Structured Finance

Structured Credit / U.S.A.

Avery Point II CLO, Limited/Corp.

Presale Report
Inside This Report
Transaction Summary Key Rating Drivers Additional Rating Drivers Transaction Comparison Asset Analysis Cash Flow Analysis Rating Sensitivity Portfolio Management Additional Structural Features Counterparty Risk Transaction and Legal Structure Criteria Application, Model, and Data Adequacy Performance Analytics Appendices Page 1 1 2 2 2 4 7 9 9 11 12 12 13 1418

Capital Structure
Class A B-1 B-2 C D E F Subordinated Notes Total
a

Expected Rating AAAsf NR NR NR NR NR NR NR

Expected Outlook Stable N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Amount ($ Mil.) 304.00 46.00 25.00 36.00 26.00 24.00 13.50 42.25 516.75

CE (%)

39.2 25.0 25.0 17.8 12.6 7.8 5.1 N.A.

Interest Rate (%) 3mL + 1.11 3mL + 1.55 3.21 3mL + 2.75 3mL + 3.45 3mL + 4.25 3mL + 5.10 Residual

Final Maturity July 2025 July 2025 July 2025 July 2025 July 2025 July 2025 July 2025 July 2025

TT (%) 58.8 N.A. N.A. N.A. N.A. N.A. N.A. N.A.

TTLM (x) 4.9 N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Credit enhancement (CE) is based on the target par amount of $500.0 million. Notes: Expected ratings do not reflect final ratings and are based on information provided by the issuer as of June 7, 2013. These expected ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy, sell, or hold any security. The offering circular and other material should be reviewed prior to any purchase. TT Tranche thickness. TTLM Tranche thickness loss multiple. NR Not rated. N.A. Not applicable.

Related Presale Appendix

Avery Point II CLO Limited/Corp. (June 2013)

Transaction Summary
Avery Point II CLO, Limited and Avery Point II CLO, Corp. (together, Avery Point II, or the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Sankaty Advisors, LLC (Sankaty). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $500.0 million of primarily leveraged loans. The CLO will have a four-year reinvestment period, expected to end in July 2017.

Related Criteria
Global Structured Finance Rating Criteria (May 2013) Global Rating Criteria for Corporate CDOs (August 2012) Global Criteria for Cash Flow Analysis in CDOs (September 2012) Criteria for Interest Rate Stresses in Structured Finance Transactions (January 2013) Counterparty Criteria for Structured Finance and Covered Bonds (May 2013)

Key Rating Drivers

Sufficient Credit Enhancement: Credit enhancement (CE) of 39.2% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an AAAsf stress scenario. The level of CE for class A notes is above the average CE of recent CLOs. B/B Asset Quality: The average credit quality of the indicative portfolio is B/B, which is comparable to recent CLOs. Issuers rated in the B category denote a highly speculative credit quality; however, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are robust against default rates of up to 67.8%.

Analysts
Erika Tsang, CFA +1 212 908-0817 erika.tsang@fitchratings.com Robert Rhein +1 312 606-2314 robert.rhein@fitchratings.com Derek Miller +1 312 368-2076 derek.miller@fitchratings.com

Strong Recovery Expectations: The indicative portfolio consists of 95.8% senior secured loans, approximately 91.5% of which have strong recovery prospects or a Fitch Ratings-assigned recovery rating of RR2 or higher. This is in line with the seniority profile of recent vintage CLOs.

www.fitchratings.com

June 7, 2013

Structured Finance
Additional Rating Drivers
Consistent Portfolio Parameters
The structure and portfolio composition of Avery Point II closely resembles that of recently issued CLOs, while the class A notes benefit from a relatively higher degree of CE than the average of recently rated CLOs.

The portfolio will be actively managed and bound by concentration limitations and collateral quality tests addressing various loan and structural characteristics. Aside from the lack of limitation on assets that pay less frequently than quarterly, the concentration limitations and collateral quality test levels presented to date are within the range of limits set in the majority of recent CLOs. Fitch addressed the impact of the most prominent risk-presenting concentration allowances and targeted test levels in its analysis.

Transaction Comparison
1Q132Q13 CLOs Transaction Target Par Amount ($ Mil.) Reinvestment Period (Years) Noncall Period (Years) Avery Point II CLO 500.0 4 2 Race Point VIII CLO 500.0 4 2 Average 488.4 4 2 Minimum 300.0 2 2
a

Maximum 898.7 4 3

Notes CE
Senior Class (%) Structure Senior Overcollateralization (OC) Test Senior OC Test Level (%) A/B 124.3 A/B 125.9 A/B 124.3 A/B 118.4 A/B 142.0 39.2 38.0 36.9 33.3 42.4

Portfolio Covenants and Concentration Limitations Max. Initial WAL (Years) Initial Target WARF Max. CCC Assets (%) Min. WAS (%) Actual WAS (%) Max. Fixed Assets (%) Min. WAC (%) Max. Single Obligor (%) Min. Senior Secured (%) Max. 2nd Lien and Subordinate (%) Max. Covenant-Lite (%) Maximum Long-Dated Assets (%)
a

8.0 2800 5.0 3.9 4.6 10.0 7.3 2.5 90.0 10.0 40.0 0.0

8.0 2553 7.5 3.7 4.5 10.0 8.0 2.5 90.0 10.0 50.0 0.0

7.9 2725 7.1 3.9 4.8 6.2 6.9 2.5 91.1 8.8 50.4 0.2

6.9 2400 5.0 2.9 4.0 4.0 2.0 90.0 2.5 35.0 0.0

8.5 3150 7.5 4.7 5.9 10.0 8.0 3.0 95.0 10.0 70.0 2.0

Includes CLOs backed by portfolios of broadly syndicated loans that priced from Jan. 1, 2013 through May 31, 2013.

Asset Analysis
Related Research
Sankaty Advisors, (October 2012) LLC

U.S. Leveraged Finance Market Quarterly (First- Quarter Synopsis) (April 2013) U.S. Leveraged Finance: Road to Recovery Ratings (February 2012) CLO Market Quarterly (January 2013)

The Fitch Portfolio Credit Model (PCM v2.3.2) was used to determine hurdle default rates (rating default rates, or RDRs) and expected portfolio recovery rates (rating recovery rates, or RRRs) for the AAAsf rating level. The PCM was run on the indicative portfolio, as well as a Fitch stressed portfolio that was created according to the portfolio concentration limits and collateral quality tests, as described below. Fitchs analysis focused on the Fitch stressed portfolio, given the managers ability to reinvest principal proceeds. The portfolio presented to Fitch on May 30, 2013 (the indicative portfolio) consists of 126 assets from 120 obligors, including 64 unidentified obligors with assumed loan characteristics

Avery Point II CLO, Limited/Corp. June 7, 2013

Structured Finance
comprising 38.7% of the portfolio. Fitch considers the indicative portfolio to be of similar diversity in terms of obligor and industry concentrations, relative to recently issued CLOs.

Asset Quality

Distribution of Assets Treated CCC+ or Lower

Fitch IDR Mapping Rated < or = CCC+ B/Rating Outlook Negative No Rating Total Portfolio (%) 2.3 1.0 1.6 4.8

The weighted average rating of the indicative portfolio is B/B (as determined by Fitchs global rating criteria for corporate CDOs). Fitch has an explicit rating or a credit opinion for 21 obligors from the indicative portfolio comprising 23.3% of the total portfolio par balance; ratings for 37.9% of the total portfolio were derived using Fitchs issuer default rating (IDR) equivalency map. In addition, unidentified obligors were predominantly indicated to be within the B rating category; these obligors were generally assumed to maintain these ratings in the Fitch stressed portfolio. As the transaction documents do not contain a covenant for a maximum Fitch weighted average rating factor (WARF), Fitch assumed the average portfolio quality remains in the B/B rating category in its construction of the Fitch stressed portfolio (see the portfolio distribution in the Underlying Rating Distribution chart below).
Underlying Rating Distribution
(As of June 7, 2013)
Indicative Portfolio
(%)
45 40 35

Fitch Stressed portfolio

30
25 20 15 10 5 0

BBB

BB

BB

B+

CCC+

CCC

Fitch considers 4.8% of the indicative portfolio to be rated in the CCC category, while the maximum permitted exposure to assets rated CCC (as defined by S&P ) is 5.0%. Of this amount, 1.6% of the indicative portfolio has no public rating or Fitch credit opinion and was considered CCC. Fitch increased the CCC concentration for the Fitch stressed po rtfolio to match the maximum permitted CCC exposure.

Asset Security
The indicative portfolio consists of 95.8% senior secured loans, 2.2% second lien loans, and 2% bonds. Fitch has assigned asset-specific recovery ratings to 15.6% of the indicative portfolios assets. In the case of assets for which no asset-specific recovery ratings have been assigned, Fitch applied the standard Fitch recovery rate assumptions for assets based in the same jurisdiction and having the same ranking in the capital structure (as determined via the agencys global rating criteria for corporate CDOs). The concentration limitations specify that senior secured loans and eligible investments must represent at least 90.0% of the portfolio. Senior secured bonds, senior secured notes, highyield bonds, second lien loans, and senior unsecured loans in total cannot exceed 10.0% of the portfolio. Adjustments were made to the Fitch stressed portfolio to mirror this distribution.

Avery Point II CLO, Limited/Corp. June 7, 2013

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Recovery Distribution
(As of June 7, 2013)
Indicative Portfolio
(%) 90 80 70

Fitch Stressed Portfolio

60 50
40 30 20 10 0

RR1 (Outstanding: 91%-100%)

RR2 (Superior: 71%-90%)

Strong Recovery RR3 (Good: 51%- Weak Recovery 70%)

Moderate Recovery

Obligor and Industry Concentration

The concentration limitations allow exposure of up to 2.5% each for five obligors, which were incorporated into the Fitch stressed portfolio. The remaining obligors may each constitute up to 2.0% of the portfolio. The transaction also allows for up to 12.0% concentration in each of three industries and up to 15.0% for one additional industry, with a maximum 10.0% concentration for remaining industries. Fitch accounted for the maximum allowable industry concentration in its analysis of the Fitch stressed portfolio.

Top Five Obligor Concentrations

Obligor 1 2 3 4 5 Fitch Rating BB B BB CCC B Indicative Fitch Stressed Portfolio (%) Portfolio (%) 2.0 2.0 1.9 1.6 1.6 Seniority Strong Recovery and Weak 2.5 Metals & Mining Recovery 2.5 Industrial/Manufacturing Rr1 (Outstanding: 91%100%) 2.5 Energy Strong Recovery 1.6 Computers & Electronics Rr3 (Good: 51%70%) 1.6 Telecommunications Strong Recovery Fitch Industry

Top Five Industry Concentrations

Industry Gaming and Leisure and Enter ainment Industrial/Manufacturing Metals & Mining Energy Business Services Indicative Portfolio (%) 11.3 9.4 9.1 8.8 8.7 Fitch Stressed Por folio (%) 15.0 12.0 12.0 12.0 7.3

Cash Flow Analysis

Fitch used a customized proprietary cash flow model to replicate the principal and interest waterfalls (described in detail in Appendix D, page 18) and various structural features of the transaction to assess their effectiveness, including the structural protection provided by excess spread diverted through the overcollateralization (OC) and interest coverage (IC) tests. Each model run considers 12 stress scenarios to account for different combinations of default timings and interest rate stresses, as described in Fitchs cash flow analysis criteria. The cash flow model was run using the PCM outputs for the indicative portfolio, as well as for the Fitch
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stressed portfolio. Fitch assumed the class A, B-1, C, D, E and F notes earn a weighted average cost of funding of 1.71% over three-month LIBOR and that the class B-2 notes earn a fixed coupon of 3.2% in its cash flow analysis. The transaction documents provide the portfolio manager the flexibility to choose certain combinations of cases for compliance with the S&P CDO Monitor Test, namely the minimum weighted average recovery rate (WARR), maximum WAL, and minimum weighted average spread (WAS), toward which the portfolio will be managed. The portfolio manager will determine the initial WARR, WAL, and WAS cases at or before the end of the ramp-up period. More discussion on the use of these multiple parameters as a portfolio management tool can be found in the Management to Dynamic Collateral Quality Tests section on page 9. Fitch modeled the WAS at 3.9%, according to the initial level targeted by the portfolio manager, as represented to Fitch.

Interest Income and LIBOR Floors

The calculation of the WAS includes additional spread above actual LIBOR from loans that have a LIBOR floor mechanism in place. While LIBOR floors will create additional interest cash flow for Avery Point II during periods of low LIBOR, the benefit is expected to disappear after LIBOR reaches 1.5%. The indicative portfolios WAS is 4.6%, including the benefit for LIBOR floors, while the same portfolio would lead to a WAS of 3.8% if LIBOR is increased above 1.5%. Approximately 97.2% of the current indicative portfolio has LIBOR floors between 0.75% and 1.5%. Fitchs analysis of the indicative portfolio accounted for the benefit of addi tional spread from LIBOR floors, while the analysis of the Fitch stressed portfolio assumed all floating-rate assets earn interest at the minimum WAS test level, which was represented to Fitch as initially 3.9% over LIBOR. The transaction documents permit a maximum of 10.0% fixed-rate collateral with a minimum weighted average coupon (WAC) of 7.25%. Fitch assumed a 10% fixed-rate collateral bucket in its cash flow analysis of the Fitch stressed portfolio and assumed the remaining 90.0% of the portfolio to pay on a floating-rate basis.

Interest Reserve Mechanism

The concentration limitations do not restrict the amount of assets that pay less frequently than quarterly, though no assets may pay less frequently than semi-annually. Instead, if the aggregate principal balance of assets that pay less frequently than quarterly exceeds 10%, there is an interest smoothing mechanism senior to class A interest in the interest waterfall that will deposit the liquidity reserve amount back into the interest collection account to be distributed on the following payment date. The liquidity reserve amount is essentially the excess, if any, of the interest received from semi-annual pay assets above the 10% threshold over the amount of interest that would have been received from those assets had they been quarterly pay. The calculation method of the reserve and its placement in the waterfall effectively mitigates the transactions exposure to assets that pay semi-annually in excess of 10%. Therefore, the Fitch stressed portfolio assumed that 10% of the underlying assets pay interest less frequently than quarterly.

Avery Point II CLO, Limited/Corp. June 7, 2013

Structured Finance
Overcollateralization and Interest Coverage Tests
The structure includes standard OC tests, IC tests, and a reinvestment OC test. Failure of an OC or IC test will result in interest or principal proceeds, as applicable, to be diverted to redeem the rated notes sequentially. Failure of the reinvestment OC test during the reinvestment period leads to the lesser of 50% of remaining interest proceeds and the required cure amount to be reinvested in additional collateral assets. Failure of the reinvestment OC test after the reinvestment period results in the lesser of 50% of remaining interest proceeds and the required cure amount being used to redeem the notes. The IC tests are not applicable in the priority of payments until the second payment date.

Coverage Tests
(%) Indicative Portfolio Trigger Overcollateralization (OC) Tests Class A/B (Senior) OC Test Class C OC Test Class D OC Test Class E OC Test Interest Diversion Tests Reinvestment OC Testb Interest Coverage (IC) Tests Class A/B (Senior) IC Test Class C IC Test Class D IC Test
a

Fitch Stressed Portfolio Cushion 9.00 7.50 6.00 4.50 Initial Levela 133.33 121.65 114.42 108.46 Cushion 9.00 7.50 6.00 4.50

Initial Levela 133.33 121.65 114.42 108.46

124.33 114.15 108.42 103.96

102.37

105.37

3.00

105.37

3.00

120.00 110.00 105.00

386.26 326.28 286.74

266.26 216.28 181.74

330.19 278.91 245.11

210.19 168.91 140.11

Initial OC levels based on target portfolio amount of $500 million. bReinvestment OC Test trigger changes to 101.87% after the reinvestment period.

Effectiveness of Coverage Tests: May be Diminished by Discount Obligation Provisions

The transaction features discount obligation provisions that are standard among recent CLO issuances. While discount obligations are generally included at their purchase price for purposes of calculating OC tests, a senior secured loan will not be considered to be a discount obligation unless it is rated B or higher by S&P and is purchased at a price below 80% of par. For senior secured loans rated below B by S&P, the purchase price threshold increases to 85% of par. Since assets purchased at a price below par, yet above the discount obligation thresholds, may be marked at par for calculations of the OC and reinvestment OC test ratios, this may minimize the effectiveness of these tests during the reinvestment period. The portfolio manager may potentially build par with the purchases of assets priced below par, yet above discount obligation thresholds. Therefore, Fitch considered a sensitivity scenario in which credit was not given to excess spread or the diversion of interest proceeds through OC and reinvestment OC tests during the four-year reinvestment period.

Cash Flow Model Outputs

Break-even default rates (BDRs) show the maximum portfolio default rates the class A notes could withstand in stress scenarios without experiencing a loss. BDRs for the class A notes
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were then compared with the PCM hurdle rates at the AAAsf rating stress. A rating committee would typically expect the BDR to be above the PCM hurdle rate to achieve a given rating, in this case AAAsf for the class A notes. The table below presents the lowest BDR of the 12 stress scenarios. The class A notes passed the PCM hurdle rate on both the indicative and Fitch stressed portfolio analysis in all 12 stress scenarios. Fitch was comfortable assigning AAAsf ratings to the class A notes because the agency believes the tranche can sustain a robust level of defaults, in line with an AAAsf stress scenario, as well as due to the strong performance of the notes in several sensitivity scenarios.

Break-Even Default Rates

(%) Portfolio Class Break-Even Default Rate Assumed Recovery Rate PCM Hurdle Default Rate Default Cushion Default Timing LIBOR
a

Indicative Class A 70.0 37.3 55.2 14.8 Mid Up

Fitch Stressed Class A 67.8 34.7 62.3 5.5 Mid Up

Fitch stressed portfolio based on eight-year WAL, 3.9% WAS, maximum second lien, and obligor and industry concentrations.

Rating Sensitivity
In addition to Fitchs stated criteria, the agency analyzed the structures sensitivity to the potential variability of key model assumptions. The rating sensitivity analysis is based on the Fitch stressed portfolio. These sensitivities only describe the model-implied impact of a change in one or more of the input variables. This is designed to provide information about the sensitivity of the rating to key model assumptions. It should not be used as an indicator of possible future performance. The key model assumptions analyzed are described below. Rating Sensitivity to Default Probability A default probability multiplier of 125% and 150% is applied to the default probability of each obligor. Rating Sensitivity to Recovery Rates A 75% and 50% multiplier is applied to asset-level recovery rates. Rating Sensitivity to Correlation A 2.0x base country correlation increase is applied. Rating Sensitivity to Combined Stress A default probability multiplier of 125%, recovery rate multiplier of 75%, and 2.0x base correlation for the country are applied. Rating Sensitivity to Inefficient Coverage Tests OC and IC tests were not accounted for during the reinvestment period.

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Structured Finance
Rating Sensitivity to Spread Compression over Two Years The minimum WAS of the portfolio was reduced from the current covenanted level of 3.9% to 2.0%. The assumed portfolio WAL was also reduced by two years to six years; no credit migration was assumed to occur.

Rating Sensitivity
Median Rating Rating Sensitivity to Default Probability (DP) 125% DP Multiplier Rating Sensitivity to DP 150% DP Multiplier Rating Sensitivity to Recovery Rates (RRs) 75% RR Multiplier Rating Sensitivity to RRs 50% RR Multiplier Rating Sensitivity to Correlation 2.0x Base Correlation Increase Rating Sensitivity to Combined Stress 125% DP Multiplier, 75% RR Multiplier, 2.0x Base Correlation Increase Rating Sensitivity to Inefficient Coverage Tests Rating Sensitivity to Spread Compression over Two Years AAA AA+ AAA AA+ AAA AA AA+ AAA Class A Lowest Rating AA+ AA+ AA+ AA AAA AA AA AAA

Portfolio Management
Avery Point II will have a four-year reinvestment period, which is expected to expire in July 2017. Discretionary sales are permitted at any time and are limited to 25% of the portfolio during the same calendar year (as measured by the portfolio balance as of the beginning of such calendar year). The portfolio manager will be permitted to sell defaulted, credit-risk, and credit-improved assets at any time, including after the reinvestment period. Subject to certain criteria, all unscheduled principal proceeds and proceeds from credit-risk and credit-improved sales may be reinvested after the reinvestment period.

Conditions to Reinvestment
During Reinvestment Period After Reinvestment Period Type of proceeds: Credit Improved sales and Unscheduled Principal Payments Type of Proceeds: Scheduled/Unscheduled Principal Payments, Discretionary Sales Type of Proceeds: Credit Risk Sales Type of proceeds: Credit and Credit Improved Sales and Defaulted Obligations Sales Risk sales

Collateral Quality Tests Concentration Limitations Coverage Tests Maturity Requirements

Satisfaction, or if failing, maintain or improve Satisfaction, or if failing, maintain or improve Satisfaction, or if failing, maintain or improve N.A.

Satisfaction, or if failing, maintain or improve (only applies to minimum fixed coupon, minimum floating spread, and S&P minimum WARR tests) Satisfaction, or if failing, maintain or improve Satisfaction of OC tests Weighted average maturity of new asset must be same or earlier than that of the related disposed obligation

RBC will be satisfied.

APB of all additional collateral will at least equal the sales proceeds, or (ii) RBC will be satisfied.

APB of additional collateral will at least equal the sales proceeds, or (ii) RBC will be satisfied.

RBC will be satisfied.

Par Amount Requirements Rating Requirements N.A. Satisfaction, or if failing, maintain or improve N.A. New asset must have same or better S&P rating than that of the related disposed asset

S&P CDO Monitor Test

N.A.

Note: Conditions to reinvestment outlined above assume additional assets meet the definition of a collateral obligation as defined in the indenture. APB Aggregate principal balance. RBC Reinvestment balance criteria. N.A. Not applicable.

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Structured Finance
Additional Portfolio Concentrations
In addition to the permitted CCC bucket, second lien loan, industry, and obligor concentrations, the documents include other notable concentration limitations. Exposures to fixed-rate assets, and deferrable interest loans, among others, are kept to a minimum. Investments in structured finance assets, synthetic assets, and loans from emerging markets are not permitted. The concentration limitations and collateral quality tests are further detailed in Appendix D on page 18. The indicative portfolio has a WAL of approximately 6.0 years, while the transaction is initially covenanted to an eight-year maximum WAL that steps down with the passage of time. Fitch assumed an eight-year WAL in the Fitch stressed portfolio. Additionally, the portfolio guidelines do not permit long-dated assets.

Management to Dynamic Collateral Quality Tests

The minimum WAS, WARR, and WAL covenants will be selected on or prior to the last day of the ramp-up period and thereafter can be changed by the portfolio manager at any time. The exact combinations of the chosen covenants at any given time are determined based on the satisfaction of a model that is not transparent to the investor. In Fitchs view, the key risks of relying on a third-party modeling tool as a monitoring test are the lack of transparency and the potential variability of the tool. Fitch views several factors as mitigating the risk presented by the limited transparency in the collateral quality parameters. First, the results of the S&P CDO Monitor Test must be maintained or improved upon changes to any of the selected covenanted levels. Consequently, the introduction of additional portfolio risk should be mitigated with a concurrent tightening of another covenant; for example, to lower the applicable minimum WAS covenant, the minimum WARR would be increased. Also, Fitch has assessed the capability of the portfolio manager to manage the transaction, in accordance with the terms of the transaction documents, and has gained comfort with the managers ability to adequately manage the Avery Point II portfolio. Additionally, Fitch has tested various sensitivity scenarios, as discussed in this report, including a scenario evaluating the wide spectrum of minimum WAS requirements permitted by the documents, which highlight the strong performance of the notes in high default and/or low recovery scenarios, among others.

Additional Structural Features

Repurchased/Surrendered Notes
The transaction allows for notes to be surrendered without payment to noteholders. However, surrendered notes will be deemed to remain outstanding for purposes of the OC test calculations until all notes of the applicable class and any notes senior to such class are redeemed.

Optional Redemption/Refinancing
The transaction features standard optional redemption and refinancing provisions that may be undertaken after the two-year noncall period expires at the direction of a majority of the subordinated notes and with written consent of the portfolio manager. An optional redemption consists of either liquidating the collateral (redemption) or acquiring a loan or issuing new notes (refinancing). An optional redemption may only occur if the expected liquidation proceeds and/or refinancing proceeds are sufficient to repay the full principal amount and any accrued and unpaid fees, expenses, and interest amounts on all classes of notes. The holders of any
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Structured Finance
class of notes may agree by unanimous consent to decrease the redemption price for that class of notes and receive a lesser amount in exchange for that redeemed class of notes. This transaction also features the possibility for partial redemption via refinancing, where either a majority of the subordinated noteholders or the portfolio manager may elect to redeem only one or more classes of notes through a refinancing. New notes would be issued in the same amount as those being replaced, and would have the same priority in the capital structure. The weighted average spread over LIBOR or fixed rate of interest of the new class of notes would be less than or equal to the weighted average spread or fixed interest rate of the notes being refinanced. Fitchs credit view on these features is neutral, since repayment in whole of the applicable class of notes is a prerequisite to any redemption or refinancing.

Re-Pricing of Notes
Following the noncall period, a majority of the subordinated notes or the portfolio manager may direct the issuer to reduce the spread over LIBOR or fixed rate of interest on any class of notes (repricing). Noteholders of the affected class will be notified at least 30 days prior to the proposed repricing date, which notification will indicate the proposed spread and request for consent for the proposed spread. Noteholders will need to provide written response if they do consent to the repricing; a lack of response will be deemed a non-consent to the re-pricing. Any noteholders that do not consent to the re-pricing may be required to sell their notes to other parties at a price not less than par plus accrued interest. Fitch views the re-pricing of the notes as similar to the traditional call features from earlier vintage CLOs. This feature makes a call operationally easier to execute and provides the affected noteholders the option to remain invested in a familiar transaction, which may have otherwise been called by the equity investor. Fitch expects to review the terms of any spread reduction, analyzing the then-current capital structure and portfolio composition, and make a public comment, if appropriate. As long as the notes remain outstanding, Fitch expects to maintain its rating, if applicable. Absent any salient credit issues in the portfolio, Fitch expects the re-pricing of the notes would be a credit-neutral event at worst and a modest credit-positive at best, since any reduction in spread of a CLO will result in a lower cost of funding to the CLO and generate more excess spread that could be available in the interest waterfall to pay notes following the failure of a coverage test.

Events of Default: Undercollateralization

An event of default (EOD) will occur if the ratio of the aggregate principal balance of the portfolio (with no haircuts to discounted or CCC obligations but with defaulted obligations treated at market value) to the aggregate outstanding amount of class A notes is less than 102.5%. If an EOD occurs under this clause, holders of a supermajority of the controlling class may vote to accelerate the transaction and declare all notes to be immediately due and payable. Fitch notes that this test is less sensitive to early warning signs of portfolio deterioration than if the haircuts to discounted or CCC assets were applied. However, given the voting threshold to direct the sale and liquidation of the collateral, class A notes have a somewhat controlled exposure to market value losses should an EOD occur (see Appendix D, page 18, for the par value EOD test calculation details). The transaction also includes standard provisions for the potential liquidation of the collateral pool after an EOD occurs. If an EOD has occurred and is continuing, and the notes have been accelerated, a liquidation of all or part of the collateral pool may occur if either the expected liquidation proceeds are sufficient to repay all classes of notes (other than the subordinated notes) in
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Structured Finance
full or if a liquidation is directed by more than two-thirds of each class of notes (other than the subordinated notes), voting separately.

Counterparty Risk
Portfolio Manager
Fitch views Sankaty as satisfactory for the management of Avery Point II.

The transaction will be managed by Sankaty. As part of its analysis, Fitchs Fund and Asset Manager Rating Group evaluated Sankaty and determined its capabilities satisfactory in the context of ratings assigned to the transaction and investment parameters that govern Sankatys activities. (For additional information, see Fitchs Asset Manager Profile Report in Appendix B, pages 1516.) As compensation for managing the portfolio, the portfolio manager will receive senior and subordinated investment management fees of 15 bps and 35 bps per annum, respectively, based on the total portfolio size as of the beginning of each collection period. The senior management fee is paid prior to class A note interest, while the subordinate management fee will be payable after all note interest is paid and after the reinvestment OC test. Fitch views the asset management fees as being in line with industry averages, which is an important factor in facilitating the replacement of a portfolio manager in the event of the departure of key members of the management team or any other form of wind-down, bankruptcy, or insolvency of the existing portfolio manager.

Hedge Counterparties
The floating rate notes and most of the indicative assets reference the same index, minimizing basis risk. No hedging strategies are included in the analysis at this time.

Other Counterparties
Provisions for the eligible investments to be purchased with intra-period interest and principal collections, as well as the rating requirements of the institutions at which the issuers various bank accounts will be established, conform to Fitchs counterparty criteria for supporting note ratings of AAAsf. Requirements for other counterparties, such as the trustee, collateral administrator, and custodian, also conform to Fitch criteria.

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11

Structured Finance
Transaction and Legal Structure
The notes will be issued by Avery Point II, a bankruptcy-remote, special-purpose vehicle organized under the laws of the Cayman Islands and the state of Delaware. The notes are secured by the underlying loan portfolio. Payments to the notes will be made quarterly and are expected to begin in January 2014.

Transaction Structure
Sankaty Advisors, LLC (Asset Manager)
Class A Notes Class B1 & B2 Notes Class C Notes

Loan Portfolio $500 Million High-Yield Loans

Sale of Loans to Issuer

Principal and Interest

Avery Point II CLO, Limited/Corp. (Issuer)

Note Proceeds (for Loan Purchase)

Note Proceeds

Class D Notes
Class E Notes

Class F Notes
The Bank of New York Mellon (Trustee and Collateral Administrator) Subordinated Notes

Disclaimer
For the avoidance of doubt, Fitch relies, in its credit analysis, on legal and/or tax opinions provided by transaction counsel. As Fitch has always made clear, Fitch does not provide legal and/or tax advice or confirm that the legal and/or tax opinions or any other transaction documents or any transaction structures are sufficient for any purpose. The disclaimer at the foot of this report makes it clear that this report does not constitute legal, tax, and/or structuring advice from Fitch and should not be used or interpreted as legal, tax, and/or structuring advice from Fitch. Should readers of this report need legal, tax, and/or structuring advice, they are urged to contact relevant advisers in the relevant jurisdictions.

Criteria Application, Model, and Data Adequacy

Criteria Application
Key criteria reports used are Global Rating Criteria for Corporate CDOs, dated August 2012, and Global Criteria for Cash Flow Analysis in CDOs, dated September 2012; both are available on Fitchs website at www.fitchratings.com. Additional criteria used in Fitchs analysis are listed on page 1.

Model
The credit analysis followed a two-step process. First, the agency analyzed the portfolios default and recovery probabilities using Fitchs PCM V2.3.2, in accordance with its corporate CDO criteria.

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Second, Fitch analyzed the structure using its proprietary cash flow model, as customized for the transactions specific structural features, in accordance with the cash flow analysis criteria.

Data Adequacy
Fitch utilized publicly available information to provide credit opinions on 11.2% of the underlying public companies. In addition, Fitch publicly rates 12.1% of the portfolio. The information utilized in Fitchs analysis is as of June 7, 2013. Sources of information used to assess these ratings were the transaction documents provided by the arranger, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the public domain. Fitchs credit opinions and recovery ratings are produced by the corporate rating group and reviewed by a rating committee. The rating committee has a similar profile to those for Fitchs explicit ratings in terms of the number and seniority of voting members in the quorum. Fitch will review and update its credit opinions and recovery ratings through this committee process at least annually, with informal reviews on a quarterly basis and ongoing monitoring of information in the market.

Performance Analytics
Fitch will monitor the transaction regularly and as warranted by events with a review. Events that may trigger a review include the following: Asset defaults, paying particular attention to restructurings and recoveries. Portfolio migration, including assets being downgraded to CCC, or po rtions of the portfolio being placed on Rating Watch Negative or Rating Outlook Negative. OC or IC test breach. Breach of concentration limitations or portfolio quality covenants. Future changes to Fitchs rating criteria. Surveillance analysis is conducted on the basis of the then-current portfolio. Fitchs goal is to ensure that the assigned ratings remain an appropriate reflection of the issued notes credit risk. Details of the transactions performance are available to subscribers on Fitchs Web site a t www.fitchratings.com.

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Appendix A: Transaction Overview Avery Point II CLO, Limited/Corp.
Capital Structure Class A B-1 B-2 C D E F Subordinated Notes Total
a

U.S./Structured Credit
Size (%) 58.8 8.9 4.8 7.0 5.0 4.6 2.6 8.2 100.0 Size ($ Mil.) 304.00 46.00 25.00 36.00 26.00 24.00 13.5 42.25 516.75 CE (%) 39.2 25.0 25.0 17.8 12.6 7.8 5.1
a

Expected Ratings AAAsf NR NR NR NR NR NR NR

Expected Rating Outlook Stable N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Interest Rate (%) 3mL + 1.11 3mL + 1.55 3.21 3mL + 2.75 3mL + 3.45 3mL + 4.25 3mL + 5.10 Residual

PMT Frequency Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly

Final Maturity July 2025 July 2025 July 2025 July 2025 July 2025 July 2025 July 2025 July 2025

Based on the target par amount of $500.00 million. NR Not rated. N.A. Not applicable. Four years Two years Swaps Payment Frequency None Quarterly

Scheduled Revolving Period Scheduled Non-Call Period Key Information Details: Closing Date Country of Assets and Type Country of SPV Primary Analyst Secondary Analyst Leveraged Finance Analyst

Parties: Arranger June 2013 (expected) U.S. leveraged loans Cayman Islands Erika Tsang, CFA +1 212 908-0817 Robert Rhein +1 312 606-2314 Darin Schmalz +1 312 606-2324 Trustee and Collateral Administrator Portfolio Manager Issuer

Merrill Lynch, Pierce, Fenner & Smith Incorporated The Bank of New York Mellon Trust Company Sankaty Advisors, LLC Avery Point II CLO, Limited/Corp.

Key Rating Drivers Sufficient Credit Enhancement: Credit enhancement (CE) of 39.2% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an AAAsf stress scenario. The level of CE for class A notes is above the average CE of recent CLOs. B/B Asset Quality: The average credit quality of the indicative portfolio is B/B, which is comparable to recent CLOs. Issuers rated in the B category denote a highly speculative credit quality; however, class A notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are robust against default rates of up to 67.8%. Strong Recovery Expectations: The indicative portfolio consists of 95.8% senior secured loans, approximately 91.5% of which have strong recovery prospects or a Fitch Ratings-assigned recovery rating of RR2 or higher. This is in line with the seniority profile of recent vintage CLOs. Additional Rating Drivers Consistent Portfolio Parameters: The portfolio will be actively managed and bound by concentration limitations and collateral quality tests addressing various loan and structural characteristics. The concentration limitations and collateral quality test levels presented to date are within the range of limits set in the majority of recent CLOs. Fitch addressed the impact of the most prominent risk-presenting concentration allowances and targeted test levels in its analysis.
Transaction Structure
Sankaty Advisors, LLC (Asset Manager)
Class A Notes Class B1 & B2 Notes Class C Notes

Loan Portfolio $500 Million High-Yield Loans

Sale of Loans to Issuer

Principal and Interest

Avery Point II CLO, Limited/Corp. (Issuer)

Note Proceeds (for Loan Purchase)

Note Proceeds

Class D Notes
Class E Notes

Class F Notes
The Bank of New York Mellon (Trustee and Collateral Administrator) Subordinated Notes

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Appendix B: Fitchs Asset Manager Profile Report The Fitch View
Sankaty Advisors, LLC
Strengths

Experienced CLO manager that has managed 19 CLOs since 1999. Loan portfolios outperformed LSTA in terms of annual gross return and annual default rates from 19992011. Extensive experience level of key personnel within the leveraged loan asset class. Robust investment, oversight, and credit-monitoring policies.

Challenges
To maintain CLO performance in more challenging markets, mitigated by the long, good performance track record demonstrated to date. To maintain stability among key staff and preserve the talent pool amidst increasing industry competition.

Company and Staffing

Total committed assets under management totaled approximately $18.6 billion as of Jan. 1, 2013. Invests across the credit universe, including performing and distressed bank loans and high-yield bonds; debtor-in-possession loans; mezzanine/private placements; structured products; credit-based equities; credit default swaps; and special situations investments. Sankaty typically retains large percentages of equity classes in the CLOs it manages. Sankaty employs a total staff of 180, including 87 investment professionals and has offices in Boston, Chicago, New York, and London. Senior managers across the firm average 20-plus years of experience. Turnover has remained low, and the firm has added 16 investment professionals over the past five years. Investment staff has extensive experience in structuring and negotiating complex transactions involving high-yield assets. A dedicated distressed/workout team, including the in-house counsel, manages the workout process for distressed investments. Sankaty has a sound oversight function; all potential issues found by its compliance department are followed up with senior management as necessary, and all internal audit reports are reviewed by Bains senior management, the chief credit officer, and a compliance oversight committee. Sankaty is a registered investment adviser with the SEC.

Credit Selection
Sankaty utilizes a classic buy-and-hold strategy based on fundamental credit analysis and disciplined portfolio monitoring. The investment strategy relies on an approach of fundamental business, industry, and competitive analysis. All approvals are made by a committee that includes five Sankaty managing directors and the industry analysts who follow the credit.

Portfolio and Risk Management

Sankatys research function is overseen by a 38-member industry research team; each industry team covers approximately 2045 credits.

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There is a thorough investment monitoring process, under which each analytical team provides a monthly sheet with an update of every credit. On a quarterly basis, a more detailed update is provided by the analytical team on each name covered.

Investment Administration

Dedicated CLO administration resources provide independent trustee reconciliation and indenture compliance monitoring. Proprietary models and Intex software are used to model CLO structures and cash flow waterfalls. There is a daily reconciliation of cash and weekly reconciliation of securities with custodians and administrators. An automated system is in place that reconciles daily all activities and cash balances against Sankatys internal Wall Street office database. Investor reporting is available via password-protected Web access, whereby investors can access quarterly commentary, account-specific information, capital account balances, and fund performance. Sankaty also has a dedicated, 13-person investor relations team, headed by the chief operating officer, to handle all investor requests. While third-party providers are used for banking/cash management, custody, prime brokerage, and certain valuations, and all back-office, finance, and operational activities are conducted inhouse, no core functions are outsourced. Scalability of processes is demonstrated through the successful integration of CLOs issued since 1999.

Technology

Robust CDO-specific tools/systems enable Sankaty to analyze trades on a pro forma basis, manage CDO compliance, provide enhanced management/investor reporting, and shadow the CDO trustees accounting. The company has devoted significant resources over the past several years to develop robust business systems and IT infrastructure that support the overall structured product platform. A comprehensive disaster recovery plan is in place and regularly tested for robustness. The last test of the system was completed in May 2011 and resulted in no material findings.

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Appendix C: Priority of Payments

Payment Waterfalls
Interest Waterfall 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Taxes, governmental fees, and administrative expenses Base management fee Liquidity reserve amount and hedge counterparties Class A interest Class B interest Class A/B coverage tests Class C interest Class C deferred interest Class C coverage tests Class D interest Principal Waterfall 1. Taxes, governmental fees and administrative expenses 2. Base management fee 3. Liquidity reserve amount and hedge counterparties 4. Class A interest 5. Class B interest 6. Class A/B coverage tests 7. Class C coverage tests 8. Class D coverage tests 9. Class E coverage test 10. If a tax event, special redemption or optional redemption, redemption of the notes in accordance with the note payment sequence, or to the subordinated notes in connection with an optional redemption if the secured notes are PIF 11. During the reinvestment period, class C interest, then class C deferred interest; provided the class C coverage tests will be satisfied pro forma 12. During the reinvestment period, class D interest, then class D deferred interest; provided the class D coverage tests will be satisfied pro forma 13. During the reinvestment period, class E interest, then class E deferred interest; provided the class E coverage test will be satisfied pro forma 14. During the reinvestment period, class F interest, then class F deferred interest; provided the reinvestment test will be satisfied pro forma

11. 12. 13.

Class D deferred interest Class D coverage tests Class E interest

14.

Class E deferred interest

15.

Class E OC test

15. During the reinvestment period, to reinvest in additional collateral; after the reinvestment period, to purchase additional collateral using principal proceeds from credit risk obligations, credit improves obligations or unscheduled principal payments 16. After the reinvestment period, to redeem notes in accordance with the note payment sequence 17. After the reinvestment period, accrued and unpaid subordinated management fees; any interest on deferred management fees; any deferred management fees, at manager's discretion 18. After the reinvestment period, accrued and unpaid administrative expenses

16. 17.

Class F interest Class F deferred interest

18.

During the reinvestment period, if the reinvestment test is not satisfied, the lesser of 50% remaining interest proceeds or amount to cure the test applied as principal proceeds; after the reinvestment period, if the reinvestment test is not satisfied, the lesser of 50% remaining interest proceeds or amount to cure the test to redeem notes in accordance with the note payment sequence Accrued and unpaid subordinated management fees First, any interest on management fees deferred by the portfolio manager that remains accrued and unpaid from prior distribution dates; second, any deferred management fees, at manager's discretion Accrued and unpaid administrative expenses or hedge counterparty payments Subordinated notes up to the incentive interest threshold (12% IRR) Remaining proceeds to be paid: 20% to portfolio manager (as incentive interest) and 80% to subordinated notes

19. 20.

19. After the reinvestment period, unpaid hedge counterparty payments 20. After the reinvestment period, subordinated notes up to the incentive interest threshold (12% IRR) 21. After the reinvestment period, remaining proceeds to be paid: 20% to portfolio manager (as incentive interest) and 80% to subordinated notes

21. 22. 23.

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Appendix D: Collateral Quality Tests, Concentration Limitations, and Coverage Tests Notable Concentration Limitations
Description Maximum % of Each of the Top Five Obligors Outside of the Five Obligors, Maximum % of Next Obligor Maximum % of Securities Rated CCC+ or Below by S&P Minimum % of Senior Secured Loans Maximum % of Second Lien Loans, Senior Unsecured Loans, Senior Secured Notes or Bonds Maximum % of Letters of Credit Maximum Top Industry % (One Industry) Outside of Top Industry, Maximum Single Industry % (Up to Three Industries) Outside of Top Four Industries, Maximum Single Industry % Maximum % of Fixed-Rate Assets Maximum % of Covenant-Lite Loans Maximum % of Non-U.S. Issuers Maximum % of Unfunded Commitments Maximum % of Deferrable and Partial Deferrable Securities Maximum % of Current-Pay Assets Maximum % of Step-Down Obligations Maximum % of Participations Maximum % of DIP Loans Maximum % of Bridge Loans Maximum % of Synthetic Securities Limit 2.5 2 5 90 10 2.5 15 12 10 10 40 20 10 0 2.5 5 20 7.5 5 0

Collateral Quality Tests

Description Minimum Weighted Average Coupon (%) Minimum Weighted Average Spread (%) Maximum Weighted Average Life (Years) S&P Minimum Weighted Average Recovery Rate Test (%) S&P CDO Monitor Test Limit 7.25 3.9 8.0 (Declining) Determined by Sankaty and S&P Determined by Sankaty and S&P

Coverage Tests
(%) Test OC Class A/B Class C Class D Class E IC Class A/B Class C Class D Trigger 124.33 114.15 108.42 103.96 Definitiona ACPA divided by A and B ACPA divided by A + B + C (including class C deferred interest) ACPA divided by A + B + C + D (including class C and D deferred interest) ACPA divided by A + B + C + D + E (including class C, D and E deferred interest)

120.0 110.0 105.0

Interest proceeds and expected interest income minus senior expenses, divided by interest due to class A and class B notes Interest proceeds and expected interest income minus senior expenses, divided by interest due to class A, class B, and class C notes (excluding class C deferred interest) Interest proceeds and expected interest income minus senior expenses, divided by interest due to class A, class B, class C and class D notes (excluding class C and D deferred interest)

Reinvestment OC Class F

During RP: 102.37 Post RP: 101.87

ACPA divided by A + B + C + D + E + F (including class C, D, and E + F deferred interest). ACPA (but with no haircuts for CCC+ or discounted obligations, defaulted obligations treated at MV) divided by the sum of the class A principal amount outstanding.

Par Value EOD Par value EOD

a

102.5

A equals class A principal amount outstanding, B equals class B principal amount outstanding, C equals class C principal amount outstanding, D equals class D principal amount outstanding, E equals class E principal amount outstanding. MV Market value. RR Recovery rate. RP Rein vestment Period. Adjusted Collateral Principal Amount (ACPA) equals aggregate principal balance of assets + principal cash. Assets are generally included at their par value, except for: Defaulted assets: if defaulted < 30 days, applicable RR; if defaulted > 30 days and < 3 years, lower of MV and RR. Discount obligations: are generally defined as either senior secured loan rated B or higher and purchased at a price below the lesser of 80% of par (or 85% of par for senior secured loans rated below B); or an obligation that is not a senior secured loan rated 'B ' or higher and purchased at a price below the lesser of 75% of its principal balance (or 80% of its principal balance for nonsenior secured loans rated below 'B'); discount obligations are included at purchase price until (i) MV is above 90% for 30 consecutive days for senior secured loans, after which the asset will be included at par; or (ii) MV is above 85% for 30 consecutive days for any collateral obligation that is not a senior secured loan. Excess of 7.5% of aggregate principal balance of assets rated CCC+ and below: included at MV. Source: Transaction documents.

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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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