Deal Issues and Extracting Value in the Great Recession

1. Deal Issues and Extracting Value in the Great Recession Lawrence Schnapf Schulte Roth & Zabel Lawrence.schnapf@srz.com 212-756-2205 www.environmental-law.net

3. “We have always known that heedless self-interest was bad morals…… We now know that it is bad economics” FDR

4. “Tragedy is a tool for the living to gain wisdom.. • All men make mistakes but a good man yields when he knows his course is wrong, and he repairs the evil.” • RFK

5. “[Contemporary man] is blind to the fact that, with all his rationality and efficiency, he is possessed by powers that are beyond his control…. His gods and demons have not disappeared at all; they merely have new names” Carl Jung

6. “Whenever the roles of individuals within a group become specialized, it becomes both easy and possible for the individual to pass the moral buck to some other part. • In this way, not only does the individual forsake his conscience but the conscience of the group can become so diluted as to be non-existent” • Stanley Milgram

7. Cant Have Your House and Spend it Too

8. The Great Unwinding • Massive losses of Capital • Massive De-leveraging • Short Borrowing, Long Investing • Rating Agencies As Toll Collectors instead of Gatekeepers • “Denominator Effect” • Connectivity (CDS) • Mark-to-Market Write downs • Opaque and Complex Instruments

9. Causes of Great Recession • Misperceived and Mispriced Risk • Too Much Capital • Low Interest Rates • Excessive Leverage • Aggressive Pricing • Lax Underwriting

10. Current Market Conditions • Banks in Capital Preservation Mode • Balance Sheets Clogged with Unmarketable Loans • Forced Liquidations To Raise Capital and Meet Margin Calls • No Loans for Empty Spaces or Raw Land • Loan Maturity Defaults Are the Primary Risk

11. Current Market Conditions • Hard to get DIP Financing • Construction Lender Defaults • Mezz lenders Take Equity Stakes • SBA Lenders Disappearing

12. Worst Is Yet to Come • Rising Defaults in CRE Loans • Exhaustion of Interest Reserves • Maturity Defaults • Expect Surge of Foreclosures When 2005-2007 loans come due • Force Majeure or MAE Lawsuits

13. Doing Business in Great Recession • Distress Asset and Loan Sales • Seller Financing • New Equity Players and Mezz lenders to Absorb de-leveraging loans • Fast Bankruptcy Asset Sales • Construction Lenders Take Title to Unfinished Projects • Enterprise Value Lending

14. Opportunities • Strategic Acquisition (stock deals) • Balance Sheet Lending • Greater Diligence on Old and New Loans • Stricter Underwriting • Poorly Maintained Properties • Loss of Entitlements • Loan Overhang Will Be Absorbed • Pre-Crunch and Post-Crunch Buyers Will Eventually Trust Pricing Mechanisms • Plain Vanilla Financing

15. Application to Environmental Issues • “Beware of Geeks Bearing Models” • AIG did not model collateral calls or downgrade • Risk Management starts with recognition that forecasts can be wrong • Weigh and deal with the consequences of being wrong • There are no “onlys” in the future • Lack of Transparency • Performance-Based Standards • Moral Hazards • Inadequate Requirements for AAI • Risk-based Cleanups and Climate Change