Leveraged Loan Markets

Leveraged Loan Markets

Reflecting Thus Far & Themes For Investing In Debt Via Secondary Trades

by

Sachin Sarnobat

(917) 940 9793

October 2008

Preface

Over the last several years, private equity, a word that was once whispered by hushed voices has now become common parlance. The leveraged buyout

boom of the last several years made kings out of private equity players, but the king-makers in this boom were the institutional, leveraged loan investors.

Sadly, they are the ones who are ‘left holding the bag’ after the kings abdicated with the treasury.

Beginning in 2003, institutional players began dominating the leveraged loan market. Cheap liquidity raised via the CLO structures was the main driver and

eventually created excess supply. Innovations in the credit derivatives market led investors to believe that risk was truly being held by those who could

afford it. The main impact of these developments was wafer thin credit spreads and later, loose lending standards.

Concurrently with these developments, the so called decade of moderation ushered in global growth and a “decoupling” of the rest of the world from the

American growth engine. The side effect of this optimism was robust growth projections and unbridled consumer spending that supported capital spending

by corporations. Asset bubbles took over and attracted additional pools of capital from the public as well as private markets.

As the asset bubble burst, the 2007/08 credit crisis created a wide spread dislocation in the leveraged loan market because of fundamental as well as

technical reasons. This report seeks to identify some of the structural nuances and understand implications of this dislocation from a secondary debt

investors standpoint.

This report is divided into the following sections:

• Key implications of the last several years (p3)

• Broad investment themes (p9)

• How did we get here? (p13)

• Corporate Issuers vs. LBOs (p21)

• Demand & supply technical factors (p25)

• Spreads & recovery by sector (p29)

• Analysis of secondary trading data (p33)

I look forward to your comments. Thank you for this opportunity.

1. Increase In First Lien Leverage

Under-collateralization, Decreased Visibility, Value Leakage, Over-Levered Cash Flows

Institutional Lenders Inadvertently Subverted The Practical Intent of Low Cost Leveraged Loans

Features Practical Intent What Changed Implications

Fully secured on a first lien basis

• Preserve value for investors even in a case of a downside scenario • Depends on the lenders attestation of “asset values” and

“liquidation values”

• Usually a cushion between the liquidation value and the amount of debt is provided

• Global asset bubble, inflated underlying asset values

• Under-collateralization

Maintenance Covenants

• Provide investors comfort that the borrower is adhering to its operating plan and is inline in achieving the business objectives that were outlined when the money was loaned

• Incase the company deviates from operating plan, investors have a “hammer” to force the company to “come to the table” and adjust/compensate investors for the increased risk

• Looser covenants with greater head room • Fewer covenants • Covenant-lite loans

• Decreased visibility of company operating performance for investors

• Lower likelihood of intervention will in advance of distress

Cash Flow Sweeps

• Cash flow sweeps are designed to force the company to de-lever and hence minimize the principal-agent problem by providing debt discipline

• Creates value for junior capital as the sweeps reduce secured claims on the underlying asset over time

• Lower cash flow sweeps with looser step-ups • Equity markets were

ready and willing to provide liquidity to take private companies public

• Management could now try to take on “Hail Mary” projects – thus increasing the risk of destroying capital

• Increased sponsor ownership provides incentive to use available cash flow for restricted payments, causing value leakage to debt investors

• Sources of equity proceeds have dried up Fraction of the

entire capital structure

• Traditionally, secured first lien leverage with maintenance covenants formed a small fraction of the capital structure • This ensured that companies were able to meet maintenance

covenants even with significant deviations from operating plan, but the presence of the maintenance covenants kept them on track

• Bond heavy structure with a small first lien loan component provided a borrower with a solid defensive structure to withstand

• Leveraged loans because the dominant part of the capital structure

• Good quality companies that are over-levered on a first lien basis

• Companies that needed a bond-heavy defensive, structure were now levered to the hilt with maintenance covenants

80 70 56 24 63 44 43 0 10 20 30 40 50 60 70 80 90

Revolvers Term Loans Sr. Bonds Subordinated Bonds Secured Unsecured

•

Loan loss varies from cycle to cycle and in this

cycle will depend:

–

Quality of loans and intrinsic credit quality

–

Under-collateralization due to overvalued assets

and over-levered cash flows

–

Level of subordination at the time of default

•

An increased use of asset based and

non-recourse debt has left highly liquid assets like

inventory and receivables encumbered

–

Severity of downturn

•

Depth of current recession is expected to be

worse than the previous ones and asset values

will take longer to recover

–

Expected market value of defaulted assets

•

Lack of liquidity for buyers could force more

liquidations versus bankruptcy reorganizations

–

Maintenance covenants (or lack thereof)

•

This cycle this aspect will determine how soon

lenders will be able to intervene and prevent

collateral and recovery value erosion

•

The current loan spreads imply a average

default rate of 20% at 50% recovery rates

–

Room for significant upside if default rate are

lower or recovery rate are higher or both

–

See p37 for additional analysis

Recovery Rates Could Between 50-60

Driving Factors & Implications

2. Lower Recovery Values & Higher Default Rates

Recoveries Will Be Closer to Those for Unsecured Loans because of Under-collateralization

Discounted Recovery Rates By Instrument Type (1987 – 2006)

•

Historically from 1986-2006, nominal recoveries have

been 80 and discounted recoveries have been about 70

cents on the dollar for secured term loans

•

The difference between nominal and discounted

recovery rates is the time value from the pre-petition

date from when the borrower halts interest payments to

the time of recovery

Covenant Headroom Increased

Lenders Will Have Negotiating Leverage

3. Lax Covenant Structures Based On Bullish Projections

Companies Will Need Lender Support For Amendments / Waivers

Year One Debt/EBITDA Headroom as a Percentage of Covenant Level for LBOs

_{Lender Consent Required For Waivers/Amendments}

Effective Covenant Cushions Will Now Be Tighter

Illustrative Covenant Calculations

($,mm) Yr.0 Yr.1 Yr.2 Yr.3 Projected EBITDA $100 $120 $132 $139 growth 20% 10% 5% Interest $50.0 $45.0 $40.0 $35.0 Projected Covenant 2.0x 2.7x 3.3x 4.0x Headroom or Cushion 25% 30% 35% 35% Threshold EBITDA (1) 25% $75.0 $84.0 $85.8 $90.1 Covenant Level 1.5x 1.9x 2.1x 2.6x Realistic Projected EBITDA $85 $89 $98 $103 Discount 15% 26% 26% 26% revised growth 5% 10% 5% Realistic Covenant 1.7x 2.0x 2.5x 2.9x

•

Given that most of the loans have been trading

well below par, any amendment/waiver request

is likely to be expensive

•

For transactions that actually have

covenants, slightly looser covenants will

probably NOT be the key issue

–

Covenants were based on bullish projections, and

given more sober revised outlooks the cushions

will now be much tighter

•

Liquidity management will be critical for

companies that had planned to invest and grow

sales

–

Given the much greater leverage on the

companies, positive cash flow and access to

liquidity could be an issue

–

The credit crunch will make raising new debt

capital difficult

•

Management will have to work with lenders to

secure covenant amendments/waivers as well

as secure additional external sources of

financing

24% 19% 25% 23% 27% 26% 23% 28% 24% 17% 0% 10% 20% 30% 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q-3Q08

•

Company proposal in return for covenant

amendment

–

$100 million pay down at par as part of the

economics of the amendment.

–

50 bps spread increase that would take pricing to

L+425

–

3% LIBOR floor extension

–

150 bps fee on post-paydown outstandings

•

$1.43 billion term loan was put in place in conjunction

with Dana’s exit from Chapter 11 earlier this year

–

The loan is currently priced at L+375 and includes a 3%

LIBOR floor for two years

–

The paper was issued at a 90 OID

•

Dana (BB-/B1 corporate) announced significantly weak

results

–

Third-quarter EBITDA of $15 million was $111 million below

results for the same period in 2007.

–

Lower production and higher steel costs of $140 million

more than account for this reduction

–

Results also included higher pricing, cost savings, and

unfavorable currency changes

–

Dana is planning up to 10 additional plant closures in 2009

and 2010, and it has expanded its targeted 2008 workforce

reduction to 5,000 from 3,000

–

YTD EBITDA of $290 million vs. $373 million for the same

period in 2007

–

Full-year sales of $8.2 billion and EBITDA of $300 million

expected

•

Dana maintaining large cash reserves to preserve access

to liquidity

–

The auto supplier had a $1.0 billion cash balance at Sept. 30,

including $180 million that it drew during October from its

$650 million revolving credit

•

Free cash flow of negative $151 million for the third

quarter was about the same as that during the same

period in 2007

Lenders Can Extract Value + Readjust Terms

Company Situation

Case Study: Dana Corp. – Value of Covenants

The Auto Supplier Completed an Expensive Amendment Seeking Covenant Relief

Par paydown + coupon +upfront fees + LIBOR Floor

Weak earnings indicative of sector underperformance

•

The automotive supplier is projecting year-end

non-compliance with the covenants on its term loan

–

The company was in compliance with the 3.1x

total-leverage test as of Sept. 30

–

However, the leverage covenant is due to step down

to 2.9x on March 31, 2009, with additional step-downs

in subsequent quarters

•

The term loan is quoted at 63.5/65.5 with the entire

auto sector is under pressure

Having Covenants Is Critical For Value Capture

Asset Values Increased…

Other Peoples Money

4. Thin Equity Cushions With No Sponsor Support

Private Equity Sponsors Will Act In Their Self Interest, Often To The Detriment of Lenders

Average Purchase Price Multiples Of LBO Transactions

Sponsor Ownership Will Act Against Debt Holder Interest

…With Lower Equity Cushions

Average Equity Contributed As % of Total Purchase Price

28% 30% 32% 31% 31% 27% 30% 31% 31% 38% 20% 30% 40% 50% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q-Public-to-Private All Other

•

Unprecedented availability of cheap liquidity led

tight equity cushions in recent LBO transactions

–

Eq. In the Tribune transaction, the present value of the

tax savings was presented to the debt investors as part

of the equity cushion

•

The tax savings were only important as long as

Tribune was earning positive taxable income

•

As the business performance has gone south, the

present value of the tax savings has diminished

•

Sponsors acting to maximize returns to their

limited partner investors, do not have enough

“skin-in-the-game”

•

Equity investors can usually intervene in troubled

companies and support the going concern value by

providing liquidity and recapitalizing the business

–

The main motivation is to preserve the residual value

of the equity holders

•

Sponsors have taken the opposite path by going

down the dividend-recapitalization route

–

Companies that have been over-levered because of

sponsor dividends will face challenges in terms of

2.4 2.4 2.6 _2.2 2.3 2.5 2.6 2.3 2.6 2.9 3.5 4.2 7.9 8.1 7.7 6.3 6.1 6.5 7.1 7.4 8.2 8.6 9.8 9.7 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q-3Q08 Equity/EBITDA Others Sub Debt/EBITDA Senior Debt/EBITDA Total

5. Access to Take-Out Capital Determines Returns Today

Take-Out Capital Supply is Lower Than Initially Invested, But Will Grow Over Time With GDP

Type

Source

Requirements for Target Investment

Internal

Organic Cash Flows

- Strong franchise values that sustain

through the cycle

- Access to liquidity

Desirable

(Higher Rated)

Equity Markets

- Franchise value can support growth

Debt Markets

- Well known issuer that has good

relationships with debt investors

Ch-7 Liquidation

- Easily separable assets

- Readily identifiable buyer

Less Desirable

(Lower Rated)

Limited Access

None

Ch-7 Liquidation

- No access to incremental liquidity

- Excess capacity in industry

- Weak competitive position

- Fundamental industry restructuring

?

Ch-11 Reorganization

- Availability of DIP Financing

- Customer lock-in and influence over

suppliers that preserves value through the

reorganization

- Access to public/private capital markets

for bankruptcy exit

External

Take-Out

Capital

Available

Investment Themes Relevant In Current Environment

Theme Sector Related Issues Company Related Issues

Discretionary Consumer Spending

• Discretionary consumer spending that drives almost 70% of the US GDP was significantly over estimated

• Capital expenditures that were committed to before the crisis could cause significant over-supply

• Avoid sectors that were levered for robust consumer spending cash flows

• Avoid sectors that have fixed costs and high capital expenditures

• Commodity vs. differentiated value proposition • Differentiated value proposition needs to be

sustained, quality driven, non-discretionary and important to customer’s competitive advantage

Recession • The recession trough could be much deeper than past recessions and last much longer

• Pick defensive sectors that serve a core customer base that provide critical services • Even if margins decline, ability of companies

to avoid negative cash flows will determine survivors

• Pick companies with high degree of variable costs that can be cut as sales decline

• Capital structures will need to be defensive

Liquidity • Banks are undercapitalized and access to liquidity will be severely constrained

• Pick sectors that are not capital intensive • Additionally, because of asset-light nature,

these sectors should have strong brands, proprietary intangible assets, value-added service oriented components

• Company should have revolving credit facilities as well as room under its credit

agreements/indentures that offer flexibility to execute asset based lending agreements

Capital Spending • Capital spending will be deferred because of lack of financing

• Pick sectors that need capital expenditures based on replacement cycles

• Pick companies with access to liquidity over the next several years with reliable counterparties • Backlog driven industries with strong credit

worthy customers

Marginal Producers

• Marginal producers will be disproportionately hit

• Sectors where capacity utilization affects pricing will favor level utilization companies even if they are not the lowest cost producers

• Producers that supply the last x% of demand at premium pricing will be affected

Obsolescence of Business Models

• Sectors like Auto, Residential Homes, that relied heavily on availability of financing will have to be restructured

• Complementary industries will suffer • Too much uncertainty for non-investment

grade, highly levered borrower

• Need to look to collateral values of the market leader in these sectors

• Smaller players could be squeezed from not being able to re-write the rules of the game to their favor

Investment Themes Relevant In Current Environment

Theme Sector Related Issues Company Related Issues

Sponsors • In a distressed scenario, sponsors should be able to provide equity injections to keep the business solvent

• Certain sectors such as retail, chemicals saw dividend

recapitalizations mere months after the companies were taken private

• Sponsors should have enough “skin-in-the-game” to care, else if the sponsor has taken a dividend off the table then solvency in a distressed scenario could lead to bankruptcy fairly quickly

US vs. Non-US Revenues

• Exposure to fast growing Asian markets • Sectors that are regionally serviced/supplied via a local franchise

• Market leadership in fast growing markets and access to liquidity to support market share growth

Bankruptcy • Even if bankruptcy is the optimal answer to keep going-concern value, current downturn might depress asset values, and not provide liquidity to potential buyers

• If entire sector is distressed, then bankruptcy reorganization could lead to liquidation versus a sale and might not maximize value

• Company need to be in jurisdictions that are friendly to enforcing on liens and where bankruptcy reorganization does not cause value leakage to junior capital

Size • Mega-LBOs like TXU and HCA would not have happened without the level of cheap liquidity

• Great companies with premium franchise value even if leverage is a concern

• Mega-LBOs in “toxic” sectors like Autos, Financials will be challenging to execute successfully and exit • Any governmental intervention

increases uncertainty

• Need to verify underlying collateral value and structure that will enable lenders to capture that value for par payback on the secured loan

• Mega-LBO candidates were market leaders in their space and provided strong, stable cash flows

• Need to verify that sponsors have “skin-in-game” and are pre-dividend recapitalization

• These companies will make excellent IPO candidates when the equity markets open again

Structure • Covenant-lite, PIK Toggles, Incurrence Term Loans

• Need strong understanding of the sector as well as company to understand the level of distress • Lack of covenants will add a level of complexity to

negotiate with borrower

Working Capital • Working capital management will be focus of most management teams

• Sectors that traditionally involved supplier financing will get squeezed because suppliers lines of credit will no longer be able to support them

• Strong customer power will require suppliers to finance inventories at their own expense

What Makes An Ideal Target for Debt Investments?

Strategic Analysis of Company vis-à-vis Buyers, Suppliers & End-Consumers

Suppliers

Ideal TargetCo

Buyers or Customers

End-Consumer

• Large number of smaller

suppliers that are commodity pricing driven • Excess capacity in supplier

industry

• Specialized suppliers dependent on specific industry demand • Suppliers that have access

to vendor financing facilities to provide credit lines to TargetCo • Located close to TargetCo

and provides lock-in

In a recession scenario, the ideal TargetCo will have: • Customer lock-in via contracts in the “right” industries • Customer switching costs that need cash expenditure

• Companies that help their customers achieve and sustain cost competitiveness • Ability to assume a greater number of buyer activities more efficiently and cross sell

additional services to enhance revenue • Ability to find new, alternative product markets

• Constant utilization companies will have lower costs even though smaller competitor s grow faster during the upturn

• Strong regional franchise

• Industries that do not have a need for extensive marketing/advertising • Low working capital needs because of well capitalized buyers

• Lean operations with non-critical operating activities outsources to lowest cost producer • Experienced management team that has seen a previous downturn

• No adverse regulatory pressures

• Defensive capital structure with presence of bonds to minimize maintenance covenants

• Smaller than Company • Profitable, well capitalized • Replacement cycle driven • Depends on TargetCo to

provide goods or services critical to its competitive advantage with end-consumer

• Quality driven needs • Customization driven with

heavy interaction between respective teams • Small portion of end

product costs • Ability to out-source

additional services to TargetCo

• Avoid customers that could demand specific performance and potentially renegotiate contracts in a bankruptcy scenario • Demands differentiated product based on sustained value proposition

• Cost of low-quality is high • Few substitutes

• Not discretionary buyer • Stable base of necessity

driven buying behavior • Replacement need or

maintenance driven buying pattern

• In case of service industries, recession resistant needs like healthcare services • Geography of

end-consumer will play a factor Product Focus Industry Focus

Product focused companies specialize in an application of their technology across various industries

Industry specialists provide a broad range of services for a tailored to a particular industry and depend on the health of that industry and related industries that support it

Ideal players would have: • Quasi-monopolistic markets • Proprietary technology • Complex product or patents

• Some economies of scale that prevent industry specialists from competing with them and allow them to be lowest cost producers

• If product is simple, cost focused customer

• If product is complicated, quality focused customer, but without need for extensive customization

• Variable costs that can be cut at short notice with decreased revenues

Ideal players would have:

• Industry leadership, market share, brand • Customer demanding specialization,

customization

• Complex assets like factories that need significant investments

• Oligopolistic markets that understand the dynamics of capacity driven pricing because fixed costs create penalty for

underutilization

201 ₁₆₈ 101 117 121 233 286 277 465 527 114 209 184 139 105 81 74 112 112 159 149 59 $0B $100B $200B $300B $400B $500B $600B $700B $800B 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 YTD 7/08 Institutional Bank 2 1 0 2 72 229 409 261 ₂₅₁ 220 0 0 100 200 300 400 500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3Q08

Leveraged Loan & High-Yield Bond Volumes

Institutional Ownership Fueled Leveraged Loan Issuance and The Subsequent Debt Boom

75 100 126 130 136 147 184 235 376 522 554 0 1 9 12 24 35 32 16 14 16 19 39 66 71 63 66 71 81 159 182 231 260 335 374 396 461 495 531 551 71 79 91 94 121 121 121 119 113 107 121 $0B $200B $400B $600B $800B $1000B $1200B $1400B 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007YTD 7/08 First Lien Second Lien Sr Secured Sr Unsecured Subordinated

Pre-2003 Banks Dominated The Leveraged Loan Market, But Institutional Demand Took Over And Multiplied from 2004-2007

The Demand/Supply Mismatch and Increased % Institutional Ownership, Led To Looser Lending Standards

# Transactions Without Upfront Fees

Institutional Volume Outstanding: $1,338bn

% Institutional Ownership of Leveraged Paper

# Transactions Without Upfront Fees Is an Indicator of Demand Vs. Supply

41 % 3% 6% 41 % 9% 44% 0% 10% 20% 30% 40% 50% 60%

Jun-96 Oct-97 Mar-99 Jul-00 Nov-01 Apr-03 Aug-04 Jan-06 May-07 Oct-08

Institutions Banks 0% 0% 0% 1% 36% 67% 86% 93% 86% 40% 0% 0% 25% 50% 75% 100% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3Q08

6 33 47 52 93 98 90 4 7 2 3 12 17 22 46 55 ₄₄ 11 1 4 6 14 21 14 4 4 7 4 50 100 150 200

$500 million-$1 billion $1-2 Billion $2-5 billion $5 billion or more

The Top 10 Accounts Got Larger

Increased Number of Institutional Investors

Mega-Accounts Lead To Mega-LBOs

As The Market Was Overrun by Cheap Liquidity, Deals Grew Increasingly Ambitious & Issuer Friendly

…resulting In Mega-LBOs i.e. Companies That Would Not Have Experienced Those Levels of Debt

Top 10, 10-20, 20-30 Account By Size ($,mm)

Investor Groups that Made 10 or More Primary Commitments Each Year

22 29 48 54 ₄₂ 64 76 98 116 168 218 261 79 0 50 100 150 200 250 300 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3Q08

Number Of LBOs (#)

23 36 48 25 26 41 64 65 82 110 277 128 58 74 151 43 39 69 91 122 130 232 357 237 --100 200 300 400 500 600 700 800 900 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3Q08 Top 10 Accounts By Size 11-20th Account by Size 21-30th Account By Size

8.8 7.1 6.7 5.3 5.0 5.1 5.3 5.2 5.8 5.6 _5.2 4.5 4.0 _{3.7 3.8} 3.9 4.2 4.3 4.4 4.9 _4.7 4.3 3.6 3.9 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 1987 1988 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 4Q07 1Q08 2Q08 3Q08

Sub Debt/EBITDA

Other Sr Debt/EBITDA

SLD/EBITDA

FLD/EBITDA

4% 6% 5% 6% 10% 13% 11% 17% 28% 33% 57% 44% 14% 18% 18% 19% 20% 24% 23% 37% 39% 42% 28% 41% 82% 75% 77% 75% 69% 62% _66% 46% 33% 25% 15% 15% 0% 25% 50% 75% 100% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q-3Q08 2 or less 3 4 or more 2.3 2.6 0 1 2 3 4 5 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q-3Q08 First Lien Total Debt

Number of Covenants Dropped Below Three…

…and 60% had Two or Fewer Covenants

Debt Multiples & Covenants Over Time

Increase In First Lien Leverage With Loose Covenants Incurred In A Bullish Market

First Lien Leverage Increased To Levels Only Second to 1987

Leverage & Coverage Multiples

As The Market Was Overrun by Liquidity, Deals Grew Increasingly Ambitious & Issuer Friendly

18 27 55 70 74 71 107 27 15 20 51 52 52 121 141 26 24 22 38 56 61 136 88 22 22 19 32 36 43 51 78 15 13 10 19 33 16 35 39 9 26 23 39 38 32 51 73 16 $0B $100B $200B $300B $400B $500B

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Jun-08 <3.0x 3.0x-3.99x 4.0x - 4.99x 5.0x - 5.99x 6.0x - 6.99x >7.0x 26 20 33 23 24 55 49 9 64 58 106 136 111 175 219 43 14 ₁₉ 35 36 46 115 137 25 13 24 58 92 96 120 122 37 $0B $100B $200B $300B $400B $500B

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Jun-08 <1.5x 1.5x - 2.99x 3.0x - 3.99x >4.0x

Leverage Multiples Increased As Companies Levered Themselves With Tighter Interest Coverage

79 146 158 349 500 94 76 145 132 111 102 11 41 $100B $200B $300B $400B $500B $600B

0% Sweep 50% Sweep 75% Sweep 100% Sweep

..But At The Same Time Relied On IPO Proceeds From Equity Markets To Pay Down Debt

Total Leverage

Interest Coverage

Equity Issuance Recapture

Excess Cash Flow Sweeps

74 75 198 197 213 302 369 85 13 18 -- 37 8 125 --30 28 35 46 28 37 158 28 $100B $200B $300B $400B $500B $600B

L+225bps L+257bps 175 200 225 250 275

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Covenant-Lite All Other First-Lien

Debt Innovations Like Cov-Lite & PIK Toggle Loans

Competition To Deploy Capital Led To Sponsors To Push The Envelope on Structure

Approximately $90billion of Covenant-Lite Loans Are Currently Outstanding

Covenant-Lite Term Loans Trade at a Discount To Comparable Credits

Par Volume of Covenant Loans Currently Outstanding

Average Nominal Spread (bps)

67.43 73.12 65 70 75 80 85 90 95 100 105

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Covenant-Lite All Other First-Lien

Average Bid

32bps 570bps 92 --$25bn $50bn $75bn $100bn D e c-0 4 D e c-0 5 Ja n -0 6 Fe b -0 6 M a r-0 6 A p r-0 6 M a y-0 6 Ju n -0 6 Ju l-0 6 A u g -0 6 Se p -0 6 O ct -0 6 N o v-0 6 D e c-0 6 Ja n -0 7 Fe b -0 7 M a r-0 7 A p r-0 7 M a y-0 7 Ju n -0 7 Ju l-0 7 A u g -0 7 Se p -0 7 O ct -0 7 N o v-0 7 D e c-0 7 Ja n -0 8 Fe b -0 8 M a r-0 8 A p r-0 8 M a y-0 8 Ju n -0 8 Ju l-0 8 A u g -0 8 Se p -0 8 O ct -0 8

164 0bps 50bps 100bps 150bps 200bps 250bps

Why Do Cove-Lites/PIK-Toggles Trade At A Discount?

Lenders Dislike Lack of Visibility, Cannot Capture Waiver/Amendment Fees or Adjust Terms

•

Lack of covenants are adverse to debt value because they complicate the principal-agent problem and

delay identifying potential issues to lenders

1.

Delay extracting value from the borrower as consent fees because of technical amendments

2.

Prevent renegotiating the terms of the debt structure to adjusted for the revised risk profile

3.

Since secured loan covenants tend to be breached first, prevents the lenders from intervening and helping the

management correct course

4.

Borrower may decide to stay the course and cause value leakage from the collateral until a point of no-return

5.

Lack of visibility of when default will hit, adds to lender apprehension as lenders cannot manage their risk and exit

position before the borrower is in a serious default

Approximately $100billion of Covenant-Lite Loans Are Currently Outstanding

Covenant-Lite Loans Preclude The Lender From Capturing Amendment & Covenant Relief Fees

Average Covenant Relief Amendment Fee (bps)

Average Covenant Relief Spread Increase (bps)

63 0bps 10bps 20bps 30bps 40bps 50bps 60bps 70bps 80bps

Lastly, Ratings Were Issued In A Bull Market

Loans Are “Notched Up” Based On Historical Recovery Rates

•

LBOs were structured to a single B corporate rating and

a BB loan rating

•

Ratings considered should be corporate ratings rather

than facility ratings

–

Due to the recent trend of highly levered LBOs, debt service

and access to liquidity will be important

•

Loan ratings incorporate the positive effects of the

security and liens on recovery value in case of

bankruptcy

•

Borrower default is tightly correlated to corporate

ratings

1 5 18 43 92 134 117 56 32 16 5 2 2 0 13 61 $0B $50B $100B $150B BBB+BBB BBB- BB+ BB BB- B+ B B- CCC+CCC CCC- CC C D NR

All BB Loans Are Not Born Equal

Loan Or Facility Based Ratings Are Higher…

Loan/Facility Ratings & Spreads

..But Corporate Ratings Will Also Be Important

Loan Ratings Could Overestimate Recovery Value

Loan / Facility Based Ratings

Corporate Credit Ratings

Average Secondary Spread Based On Loan Ratings

1 3 10 31 69 157 116 103 17 3 1 15 70 $0B $50B $100B $150B $200B BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CC D NR 80% 20% 50% 50% 1,088 1,265 1,456 1,728 2,653 3,176 L+200bps L+700bps L+1,200bps L+1,700bps L+2,200bps L+2,700bps L+3,200bps BB+ BB BB- B+ B

•

As the large Mega-LBOs were being structured,

large corporate opportunistic refinancings

peaked in 2007

•

These transactions structured similar to LBO

transactions, but had lower leverage and higher

coverage ratios

•

The current environment allows for investing in

a select pool of corporate loans that are direct

competitors of the companies that were LBOed,

but have much more flexibility from a capital

structure standpoint

$130 billion of Volume in 2007

Commentary

Large Corporate Issuances Peaked In 2007

The LBO Boom Also Allowed Corporate Issuers To Avail The Same Loose Covenants

$,Bn of Corporate Transactions that Were Opportunistic Refinancings

Average of $780mm Per Transaction in 2007

#Corporate Transactions that Were Opportunistic Refinancings

13 38 76 65 55 131 0 $0B $20B $40B $60B $80B $100B $120B $140B $160B 40 93 231 207 141 166 0 0 50 100 150 200 250 300

Corporate Vs. LBO

Corporate Transactions Have Been 1.1x Turns Less Levered With 0.8x Increased Coverage

Total Debt/EBITDA Senior Secured Debt/EBITDA EBITDA/Cash Interest EBITDA - Capex/Cash Interest

LBO Corporate ∆ LBO Corporate ∆ LBO Corporate ∆ LBO Corporate ∆

1Q-3Q08 4.9x 3.7x 1.2x 4.2x 2.9x 1.3x 3.0x 4.4x (1.4x) 2.3x 3.0x (0.8x) 2007 6.2x 4.9x 1.3x 5.5x 4.4x 1.1x 2.1x 3.0x (0.8x) 1.6x 2.4x (0.8x) 2006 5.4x 4.4x 1.0x 4.6x 3.9x 0.7x 2.3x 3.1x (0.8x) 1.9x 2.4x (0.5x) 2005 5.3x 4.3x 1.0x 4.0x 3.6x 0.4x 2.7x 3.6x (0.9x) 2.1x 2.7x (0.6x) 2005-07 Avg. 5.6x 4.5x 1.1x 4.7x 3.9x 0.7x 2.4x 3.2x (0.8x) 1.9x 2.5x (0.6x) 2004 4.8x 4.3x 0.6x 3.3x 3.1x 0.2x 3.4x 4.0x (0.6x) 2.6x 2.8x (0.2x) 2003 4.6x 4.1x 0.6x 2.8x 2.7x 0.1x 3.1x 3.7x (0.6x) 2.5x 2.5x 0.0x 2002 4.0x 4.0x 0.0x 2.5x 2.7x (0.2x) 3.2x 3.6x (0.4x) 2.4x 2.4x (0.0x) 2001 4.1x 4.0x 0.0x 2.7x 2.6x 0.1x 2.7x 3.2x (0.5x) 2.0x 1.8x 0.2x 2000 4.2x 4.2x (0.0x) 3.2x 2.8x 0.4x 2.3x 3.0x (0.7x) 1.6x 1.8x (0.2x) 1999 4.7x 4.6x 0.1x 3.2x 3.2x (0.0x) 2.3x 2.9x (0.6x) 1.7x 1.5x 0.1x 1998 5.4x 5.0x 0.4x 3.2x 3.4x (0.1x) 2.1x 2.6x (0.5x) 1.2x 1.3x (0.1x) 1997 5.7x 5.4x 0.3x 4.0x 3.6x 0.5x 2.0x 2.3x (0.3x) 1.2x 1.2x 0.1x

Lenders Need To Be Careful About Hidden Traps

Citadel Capitalized On Absence of Buyers

Dangerous Precedent or New Buyer Base?

Citadel Broadcasting Redeems Loan At Below Than Par Value via a Modified Dutch Auction

Win-Win versus Giving Away Upside

Transaction Overview

$1.5Bn Covenant-Lite Term Loan

•

Corporate borrowers who do not have onerous cash

flow sweeps like LBO buyers have the ability to use the

excess cash flow to request an amendment for a

buy-back below par

•

As the secondary market gets weaker and liquidity is

drying up, a greater number of lenders could be

tempted

•

This is a dangerous precedent because it not only

changes the dynamics of the leveraged loan institutional

structure, but also creates incentive for the borrower to

be opportunistic about redeeming debt below par

•

Loans generally have no provision for the borrower or

any of the affiliates of the borrower to redeem the loan

at less than par value via a Dutch auction tender

•

The concept of tendering for a debt instrument by the

borrower below par is not new and is used extensively

by issuers of unsecured and subordinated bonds when

the bonds are trading below par

–

This provides liquidity to existing debt holders who are

willing to give up value in exchange for the ability to exit

their respective positions

•

Citadel Broadcasting sought an amendment that allowed

the borrower to purchase its loans at a price below par

as part of a modified Dutch auction

•

Under terms of that amendment, the issuer had the

ability to approach investors up to three times over 90

days to repurchase as much as $200 million of its TLA

and TLB

–

Citadel Broadcasting bought back just over $149 million of

senior debt after completing an amendment in March that

allowed the company to purchase up to $200 million of its

loans at a price below par as part of a modified Dutch

auction

–

Citadel paid an average of just under 81 to repurchase

paper whereas Citadel’s TLB was quoted at 45/47 recently

–

Citadel’s lenders do not have an excess cash flow recapture

provision, and the company’s covenants were flexible

–

Lenders would not be entitled to the pay down and the

issuer could easily dividend out its cash on hand

Purpose

Merger; Along with an RC and TLa, backs the merger of the Citadel Broadcasting with Disney's ABC Radio Holdings.

Industry Radio; Domestic mid-market radio franchise. Deal Size $1535mm

Corporate Rating (at

close) B+/Ba3 Loan Rating (at close) B+/Ba3

TLB (Flex) $1535M/L+162.5 (-12.5 bps) Institutional Break Price 100.25%

Demand & Supply Technical Factors

Lack of Capital Has Severely Curtailed Demand For Leveraged Loans

•

The four main pillars of loan market technicals

have crumbled over the past year, in the face of

the ongoing bear market

1.

CLOs: Year to date, managers have priced $13.5

billion of new vehicles, down from $83 billion

during the same period last year

•

Many TRS and market value CLOs because of

structure mandates, are hitting selling trigger

points as asset values fall further depressing

valuations

2.

Prime Funds: Withdrawal of assets by retail

investors are bleeding the prime funds.

•

Through September investors withdrew $6.4

billion, versus $1.8 billion of net inflows during

the first nine months of last year.

3.

Repayments: Repayment rates have slowed to

all-time lows

•

Repayments for the year to date totaled $43.9

billion, down 67% from the same period in

2007, when issuers repaid $133 billion.

4.

Institutional fund raising: Year-to-date fundings

total $85 billion, down 70% from the same period

last year, versus an increase of $144 billion during

the same period in 2007

Demand Supply

Prices Will Continue to Have Downward Pressure

Demand/Supply Mismatch

$420bn

•

About $150 billion has been withdrawn from the institutional

loan market and unless this amount is replenished, prices will

not return to par

•

The marginal seller of loans has been the mark-to-market

account (market value CLOs, TRS line, hedge funds) that

remain vulnerable to redemptions

Repayment Rates Have Slowed To a Trickle

Companies Are Conserving Cash To Ride The Downturn And Are Only Delaying Default

Repayment Rates Dropped from $160bn to about $60bn per year as of October, 2008

Monthly & Rolling12-month repayment amounts ($,billions)

$0B $50B $100B $150B $200B $0B $3B $6B $9B $12B $15B $18B $21B $24B $27B $30B

Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08

Repayment amount Rolling-12mo

•

Majority of the companies that raised debt capital especially via LBOs over the last few years, were over levered

with fixed charges being a strong demand on cash flow

–

Deleveraging is the key attribute that will keep the companies from default since growth in EBITDA will be difficult to achieve

because of the global slowdown and rationalization of both GDP and sector growth projections

•

Looser maintenance covenants and lower cash flow sweep requirements are allowing the companies to avoid

triggering default

•

A lack of ongoing repayments indicates that when “fate catches up” and performance erodes to a thin cushion to

default

Decrease In Repayments Highlights the Severity of Potential Underlying Issues

Companies need to deleverage to avoid default

2008 Has Been A Year Of Net Capital Withdrawal

CLOs Were the Overwhelming Driver of Institutional Demand from 2005-2008

Estimated Cash Inflows into Institutional Accounts By Account Type

Institutional Net Cash Flows less Change in Outstandings

9.1 12.1 16.2 25.5 52.6 97.0 88.9 13.5 -0.5 1.0 0.2 2.1 0.7 2.6 2.8 -5.6 -5.2 -5.7 0.1 9.0 4.2 5.5 -1.0 -5.9 -$20.0B $0.0B $20.0B $40.0B $60.0B $80.0B $100.0B 2001 2002 2003 2004 2005 2006 2007 YTD08

CLO Issuance

CLO Pipeline Change

Prime Funds

-$12B -$10B -$8B -$6B -$4B -$2B $0B $2B $4B $6B $8B $10B $12B

Discretionary Consumer + RE Exposure

Even though historical recovery values are high for Gaming & Lodging, recent real estate boom could lower these values.

Secondary Spreads & Recovery Values On Default

Food Products, Healthcare, Industrials, Chemicals, Utilities Will Be Defensive Sectors

BB & B Rated Loan Secondary Spreads

Recovery Values On Default

Significant risks in light of government intervention

Weak Consumer Spending + Low Collateral Value

79.5 62.6 62.3 70.3 65.3 76.1 82.8 55.1 _53.9 70.3 79.9 55.0 79.5 53.9 0 20 40 60 80 100 Fo o d P rd ts H e a lt h ca re C o n ta in e rs /G la ss U ti lit ie s In d u st ri a ls Le is u re C h e m ic a ls R e ta ile rs E le ct ri ca l B ro a d ca st in g G a m in g & L o d g in g P u b lis h in g A u to H o m e B u ild in g 832 1016 945 1009 1077 1267 1873 1611 1762 1353 1963 2088 2260 2032 290 130 367 314 440 650 89 380 273 859 444 731 642 ₈₉₃ 1,122 1,146 1,312 1,323 1,517 1,917 1,962 1,991 2,035 2,212 2,407 2,819 2,902 2,925 --L+750bps L+1,500bps L+2,250bps L+3,000bps Fo o d P rd ts H e a lt h ca re C o n ta in e rs /G la ss U ti lit ie s In d u st ri a ls Le is u re C h e m ic a ls R e ta ile rs E le ct ri ca l B ro a d ca st in g G a m in g & L o d g in g P u b lis h in g A u to H o m e B u ild in g

B

•

Criteria relevant to debt investors:

– Risk/return ratio measured by Sharpe Ratio

– Recovery values in even of downturn

– Liquidity provided by secondary market as

measured by the par amount outstanding

– Size of company within sector as measured by

the average size of loan

• The Sharpe Ratio and Standard Deviation were

calculated based on trading data over from January

2002 – YTD October

Sector Number Par (mm) Bid Avg. Size Stdev Sharpe Recovery

Clothing - Textiles 13 $3,000 76.7 $230 5.2% 80% 62.3 Nonferrous Metals - Minerals 13 4,300 75.5 330 4.8% 69% 59.0 Oil And Gas 50 22,550 77.0 450 3.1% 63%

Aerospace and Defense 30 9,600 76.1 320 3.0% 59%

Industrial Equipment 30 8,850 75.1 295 3.1% 55% 65.3 Chemicals And Plastics 52 27,050 70.1 520 4.6% 52% 82.8 Electronics - Electrical 41 17,750 68.1 435 5.5% 49% 53.9 Telecom 43 34,850 83.6 810 5.6% 46% 45.3 Food And Drug Retailers 11 5,350 76.6 485 3.3% 35% 79.7 Utilities 54 40,100 77.6 745 5.8% 34% 70.3 Conglomerates 17 5,350 75.9 315 4.3% 34%

Financial Intermediaries 30 25,050 72.0 835 3.4% 32% Business Equipment and Services 61 30,300 72.0 495 4.6% 32%

Industrials 196 93,500 68.7 475 4.3% 29% 70.3 Healthcare 97 55,450 78.6 570 3.5% 25% 62.6 Containers and Glass Products 21 9,100 76.0 435 3.9% 25% 62.3 Forest Products 14 11,950 81.3 855 4.2% 23%

Food Products 33 13,500 79.5 410 3.9% 20% 79.5 Leisure Goods-Activities -Movies 41 18,650 67.4 455 3.7% 19% 76.1 Surface Transport 18 6,450 63.7 360 5.0% 12% 62.6 Retailers (Not Food And Drug) 34 19,600 66.8 575 4.0% 12% 55.1 Lodging And Casinos 44 26,100 62.6 595 5.3% 11% 81.1 Home Furnishings 23 5,450 60.7 235 5.4% 11% 53.9 Cable and Satellite TV 24 23,200 75.2 965 5.9% 1% 85.3 Food Service 30 10,750 73.5 360 4.5% 0% 76.1 Automotive 53 38,350 61.1 725 6.1% (3%) 79.5 Building And Development 60 22,450 58.2 375 4.3% (5%) 53.9 Beverage & Tobacco 11 3,700 76.7 335 3.7% (7%) 76.1 Publishing 63 40,750 57.4 645 5.8% (7%) 55.0 Cosmetics - Toiletries 15 4,600 69.0 305 5.0% (10%) Radio And Television 41 24,700 64.6 600 5.3% (10%) 85.3 Media 115 83,850 63.4 730 5.6% (20%)

Sub-Sectors Sorted By Sharpe Ratio

What Sectors Will Have Access To Liquidity?

Asset Based Lending Is A Source of Capital That Can Be Raised During A Downturn

Lenders Look To Value of Specific, Easily Liquidated Collateral And Can Provide Liquidity

The Asset Based Lending Market is Used More By Some Industries Than Others

Asset Based Loans As a % of Total Leveraged Loan Volume

($ in millions)

5.0% 3.3% 7.7% 5.1% 6.2% 13.3% 8.6% 9.7% 4.8% 3.6% 7.2% _6.2% 4.6% _4.1% 8.5% 11.3% 7.9% 17.7% 14.1% 0% 5% 10% 15% 20% 25% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 YTD3Q08 465 476 500 590 610 700 790 1,216 1,294 1,676 1,961 2,136 3,192 6,590 7,632 7,883 8,416 11,655 0 2,500 5,000 7,500 10,000 12,500 15,000

Average Bid Based On Ratings Shows The Gap Widening, But Technical Reasons Have Dominated

Performance & Ratings Based Pricing

Defaults & Non-Performance Haven’t Hit Secondary Pricing of Loans

Average Bid Based On Performing Vs. Non-Performing

(1)

_Loans

70 75 80 85 90 95 100 105 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 12/06 6/07 12/07 6/08 Performing Loans Index All Loans Index

65 70 75 80 85 90 95 100 105 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 12/06 6/07 12/07 6/08 Current BB Index Current B Index

0.89 0.20 0.40 0.60 0.80 1.00 82.44 77.00 75 80 85 90 95 100 105 D e c-9 8 Ju n -9 9 D e c-9 9 Ju n -0 0 D e c-0 0 Ju n -0 1 D e c-0 1 Ju n -0 2 D e c-0 2 Ju n -0 3 D e c-0 3 Ju n -0 4 D e c-0 4 Ju n -0 5 D e c-0 5 Ju n -0 6 D e c-0 6 Ju n -0 7 D e c-0 7 Ju n -0 8 Loans Bonds

Relative Value: Bonds Vs Loans

From a Relative Value Perspective, Secured Loans Seem To Undervalued

Unsecured Bonds Traded Below Secured Loans In the Last Cycle…

…But This Cycle Has Seen Tight Correlated Moves That Imply Technical Selling Pressure

Weighted Average Bid Price For Leveraged Loans & High Yield Bonds

Relative Value: Bonds Vs Loans

Leveraged Loans Are Yielding Spreads That Exceed Those Seen In The Last Cycle

L+790bps L+1,111bps L+150 L+350 L+550 L+750 L+950 L+1150 L+1350 L+1550

Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Loan Spread to Maturity Bond Swapped to Worst

Differential Between Unsecured & Secured Paper is ~320bps at Absolute Rates Well Above 10.00%

•

The spread between secured loans and bonds accounts for:

–

Security package, priority and liens

–

Tighter maintenance covenants

–

Ongoing compliance and reporting covenants

–

Cash flow sweeps

–

Recovery values on default or credit loss given default

•

Historically, spreads between secured versus unsecured paper have been around 218bps

–

A 320bps spread between secured vs. unsecured either implies much lower recovery values or under pricing of

unsecured bonds on a relative value basis

Source S&P/LSTA Leveraged Loan Index and Merrill Lynch High-Yield Index (H0A0)

320 bps

Average Nominal Spread of the S&P/LSTA Index

L+280bps

Historical Average Default Rate

3.0%

Historical Loss Given Default

30.0%

Average Credit Loss

90bps

Average Effective Spread

190

Historical Return from 1997-2008

4.11%

Spread to Maturity of the LSTA

1,166

Less: Effective Spread

(190)

Risk Premium

976

Average Recovery Secured Loans

70%

Loss Rate

30%

Implied Default Rate = Risk Premium/Loss Rate

33%

3.27% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

Recovery Rates LSTA Spread 25% 50% 70% 90% L+500 4% 6% 10% 31% 750 7% 11% 19% 56% 1,166 13% 20% 33% 98% 1,250 14% 21% 35% 106%

Current Default Rate is 3.27%

Implied Default Rates

Higher Default Rates and Lower Recovery Rates

The Spread of 1,166bps on the LSTA Index Implies that Recovery Values Will Be Lower Than 70%

Recovery Rates of 50% Are More Likely

Lagging 12-months Default Rate by Number of Issuers

Lagging 12-months Default Rate by Number of Issuers

Implied Default Rates Vs. Recovery Rates (RR)

33%

20%

17%

3.3%

0% 5% 10% 15% 20% 25% 30% 35%

Oct-98 May-99 Dec-99 Jul-00 Feb-01 Sep-01 Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 70%RR 50%RR 50%RR+125bps Actual Rate

Current Trading Levels Imply a 20% Default Rate Assuming a 50% Recovery Rate

As the liquidity boom took off, several LBOs that were structured in early part of the cycle were good quality credit with well structured covenant and reasonable leverage – reflected in trading behavior in loans of that vintage 0 % 3% ₂% 2% 2% ₁% 0 % ₀% ₀% ₀% 2 0 % -- 0 0 0 0 0 0 0 -- 0 0 0 0 0 0 0 0 0 -- 0 0 0 6 % 4 % 7 % 11 % 1 2 % 2 % 0 % ₀% ₀% 7 % 2 4 % 9 1 % 6 7 % 6 4 % ₆6% 6 1 % 2 0 % 9 % 12 % 2 4 % 9 1 % 7 % 3 % 2 4 % 2 1 % 1 3 % 1 8 % 7 6 % 9 0 % 8 7 % 7 5 % 1 % 0 % 0% 25% 50% 75% 100%

As With Fine Wine, Vintage Of Loans Matters

2007 Vintage Loans Were Mostly Trading Below Par

Distribution of Secondary Loan Bid Price By Vintage Of Loan

The loans issued earlier than 2003 trade at a discount because probability of default increases with the age of the loan instrument

Several Mega-LBOs were structured in 2006 but never hit the market until 2007 These were deals that were over-levered and pushed the envelope with covenant-lite structures

DISCLAIMER

These discussion materials are presented solely for the purpose of demonstrating analytical and critical thinking abilities. Data used this in these materials was based on trial subscriptions provided by Capital IQ, S&P LCD Comps, Bloomberg, Markit and other public data sources that need a fully paid subscription and are used in good faith. These materials may not be reproduced without the written permission of the author.