B2B Finance: Credit Crunch Creates Opportunitiesfor Large Corporates, Poses Policy ChallengesMarch 2010

Small and Medium Sized Business

This is not a research report and was not prepared by Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading, banking and other non-research personnel. Past performance is not necessarily a guide to future performance. Morgan Stanley does not provide tax, legal or accounting advice. This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters discussed herein. It is not a solicitation or recommendation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Please see additional important information and qualifications at the end of this material.

All forecasts (and all estimates and assumptions relating thereto ) are subject to change at any time and may not com e to pass due to changes in market or economic condition s.

Small/Medium Enterprises (SMEs) & the Credit Crunch

2

• Financing for SMEs has not yet recovered from the credit crunch

• SME credit was disproportionately underpriced during the credit bubble, so SMEs face a disproportionate adjustment

• The collapse of SME credit is attributable to both supply and demand factors. Prospects for a recovery in credit capacity are uncertain, owing to the disruption in non-bank financing and the 24% decline in bank commercial lending during 2009(1)

• Policymakers are especially concerned, since SMEs employ approximately 66% of private sector workers

• New markets are evolving, but so far their capacity is a fraction of that available prior to the crunch

• Healthy companies with a cost of capital advantage relative to that of their smaller suppliers may have a window of opportunity to create value using their working capital to finance suppliers. Few companies appear to be capitalizing upon this opportunity

• When financing any counterparty, be careful to extend credit that tends to be “self-liquidating”(2) rather than based on asset values that might be inflated

Notes:1. Statement of Governor Elizabeth Duke before the House Financial Services Committee on Small Business, February 26, 2010. The Fed’s

Survey of Terms of Business Lending showed spreads on loans from $100,000 to $25 million widened by 100bp in 2009, reaching their highest levels in more than a decade.

2. Self-liquidating credit facilitates production, whose profits pay back the loan. By contrast, no production effort is tied to non self-liquidating credit, whose interest payments depend on other sources of income and which tends to be borrowed for speculation or consumption.

One effect of the credit crunch is a wide cost-of-capital differential between large customers and smaller suppliers. Healthy companies may be able to create value by using their balance sheets to finance their suppliers & customers

SMEs Account for Substantial Employment, Revenue

3

U.S. Total Economy Expenditures (1)

Companies within Revenue Ranges

$0MM–$25MM Total50,583,34145%

$25MM–$500MM Total23,187,35921%

$500MM–$1Bn Total5,380,0105%

Over $1Bn Total33,249,94430%

Number of Employees at U.S. Companies

$0MM–$25MM Total5,478,10525%

$25MM–$500MM Total4,550,44421%

$500MM–$1Bn Total1,078,9805%

Over $1Bn Total10,954,99950%

Annual Revenue at U.S. Companies: by Size

Companies within Revenue Ranges

Sources: U.S. Census Bureau; 2002 County Business Patterns and 2002 Economic Census

SMEs employ roughly 2/3 of private sector workers and generate roughly half of business revenues. They also generate a large portion of business-to-business activity in the economy, which is much larger than GDP

Notes:1. Total economy expenditures represents IRS total receipts less reported net income. For 2007-2009, data not yet released but we estimated total

expenditure for each C-Corps, S-Corps, Partnerships and Proprietorships using multiple regressions against historical personal consumption expenditures and gross private domestic investment (where the r2 for each ranged from 94-99% and high t-statistics indicated strong statistical significance).

2. Capital Expenditures shown as gross private investment less residential fixed investment.

Sources: Bureau of Economic Analysis, IRS. Based on methodology of Sean Corrigan, "Bastiat's Iceberg," Diapason Commodities Management, December 2009

0

6,600

13,200

19,800

26,400

33,000

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

C-Corps S-Corps Partnerships Proprietorships CAPEX

GDP

$Bn

(2)

Total Expenditures

(area)

GDP (bars)

Corporate Equities $12,081

Corporate Bonds$4,073

Bank Loans to Businesses$1,476

Finance Company Loans to Businesses $474

$ in billions

Market Value of Select Financing Markets Available to Nonfinancial Businesses

Debt & Equity Capital Markets Finance Few SMEs

4

Specific Financing Market Sizes (Including Financial Companies)

Investment Grade Corporate Debt $4.9Tn

Commercial Real Estate $2.4Tn

Securitization Market (1) $1.5Tn

High-Yield $1Tn

Equipment Leasing $650Bn

Leveraged Loans (Syndicated) $600Bn

Asset Based Lending $590Bn

Factoring $136Bn

Note:1. Securitization excludes CDO and Home Equity markets which are approximately $1.1Tn and $2.5Tn, respectively

Portion of Select Capital Markets by Company Revenue Larger Companies Account for a Disproportionate Share

of Capital Market Financing

Revenue Equity Market

%

High-Yield and Leveraged

Loans %

<$25MM 0.4 0.8

$25MM–$500MM 3.6 2.3

$500MM–$1Bn 3.2 4.1

>$1Bn 92.8 92.8

SMEs generate roughly 45% of business revenues in the US but only account for <5% of capital markets activity in the US, based on data for the US equity, high yield and corporate bond markets

Sources: Federal Reserve statistical release Z.1; Thomson Reuters, Equipment Leasing and Finance Association, Commercial Finance Association, Bloomberg, Standard & Poor’s, Morgan Stanley

Source: Federal Reserve statistical release Z.1

Sources: Thomson Reuters, Bloomberg, Standard & Poor’s, Morgan Stanley

0200400600800

1,0001,2001,4001,6001,800

Oct-07 Jan-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Mar-10

Deere Capital CAT Fin Textron Fin GECC

5

Non-Bank Finance Capacity Is Fraction of Former Size

The capital markets have become unfriendly to finance companies, whether captive or third-party, and most commercial finance securitization markets remain dependent on TALF

Captive Finance CDS Spreads Not Back to Pre-Crisis Levels

(bps)

Source: Bloomberg

Levels ThenGECC 29Deere Capital 22CAT Financial 37Textron Financial 35

Levels NowGECC 195Deere Capital 70CAT Financial 73Textron Financial 154

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008 2009

Deere Capital GECC CAT Fin. CNH Fin. PCAR Fin.

Average

Captive Finance Cos. Still Highly Leveraged, Though Deleveraging(x)

Source: company filings

Sources: Bloomberg, IFR Markets

7.5

2.45.9

13.011.2

1.0

0.5

0

2

46

8

10

12

14

16

2005 2006 2007 2008 2009 2010 YTD

0

100

200

300

400

Equipment ABS TALF Avg. Spread

Securitization Down Substantially: Equipment ABS E xample

($Bn) ABS Volumes Fixed Auto Spread to Swaps (bps)

(1)

Notes:1. As of 3/8/10

2. CIT has not been rerated since emerging from bankruptcy

0

3

6

9

12

15

18

21

2000 2001 2003 2004 2006 2007 2008

Deere Credit GMAC CIT TXT Fin. HOG AGFC GECCCAT Fin.

Finance Company Ratings Deterioration

Source: Bloomberg

(2)

A

BBB

BB

B

CCC

SD

AA

AAA

S&P Long-Term Credit Rating

Deb

t / E

quity

SMEs Rely on Bank Credit, Which Is Scarce

6

“Borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. . . However, access to credit remains strained for borrowers who are particularly dependent on banks, such as

households and small businesses.” —Ben Bernanke, Economic Club of New York speech, November 16, 2009

Note:1. Seasonally Adjusted

Small Businesses Still Face Obstacles to Credit

Index S.A. % (2)

Sources: National Federation of Independent Business, Morgan Stanley Research

Sources: National Federation of Independent Business, Morgan Stanley Research

0

25

50

75

100

Jan-03Jun-03

Nov-03Apr-0

4Sep-04

Feb-05Jul-05

Dec-05May-06

Oct-06Mar-0

7Aug-07

Jan-08Jun-08

Nov-08Apr-0

9Sep-09

Feb-10

80

88

96

104

112

Morgan Stanley Business Conditions Index (S.A., Left Scale)

NFIB: Small Business Optimism Index (S.A., 1986 = 100, Right Scale)

Small Business Confidence Has Diverged from Broader Indicators

Index S.A. %(2)

(2)

(1)

(1)

41.6

37.335.6

21.7

31.7

24.2

19.7

25.126.5

20.1

24.726.1

30.832.5

37.7

48.6

45.5

51.2

35.1

50.9

42.0

52.1

44.1

57.3

42.8

38.9

25.0

29.5

18.8

10.5

17.617.3

25.8

38.9

26.928.1 28.0

44.7

45.645.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

Debt Repay. Working Capital M&A Corp. Purp. Other

Middle Market Loan Volume Has Declined Substantiall y

Volume ($Bn)

Source: Thomson Reuters Loan Pricing Corporation (LPC)

0

23

45

68

90

Jan-03Jun-03

Nov-03Apr-0

4Sep-04

Feb-05Jul-05

Dec-05May-06

Oct-06Mar-0

7Aug-07

Jan-08Jun-08

Nov-08Apr-0

9Sep-09

Feb-10

0

5

9

14

18

Credit Conditions Index (Left Scale)

NFIB: Percent Reporting that Credit Was Harder to Get Last Time, Net (S.A., %, Right Scale, Inverted)

Small Businesses Still Face Obstacles to Credit

Index S.A. % (2)

Loan Balances Declining at Major Commercial Finance Companies $MM

CIT Commercial Asset Balances (1) (2) 2007 9/30/2009 % Change

Corporate Finance 24,126 18,212 (24.5)

Transportation Finance 13,583 14,621 7.6

Vendor Finance 16,057 11,753 (26.8)

Factoring Volume 44,967 23,691 (47.3)

GECC Financing Receivables 2008 2009 % Change

Americas Commercial Lending and Leasing 105,410 87,496 (17.0)

Textron Financial 1/2/2009 1/3/2010 % Change

Finance Receivables (3) 6,724 5,865 (12.8)

Notes:1. 9/30/09 vs. 2008 data: Corporate Finance: -8%; Transportation Finance: +5%; Vendor Finance: -19%; Factoring: -6%2. CIT expected to release its 2009 10K on or about March 163. Finance receivables held for investment, net

Cause of SME Crunch? It’s Both Supply and Demand

7

%

Source: company reports

Source: Federal Reserve Senior Loan Officer Opinion Survey, January 2010.

Loan demand still

declining, but the rate of decline is improving

Credit standards no longer tightening

(80)

(40)

0

40

80

120

Q2 ’90

Q3 ’91

Q4 ’92

Q1 ’94

Q2 ’95

Q3 ’96

Q4 ’97

Q1 ’99

Q2 ’00

Q3 ’01

Q4 ’02

Q1 ’04

Q2 ’05

Q3 ’06

Q4 ’07

Q1 ’09

Large & Medium Small Large & Medium Small

Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans

Net Percentage of Domestic Respondents Reporting Tightening Standards for C&I Loans

Declines in SME credit can be explained by both a contraction in the supply of capital to these companies and reduced demand for credit as SMEs delay business investment

Loan Demand Still Declining, but the Rate of Declin e Is Improving

Substantial declines in finance company

capacity

Autos: An Example of Highly Levered, Interdependent Supply Chain

8

Suppliers

U.S. OEMs

Dealers

Fleets

Consumers

Indicative U.S. Leverage ($Bn)

~$80 Borrowings

~$70 Borrowings~$50 Negative Working Capital

~$100 Floorplan Financing

~$500 Consumer Loans & Leases

~$850

~$50 Fleet Financing

US Auto Industry Supply Chain and Estimated Leverag e

Credit constraints among SMEs can impact entire industry supply chains, some of which may still be digesting overinvestments made during the last credit bubble. Efficiencies from specialization along the chain may be at risk

Source: Morgan Stanley estimate

Re-thinking Working Capital: 3 SME Credit Solutions

9

As the credit crunch hit, companies pursued working capital management strategies that hoarded cash. This approach may no longer be optimal

Working Capital Challenges

• Challenges for Buyers

– reduce net working capital needs by extending days payable outstanding (DPO)

– maximize return on cash amid historically low interest rates

– reduce supply chain risk / operational risk

• Challenges for Suppliers

– source operating cash flow

– 52% of working capital is tied up in accounts receivable for a typical SME

– days sales outstanding (DSO) is approximately 50.9 days (median for companies with revenues <$500MM)

– limited access to efficient capital

Working Capital Solutions

1. Self: Invoice Discounting

– Buyer accelerates cash to supplier in exchange for discount to Buyer

– can create substantial value but may be operations-intensive and tie up liquidity

2. Bank: Supply Chain Financing and Factoring

– Buyer negotiates extended payment terms/discount and approves invoice, creating an irrevocable payment obligation. Seller then sells invoice to third party in exchange for cash at rates based on Buyer’s stronger credit and at rates lower than Supplier’s traditional funding sources

– traditional factoring products

3. 3rd Party: Sale of Accounts Receivable

– a new market-based exchange on which to fund accounts receivable is rapidly growing, providing suppliers with electronic access to a large pool of competitive institutional capital; approximately 80% of the invoices traded are payables of investment-grade companiesSources: FactSet, Capital IQ, Morgan Stanley

(1) Use Cash to Pay Supplier Early, at a Discount (2) Borrow to Pay Supplier Early, at a Discount

Assumptions: Assumptions: Cash on Balance Sheet 100.0 Amount Borrowed 100.0

Yield on Cash 1.0% Borrowing Cost 3.0%Income Statement Impact: Income Statement Impact:

Cost Savings from Discount on Payable 4.0 Cost Savings from Discount on Payable 4.0 Forgone Interest on Cash (1.0) Forgone Interest on Cash -

Additional Financing Costs - Additional Financing Costs (3.0) Additional Cost to Implement - Additional Cost to Implement -

Net Income Increase (pre-tax) 3.0 Net Income Increase (pre-tax) 1.0

Supplier's Financial Statement Impact

Assumptions: Amount of Immediate "Financing" 100.0

Borrowing Cost 6.0%Income Statement Impact:

Change in Sales Revenue (4.0) Financing (Cost) Savings 6.0

Net Income Increase (pre-tax) 2.0

Opportunity: Creating Value from Working Capital

10

Illustration: Pay Your Supplier Immediately, but a t a 4% Discount

Companies can pay suppliers less moneybut more quickly and extract value for both parties, assuming they have a cost of capital advantage relative to their suppliers. Working capital could become a profit center!

Profits increase for both the Company and its Supplier, even if the Company borrows to

finance the relationship

Large Co. Supplier TotalRevenue 96.0COGS 96.0NOPAT 72.6 27.4 100.0

AverageAccounts receivable 0.0Accounts payable 0.0Invested capital 676.3 173.7 850.0

ROIC, annual 10.73% 15.77%Value Creation $18.5 $3.1 $21.6∆ Value Creation $0.5 $1.1 $1.6

ROIC Components: After Discount

Large Co. Supplier TotalRevenue 100.0COGS 100.0NOPAT 70.0 30.0 100.0

AverageAccounts receivable 27.4Accounts payable 27.4Invested capital 650.0 200.0 850.0

ROIC, annual 10.77% 15.00%Value Creation 18.0 2.0 20.0

ROIC Components: Before Discount

Detail: How to Create Value from Working Capital

11

Illustrative Transaction:

• Value Created for Buyer:

– Gains through reduced COGS partially offset by additional financing costs

• Value Created for Supplier:

– Gains through reduced financing costs, partially offset by reduced operating profit due to lower revenue

1

2

3

Discount on payables results in reduction in COGS for Large Co. and reduction in revenue for Supplier; NOPAT for both parties changes by discount times (1- tax rate)

Accounts payable and accounts receivable go to 0, as transaction becomes cash on delivery; invested capital increases for Large Co. due to swap of payables for immediate cash outflow which requires incremental debt or equity financing; invested capital decreases for Supplier as incremental cash acquired is used to pay down debt or repurchase equity

ROIC increases for both parties as discount offsets difference in capital charge for both parties. Split of value creation depends upon negotiation within the acceptable discount range.

ROIC = NOPAT / Invested Capital

Value Creation = (ROIC – WACC) * Invested Capital

4

1

2

3

4

Source: Morgan Stanley

Large buyers may create value and mutual benefits with their suppliers via invoice discounting, which, in effect, allows smaller suppliers to benefit from the buyer’s lower cost of capital

Purchase amount ($M) 100.0Payable duration (days) 100

Price discount 4.0%Discounted amount ($M) 96.0

Large Co. SupplierWACC 8.0% 14.0%Financing cost 2.2 3.8Tax rate 35% 35%Price discount for paying cash on delivery:Revenue reduction 4.0COGS reduction 4.0

Transaction Assumptions

Incremental Value ($M) for Paybles Reduction of 100 Days

0.0

0.5

1.0

1.5

2.0

2.5

3.26% 3.65% 4.03% 4.42% 4.80% 5.19% 5.57%

Value Split

Rules of Thumb for Value Creation via Working Capital

12

• Maximum value created when:

– Significant working capital costs exist for supplier

– Buyer has large WACC advantage

– Buyer has lower tax rate

Assumptions Large Co. Supplier Tax (%) 20 35

WACC (%) 8 14

Change in Days to 0 100 days 100 days

Assumptions Large Co. Supplier Tax (%) 35 35

WACC (%) 8 14

Change in Days to 0 100 days 100 days

Assumptions Large Co. Supplier Tax (%) 20 35

WACC (%) 14 14

Change in Days to 0 100 days 100 days

Purchase Price Discount

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

10 40 70 100 130 160 190 220 250

Maximum Minimum

Range of Mutually-beneficial DiscountsPurchase Price Discount

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

10 40 70 100 130 160 190 220 250

Maximum Minimum

Range of Mutually-beneficial Discounts

1. Large Co. Has Lower WACC2. Large Co. Has Lower Tax

Rate3. Large Co. Has Lower Tax

Rate and Lower WACC

Purchase Price Discount

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

10 40 70 100 130 160 190 220 250

Maximum Minimum

Range of Mutually-beneficial Discounts

With an invoice discount of 4%, Supplier extracts more value than

Large Co.

The acceptable discount range under these assumptions is 3.26%

to 5.34%

Dis

coun

t

Dis

coun

t

Dis

coun

t

Incremental Value ($M) for Paybles Reduction of 100 Days

0.0

0.5

1.0

1.5

2.0

2.5

2.67% 3.15% 3.64% 4.12% 4.60% 5.09% 5.57%

Value SplitIncremental Value ($M) for Paybles Reduction of 100 Days

0.0

0.5

1.0

1.5

2.0

2.5

4.58% 4.74% 4.91% 5.07% 5.24% 5.41% 5.57%

Value Split

Acceptable Discount Range Acceptable Discount Range Acceptable Discount Range

Large Co. Value

Supplier Value

Large Co. Value

Supplier Value

Large Co. Value

Supplier Value

Payable Duration Payable Duration Payable Duration

$ $ $

Corporate America Not Capitalizing on Opportunity

Source: company reports, based on public filings of 144 companies in the retail sector

13

2024283236404448525660

12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09

Median Days Payable

Largest Retailers Have Not Materially Changed their Days Payable…Median days payable for largest retail companies

48 Days

…While Large Retailers Have Very Low WACC, Which Means They Could Shorten Payables in Return for Discounts from Suppliers with Higher Capital Costs…

8.58.8

10.4 10.511.1

10.2

11.6

9.9

9.2 9.3

6

8

10

12

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

WACC of 144 Retail Companies Sorted by Decile (Large to Small)

10%

%

If you provide us with a list of your top publicly traded suppliers, Morgan Stanley will determine whether your company could take advantage of this opportunity

Corporate America can capture value by shortening payables in exchange for a discount to suppliers, but evidence shows they are not doing so. Large retailers, for example, have not materially changed their days payable

Source: retail sector company reports

• liquidity, leverage constraints

• better alternative uses of cash

• can be operationally intensive

• historical view that supplier finance is responsibility of suppliers

Potential Explanations

A New Capital Market: The Receivables Exchange

14

Companies can extend their payment terms to their supplier base while offering SMEs the opportunity to finance accounts receivable on a relatively new online trading platform, with institutional investors and at market rates

• 2009 Volume Growth: 42% per month (avg.)

• Avg. Auction Size: >$100K

• Avg. Invoices/Auction: 4

• Discount Fee: 0.5%–3%

• Shortest Auction: 16 sec.

• Avg. Duration: 1 day

• Completion Rate: 99%

• No. of Sellers: 1,000+

• % Repeat Sellers: 83%

• Avg. Revenue: $30MM

• A/R Inventory: $12Bn

• Buyer Liquidity: $20Bn

• Industries: 40+

• States: 48

• Investment-Grade: 81%

• S&P 500: 50%

• Publicly Traded: 58%

Auction StatisticsAccounts Receivable Sellers (SMEs)

Accounts Payable Obligors

A Competitive Supplier Solution for Large Companies� Extend DPO and enhance working capital

� Reduce supply chain risk

Efficient Market Access for SMEs� Broad market access to institutional investors

� Increased liquidity and diversified funding sources

� Lower cost of capital through competitive bidding

� Complete financing control and flexibility on terms

Effective Origination Channel for Receivable Buyers� Increased origination

� Centralized access to new large asset class

� Diversification with high-risk adjusted returns� Back-office savings

Source: The Receivables Exchange (www.receivablesxchange.com)

The Receivables Exchange, a private company, starte d trading on November 18, 2008 to bring private capital to the market for SME credit. Via The Rece ivables Exchange, an SME can auction its receivable s to the highest bidder(s) for a substantial advance rat e. The Receivables Exchange provides straight-thro ugh processing and acts as collateral agent and service r, using an innovative approach to mitigate default risk

Source: The Receivables Exchange (www.receivablesxchange.com)

Spectrum of Opportunities to Finance Suppliers and Customers

15

Strategies

Description

Funding Sources

Benefits

Self: Direct Lending

• Captive FinCo or Bank Model

• Originate and hold all loans on FinCo/ Bank Balance Sheet

• Large balance sheet• Full risk (credit, rate)

retention

• Unsecured Debt• CP• Deposits??

+ Preserves customer touchpoint and dealer relationships

+ Allows full control over originations

+ Preserves revenue and earnings from financial services

– Retains credit risk and capital needs

– Continue to have funding needs and liquidity pressures

– Exposed to capital market shocks

– Regulatory oversight and restrictions

Considerations

Self: Invoice Discounting

• Large Corp can use its working capital to make early payments to Suppliers in exchange for a discount

• Cash• CP / debt

+ Large Corp has potential for higher short-term returns on cash

+ Large Corp benefits from reduced supply chain risk by providing liquidity to SME Supplier

+ SME Supplier has cash without incurring debt

– Increases working capital needs, using cash or increasing debt

– Can be operationally intensive to establish a discounting program with Suppliers

Bank: Supply Chain Financing

• Large Corp’s strong credit allows Suppliers to sell receivables and receive cash at rates lower than traditional Supplier financing sources

• Bank

+ Large Corp able to extend Days Payable Outstanding (DPOs) and reduce working capital needs

+ Large Corp benefits from SME Supplier reduced supply chain risk

+ SME suppliers able to access cheaper financing as a result of Large Corp’s stronger credit rating

– Requires negotiation of longer DPOs

– Enhance invoice processing systems

– Requires integration of technology before Supplier sees benefits

Bank/3 rd Party: Loan Sales, Vendor Financing

• Large Corp originates loans to Suppliers and Customers for sale / placement with others

• Minimal balance sheet• Minimal risk (credit, risk)

retention

• Loan Sales– Bulk– Flow

• Vendor Financing

+ Large Corp provides liquidity to Suppliers and Customers

+ Limits Large Corp’s credit exposure and capital needs

+ Able to selectively retain portions of portfolio and originations going forward

+ Can leverage capabilities, operations and distribution of a stronger partner

+ Preserves max funding flexibility

– Loss of revenue stream– Removes additional

customer touchpoint and may hurt dealer relationships

– Feasibility of exit may be difficult and pricing may be unattractive

3rd Party: The Receivables Exchange

• Suppliers sell their B2B receivables on TRE in a competitive real-time electronic marketplace, similar to the CP market

• TRE handles all admin, operational, treasury and processing functions

• Hedge Funds, Banks, and Other Institutional Investors

• Market-based funding, not reliant on single source

+ Large Corp can extend DPOs, keep cash on hand, enhance working capital

+ Reduces supply chain risk to Large Corps as Suppliers can access competitively-priced liquidity, using Large Corp credit rating

+ Supplier DSOs reduced to 1 day, improving their cash conversion cycle & ROE

– New, small, developing market

Source: Morgan Stanley

Financing Suppliers Financing Suppliers or Customers

16

Financing Your B2B Customers

• Fund and retain all new originations on balance sheet• Funding needs determined by origination levels• Key Considerations:

– Credit risk retained on balance sheet– Funding uncertainty– Regulatory uncertainty

Captive Finance Company

• Growth of deposit base through thrift charter to provide stable funding source for asset originations

• Accumulate deposits through broker channel and potentially retail channels (online; branches?)

• Key Considerations: – Credit risk retained on balance sheet– Funding uncertainty– Regulatory clarity/flexibility/cooperation– Possibly requires an ownership partner to comply

with regulatory requirements– Infrastructure and capabilities to grow bank assets

and accumulate deposits

Bank Subsidiary

• Develop funding partnerships or explore liquidity alternatives, through:– Bulk sales : portfolio sales done on a one off basis – Forward flow : agreement to sell a specific amount

of newly originated loans meeting certain criteria– Vendor financing : arrangement where partner

originates or funds some or all of new loans (potentially white label)– Able to preserve sales touchpoint if desired

• Balance sheet relief while maintaining future flexibility and preserving ‘marketing value’ of financings

• Key considerations: – Financing partner(s)– Annual funding beyond receivable sales

Loan Sales and Vendor Financing

Comparables Comparables Comparables

Companies have traditionally been more willing to arrange financing for customers than suppliers. Forming a captive or bank may not be realistic in the current environment. Other alternatives depend on finding a lender

Examples of Large Corporate Financing Programs

17

IBM

Cisco

Microsoft

Wal-Mart

Kohl’s

Pep Boys

• IBM Global Financing to make $5Bn available to finance IT initiatives in key economic stimulus projects -- $2Bn U.S. and Canada, $2Bn Europe and $1Bn Asia-Pacific

• Cisco Capital extended zero percent financing offers to small businesses in U.S., Canada and Europe

• November 2009 announced 0% financing on purchases up to $1MM for some of its software• Microsoft Financing provides financing to businesses for MSFT software, services and third party software and

hardware payment with terms typically between 24-60 months

• November 2009 announced “Supplier Alliance Program” in which ~1,000 suppliers (~2% total) primarily apparel can sell Wal-Mart invoices in a supply chain financing program and receive payment within 10-15 days (compared to typical 60-90 days) at interest rates based partly on Wal-Mart’s AA rating

• July 2009 Kohl’s Corp. offered 41% of its suppliers sell Kohl’s invoices in a supply chain financing program

• September 2009 Pep Boys offered select suppliers participation in supply chain financing program

Sources: IBM press releases dated 30 April and 27 May 2009; Cisco press release dated 15 September 2009; www.microsoftfinancing.com; “Wal-Mart Looks to Bolster Suppliers," WSJ (14 November 2009); Pep Boys press release dated September 8, 2009 (“Pep Boys Revs Up Supply Chain Finance Offering with PrimeRevenue”)

Final Observations

18

• Companies have not traditionally financed their suppliers, but owing to the credit crunch for SMEs it may be optimal to do so—and may be necessary to maintain supply chain efficiencies

– a profit opportunity for treasury and/or purchasing departments

• For companies not opting to finance their suppliers, new markets are developing that tap institutional investors to provide suppliers efficient and competitively-priced capital

• Companies are already in the lending business, even though they may not view it as such

– working capital is a form of lending: receivables/payables

– unlike bank lending, working capital is not regulated and not subject to regulatory capital requirements

– the lack of SME credit capacity plus the build-up of cash on corporate balance sheets create logical conditions to re-think working capital strategy, within rating constraints

Owing to a divergence in the availability and cost of capital between healthy companies and their smaller suppliers, companies should think strategically about using their balance sheets to finance counterparties

19

Appendix A

Appendix: Additional Slides

Loan Originations at Banks Participating in CPPAPPENDIX: ADDITIONAL SLIDES

20

Source: Treasury Department Monthly Lending and Intermediation SnapshotNotes:1. These loans are already accounted for in either consumer lending, commercial lending, or a

combination of both2. Total Originations does not include the “Small Business Originations” column3. Monthly percentage changes are calculated versus October 2009 figures

4. Annual percentage changes are calculated versus November 2008 figures. Annual changes will be calculated only for the original Top 21 CPP recipients and will exclude data from Hartford Financial Services Group as data begin in June 2009

5. Reliance on internal reporting means that aggregation by loan category varies for each reporting bank. Because of the differences in loan category definitions, comparisons of origination levels across firms may be imperfect

Loan Originations at Institutions Participating in Capital Purchase Program, November 2009 (5) $MM

Name First

Mortgage HELOC (Lines and Increases)

U.S. Card (Managed): Initial Line

Amount

Other Consumer

Lending

C&I: Renewal of

Existing Accounts

C&I: New Commitments

CRE: Renewal of

Existing Accounts

CRE: New Commitments

Small Business (1)

Total Originations (2)

Monthly Change in Total

Originations (3) (%)

American Express N/A N/A 1,257 N/A N/A N/A N/A N/A N/A 1,257 6 Bank of America 27,713 919 1,340 1,447 14,788 8,648 3,020 154 1,214 58,029 2 Bank of New York Mellon 63 3 N/A 0 38 15 89 0 N/A 208 (35) BB&T 1,867 43 151 240 492 979 1,353 367 786 5,491 (4) Capital One 109 17 217 332 125 342 51 159 61 1,352 (10) CIT N/A N/A N/A 0 2,465 297 0 0 9 2,762 (7) Citigroup 3,338 90 6,874 888 1,404 1,924 139 37 128 14,693 18 Comerica 34 9 18 26 2,935 461 326 80 151 3,889 43 Fifth Third 1,648 75 103 307 1,548 1,078 471 132 275 5,362 0 Goldman Sachs 17 0 0 14 820 4,308 282 190 10 5,631 207 Hartford 0 0 N/A 0 0 0 0 0 0 0 (100) JPMorgan Chase 12,325 122 3,811 2,479 15,213 14,474 598 542 719 49,563 2 KeyCorp 153 71 0 17 1,073 519 693 72 40 2,598 37 Marshall & Ilsley 203 64 6 43 182 65 43 40 12 646 (6) Morgan Stanley 15 0 N/A 289 617 3,292 0 0 133 4,213 (67) Northern Trust 105 49 N/A 112 708 295 31 83 16 1,383 13 PNC 761 264 137 210 3,607 2,000 401 159 241 7,539 (6) Regions 689 77 N/A 76 1,415 862 1,439 173 542 4,732 (2) State Street N/A N/A N/A N/A 890 482 2 0 N/A 1,374 58 SunTrust 2,867 89 4 316 966 851 210 171 46 5,474 (3) U.S. Bancorp 4,082 326 831 732 3,936 2,191 753 462 446 13,313 (5) Wells Fargo 31,161 379 1,209 1,809 8,217 9,223 2,014 862 2,031 54,874 8 Total (All Institutions) 87,149 2,597 15,958 9,336 61,438 52,307 11,915 3,684 6,858 244,383 2 Monthly Change in Total (All Institutions) (3) (%) 4% (15)% 14% (28)% 1% 6% (4)% (20)% (18)% 2% Annual Change in Total (All Institutions) (4) (%) 91% (45)% (28)% 15% 7% 3% 23% (51)% – 17%

Loan Category Key

First Mortgages Loans secured by first liens on residential real estate

HELOC Home equity lines of credit

U.S. Card (Managed) U.S. credit cards (managed)

C&I Commercial and industrial

CRE Commercial and real estate

Small Business Loans to small businesses

N/A Denotes recipient is not active in this category

Loan Originations at Institutions Participating in Capital Purchase Program, April 2009 $MM

Name First

Mortgage HELOC (Lines and Increases)

U.S. Card (Managed): Initial Line

Amount

Other Consumer

Lending

C&I: Renewal of

Existing Accounts

C&I: New Commitments

CRE: Renewal of

Existing Accounts

CRE: New Commitments

Small Business (1)

Total Originations (2)

Monthly Change in Total

Originations (3) (%)

American Express N/A N/A 629 N/A N/A N/A N/A N/A N/A 629 (52) Bank of America 32,702 1,347 1,394 2,155 18,523 8,796 2,030 1,183 1,170 68,131 3 BB&T 2,784 70 200 354 463 1,460 1,059 247 1,191 6,637 (8) Bank of New York Mellon 64 17 N/A 9 93 41 30 61 N/A 315 (13) Capital One 152 26 488 522 352 366 80 79 122 2,064 (12) CIT N/A N/A N/A 0 2,705 629 0 0 11 3,334 (13) Citigroup 8,882 190 6,536 1,009 532 2,326 116 12 103 19,603 3 Comerica 33 18 19 39 1,997 307 360 79 269 2,852 13 Fifth Third 2,255 130 211 307 1,953 573 617 155 445 6,201 (12) Goldman Sachs 40 0 0 28 608 288 0 0 0 964 (73) JPMorgan Chase 13,139 214 3,592 2,670 18,112 11,591 568 432 696 50,317 (23) KeyCorp 157 137 0 21 1,009 829 587 66 41 2,806 12 Marshall & Ilsley 416 68 7 89 261 142 181 62 28 1,224 38 Morgan Stanley 25 0 N/A 464 250 766 0 0 3 1,505 (63) Northern Trust 82 102 N/A 86 573 509 37 56 23 1,446 (12) PNC 2,222 503 140 213 3,022 1,906 458 179 372 8,643 (12) Regions 925 117 N/A 82 1,712 699 1,541 392 620 5,468 (6) State Street N/A N/A N/A N/A 1,205 170 32 0 N/A 1,407 (3) SunTrust 5,002 143 11 312 1,557 1,017 332 202 68 8,576 (3) U.S. Bancorp 5,335 560 900 838 4,488 1,981 1,259 444 497 15,805 (3) Wells Fargo 40,009 666 1,126 1,859 10,116 7,678 2,284 1,380 1,923 65,118 0 Total (All Institutions) 114,224 4,308 15,253 11,056 69,531 42,072 11,571 5,029 7,582 273,045 (7) Change in Total (All Institutions) (3) (%) (3)% (9)% (7)% 2% 6% (29)% (20)% (23)% N/A (7)%

Business Fixed Investment Seasonally Adjusted at Annual Rates ($Bn)

2009 vs. 2007 Selected Equipment Types 2009 2008 2007 VARI +/- % +/- Information Processing Equipment Communications 90.5 100.2 97.3 (6.8) (7.0) Computers & Peripherals 74.9 86.7 89.2 (14.4) (16.1) Medical 69.5 68.7 64.3 5.2 8.1 Non-Medical Instruments 30.6 29.8 27.9 2.8 9.9 Office Accounting 9.0 9.3 9.4 (0.4) (4.5) Photocopy 3.9 4.2 3.7 0.3 7.2 278.4 298.8 291.7 (13.3) (4.6) Software Software (not embedded) 244.2 264.1 245.6 (1.5) (0.6) Industrial Equipment General Industrial/Material Handling 53.2 70.1 70.8 (17.6) (24.8) Special Industry Machinery (NEC) 26.2 34.7 38.4 (12.3) (31.9) Metalworking Machinery 19.7 29.9 29.0 (9.3) (32.0) Fabricated Metals 17.0. 17.7 17.5 (0.6) (3.2) 116.0 152.4 155.7 (39.7) (25.5) Transportation Equipment Trucks, Trailers & Buses 29.5 61.1 93.3 (63.8) (68.4) Aircraft 15.2 20.2 24.0 (8.8) (36.6) Marine 2.4 3.8 4.6 (2.2) (47.9) Rail 3.8 7.9 8.9 (5.1) (57.7) 50.8 93.2 130.8 (79.9) (61.1) Other Equipment Agricultural Machinery 26.1 26.9 23.2 2.9 12.7 Construction Machinery 20.1 32.9 34.0 (14.0) (41.0) Mining/Oilfield Machinery 17.2 19.4 18.9 (1.7) (9.1) 63.4 79.2 76.1 (12.8) (16.8) Selected Equipment Types Total 752.8 887.6 899.9 (147.1) (16.3) Not Shown 155.7 196.5 204.9 (49.2) (24.0) All Non-Residential Equipment & Software 908.4 1,084.1 1,104.8 (196.4) (17.8)

The Decline in Business Fixed InvestmentAPPENDIX: ADDITIONAL SLIDES

21

Source: Bureau of Economic Analysis

How The Receivables Exchange WorksAPPENDIX: ADDITIONAL SLIDES

22

Receivables Buyer Submits Bid

Advance: $900,000Disc Fee $9,000

Win Auction

Advance: $900,000Disc Fee: $9,000

TRE Remits

Receivables Buyer $909,000

Tuesday1:30 p.m.

Wednesday3:00 p.m.

Monday9:30 a.m.

Thursday10:00 a.m.

30th Day11:07 a.m.

30th Day12:07 p.m.

Supplier Posts Auction

Invoice: $1,000,000Min Advance: $900,000Max Fee: $10,000

Advance Funds

$900,000(Less TRE fees) Invoice Pays

$1,000,000

TRE Remits

Supplier: $91,000

2 3

6

1 4

5

Source: The Receivables ExchangeNote:1. In the above illustration of a $1MM face value auction with a 30-day turnaround of payment, the cost of capital is .9% for example purposes only. Competitive

bidding by Buyers on the Exchange will determine the actual discount fee. There is also a nominal transaction fee charged by The Exchange

APPENDIX: ADDITIONAL SLIDES

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APPENDIX: ADDITIONAL SLIDES

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