1

The Syndicated Loan Market- Who is the LSTA (and what is our focus)?- Description of loan market (size, segments, lender constituency)- Secondary market (and what it shows)- Pressures in the loan market (and for borrowers)

Bram Smith – bsmith@lsta.org (Interim Executive Director)Elliot Ganz – eganz@lsta.org (General Counsel)Meredith Coffey – mcoffey@lsta.org (SVP – Research)

2

Who is the LSTA?

The Loan Syndications and Trading Association is the trade association for the floating rate corporate loan market. The LSTA promotes a fair, orderly, and efficient corporate loan market and provides leadership in advancing the interestof all market participants. The LSTA undertakes a wide variety of activities to foster the development of policies and

market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans and related claims.

The LSTA seeks to enhance public understanding of the corporate loan market and to serve the public interest by encouraging adherence to high ethical standards by all market participants. The LSTA plays a pivotal role in monitoring and bringing consensus to this important asset class by acting as a forum for the analysis and discussion of issues and developments relating to the loan market and advocating the shared interests of its membership. The Association formulates policy through its Board of Directors after consensus is developed through the active involvement of individual officers and employees of Member firms.

The LSTA stands out among financial market trade associations because it represents all segments of the market it serves: primary sales; par/near par and distressed trading; and bank and non-bank portfolio management. The LSTA membership totals more than 280 institutions.

3

U.S. Corporate loan market is a vital source Of capital for American business

0

500

1000

1500

2000

2500

3000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Total OutstandingTotal Committed

According to government data, the U.S. syndicated loan market totals nearly $2.8 trillion of committed lines and outstanding loansIt is a key source of financing for many large and middle market companies in the U.S.

U.S. Corporate loan and loan commitments outstanding

Com

mits

/out

stan

ding

s($

Bils

.)

Source: Shared National Credit Review

4

4 key U.S. large corporate loan market segments

Investment grade loan market• Loans to companies rated >= BBB-

/Baa3 AND with a relatively low LIBOR spread

• 2007 lending: $658 billion• 2008 lending: $319 billion

Leveraged loan market• Loans to companies rated < BBB-/Baa3 or

unrated & with a high spread* • Divided into bank (pro rata) and non-bank

segments• 2007 lending : $689 billion• 2008 lending : $294 billion

Institutional loan market • Leveraged loans with non-bank lenders

(such as mutual funds, CLOs, insurance companies, hedge funds, etc)

• 2007 lending: $426 billion• 2008 lending: $69.6 billion

Secondary loan market • Market in which loans trade following the

close of primary syndication• Most U.S. loan trading involves leveraged

loans • 2007 trading: $442 billion• 2008 trading: $510 billion

Source: Reuters LPC for primary lending; LSTA for secondary trading

*Traditionally LIB+150, increased to LIB+350 in 1Q09

5

U.S. Syndicated loan volumes

0

200

400

600

800

1000

1200

1400

1600

1800

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

LTM

1Q

09

Other ($Bils.)IG ($Bils.)Lev. ($Bils.)

Overall primary loan volume is down materiallyAt $764B, new loan volume in 2008 is at lowest level since 1994At $104B, 1Q09 loan issuance is down 41% from 1Q08

Loan

vol

ume

($Bi

ls.)

Source: Thomson Reuters LPC

U.S. syndicated lending volume

6

Non-bank term loan outstandings

580.3596.1

13.634.7

148.0

192.7132.5

247.8

73.3101.1 129.9

117.3

399.7

556.8

$0B

$100B

$200B

$300B

$400B

$500B

$600B

$700B

YE1

996

YE1

997

YE1

998

YE1

999

YE2

000

YE2

001

YE2

002

YE2

003

YE2

004

YE2

005

YE2

006

YE2

007

YE2

008

2/6/

2009

As of

Non-bank term loan outstandings by year

Out

stan

ding

s($

Bils

.)

Source: S&P/LCD

7

Pressures on the secondary

2007: Supply-demand imbalance2008: Deleveraging2009: Credit?

8

Dislocation: Loan prices decline sharply in 2008Bi

d (%

of p

ar)

Source: LSTA/LPC MTM Pricing

Loan prices come under considerable pressure in past 18 monthsThis unusual behavior has impacted leveraged companies’ ability to access financing

U.S. non-bank loan bids

6062646668707274767880828486889092949698

100102

6/19

/02

1/10

/03

8/1/

03

2/24

/04

9/14

/04

4/7/

05

11/1

0/05

6/5/

06

12/2

1/06

7/13

/07

2/1/

08

8/21

/08

3/13

/09

Average bid

Median bid

9

Loan trading activity high; more loans trade < 80

0

20

40

60

80

100

120

140

160

180

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08

"Distressed" < 80Par >= 80

Trading activity remained relatively robust in 4Q08More loans are trading < 80 cents on the dollar, which was typically considered “distressed”However, there is an increasing disconnect between price and credit quality

Trad

ing

volu

me

($Bi

ls.)

Trading volume

Source: LSTA trade data study

10

Prices have declined even for companies With high ratings and no downgrades

0

10

20

30

40

50

60

70

80

90

100

BBB- BBB BB+ BB BB- B+ B B- CCC+ CCC CCC- D

4Q07 4Q08

Trade prices by rating category (4Q07 vs. 4Q08)

% o

f tra

ding

sam

ple

Even higher rated companies are trading at levels previously considered distressedTypical trade price of BBB- names declined from 97.87 in 4Q07 to 85.15 in 4Q08Typical trade price of BB+ rated names declined from 97.7 in 4Q07 to 80.09 in 4Q08

Source: LSTA trade data study

11

Default rates are climbing

Source: LSTA/LPC MTM Pricing, Standard & Poor’s LCD

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

12/3

1/98

6/30

/99

12/3

1/99

6/30

/00

12/3

1/00

6/30

/01

12/3

1/01

6/30

/02

12/3

1/02

6/30

/03

12/3

1/03

6/30

/04

12/3

1/04

6/30

/05

12/3

1/05

6/30

/06

12/3

1/06

6/30

/07

12/3

1/07

6/30

/08

12/3

1/08

LTM $Defaults / Outstanding-12 months

LTM # of Issuers in default / Total Issuers-12months

Leveraged loan default rate

Def

ault

rate

(%)

Initially defaults were defined by small companiesDefaults becoming materially larger“Shadow” default rate higher – above 9%Amendments are becoming more difficultLoss given default could worsen

12

Impact on borrowers

PressuresDeleveragingDefaultsConsolidationLiquidity

ImpactNew issue yieldsAmendmentsRefinancing cliff

13

Bank consolidation impacts liquidity

14

Number of investor groups that made 10 or more primary commitments each year

22 29

48 5442

98116

168

218

261

857664

0

150

300

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

*With the slow down in deal number, for the latest period LCD uses $100M of estimated allocations as a cut-off

Buyside is less active in 2008 – and may contract in 2009

Source: Standard and Poor’s LCD

# of

act

ive

inve

stor

s

15

Leveraged loan prices fall, secondary yields increase, Primary squeezed out

Source: LSTA/LPC MTM Pricing, Standard & Poor’s LCD

Secondary loan yield (yield to 3 years)

LIB+

(bps

)

Default rates have climbed, but currently are below peak of last cycleLoan prices well below last downturnSecondary spreads go into the thousands over LIBORPrimary market cannot compete

0

400

800

1200

1600

2000

2400

2800

3200

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09

BB rated loans

B rated loans

0

400

800

1200

1600

2000

2400

2800

3200

1Q98

5/1/

1999

1/1/

2000

9/1/

2000

5/1/

2001

1/1/

2002

9/1/

2002

5/1/

2003

1/1/

2004

9/1/

2004

5/1/

2005

1/1/

2006

9/1/

2006

5/1/

2007

1/1/

2008

9/1/

2008

0

400

800

1200

1600

2000

2400

2800

3200

Precision Drilling TNSLevel 3

Primary yields (higher rated loans)

LIB+

(bps

)

16

0

5

10

15

20

25

30

35

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Constraints: Companies need amendmentsAnd have to pay up

Source: S&P/LCD

Margin increase on amended loans

Cou

nt

As the economic environment weakens, more companies are seeking amendments or covenant waivers for their loans48 covenant amendments tracked in Jan/Feb; annualizes to nearly 300 – and pace may quickenWith low secondary prices, reduced lender liquidity and different lenders, amendments are more expensive

* The data above comprises publicly available covenant amendment information tracked by a loan information company (S&P/LCD). It does not include information that has not been made public.

0 bp

50 bp

100 bp

150 bp

200 bp

250 bp

300 bp

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Count of amendments w/fees

17

CLO issuance buoys institutional loan growthBoth markets stop in 2008

0

50

100

150

200

250

300

350

400

450

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

10

20

30

40

50

60

70

80

90

Total issuance (incl refis, repricings)CLO issuance

Inst

issu

ance

($Bi

ls.)

Source: Thomson Reuters LPC, Intex, Wachovia

Institutional loan issuance

Institutional market growth enabled by CLO growthSevere dislocation in CLOs and institutional loan market in 2008CLO issuance stopsAbility to issue new loans endsThis is not simply an institutional problemThese loans need to be refinanced – and this is a Corporate America problem

CLO

issu

ance

($Bi

ls.)

18

The 2005-2007 bulge of leveraged loans will mature…And will need to be refinanced

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015 2016

TL

RC mats

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015

TL mats

RC mats

Scheduled maturity profile Expected refinancing profile

Issuance boom from 2005-2007 will mature in 2011-2014However, loans will need to be refinanced a year earlier (2010-2013)Revolvers will create nearer term refinancing pressure

Volu

me

of lo

ans

($Bi

ls.)

Volu

me

of lo

ans

($Bi

ls.)

Source: LSTA,S&P/LCD, Intex, Wachovia

19

CLO reinvestment period will end, Reducing demand as loan maturities hit

-300

-200

-100

0

100

200

300

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Cumulative decrease in demand asreinvestment period endsCumulative CLO outstandings

CLO issuance peaked in 2007 (Outstandings in red)CLO reinvestment periods range 5-7 years (Blue reflects “frozen” amt of CLOs as reinvestment ends)As reinvestment periods end, CLOs will no longer be able to buy new loansIn turn, “re-investible” dollars will decline Blue line reflects MAXIMUM “reinvestible” CLO dollars – eg, if all loans in CLOs are repaidIn reality, reinvestible dollars will be much lower (dotted lines)

Volu

me

($Bi

ls.)

CLO issuance vs. CLOs going static Theoretical CLO reinvestment capacity

Volu

me

($Bi

ls.)

0

50

100

150

200

250

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Max reinvestible $

75% maxreinvestible50% maxreinvestible25% maxreinvestible10% maxreinvestible

Source: LSTA,S&P/LCD, Intex, Wachovia

20

There may be a significant refinancing shortfall

-

50

100

150

200

250

2009 2010 2011 2012 2013 2014

Index TL expected refi date

CLO demand - assumes 25% max reinvestible

CLO demand - assumes 50% max reinvestible

Volu

me

($Bi

ls.)

Starting in 2011, there will be a large volume of loans that must be refinancedBecause CLOs will be entering the end of their reinvestment periods, they will not be able to refinance these maturing loansThis is probably an unrealistic best case scenario

Source: S&P/LCD, Wachovia Securities, LSTA

TL refinancing profile vs. possible CLO demand

21

How to address refinancing cliff?

0

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015

Total

Less Defaulted Loans

Less Defaulted and CCC Loans

Less Defaulted, CCC and B- Loans

Expected refinancing schedule

Issuance boom from 2005-2007 will mature in 2011-2014However, loans will need to be refinanced a year earlier (2010-2013)

Avg. Inst loan issuance1998-2005

Volu

me

of lo

ans

($Bi

ls.)