Consumer ABS Research An Overview of Asset-Backed Securities

John McElravey, CFA Head of Consumer ABS Research john.mcelravey@wellsfargo.com 704.410.3081

March 23, 2017

All estimates/forecasts are as of 3/15/17 unless otherwise stated.

Please see page 27 for the rating definitions, important disclosures and required analyst certifications.

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A Show of Hands

In terms of the investment process for asset-backed securities (ABS):

Buying ABS currently for your portfolios?

Approved ABS for investment, but have not yet started buying?

In the process of analyzing ABS as an investment option?

Not considering ABS because of:

A lack of resources to do the analysis?

Past headlines involving the non-agency mortgage market?

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Investing in Consumer ABS

Consumer ABS is a higher-quality sector with about 80% of bonds rated AAA.

This is down from 86% in 2012 as the composition of the market has swung to more credit-oriented sectors and issuers.

Maturities tend to be short. The new issue market’s overall weighted-average life in 2016 was just 2.53 years. The majority of bonds have maturities of three years or less.

Most ABS sponsors should be well known to investors, in our opinion, from the corporate bond or commercial paper markets.

The intersection of shorter duration and credit risk characteristics may restrict the ABS buyer base to some degree, in our opinion. We believe this is one reason that ABS spreads have tended to be wider and more volatile than in the pre-crisis past.

Robust structural protections allow investors to pick up yield without taking on undue credit risk.

With interest rates rising and the yield curve steeper at the front end, our relative value focus is on incremental yield and price appreciation as better sources of relative value.

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ABS Investor Continuum

ABS may be purchased by a wide range of investors:

Money-Market Funds

Commercial Banks

Money Managers

Insurance Companies

Pension Plans

Hedge Funds

Private Equity

ABS can satisfy different investors’ maturity and risk preferences.

More regulated, higher liquidity needs,

may take less credit risk.

Less regulated, lower liquidity needs,

may take more credit risk.

Source: Wells Fargo Securities.

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What Are Asset-Backed Securities?

ABS are created when the periodic cash flows from financial assets, loans, leases or other receivables, are pooled and structured into securities sold to investors.

Securitization of nonmortgage assets began in 1985, with equipment leases and followed shortly thereafter by auto loans.

Credit performance and structures have been tested over several economic cycles.

The financial assets are sold to a special purpose vehicle (SPV) by the originator to create a legal separation from the bankruptcy risk of the originator.

The SPV issues securities backed by the periodic principal and interest cash flows of the underlying pool of assets.

Principal and interest collected on the loans pay principal and interest on the ABS.

The originator of the loans is normally the servicer for the assets.

The bonds rely primarily on the underlying assets for payment and do not normally rely explicitly on the credit of the originator, seller or servicer to redeem the bonds.

Nevertheless, the originator/servicer of the assets do play some role in the credit risk and valuation of the ABS.

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ABS Flow Chart – Turning Loans into Bonds

A lender extends credit and services the loans.

The borrowers’ obligations are sold or pledged to a trust.

The interest and principal cash flows are structured into securities.

The ABS are sold to investors with various maturity needs and risk appetites.

Source: Wells Fargo Securities.

Class A

Class B

Class C

Lender/Servicer/ Originator

Credit Extended

Pool of Loans, Leases, or

Receivables

Borrowers

Interest

Principal

Interest

Principal

ABS Investors

ABS Trust(Special Purpose

Vehicle)

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Benefits of Securitization

Securitization provides liquidity for lenders carrying less-liquid assets on their balance sheets, such as consumer loans or equipment leases.

Lenders sell one asset (loans/receivables) and receive another asset (cash).

ABS can offer diversification of funding alternatives for a lender.

Direct access to the capital markets may offer a lower cost of funds compared to other corporate debt, equity or bank financing.

Risk transfer can be achieved to outside investors from the originator.

New ABS may be created that can satisfy the various investor appetites for risk.

ABS typically carry higher credit ratings, and lower risk of default, than the corporate credit risk/rating of the originator or securitization sponsor.

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Consumer ABS New Issue Market – 2016 Share by Sector

The Auto sector accounted for 46% of new issue ABS in 2016, the largest segment of the market.

Subprime loans and prime auto leases have increased their shares.

A lack of credit card and student loan issuance has shifted the composition of ABS.

Nonbenchmark sectors, such as equipment and auto floorplan ABS, have become relatively larger.

Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

Auto-Prime23.4%

Auto-Subprime14.4%

Auto-Lease7.9%

SL-FFELP4.4%SL-Private

3.7%

Card-GP16.7%

Card-PL2.6%

Equipment5.8%

EQ-Fleet Lease2.8%

Floorplan4.6%

Rental Car1.6%

Timeshare1.4%

Personal Loan5.3%

Utility0.0%

Other5.3%

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Consumer ABS Outstanding

The ABS market experienced rapid growth until 2007 as new issuers and asset classes joined, and investor demand grew.

After a steep drop during the recession, ABS outstanding has stabilized around $660 billion.

We expect modest growth in ABS going forward given the mature nature of the consumer credit markets.

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Source: SIFMA, Wells Fargo Securities.

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ABS Issuers – Familiar Corporate Names, and Some New Ones

The largest, most active issuers in consumer ABS should be familiar names to most investors.

Commercial banks, finance companies, auto captives and industrial firms that also issue corporate bonds and commercial paper dominate. However, new issuers are rising in the ranks.

The top 25 issuers accounted for 67% of total ABS volume in 2016, down from 69% in 2015 and 72% in 2014. ABS have become less concentrated with a wider variety of issuers.

Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

Rank Top Issuers 2016Amt.

($mm) Share Rank Top Issuers 2015Amt.

($mm) Share

1 Ford Credit 10,137 5.7% 1 Ford Credit 11,446 7.0%2 GM Financial 9,034 5.1% 2 Santander Drive 10,686 6.5%3 Santander Drive 8,470 4.8% 3 Ally Bank 8,350 5.1%4 Chase 8,275 4.7% 4 GM Financial 8,262 5.0%5 Nissan 7,660 4.3% 5 Chase 6,825 4.2%6 Navient Corp. 6,285 3.6% 6 Nissan 6,530 4.0%7 Capital One 6,275 3.6% 7 Mercedes Benz 5,782 3.5%8 Honda 5,500 3.1% 8 Hyundai Auto 5,146 3.1%9 Toyota 5,350 3.0% 9 Capital One 5,075 3.1%10 Hyundai Auto 5,095 2.9% 10 Navient Corp. 4,503 2.7%11 Ally Bank 5,077 2.9% 11 Honda 4,292 2.6%12 Carmax 4,865 2.8% 12 Carmax 4,215 2.6%13 Mercedes Benz 4,587 2.6% 13 Toyota 4,027 2.5%14 Social Professional Loan Program 3,749 2.1% 14 Discover 2,975 1.8%15 Citibank 3,325 1.9% 15 BMW 2,900 1.8%16 BMW 3,250 1.8% 16 OneMain Financial 2,772 1.7%17 Discover 3,050 1.7% 17 CNH 2,550 1.6%18 World Omni 2,787 1.6% 18 Synchrony Financial 2,427 1.5%19 Verizon 2,569 1.5% 19 World Omni 2,394 1.5%20 OneMain Financial 2,494 1.4% 20 Bank of America 2,300 1.4%21 CNH 2,464 1.4% 21 Sallie Mae 2,119 1.3%22 Hertz 2,309 1.3% 22 Dell Equipment 1,877 1.1%23 Synchrony Financial 2,247 1.3% 23 RBC 1,875 1.1%24 RBC 2,125 1.2% 24 John Deere 1,747 1.1%25 TD Bank 2,000 1.1% 25 Nelnet 1,689 1.0%26 Sallie Mae 1,882 1.1% 26 Social Professional Loan Program 1,680 1.0%

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ABS Issuance by Average Life

Consumer ABS maturities are concentrated in the front end of the yield curve.

In 2016, the weighted-average life of new-issue ABS was 2.53 years, equal to 2015’s figure.

ABS maturities were down from 2.80 years in 2014, 2.75 years in 2013 and 2.96 years in 2012.

Eighty-five percent of bonds issued in 2016 had original average lives of four years or less, primarily from autos, equipment and credit cards.

Longer-maturity bonds (five years or more) tend to be concentrated in student loans, auto floorplan, rental car and credit cards.

The supply of bonds with average lives beyond seven years is limited, and has been primarily from floating-rate student loan ABS.

In our opinion, rising short-term interest rates and a steeper yield curve should help support ABS demand.

2016 ABS Issuance by Average LifeAvg. Life

(yrs.)Issuance (Million $) % of Total

0 - 1 30,367 17.3%>1 - 2 41,274 23.5%>2 - 3 57,131 32.5%>3 - 4 21,278 12.1%>4 - 5 13,668 7.8%>5 - 7 8,235 4.7%

>7 3,991 2.3%Total 175,942

Market WAL = 2.53 years.Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

2015 ABS Issuance by Average LifeAvg. Life

(yrs.)Issuance (Million $) % of Total

0 - 1 29,900 18.1%>1 - 2 43,197 26.2%>2 - 3 47,997 29.1%>3 - 4 17,905 10.8%>4 - 5 15,206 9.2%>5 - 7 6,676 4.0%

>7 4,281 2.6%Total 165,162

Market WAL = 2.53 years.Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

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ABS Issuance by Credit Rating

Consumer ABS are mainly rated AAA. The highest rating categories accounted for 78% of the market in 2016, down from 80% in 2015 and a post-crisis high of 86% in 2012.

The distribution of ratings single-A and below increased in 2016 to 15% from 10% or less in earlier years.

The change in the distribution of ratings reflects the reorientation of ABS toward newer issuers and credit sectors.

A bias toward the AAA ratings in many investment policies may create good relative value opportunities in subordinated classes for investors that are less sensitive to credit ratings.

Money-market tranches, eligible under Rule 2(a)7 and rated A1/P1, are mainly issued by equipment and auto ABS deals.

2016 ABS Issuance by Rating Category

RatingIssuance (Million $) % of Total

A1/P1 16,257 9.2%AAA 121,148 68.9%AA 12,697 7.2%A 15,727 8.9%BBB 7,008 4.0%BB/B 2,150 1.2%NR 954 0.5%Total 175,942

Rating category based on lowest of split ratings.Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

2015 ABS Issuance by Rating Category

RatingIssuance (Million $) % of Total

A1/P1 16,389 9.9%AAA 116,173 70.3%AA 9,503 5.8%A 14,021 8.5%BBB 5,516 3.3%BB/B 2,050 1.2%NR 1,510 0.9%Total 165,162

Rating category based on lowest of split ratings.Source: Bloomberg, ThomsonReuters, Wells Fargo Securities.

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Credit Ratings Transitions on Consumer ABS

Most ABS carry investment grade ratings, primarily AAA.

Just 3.8% of ABS were originally rated below investment grade from 1983 to 2013.

Rating stability has been strong over the long run and through economic cycles.

Downgrades have been mostly based on a guarantor’s downgrade, such as FFELP student loans and the U.S. sovereign rating, or the corporate-rating downgrades of monoline bond insurers.

Event and servicer risk have been more likely to lead to downgrades in consumer ABS as opposed to widespread consumer credit deterioration.

From 2014-2016, S&P took just 99 rating actions to downgrade consumer ABS: 57 manufactured housing (MH), 32 student loans, 5 credit card, 5 recreational vehicle (RV).

MH credit has underperformed the overall ABS market by a large margin resulting in much of the rating volatility in aggregate measures.

U.S. ABS Rating Transitions: 1983-2013

No. of Original Upgrade/Ratings Rating AAA AA A BBB BB B CCC CC C Default Stable Downgrade5,274 AAA 82.8 8.1 3.6 2.3 1.1 0.7 0.6 0.4 0.0 0.2 82.8 17.21,760 AA 8.1 68.8 14.7 1.5 1.0 0.7 2.0 0.6 0.0 2.7 76.9 23.13,838 A 10.2 12.8 65.8 5.0 0.7 0.9 0.7 0.4 0.0 3.5 88.8 11.21,792 BBB 8.0 8.3 5.1 60.9 2.4 4.0 2.5 0.8 0.0 8.1 82.3 17.7462 BB 2.4 6.9 8.9 4.3 60.4 1.1 1.1 1.3 0.0 13.6 82.9 17.141 B 0.0 0.0 4.9 4.9 2.4 53.7 2.4 4.9 0.0 26.8 65.9 34.1

Note: Percentages are based on number of ratings. All AAA ratings from same transaction are treated as a single rating in calculations.

Source: Standard and Poor's, Wells Fargo Securities.

Current/Last Rating

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Credit Ratings Upgrade Potential

Consumer ABS offer substantial rating stability and upgrade potential.

Benchmark sectors such as credit cards and auto loans, as well as auto leases and equipment ABS, have experienced long-run positive credit rating performance.

In 2016, prime and subprime auto loan ABS experienced no rating downgrades

Spread tightening often lags upgrades providing relative value opportunities, in our opinion.

U.S. Auto Loan ABS Rating Transitions: 1983-2013

No. of Original Upgrade/Ratings Rating AAA AA A BBB BB B CCC CC C Default Stable Downgrade1,556 AAA 95.8 1.9 1.0 1.3 0.0 0.0 0.0 0.0 0.0 0.0 95.8 4.2323 AA 21.1 73.4 5.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 94.4 5.6612 A 28.9 26.1 44.4 0.3 0.2 0.0 0.0 0.0 0.0 0.0 99.5 0.5400 BBB 22.8 27.3 8.3 40.8 0.3 0.8 0.0 0.0 0.0 0.0 99.0 1.0199 BB 5.0 15.6 18.1 9.0 50.3 0.5 0.5 0.0 0.0 1.0 98.0 2.015 B 0.0 0.0 13.3 13.3 6.7 53.3 0.0 0.0 0.0 13.3 86.7 13.3

Note: Percentages are based on number of ratings. All AAA ratings from same transaction are treated as a single rating in calculations.Source: Standard and Poor's, Wells Fargo Securities.

Current/Last Rating

U.S. Credit Card ABS Rating Transitions: 1983-2013

No. of Original Upgrade/Ratings Rating AAA AA A BBB BB B CCC CC C Default Stable Downgrade1,088 AAA 96.5 1.9 0.6 0.5 0.2 0.1 0.0 0.0 0.0 0.2 96.5 3.5135 AA 5.2 88.9 5.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 94.1 5.9964 A 1.0 11.8 85.4 0.6 0.0 0.3 0.0 0.3 0.0 0.5 98.2 1.8524 BBB 1.1 3.6 6.5 85.7 1.3 0.8 0.2 0.2 0.0 0.6 96.9 3.1123 BB 0.0 0.0 0.0 0.0 93.5 0.8 0.0 1.6 0.0 4.1 93.5 6.50 B

Note: Percentages are based on number of ratings. All AAA ratings from same transaction are treated as a single rating in calculations.Source: Standard and Poor's, Wells Fargo Securities.

Current/Last Rating

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Fixed or Floating – ABS Pricing Benchmarks

ABS are benchmarked mainly to one-month LIBOR for floating-rate bonds or the swap yield curve for fixed-rate bonds.

Swaps offer a more continuous benchmark curve compared to Treasuries for interpolation of expected maturities.

Fixed-rate bonds have gained market share in the post-crisis period as credit card and student loan ABS issuance—mainly floaters–has slowed.

Fixed-rate bonds with maturities inside two years price off the Eurodollar Synthetic Forward (EDSF) curve.

Money market tranches are priced to interpolated LIBOR, or more recently, to a yield as money market rates have been suppressed.

2016 ABS Issuance by Coupon

BenchmarkIssuance (Million $) % of Total

Floating 34,992 19.9%Fixed 137,110 77.9% Swaps 78,958 44.9% EDSF 41,930 23.8% Yield/Price 16,222 9.2%No Pricing Spread 3,840 2.2%

Total 175,942

Not all bonds were priced or may have been retained by isSource: Bloomberg, ThomsonReuters, Wells Fargo Securit

2015 ABS Issuance by Coupon

BenchmarkIssuance (Million $) % of Total

Floating 37,696 22.8%Fixed 124,336 75.3% Swaps 73,870 44.7% EDSF 32,289 19.5% Yield/Price 18,178 11.0%No Pricing Spread 3,129 1.9%

Total 165,162

Not all bonds priced publicly or were retained by issuer.Source: Bloomberg, ThomsonReuters, Wells Fargo Securit

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Consumer ABS Spreads – Prime Auto ABS

Spreads on consumer ABS have been wider and somewhat more volatile in the post-crisis period (2010-present) compared with the pre-crisis past.

Movements in spreads tend to be larger and more persistent.

We believe that periods of spread volatility offer relative value opportunities.

The behavior of spreads does not seem to be motivated primarily by credit concerns.

Shifting supply-and-demand conditions indicate that investors may be rotating in and out of ABS as interest rates move and the shape of the yield curve changes.

Economic trends and headline risks are subjecting the market to additional variability.

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Source: Wells Fargo Securities.

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Source: Wells Fargo Securities.

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Incremental Yield in ABS—Three-Year Credit Card/Agency Spread Differential

ABS may offer incremental yield over Treasury and Agency bonds without taking on undue credit risk, in our opinion.

Spreads on ABS tightened as market conditions normalized after 2010, narrowing the spread differential between the two sectors.

The spread differential between credit card ABS and Agencies has been +20 bps-+40 bps.

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Incremental Yield in ABS—Auto ABS/Corporate Spread Differential

Some segments of consumer ABS may offer incremental yield over corporate bonds, as well.

On-the-run benchmark ABS spreads tend to follow comparable corporate bond spreads. However, periods of market dislocation may offer better relative value opportunities as ABS spreads widen compared to benchmark corporate sectors.

Meanwhile, credit-oriented ABS sectors and issuers may provide investors with opportunities to earn incremental yield relative to corporate bonds of similar rating and duration.

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Source: YieldBook, Wells Fargo Securities

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An ABS Case Study – CarMax Auto Loan ABS

ABS are identified by its ticker, series and class: CARMX 2015-1 A4.

This deal is an example of prime auto loan ABS with an amortizing pool of collateral.

The structure is commonly used by ABS sectors that securitize amortizing loans or leases.

Consumer ABS Case Study - CARMX 2015-1 A4Ticker: CARMXSeries: 2015-1Class: A4Pricing Speed: 1.3% ABS to Call

Class Amount (Million $)

Ratings (S/F)

Weighted-Average Life

(yrs.)

Principal Window (months)

Orig. Credit Enhancement

(%)

Pricing Spread (bps)

Yield (%)

A1 191.0 A-1+/F1+ 0.28 1-7 0.240A2 320.0 AAA/AAA 1.12 7-21 E+35 0.891A3 319.0 AAA/AAA 2.50 21-41 N+31 1.394A4 115.0 AAA/AAA 3.76 41-48 N+37 1.843B 22.5 AA/AA 3.97 48-48 3.50 N+65 2.180C 18.5 A/A 3.97 48-48 1.65 N+95 2.480D 14.0 BBB/BBB 3.97 48-48 0.25 N+165 3.180

Note: Classes A4, B, C, D subject to 10% Clean-Up Call at month 48 based on pricing assumptions.Pricing spread benchmarks: E = EDSF, N = Swaps.Source: Bloomberg, Intex, Informa Global Markets, Wells Fargo Securities.

5.75

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Data Analysis Needs for ABS

Delinquent accounts

Default rates

Net losses / loss severity

Default and net loss timing

Cumulative net loss rate

Principal prepayment rate

Monthly payment rate

Portfolio yield

Excess spread

Clean-up call efficiency

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CARMX 2015-1 A4 – Key Characteristics

A senior/subordinated structure with sequential-pay bonds that may satisfy investors with differing maturity needs and risk appetites.

To achieve desired credit ratings, credit enhancement (C/E) is provided by subordination, overcollateralization, a reserve fund and excess spread.

Rating agencies determine required C/E based on historical loss and prepayment experience, structural protections, servicer quality and financial strength.

S&P, Moody’s and Fitch are the major raters of ABS. DBRS and Kroll are gaining market share.

Credit enhancement percentages generally grow over time as the collateral amortizes, the senior bonds pay down and leverage is reduced.

Other types of structures may have static C/E percentages (e.g., credit card ABS).

Pricing spreads may be to fixed-rate benchmarks, such as EDSF (E) and interpolated swaps (N). Swaps may be denoted by N (Bloomberg convention) or S (swap curve).

Original average lives are based on an assumed pricing prepayment speed (1.3% ABS), zero losses and a 10% clean-up call.

Actual credit and prepayment performance is likely to vary from the pricing assumptions.

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Types of Credit Enhancement

Internal credit enhancement

Excess spread – finance charge collections less bond coupons and deal costs.

Cash reserve account – established by the issuer to provide extra internal liquidity for the ABS investors.

Overcollateralization – the amount of collateral in excess of bonds issued, can be thought of as the sponsor’s equity in the deal.

Subordination – lower-rated bonds that provide support for those above.

External credit enhancement

Letters of credit – an unfunded line of credit from a bank that can be drawn to provide credit support to rated ABS.

Corporate guarantee – provision from the sponsor to repurchase defaulted collateral or deliver other financial support for ABS payments.

Bond insurance – interest and principal payments will be made to investors by a third-party insurer in the event of shortfalls in cash flow from the collateral.

External C/E has fallen out of favor since the financial crisis.

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The Clean-Up Call

In our CARMX 2015-1 case study, original average lives are based on the assumed pricing prepayment speed (1.3% ABS), zero losses and a 10% clean-up call.

The clean-up call is a standard feature in most consumer ABS.

Exercise of the clean-up call would affect Classes A4, B, C, D at month 48 based on assumed cash flows.

The issuer has an option to call the collateral when the balance reaches a predetermined threshold based on a percentage of the original pool balance, usually 10%.

Clean-up calls may vary by deal or by issuer. It may be as low as 2% or as high as 20%.

The call is based on the collateral and not the price of the bonds. Collateral is repurchased at par, and those principal collections repay the outstanding bonds.

Exercise of the call option affects ABS valuations. Shorter average-life bonds that are closer to their expected maturity (to call) may be subject to greater call risk.

Issuers tend to be relatively efficient exercising the clean-up call, with it generally occurring within a month or two of reaching the threshold.

The value of the call to the issuer is based on the credit performance of the collateral, excess spread generated, as well as its capacity to be placed into a subsequent securitization.

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Prepayment Rates

In our CARMX 2015-1 case study, original average lives are based on the assumed pricing prepayment speed (1.3% ABS), zero losses and a 10% clean-up call.

Like mortgages, prepayment rates can play an important role in the average life, expected maturity and valuation of consumer ABS.

Unlike mortgages, though, prepayment rates on many consumer ABS tend to be less sensitive to interest rate changes that might create refinancing opportunities.

Instead, prepayments may be generated more by credit trends (default rates) or other economic conditions affecting consumer behavior (auto sales, job and income growth, etc.).

Various prepayment conventions have been developed and may be used depending on the type of ABS being evaluated.

CPR (Constant Prepayment Rate) is used in many asset classes, including student loans, equipment loans and leases and timeshare loans.

ABS (Absolute Prepayment Rate) calculates prepayments as a percentage of the original dollar balance of the collateral pool. It is the prepayment convention for auto ABS transactions.

PPC (Prospectus Prepayment Curve) is a prepayment vector established for pricing an individual deal. It may be reported as a percentage of the baseline curve (100 PPC).

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Yield Table Example – CARMX 2015-1 A4

Clean-Up Call -- Payment window extends 3 months

when run to maturity

Pricing Spread – Swap curve N+37 bps

Principal Payment Window Month/Year

Prepayment Assumptions: Run at slower

and faster speeds

Source: Bloomberg, Wells Fargo Securities.

26

An Overview of Asset-Backed Securities

Q & A

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Disclosure Appendix Additional information is available on request. Analyst’s Certification The research analyst(s) principally responsible for the report certifies to the following: all views expressed in this research report accurately reflect the analysts’ personal views about any and all of the subject securities or issuers discussed; and no part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report.

Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest Wells Fargo Securities does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities research analysts receive compensation that is based on and affected by the overall profitability of their respective department and the firm, which includes, but is not limited to, investment banking revenue. Wells Fargo Securities may sell or buy the subject securities to/from customers on a principal basis or act as a liquidity provider in such securities. Wells Fargo Securities Fixed Income Research analysts interact with the firm’s trading and sales personnel in the ordinary course of business. The firm trades or may trade as a principal in the securities or related derivatives mentioned herein. The firm’s interests may conflict with the interests of investors in those instruments.

About Wells Fargo Securities Wells Fargo Securities is the global brand name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank, N.A. and Wells Fargo Securities International Limited, a U.K. entity investment firm authorized and regulated by the Financial Conduct Authority. The Wells Fargo Securities legal entity that takes responsibility for the production of the Product is the legal entity which the first named author is employed by. Non-US analysts may not be associated persons of Wells Fargo Securities, LLC. and therefore may not be subject to FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities by the analysts, but will be subject to their own local regulatory requirements.

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Important Information for Non-U.S. Clients EEA The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, Wells Fargo Securities International Limited (“WFSIL”) disseminates Research which has been approved for the purposes of Section 21 of the Financial Services and Markets Act 2000 (“the Act”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the Act, WFSIL does not deal with retail clients. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.

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Disclosure Appendix

Australia Each of Wells Fargo Securities, LLC, Wells Fargo Securities Asia Limited and Wells Fargo Securities International Limited is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws, Wells Fargo Securities Asia Limited is regulated under Hong Kong law, and Wells Fargo Securities International Limited is regulated under U.K. law, all of which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities in the course of providing the financial services will be prepared in accordance with the laws of the United States, Hong Kong or U.K. and not Australian laws. Hong Kong This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited (“WFSAL”), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong), “the SFO”). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). The author or authors of this report is or are not licensed by the SFC. Professional investors who receive this report should direct any queries regarding its contents to Mark Jones at WFSAL (email: wfsalresearch@wellsfargo.com ). Japan This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, registered with the Kanto Local Finance Bureau to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moody’s Investors Services Inc, Standard & Poor’s Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies’ websites.

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Disclosure Appendix

Published reports and additional disclosure information are available at www.wellsfargoresearch.com.

This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the Wells Fargo entity in their local jurisdiction with which they deal, or the entity that provided this report to them, if they desire further information or if they wish to effect transactions in the security discussed in this report. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, to be reliable, but Wells Fargo Securities does not represent that this information is accurate or complete. Certain text, images, graphics, screenshots and audio or video clips included in this report are protected by copyright law and owned by third parties (collectively, “Third Party Content”). Third Party Content is made available to clients by Wells Fargo under license or otherwise in accordance with applicable law. Any use or publication of Third Party Content included in this report for purposes other than fair use requires permission from the copyright owner. Certain website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these external websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Credit Strategists focus on investment themes across the credit markets and sectors. Any discussion within a Credit Strategy report of specific securities is not intended to provide a fundamental analysis of any individual company described therein. The information provided in Credit Strategy reports is subject to change without notice, and investors should not expect continuing information or additional reports relating to any security described therein. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment and substantive research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright © 2017 Wells Fargo Securities, LLC.

This report was prepared by Wells Fargo Securities, LLC.

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