Credit Markets David Malpass Mike Milken Stephen Nesbitt Steven Tananbaum James Walker
Bank Source: Bloomberg Top 10 World Banks 1979 Ranked by Assets (US$ Billions) Country Assets Credit Agricole France $105 Bank of America U.S. $103 Citicorp U.S. $103 Banque Nationale de Paris France $99 Deutsche Bank Germany $91 Credit Lyonnais France $91 Societe Generale France $85 Dresdner Bank Germany $70 Barclays Group U.K. $67 Dai-Ichie Kangyo Bank Japan $67
Bank Source: Bankscope (12/31/01) Top 10 World Banks 1989 Ranked by Assets (US$ Billions) 1 Dai-Ichi Kangyo Bank 2 Sumitomo Bank 3 Fuji Bank 4 Mitsubishi Bank 5 Sanwa Bank 6 Industrial Bank of Japan 7 Crédit Agricole 8 Banque Nationale de Paris 9 Tokai Bank 10 Citigroup Country Total Assets Japan 408 Japan 372 Japan 367 Japan 364 Japan 358 Japan 260 France 242 France 231 Japan 230 US 227
Source: *The Banker (July 2008), **Bloomberg (Oct 13., 2008) Bank Top 10 World Banks 2008 Ranked by Assets (US$ Billions) Country Total Assets* Market Cap** 1 Royal Bank of Scotland U.K. 3,808 20 2 Deutsche Bank Germany 2,975 26 3 BNP Paribas France 2.494 79 4 Barclays U.K. 2,459 29 5 HSBC Holdings U.K. 2,354 162 6 Crédit Agricole France 2,268 37 7 Citigroup USA 2,187 77 8 UBS Switzerland 2,019 44 9 Mitsubishi UFJ Financial Grp Japan 1,817 78 10 Bank of America Corp USA 1,716 105
The Nature of Credit 1. Credit is what counts, not leverage. 2. Most loans to real estate are not investment-grade. 3. Interest rates are volatile and unpredictable. 4. Rating is not credit. 5. Sovereign debt is historically risky. 6. Debt values underpin all capital markets
The Nature of Credit 1. Credit is what counts, not leverage. 2. Most loans to real estate are not investment-grade. 3. Interest rates are volatile and unpredictable. 4. Rating is not credit. 5. Sovereign debt is historically risky. 6. Debt values underpin all capital markets
Financial instruments, properly deployed, create socially useful incentives increasing employment and aggregate wealth.
Leverage ratios of different financial firms Leverage ratio, total assets/common equity June 2008 Freddie Mac 67.9 Fannie Mae Federal Home Loan Banks 21.5 23.7 Brokers/hedge funds 31.6 Savings institutions Commercial banks Credit unions 9.4 9.8 9.1 Sources: Federal Deposit Insurance Corporation, Office of Federal Housing Enterprise Oversight, National Credit Union Administration, Bloomberg, Google Finance, Milken Institute.
Fannie Mae and Freddie Mac: Highly Leveraged 300 250 Mortgage book of business over capital measures Fannie Mae 244x Freddie Mac 200 167x 150 100 50 60x 60x 64x 65x 56x 81x 58x 48x 52x 56x 59x 55x 57x -393x 0 Core capital Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute. Fair value Core capital 2005 2006 2007 2008Q2 Fair value
Index: 2000 = 100 250 200 150 100 50 The latest run-up of home prices Long-term trend line WWI was extraordinary Great Depression WWII 70 s Boom 80 s Boom Latest Boom 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: Robert Shiller, Milken Institute (Annualized growth rate of nominal home index: 3.4%)
30% 20% Home prices don t go up forever Change in home prices in 100-plus years WWI Great Depression WWII 70 s Boom 80 s Boom Latest Boom 10% 0% -10% -20% 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: Robert Shiller, Milken Institute.
Most Texas Banks were AAA in the 1980s First RepublicBank Corporation
The prices of residential estate in Houston (in real terms) declined 40% from 1983-1988. - OFEHO Housing Index / FRB study
Foreclosures in Houston 30,000 20,000 10,000 1,000 1980 1986 1992
1970: In the first 70 years of the 20 th century, AA-rated railroads have had more than double the default rate of single-b rated industrials. Today: Many AAA-rated mortgage portfolios will have a higher default rate than single-b rated industrials.
AAA-rated Industrial Companies in the U.S. Microsoft ADP Exxon-Mobil Johnson & Johnson
Investment-Grade Securities AAA 16,907 AA+ 240 AA 2,098 AA- 3,414 A 2,602 A- 2,027 BBB+ 903 BBB 1,371 BBB- 1,359 Source: Bloomberg 11/6/08 Standard & Poor s Ratings New Issues: 1/1/2000 to 9/30/2008 Non-investment Grade Securities BB+ 238 BB 313 BB- 331 B+ 339 B 330 B- 1,189 CCC+ 293 CCC 214 CCC- 104 CC 36 C 11
When is a AAA not a AAA? Mortgage loans Mortgage bonds AAA AA A BBB BB-Unrated 80% 11% 4% 3% 2% Source: International Monetary Fund. High-grade structured-finance CDO Senior AAA Junior AAA AA A BBB Unrated 88% 5% 3% 2% 1% 1% Mezzanine structured-finance CDO Senior AAA Junior AAA AA A BBB Unrated 62% 14% 8% 6% 6% 4% CDO-Squared Senior AAA 60% Junior AAA 27% AA 4% A 3% BBB 3% Unrated 2%
Cents on the dollar 100 80 70 60 50 40 30 Secondary Market Prices of Third-World Debt 20 1982 1983 1984 1985 1986 1987 1988 1989
$1,500 U.S. Lending to Third-World Countries $ billions At Face Value $1,300 $1,100 $900 $700 1982 1983 1984 1985 1986 1987 1988 1989
1974 The most important year in financial history since World War II.
1974 Interest rates double in one year; highest level in recent recorded U.S. history Regulation restricts lending Energy prices skyrocket U.S. stock market plunges 50% Unemployment almost doubles
1974 RESULT: Companies with the highest returns on capital, fastest rates of growth in market share and employment, and greatest innovation were denied access to equity and debt capital.
Index 1100 1000 I ll Never Own a Stock Again Dow Jones Industrial Average 1052 on 11 Jan. 1973 900 800 700 600 500 1973 1974 578 on 6 Dec. 1974 1975 1976
Index 1100 1000 I ll Never Own a Stock Again Dow Jones Industrial Average 1052 on 11 Jan. 1973 900 800 700 600 500 1973 1974 578 on 6 Dec. 1974 1975 1976
2008-2009 Dow Jones Industrial Average 13500 12500 11500 10500 9500 8500 7500 6500 Dec 2007 Source: Datastream 4/21/09 June 2008 Dec 2008 April 2009
David Malpass slides
Credit market was providing $400 billion quarterly, now draining funds (last obs. Q4 2008) Quarterly change, $ billions 1000 900 800 700 600 500 400 300 200 100 0-100 For Video Safe slides, all information must be inside this box. 1998 2000 2002 2004 2006 2008 Sources: Haver Analytics, Encima Global.
Banks loans and leases shrinking 26-week change (last obs. April 1, 2009) 10% 8% 6% 4% 2% 0% For Video Safe slides, all information must be inside this box. -2% -4% 1/1/75 1/1/77 1/1/79 1/1/81 1/1/83 1/1/85 1/1/87 1/1/89 1/1/91 1/1/93 1/1/95 1/1/97 1/1/99 1/1/01 1/1/03 1/1/05 26 week % change 1/1/07 1/1/09 Sources: Haver Analytics, Encima Global.
New cars loan rate 48 month (last obs. April 16, 2009) 7.6 % 7.4 7.2 7.0 6.8 6.6 6.4 6.2 For Video Safe slides, all information must be inside this box. 6.0 Sources: Haver Analytics, WSJ, Encima Global. Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09
M2 13-week change, annualized (last obs. April 6, 2009) 13 week % change, AR 25% 20% 15% 10% 5% 0% Sources: Haver Analytics, Encima Global.
Which way will it break? Jobless Claims 4 week Avg (last obs. April 11, 2009) Thousands, seasonally adjusted 700 600 500 400 300 200 100 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 Sources: Haver Analytics, Encima Global.
Jim Walker slides
Securitization issuance 3,000 7% 2,500 6% Issuance ($Bn) 2,000 1,500 1,000 5% 4% 3% Tangible Equity 500 2% Sources: Fir Tree Partners, JPMorgan, Credit Suisse. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 RMBS ABS CDO Bank Tangible Equity (rhs) 1%
The unregulated financial system Lower consumer borrowing rates Short term bank profits: transaction fees and deal spreads as Principal Issuers US credit markets became most advanced and liquid globally art / music royalties? Reduced cost of capital for issuers Derivatives market became unregulated global Casino Financial institutions became holders of residual risk Tax and accounting code enabled growth of securitized debt Rating agency and bank s/dealer s compensation were wrongly incented Banks moving companies led to poor asset quality Source: Fir Tree Partners.
New corporate debt issuance Yearly 1Q09 600 2000bp 10 2000bp Issuance ($Bn) 400 200 1500bp 1000bp 500bp Spreads (bp) Issuance ($Bn) 5 1500bp 1000bp 500bp Spreads (bp) 0 0bp 0 0bp 2004 2005 2006 2007 2008 Jan 09 Feb 09 Mar 09 High Yield Leveraged Loans HY Spread (rhs) High Yield Leveraged Loans HY Spread (rhs) Source: Fir Tree Partners, JPMorgan.
Various risks to easing of credit markets Risks? Source: Fir Tree Partners.
History of U.S. debt public and private US Debt Outstanding as % of GDP 250% 240% 230% 220% 210% 200% 190% 180% 170% 160% 150% Jan 84 Jan 89 Jan 94 Jan 99 Jan 04 Jan 09 Sources: Fir Tree Partners, Deutsche Bank.
The cure Corporations Consumer Banks Debt for equity exchanges Bankruptcies Exchange Offers Secondary Equity offerings Savings Bankruptcies Debt restructuring Tangible common equity Steep yield curve Deleveraging through asset sales Source: Fir Tree Partners. INFLATE
GoldenTree Asset Management Steven A. Tananbaum, CEO & Chief Investment Officer April 2009
Past Global hunt for return and regulatory changes for banks led to the Creation and Implosion of Shadow Banking Systems Asset Based Structures Prop Desk SIVs On/Off Balance Sheet Basis Trading Books (Imaginary P&L) Evolution of Banking Model and Credit Markets is happening Real Time Credit Technicals are Evident of Market Forces at Work Most Liquid Names are Drawing the Most Interest
Present Rebound in Credit, not broad-based 1 st Lien vs. 2 nd Lien (Wide Spread between Jr. vs. Sr.) 2 nd Lien vs. High Yield Bonds (Similar level of Capital Structure) AAA rated CLO Debt Prices (Create Bank Debt at 30-50% Discount) Large EBITDA Issuers of $1 billion+ vs. $100-500 million Issuers Other Asset Backed Structures are still Very Dislocated
Retail example Capital Structure Smart & Final 2 nd Lien Dollar General Sr. Notes EBITDA ($ mm) FCF Leverage at Create Price YTM 147 5.5% 4.1x 55.0 24.4% 1,000 7.0% 4.0x 104.0 11.0% The specific investments noted within this presentation have been included for informational purposes only to illustrate the investment process. No assurance can be given that similar opportunities will arise or that the performance of these investments will be typical or representative of any or all future investments associated with GoldenTree. It should not be assumed that these investments or any investments made in the future will be profitable. Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile. The above information represents GoldenTree s internal assumptions and analysis. Accordingly, there can be no guarantee as to the results or accuracy of the information noted above. To that end, investors may lose their entire investment in the Fund. Past performance is not indicative of future results.
Healthcare example Capital Structure Generics International 2 nd Lien The TriZetto Group Unsecured Notes Biomet, Inc. Sr. Sub. Notes EBITDA ($ mm) FCF Leverage at Create Price YTM 72 3.0% 5.0x 65.0 20.0% 121 3.8% 4.0x 81.1 18.3% 900 3.5% 6.4x 94.5 11.4% The specific investments noted within this presentation have been included for informational purposes only to illustrate the investment process. No assurance can be given that similar opportunities will arise or that the performance of these investments will be typical or representative of any or all future investments associated with GoldenTree. It should not be assumed that these investments or any investments made in the future will be profitable. Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile. The above information represents GoldenTree s internal assumptions and analysis. Accordingly, there can be no guarantee as to the results or accuracy of the information noted above. To that end, investors may lose their entire investment in the Fund. Past performance is not indicative of future results.