Investment Philosophy

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CREDIT ANALYSIS
MRA MODELING
CREDIT MONITORING

Katonah Debt Advisors a team of seasoned investment professionals who use various inputs to manage the portfolio on a pro-active basis and to anticipate, not react to market movements. Our investment philosophy is: Pro-active portfolio management, with rigorous credit analysis, Maximum Reasonable Adversity (“MRA”) modeling and careful ongoing monitoring, will lead to excellent investment selections and should yield superior financial returns over time.

We actively manage our investment portfolios through:

• rigorous intial credit analysis, market analysis, and relative value analysis
• optimizing portfolio credit quality and excess spread while preserving principal
• investing in companies with improving credit profiles and clear deleveraging capability
• selecting investments with portfolio-appropriate risk-reward profiles
• maintaining up-to-date financial, qualitative, and MRA situational forecasts to determine if an investment rationale has changed, and then react as necessary

Market volatility and current events require continuous evaluation of each investment versus the firm's expectations. Information and data flows continuously via an internal messaging system between the team ensuring that the decision to buy, sell, or hold is current. On a more formal basis, Investment Committee meetings are held at minimum twice per week, and in-depth reviews of each portfolio take place on a quarterly basis.

CREDIT ANALYSIS

Rigorous credit analysis is a cornerstone of our investment philosophy. An event specific financial model reflecting company, industry, and market variables backs each investment decision. The chart below illustrates our credit decision making process.

We focus analysis not merely on a company's “numbers” but also on qualitative issues which may impact its ability to service debt. The chart below illustrates this distinction.

Qualitative Analysis	Quantitative Analysis
industry fundamentals management quality and experience alternative sources of capital ability to work through historical down- cycles diversity of customer base and product line acquisition / integration history credit profile – improving, declining, status quo	financial statement analysis financial ratio analysis event specific credit modeling capital expenditure / asset sale projections risk adjusted returns and relative value analysis asset valuations

Each of our analysts focus on a specific industry and the companies within them. A quarterly strategic review updates the team on the outlook for each industry. Our credit selection process combines top down and bottoms up analysis and is iterative.

Timely market intelligence from the high yield bond and leveraged loan markets, as well as related markets and prices, such as CDS, convertibles and equity are constantly monitored. Money flows, trading levels and news, are all important inputs to the investment decision process.

The comparison of value between investments is a critical factor contributing to strong investment performance. As a participant in the leveraged loan and high yield bond markets KDA select the best value from within a company's capital structure.

MRA MODELING

One of the key components to our credit analysis and investment process is our Maximum Reasonable Adversity (“MRA”) modeling and forecasting methodology. This process was developed by, and has been continuously used and updated over the last 20 years, by the Portfolio Manager, Syndicated Loans and Bonds.

The world is an increasingly volatile and unpredictable environment. What we expect in the future and what in fact occurs may be entirely different. KDA investment professionals constantly strive to develop case selection to predict not one but a range of scenarios. The main elements  in case selection are, therefore, determining the most likely outcome for a particular investment ( the “Base Case”), identifying those key elements in the company’s success or failure, and then modeling these elements. KDA does not use the company provided scenario as our “Base Case”.

The MRA case is then defined as those adverse conditions or events that either singly or in combination might reasonably occur during the term of the respective investment. When the MRA is used as the forecasting standard, the decision criteria becomes “survival” which is defined as the company’s ability to maintain its business while covering, at a minimum, all contractually payable senior indebtedness.

CREDIT MONITORING

The chart below shows the frequency with which we review specific issues.