Distressed Debt – Impact and Opportunities

Thomas R. Goodwin, EVP, DebtX

Kent Wheelock, VP, US Bank

Mark Holman, Director, Archon Group

November 4, 2008

Distressed Debt – How Did We Get Here

Source: Bunch of different sources

Sub-Prime Loans as a % of All Originations

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Distressed Debt – How Did We Get Here?

The Bursting Housing Bubble - Case Shiller Housing Price Index

100

110

120

130

140

150

160

170

180

190

200

Jan-

00

Jul-

00

Jan-

01

Jul-

01

Jan-

02

Jul-

02

Jan-

03

Jul-

03

Jan-

04

Jul-

04

Jan-

05

Jul-

05

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Source: Economy.com; Greed and reckless abandon

20.2%

Distressed Debt – How Did We Get Here?

First Mortgage Defaults

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Source: Economy.com

Distressed Debt – How Did We Get Here?

Source: Economy.com

Household Debt in Default

0

100

200

300

400

500

600

700

800

900

1,000

Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Distressed Debt – How Did We Get Here

Quarterly CMBS Delinquency Rates by Property Type

2005 to 2Q 2008

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08

M-F Office Retail Industrial Lodging

Distressed Debt - Delinquency Rates By Asset Classes (U.S)

Delinquency Rates By Asset

(All Banks)

0

2

4

6

8

10

12

2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2

Del.

Rate

s

Residential R/E Commericial R/E C&I Credit Cards

SOURCE: Federal Reserve Board

1992 1993 1994 1995 1996 19991998 20052004 2006 2007200220012000 20031997 2008

Distressed Debt - AAA CMBS Spreads to Swaps*

* Swaps apx. T’s + 50-60bp

�

10YR, AAA Spread Over Swaps

0

100

200

300

400

500

600

70010/1

2/2

007

11/1

2/2

007

12/1

2/2

007

1/1

2/2

008

2/1

2/2

008

3/1

2/2

008

4/1

2/2

008

5/1

2/2

008

6/1

2/2

008

7/1

2/2

008

8/1

2/2

008

9/1

2/2

008

10/1

2/2

008

AAA

* Swaps apx. T’s + 50-60bp

October 2007 to October 2008

Distressed Debt - BBB CMBS Spreads to Swaps

10YR, BBB Spread Over Swaps

0

500

1000

1500

2000

2500

300010/1

2/2

007

11/1

2/2

007

12/1

2/2

007

1/1

2/2

008

2/1

2/2

008

3/1

2/2

008

4/1

2/2

008

5/1

2/2

008

6/1

2/2

008

7/1

2/2

008

8/1

2/2

008

9/1

2/2

008

10/1

2/2

008

BBB

October 2007 to October 2008

0

5

10

15

20

25

30

35

Perf Sub Non Perf Sub Non BBB Unrated

CRE Pre-Q3 ’07 CRE – Q3 ‘08 CMBS

%

Distressed Debt - Attractive Yields in the Secondary Market

Distressed Debt - Secondary Loan Trading Volume (U.S)

Secondary Loan Trading

Dollar Volume1991 to Q2 2008

$0

$50

$100

$150

$200

$250

$300

$350

$ (

Bil.)

Par $3.60 $4.93 $6.29 $13.03 $25.61 $33.45 $51.62 $65.77 $70.17 $77.97 $75.82 $64.90 $87.42 $113.49 $135.52 $198.67 $310.20 $322.65

Distressed $4.40 $6.20 $8.75 $7.78 $8.21 $6.05 $9.02 $11.79 $8.93 $24.00 $41.70 $47.58 $57.15 $41.52 $40.82 $39.89 $31.82 $39.82

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 LTM2Q08

SOURCE: Loan Pricing Corporation

Distressed Debt - Trends In The Marketplace – Sell Side

� Land acquisition & development, and builder loans (“I don’t want to hold 5

years”)

�Stalled high-rise condo loans (proud to have a 50% fall-out rate)

�Failed condo conversion loans (short sales killing final sponsor sell-out)

� Securitization product sitting on warehouse lines that mature soon

� Hospitality, older product (anticipating PIP’s if not hit with one already)

� Franchise (restaurant, C & G)

� CTL’s (really FCTL’s)

� Entertainment (stadium seating with Dolby Surround Sound or a flea market)

� Weakened Retail (Anything in WalMart’s path)

� Sale of work-out credits to hit overall NPA levels

� Sale of loans to help manage officer workload

Distressed Debt - Trends In The Marketplace – Buy Side

� Asset valuations impacted by:

�hold times for “for-sale” properties

�new financing environment for cash flowing assets

� Much more scrutiny on exit timing & final disposition price

� Underwriting on a much more granular basis, no buying off a tape

� 100% site inspections / BPO’s versus sampling

� Minimum IRR’s way up

� Wait and see approach (don’t want to report a write-down after first

acquisition)

Distressed Debt - Historical Vacancies

Historical Vacancies

0

2

4

6

8

10

12

14

16

18

20

Dec

-00

Apr-0

1Aug

-01

Dec

-01

Apr-0

2Aug

-02

Dec

-02

Apr-0

3Aug

-03

Dec

-03

Apr-0

4Aug

-04

Dec

-04

Apr-0

5Aug

-05

Dec

-05

Apr-0

6Aug

-06

Dec

-06

Apr-0

7Aug

-07

Dec

-07

Apr-0

8Aug

-08

Source: PPR

Vacancy

RateApartment Warehouse Office Retail

Distressed Debt – Where Are Vacancies Headed?

Distressed Debt – Where Are Vacancies Headed

Vacancies Rising

0

2

4

6

8

10

12

14

16

18

20

Dec

-08

Feb-0

9Apr

-09

Jun-

09Aug

-09

Oct

-09

Dec

-09

Feb-1

0Apr

-10

Jun-

10Aug

-10

Oct

-10

Dec

-10

Feb-1

1Apr

-11

Jun-

11Aug

-11

Oct

-11

Dec

-11

Feb-1

2Apr

-12

Jun-

12Aug

-12

Oct

-12

Dec

-12

Source: PPR

Vacancy

Rate

Apartment Warehouse Office Retail

Distressed Debt – Where Are Values Headed

Distressed Debt – Where Are The Opportunities

Source: Goodwin’s Imagination

Disproportionate Impact of Pricing Declines on Lot ValuesW as C/B Is

Finished Lot Cost 150,000$ 25% (258)$ 0% 45,000$ 10%

$ Cost / SF 185.00$ 185.00$ 185.00$

SF 2,120 2,120$ 2,120$

Total Cost 392,200$ 392,200$ 392,200$

Margin 15% 15% 4%

Profit 58,830$ 58,830$ 13,830$

Builder Costs 451,030$ 75% 451,030$ 100% 406,030$ 90%

Selling Price 601,030$ -25% 450,773$ 451,030$

(Land + Costs) Decline

Distressed Debt – Where Are The Opportunities

Conduit Loan Maturities

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Maximus Advisors

Distressed Debt – When Do We Recover

Q3 ’08 Q4 ’08 Q1 ’09 Q2 ’09 Q3 ‘09 Q4 ’09 Q1 ’10 Q2 ’10 Q3 ’10 Q4 ‘10

Oil prices peak

Stock marketbottoms

Homesales

bottom

Housing starts

bottom

Employmentbottoms

Fed tightens

Housing pricesbottom

Foreclosurespeak

Housing pricesresume rising

Joblessrate peaks

Source: Economy.com

Economicexpansion

begins

DebtX Outlook

�Principals have sold loans through 3 cycles

�Each cycle has gotten shorter (though maybe not this time)

�Better information more readily available

�More cash raised each cycle

�$300 Billion per WSJ, in 2007

�More than $20 Billion raised YTD ’08 by funds for just Sub-Prime purchases

�Blackstone alone has 9 funds which have raised > $25 Billion for distressed real

estate debt and equity

�Cycle starts with appreciable “Bid – Ask Gap” due to asset valuation

�Concurrently banks begin adding reserves, adjusting the expectations for ultimate

resolution value

�Money can wait on the sidelines only so long, especially since so much of it is “OPM”

�As deals start getting done, managers of OPM don’t want miss opportunities

�Several OPM managers have said “I don’t have to wait for the bottom, it’s just gotta be

close.”

�Biggest risk in asset dumping versus orderly recognition

NEW YORK

250 West 57th Street9th FloorNew York, NY 10107

p: 212-835-9480f: 212-835-9482

ATLANTA

5755 North Point ParkwaySuite 62

Alpharetta, GA 30022

p: 770-500-3836f: 770-500-3556

www.DebtX.comSAN FRANCISCO

900 Cherry AvenueSuite 300San Bruno, CA 94066

p: 650-794-2660 or 2661f: 650-794-2662

BOSTON

133 Federal Street10th Floor

Boston, MA 02110

p: 617-531-3400f: 617-531-3499

FRANKFURT, Germany

An der Welle 4D-60422 Frankfurt/Main

p: +49-69-75-93-8414f: +49-69-75-93-8200

BIRMINGHAM, UK

1 St. Ives WayNuneaton CV11 6FR

p: +44 2476 641 316