 7
structure.
time906when many
■ High Yieldcompanies
Bonds were defaulting on obligations,
86 5
the Bank88Loan recovery rate 6 was 6
84 84
80 double that of High Yield Bonds
nearly 79 (62%
4 4 vs.
4 34%). The higher
4 4 Bank Loan recovery rate can be
3 3 75 74 73 3 3
70 2 to Bank
attributed 68Loans’
2 2 seniority in the capital69 structure. Bank Loans2 often maintain 69 a specific
Recovery Rate (%)

2
1 1 1 1 1 1 1 65 1 1 1 1
60 62
claim 0 on61a company’s assets pledged as 57 collateral for the loan. These assets – such as real
0

59 59
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 56 55
2007 55 2009 March
2008 54
50 53
estate, inventory
46
and46accounts receivable
49 – may be sold to fulfill the obligation. 2010
43 43 42
40 38 40
34 34 34
Exhibit
30 4: Recovery Rates of Bank Loans vs. High Yield Bonds 30
Since 1992
25
20 22
100
■ Bank Loans
10
90 ■ High Yield Bonds
86 88
0 84 84
80 79
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
75 74 73
70
Recovery Rate (%)

68 69 69
65
60 61 62
57 59 59
56 55 55 54
50 53
49
46 46
43 43 42
40 38 40
34 34 34
30 30
25
20 22

10
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Credit Suisse

In summary, we believe that Bank Loans may offer some stability to a fixed income portfolio in
a rising rate environment. History shows that they have performed well relative to other fixed
income asset classes in previous rising rate environments and we believe the relationship should
hold in the future. In addition, their senior position in the capital structure would help manage
downside risk if the economy takes a turn for the worse.

The Case for Bank Loans in a Rising Rate Environment Page 3


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About Ridgeworth Investments unrated, the initial spread level must be Libor plus 125 basis
points or higher. Only fully funded term loan facilities are
RidgeWorth serves as a money management holding company included. The tenor must be at least one year. Issuers must
with eight style-specific institutional investment management be domiciled in developed countries; issuers from developing
boutiques, each with a well-defined, proven approach and all countries are excluded.
with unwavering commitments to exceptional performance.
Through our multiple, style-specific boutiques, we offer a Credit Suisse Institutional Leveraged Loan Index is a subindex
wide range of equity, alternative, fixed income and liquidity of the Credit Suisse Leveraged Loan Index which contains only
management investment disciplines institutional loan facilities priced above 90, excluding TL and
TLa facilities and loans rated CC, C or in default. It is designed
RidgeWorth Investments, an investment adviser registered with to more closely reflect the investment criteria of institutional
the SEC since 1985, is headquartered in Atlanta, Georgia. investors.
Investment Considerations Barclays Capital U.S. Intermediate Credit Index includes all
publicly issued, fixed-rate, non-convertible, investment-grade,
Mutual fund investing involves risk, including possible loss
dollar-denominated, SEC-registered corporate debt. All issues
of principal. Bonds offer a relatively stable level of income,
have at least one year to maturity and outstanding par value of
although bond prices will fluctuate, providing the potential for
at least $250 million.
principal gain or loss. Intermediate-term, higher-quality bonds
generally offer less risk than longer-term bonds and a lower rate Barclays Capital Corporate High Yield Bond Index is composed
of return. Floating rate loans are typically senior and secured, in of issues that meet the following criteria: at least $150 million
contrast to other below-investment grade securities. However, par value outstanding, maximum credit rating of Ba1 (including
there is no guarantee that the value of the collateral will not defaulted issues) and at least one year to maturity.
decline, causing a loan to be substantially unsecured. Loans Barclays Capital 7-10 Year U.S. Treasury Index includes all
generally are subject to restrictions on resale. Certain types of publicly issued, U.S. Treasury securities that have a remaining
loans may limit the ability of a fund to enforce its rights and may maturity of between 7 and 10 years, are non-convertible, are
involve assuming additional credit risks. denominated in U.S. dollars, are rated (at least Baa3 by Moody’s
Although a fund’s yield may be higher than that of fixed income Investors Service or BBB- by S&P), are fixed rate, and have more
funds that purchase higher-rated securities, the potentially than $250 million par outstanding.
higher yield is a function of the greater risk that the fund’s share Citigroup 3-Month T-Bill Index measures monthly return
price will decline. equivalents of yield averages that are not marked to market.
Investments in lower rated bonds are subject to greater credit The 3-Month Treasury Bill Indexes consist of the last three
risk and may experience greater volatility than higher-rated three-month Treasury bill issues.
securities. Recovery Rate is the amount that a creditor would receive in
A bank loan fund may buy and sell securities frequently, which final satisfaction of the claims on a defaulted credit.
may result in higher transaction costs and lower performance,
and will be more likely to generate short-term capital gains Important Information
(which are generally taxed at ordinary income tax rates). This paper reflects the analysis and opinions of RidgeWorth
Rating agencies, such as Standard & Poor’s, rate securities from Investments as of June 2010. Because market and economic
AAA (highest quality) to C (lowest quality) with BBB and above conditions are often subject to rapid change, the analysis and
being called investment grade securities. BB and below are opinions provided may change without notice. The analysis and
considered below investment grade (speculative) securities. opinions may not be relied upon as investment advice.
Statements of fact are from sources considered reliable but no
Investment Terms representation or warranty is made as to their completeness
3-Month Libor is a filtered average of rates charged by banks or accuracy. Although historical performance is no guarantee
for unsecured, 90-day loans to other banks. of future results, these insights may help you understand our
investment management philosophy.
Credit Suisse Leveraged Loan Index is designed to mirror the
investable universe of the $US-denominated leveraged loan In preparing this paper, we have relied upon and assumed,
market. Loan facilities must be rated “5B” or lower. That is, the without independent verification, the accuracy and
highest Moody’s/S&P ratings are Baa1/BB+ or Ba1/BBB+. If completeness of all information available from reliable sources.

Past performance does not guarantee future results. An investor should consider the fund’s investment objectives, risks, and charges and
expenses carefully before investing or sending money. This and other important information about the RidgeWorth Funds can be found
in the fund’s prospectus. To obtain a prospectus, please call 1-888-784-3863 or visit www.ridgeworth.com. Please read the prospectus
carefully before investing.
®2010 RidgeWorth Funds. RidgeWorth Funds are distributed by RidgeWorth Distributors LLC. RidgeWorth Investments is the trade name for
RidgeWorth Capital Management, Inc., the adviser to the RidgeWorth Funds, and is not affiliated with the distributor.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

RFWP-FRHI-0610

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