Shifting Tides: Decoding the Credit Markets, Structuring Debt in Volatile Times

1. Shifting Tides: Decoding the Credit Markets, Structuring Debt in Volatile Times June, 2012 Sycamore Associates LLC

2. September, 2008: Try to Remember(“Hell is empty, and all the devils are here”…Shakespeare, The Tempest) • Sunday September 14, 2008: Lehman files for bankruptcy protection AND Merrill Lynch is sold to Bank of America • Monday September 15: Dow down 504, worst day in 7 years • September 16: AIG Liquidity Crisis, Fed takes 79% stake • September 19, Fed offers temporary increase to FDIC insurance to prevent run on banks • Previously: Bear Stearns failure, Citi capital raising • Bank failures highest in 13 years • Regulators onsite at I-Banks • GM, Chrysler File for bankruptcy

3. Bank Capitalization Issues and the Ripple Effect: Then • Capital Strains=Tight Credit • Higher Cost of Capital, for all Financials • New Ownership • Strategic Changes • Credit Scrutiny • Down grades “ as abundance of caution” • Changes in return disciplines • New regulatory environment • TARP implications

4. Current Events September 2009 • Default rates: August 20,2009: Moody’s announces it believes default rates will NOT go as high as previously predicted (15%). Moody’s cites the re-opening of the high yield bond market as a positive factor • Bond Market trends: Capacity is still good • Does success in IGR really translate to other markets? High Yield Market re-opens with $71B issuance YTD, a causative factor for the Moody’s prediction regarding defaults • Private Placements: will investors go for a broader swath of credit profiles? Still to be seen • We begin to see 3 year revolvers, • Amend and Extend • Some banks have repaid TARP funds • Regulatory issues remain hanging over the heads of banks, especially those with TARP funds • Credit underwriting is still paramount, but • We have heard our first comments from banks looking ahead to create earnings for 2010, if not 2009

5. Then the World Turned..2010 was a Very Good Year • Syndication loan market volumes rebound • Non-sponsored lending peaks in 4Q; recovers from 2009 lows • Refinancings drive bulk of loan issuance; new money picks up in 4Q • Competition intensifies; terms continue to loosen • Sponsored issuance logs second highest quarter, continues to gain market share • Dividend recaps hit a new quarterly record • LBO lending increases • Institutional issuance recovers from 2009 lows; still half of 2007’s peak levels • Yields tighten to pre-crisis levels • Middle market premium narrows in December confidential

6. Flash Forward, Spring and Summer 2011 Spring…. • AT&T $20B bridge loan – underwriting followed by immediate syndication success Summer…. • Express Scripts $14B bridge loan – underwriting followed by successefull syndication but….European banks appetite limited confidential

7. Flash Forward, Spring and Summer 2011 What next? • Euro debt concerns continue • Euro banks talk about liquidity • Banks are eager to lend, but…a more cautious note has emerged • M&A catching fire? confidential

8. Ripped From the Headlines……

9. Back to the Future confidential

10. Covenants and Structure: Investment Grade and LeveragedTrends – 1997 to 2010 (source: ThomsonReuters LPC) BBB rated borrowers see increase in market share of loans with one to two covenants Debt to EBITDA cap loosens for leveraged issuers Covenant levels in the leveraged loan market have been loosening in 2010 compared to last year, a sign that lenders are willing to ease up on structure in order to stay competitive. For leveraged deals with an institutional tranche, the average maximum debt to EBITDA ratio was 4.97 times in 1-3Q10, much higher than 2009's average of 4.48 times, and even higher than 2008's 4.84 times. For pro rata credits, the average debt to EBITDA level has jumped to 4.5 times for 1-3Q10 compared to 3.81 times in 2009.

11. State of the Refinancing Wall • Amend and extend has helped push maturities out confidential

12. High Volatility Becomes a Trend • Many well-managed companies are well-positioned with cash and low debt levels • A more cautious tone prevails with a renewed focus on structure and ‘story specifcs’ • LIBOR Floors: going, going…….back? • Half of deals in Q4 2010 had LIBOR floors • Only 11% had one in Q1 2011, BUT: • Update confidential

13. The Risk On, Risk Off Teeter Totter • Drivers confidential

14. Biding Time – Safety at the Short End confidential

15. Uncertainty Abounds: this train could stop • Geopolitical • Economic • Housing Market • UK economy struggles • Germany robust • Dollar woes • Debt, Debt, Debt • Return pressures confidential

16. Regulation Matters • Regulation is the new driver at banks and other financial institutions. • Dodd Frank (US) – “proprietary trading” • Basel (global) – leverage ratio and liquidity requirements will results in significantly higher capital over the next few years • Jamie Dimon, CEO, JPMorgan: “Lending costs will increase, depending on the type of customer and the type of loan. It is possible that some companies may no longer go to banks for loans.” (September 2010) • 2012: Peer to Peer lending emerges confidential

17. Regulation Abounds • Basel III • Liquidity coverage ratio • Net stable funding ratio • Dodd Frank and the Volcker Rule • Leveraged Loan Guidance (in the US) • Various other rules: FATCA

18. Regulation Matters to All of Us • Higher capital and liquidity requirements will most likely mean more focused client relationship lending (and/or higher borrowing costs) as rules are implemented • The playing field may not be level • Timing of implementation may vary globally • Some differences in local rules • Systemically important financial institutions (SIFIs) face higher requirements

19. Impact of Regulation • And what of the “shadow market”… • We are living through a “case study” in credit, markets and regulation • Peer-to-Peer lending: John Mack leads the way?

20. Conclusion: What are the biggest issues/changes facing the loan market? Aggregated survey responses across themes • Overall • Slowing global growth and deepening Eurozone sovereign debt crisis • European banks facing funding constraints, changing strategies • Rising costs of funds across geographies • Leveraged finance • Shorter, steeper cycles? Technicals swing between polar opposites: from overheating to over-correcting • Aging CLOs are not being replaced proportionally • Challenges in underwriting with an evolving investor base • Investment grade market • Variability in bank behavior – higher probability of surprises • Will market continue to digest bank pullback? How much pressure will this put on capacity? • Basel III and changes to internal models which dictate pricing must go up coupled with shorter tenors; Unfunded RCs will become prohibitively expensive Source: Thomson Reuters LPC Quarterly Survey 20

21. Appropriate Markets? Who Invests? • Senior debt: Unsecured • Public Debt • High-yield and Secured Debt • Asset based • Mezzanine • Equity or equity-linked • Banks, Insurance Companies • Funds, Insurance • Hedge funds, Insurance Co., some banks • Banks and finance Co. • Funds and PE • Public and PE confidential

22. Europe vs. US vs. ASEAN • Markets Linked but not Lockstep confidential

23. Update on negotiating changes • Boilerplate changes • LIBOR floors, etc • fees confidential

24. Market Today • Trends and outlook • Global market • Investment grade • Leveraged • Overview of Pricing • Regulatory developments • Future themes for the loan market

25. Global syndicated lending dropped 30% to $646 billion in 1Q12 Global syndicated loan volume Issuance ($Bils.) Source: Thomson Reuters LPC 4

26. Year-over-year, lending in EMEA shows biggest drop Change in issuance year over year Source: Thomson Reuters LPC 5

27. In the US…1Q12 leveraged lending was up 42%; investment grade was down 54% vs. 4Q11 U.S. Loan Issuance Issuance ($Bils.) Source: Thomson Reuters LPC

28. 22% of lenders struggle with capital constraints Quarterly survey results U.S. IG New money vs. refis • Capital constraints? • 22% of investment grade lenders are more constrained this year with regard to total availability of capital • 11% are less constrained • 67% have the same amount of capital • Outlook for the refinancings pipeline this year? • 11% say anemic • 67% say slow but steady • 22% say robust • Will the make-up of bank groups change in 2Q? • 42% say yes • 29% say maybe • 29% say no Source: Thomson Reuters LPC; TR LPC’s Quarterly Survey

29. Higher quality issuers continue to utilize MBP Volume of IG loans structured with Market Based Pricing Source: Thomson Reuters LPC

30. Longer tenors continue to dominate structures Tenor distribution by rating 364 day 3 year 4 year 5 year Source: Thomson Reuters LPC

31. 1Q12 High yield bond issuance reached $91 billion, breaking 4Q10’s $83 billion record Annual & quarterly institutional loan and HY bond volume Source: Thomson Reuters, Thomson Reuters LPC 31

32. $32 billion in HY bonds were used to pay down loans in 1Q12; select issuers pursued A&Es 30% of HY bond proceeds were used to pay down loans in 1Q12 A&E Volume Source: Thomson Reuters LPC 32

33. Refi activity drove leveraged lending in 1Q12 Leveraged lending Institutional loan issuance only Source: Thomson Reuters LPC

34. US Market Indicative Investment Grade Pricing *spread over Libor

35. US Market Indicative Leveraged Loan Pricing

36. US Market Indicative Mid-Corporate Loan Pricing

37. Structure Guidelines and Pitfalls • Know your own credit profile • Research similar deals • Survey your bank group • Ask what risk rating your company has internally • Ask banks to share their return dynamics with you confidential

38. Middle Market Fares Not AsWell • Ugly Stepsister? • Less flexibility in covenants • Less pricing reduction • Still credit-profile driven • Update confidential

39. Covenants: The High-Grade vs. Mid Market Divide • More covenants in MM • Lower leverage thresholds • Higher coverage levels • Based on generally more conservative underwriting standards • Reflects recent experience of downturn, lower capitalization, reduced access to capital markets confidential

40. Pricing • Dependent on many factors, including sponsorship, asset support, but • Generally can negotiate less: • E.g. reduced guaranties, foreign subsidiary requirements • Baskets for acquisition and investments confidential

41. But What’s to Come? True is it that we have seen better days."- William Shakespeare, As You Like It, 2.7 confidential

42. What Does the Future Hold? • There are some clouds on the horizon… • Impact of sovereign risk • Funding costs are higher for many institutions • Basel III capital regulations have stringent capital AND liquidity requirements for financial institutions • Phase in delayed for several years • CRE still a huge issue among smaller regional financial institutions • Investor appetites confidential

43. Q and A • Sycamore Associates • Risk, Capital Structure and Treasury Solutions • Winifred Pinet, wpinet@sycamoreassociates.com • Marcia Banks, mbanks@sycamoreassociates.com • Gina Strumolo, gstrumolo@sycamoreassociates.com • Newsletter, info@sycamoreassociates.com confidential