S A G I T T A

State Association of County Retirement Systems
The Landscape of Debt Opportunities
George W. Siguler
Managing Director
Confidential
Ver. 05.12.11
May 2011

The World Today
Home price
depreciation
Systemic banking
failures Over-leveraged
LBOs
Implosion of the
securitization industry
Sustained high
unemployment
Opaque multi-trillion
dollar credit
derivatives market
Global Distressed
Debt and
Restructuring
Opportunities
Soaring corporate
default rates
Mortgage credit
meltdown
Consumer
deleveraging
The Landscape of Debt Opportunities
May 2011
02

Global Contagion
+ The massive correction in the credit markets and the downturn in the housing market have created severe
dislocations across many asset classes
+ The contagion has spread into the global capital markets, creating a broader scope of opportunities for distressed
investors
RMBS &
other
structured
products
Corporate
leveraged loans
and high yield
Global Opportunity Set
Commercial
real estate debt
market
Consumer debt:
credit cards, auto
and student loans
Commercial
real estate
property
market
The Landscape of Debt Opportunities
May 2011
03

Unprecedented Government Support of the Markets
Selected Key Government Intervention Programs
Program Authorized ($B) Invested ($B)
Federal Reserve
GSE Debt Purchase Program $ 1,450 $ 925
TAF - Term Auction Facility $ 500 $ 110
CPFF - Commercial Paper Funding Facility $ 1,800 $ 14
Term Asset Backed Security Lending Facility $ 1,000 $ 44
U.S. Government Bond purchases $ 300 $ 295
QE2 - Long Term Treasury Purchase Program $ 600 $ 375
Other $ 850 $ -
Federal Reserve Total $ 6,500 $ 1,763
Stimulus
Economic Stimulus Act of 2008 $ 168 $ 168
Student loan guarantees $ 195 $ 33
Other $ 36 $ 19
Treasury Total $ 399 $ 220
Treasury
TARP $ 700 $ 356
Conservatorship of Fannie Mae & Freddie Mac $ 400 $ 111
Other $ 974 $ 415
Treasury Total $ 2,074 $ 882
FDIC
TLGP (Guarantee Program) $ 1,500 $ 308
Asset Guarantee Program (C, AIG, BS) $ 528 $ 154
Bank Takeovers $ 45 $ 45
FDIC Total $ 2,074 $ 508
HUD
HOPE for Homeowners $ 345 $ 20
HUD Total $ 345 $ 20
TOTAL $11.4 Trillion $3.4 Trillion
Sources: KBW Research, Federal Reserve, U.S. Treasury, FDIC, CBO, White House, Bloomberg, CNN
The Landscape of Debt Opportunities
May 2011
04

Sustained Rally
+ Massive rally in the leveraged loan and high yield universe in 2009, with the weakest credits leading the way
L+3500
L+3000
L+2500
L+2000
L+1500
L+1000
L+500
L+0
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Sources: JPMorgan Credit Research, CSFB Leveraged Finance Research
Average Discounted Spread
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
All Loans ML HY H0A0 ML HY CCC H0A3
Jul-10
Oct-10
The Landscape of Debt Opportunities
May 2011
05

High Yield Market Has Pushed Out the Leveraged Loan Maturity Ladder
+ Since December 2008 the high yield market has grown 32.7%, while the leveraged loan universe shrank 18%
USD Billions
500
400
300
200
100
Sources: Siguler Guff, JPM Credit Research
0
High Yield and Leverage Loan Maturity Schedule ($ billions)
12/10 Loans 12/10 HY
12/09 Loans 12/09 HY
12/08 Loans 12/08 HY
2010 2011 2012 2013 2014 2015 2016 2017 2018+
The Landscape of Debt Opportunities
May 2011
06

Supply/Demand Imbalances Await the Loan Market
+ In 2012, Siguler Guff believes loan supply will outstrip demand due to declining CLO re-investment
USD billions
120
100
80
60
40
20
0
Sources: Siguler Guff, S&P
CLO Reinvestment
2010 2011 2012 2013 2014
USD billions
250
200
150
100
50
0
The CLO Re-investment Capability
CLO Demand
Loan Supply
2010 2011 2012 2013 2014
The Landscape of Debt Opportunities
May 2011
07

European Leveraged Loan Market
+ In Europe, loan new issuance remained slow while maturities are looming
USD billions
600
500
400
300
200
100
-
European Leveraged Loan Market
Loan Market Size New Loan Volume
Source: Credit Suisse “2011 Leveraged Finance Outlook”
250
200
150
100
50
-
USD billions
USD billions
100
90
80
70
60
50
40
30
20
10
-
European LBO Maturities
Leveraged Loans Maturing
The Landscape of Debt Opportunities
May 2011
08

Structured Credit Markets
Par Value
+ Unprecedented government intervention through TALF, PPIP and MBS purchases by the Fed paved the way for
an RMBS rally
+ However, fundamentals continue to be weak
110
100
90
80
70
60
50
40
30
20
10
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Source: JP Morgan; AAA ratings by S&P and Moody’s
Non-Agency Pricing 60+ Delinquencies
Feb-09
May-09
Prime Alt-A 2006 AAA Subprime 2007 AAA Subprime
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
% of Original Balance
60
50
40
30
20
10
0
Prime Fixed Prime Option
ARM
Alt-A Fixed Alt-A ARM Subprime
Dec-08 Dec-09 Dec-10 Apr-11
The Landscape of Debt Opportunities
May 2011
09

Stabilization of Collateral is Key
+ Home values are the key driver of collateral performance
+ Stabilization of their decline might not be permanent yet
+ Supply/demand imbalance must equalize
Avg. Price
220
200
180
160
140
120
100
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Sources: Bloomberg, JP Morgan
Home Prices vs. Supply Underwater Borrowers
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Case/Shiller Months Supply
Mar-09
Oct-09
May-10
Dec-10
15
13
11
9
7
5
3
% of borrowers outstanding
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
All Current Del Reperf
Subprime Fixed Subprime ARM Alt A Fixed Alt A ARM
Option ARM Prime Fixed Prime ARM
The Landscape of Debt Opportunities
May 2011
010

Shadow Inventory Overhang
+ Unprecedented supply in housing stock is much larger than demand
+ Distressed inventory estimated at 7 million units, approximately 12% of existing U.S. homes
Total
% of
Inventory
REO Auction Notice of Shadow Total over
City Listings Listings Listings Default Inventory Inventory listings
Las Vegas, NV 16,765 16,835 14,879 21,135 52,849 69,614 415%
San Diego, CA 10,416 5,603 7,727 11,548 24,878 35,294 339%
Los Angeles, CA 43,050 16,706 26,789 37,894 81,389 124,439 289%
San Francisco, CA 4,176 1,856 2,265 3,355 7,476 11,652 279%
Denver, CO 17,730 3,020 10,867 1 13,888 31,618 178%
Chicago, IL 42,698 1,317 7,808 16,787 25,912 68,610 161%
Miami, FL 35,489 2,373 4,499 12,808 19,680 55,169 156%
Washington, DC 13,411 1,754 2,776 0 4,530 17,941 134%
Boston, MA 11,983 1,036 1 0 1,037 13,020 109%
New York, NY 63,022 930 1,642 17 2,589 65,611 104%
*Source: Amherst Mortgage Insight
**Based on 56 million homes in U.S.
Top 10 Metro Areas Inventory*
MBA
Delinquency
Survey %
Probability of
Liquidation
Probability
Weighted
Liquidation
Foreclosure 4.3% 100% 4.3%
90+ days 3.9% 99.2% 3.9%
60+ days 1.7% 95.6% 1.6%
30+ days 3.7% 72.4% 2.7%
Total Distressed
Inventory
U.S. Housing Overhang**
13.5% 12.4%
Affected Units 7.6 million 6.9 million
The Landscape of Debt Opportunities
May 2011
011

The Structured Credit Market is at an Inflection Point
% loss
+ Until home values stabilize, we will continue to:
+ Invest in opportunistic situations
+ View security selection as the key driver of returns
+ Allocate to niche subclasses of the mortgage market and specified pool trades (issuer- and collateral-specific
investments)
90
80
70
60
50
40
30
20
Loss Severity Cumulative Loss (2007 Mortgages)
Prime Fixed Prime ARM Alt-A Fixed Alt-A ARM Subprime
Dec-08 Dec-09 Dec-10
Source: JP Morgan; UPB refers to unpaid balance
% of Original Balance
18
16
14
12
10
8
6
4
2
0
Prime Fixed Prime ARM Alt-A Fixed Alt-A ARM Subprime
Dec-08 Dec-09 Dec-10
The Landscape of Debt Opportunities
May 2011
012

FDIC Troubled Institutions
+ Banks’ losses are rising rapidly
+ The FDIC has closed 246 financial institutions since 2008
+ 775 banks currently sit on the FDIC Problem Institutions list
USD billions
900
800
700
600
500
400
300
200
100
0
1990
1991
1992
1993
Source: FDIC Quarterly Banking Profile March 31, 2010
1994
1995
FDIC Troubled Institutions & Assets
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total Troubled Assets Total Troubled Institutions
2010
1,600
1,400
1,200
1,000
800
600
400
200
0
The Landscape of Debt Opportunities
May 2011
013

Community Bank Net Income
+ Small banks are suffering under the weight of bad loans
+ Small banks defined as having less than $10 billion in assets
USD billions
40
35
30
25
20
15
10
5
-
(5)
(10)
34
32
Community Bank Net Income
Sources: FDIC Quarterly Banking Profile 9/30/2010, Community Banks are defined as all FDIC insured institutions with an assets of $10 billion or less.
27
2005 2006 2007 2008 2009 2010
(0)
(6)
8
The Landscape of Debt Opportunities
May 2011
014

CRE Distressed Opportunity
+ Commercial Real Estate (“CRE”) Fundamentals
+ Last major down cycle (late 1980’s/early 1990’s):
+ Oversupply
+ Over-leveraging
+ Current environment:
+ Severe demand retrenchment
+ Over-valuation
+ Over-leveraging
+ Wipeout: Siguler Guff estimates CRE values have declined 45% (1) , on average; U.S. industry equity wiped
out on an aggregate basis
+ Opportunity: CRE should experience above average returns for many years (emerging from the late 1980’s/
early 1990’s real estate depression, CRE returns were attractive for 15 years)
(1) Expected price correction based on the Moody’s/REAL Commercial Property Price Index (CPPI) and Siguler Guff estimates.
The Landscape of Debt Opportunities
May 2011
015

Industry Predicament
+ Implication: CRE equity severely impaired
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
CRE Total Value CRE Debt
Equity Value
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Moodys – Commercial Property Price Index (CPPI), Siguler Guff estimates, Federal Reserve Board Flow of Funds.
(1) Expected price correction based on midpoint of Siguler Guff estimates.
Assumes 45% (1)
Decline from ‘07
The Landscape of Debt Opportunities
May 2011
016

Industry Predicament
+ Ramping debt maturities catalyze opportunity
Annual Maturities ($ Billions)
Upcoming CRE Debt Maturities (Notional)
CMBS Fixed Rate CMBS Floating Rate Insurance Company Bank/Thrift Construction Other
450
400
350
300
250
200
150
100
50
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Deutsche Bank, Barclays Capital, Federal Reserve, Siguler Guff estimates.
The Landscape of Debt Opportunities
May 2011
017

Where is the Distress Today?
+ Regional and Community banks are holding precarious amounts of CRE on their balance sheets:
Bank Size Commercial Real Estate Exposure ($Bn) CRE Loans as %
of Total Assets
>$10 billion
$10 billion - $1 billion
$1 billion - $100 million
$100 million - $0
$25.7
Source: FDIC Quarterly Banking Profiles, Q3 2010.
$382.4
$372.9
$861.4
9%
36%
35%
19%
The Landscape of Debt Opportunities
May 2011
018

Certain Disclosures
This Presentation is for informational purposes only and does not constitute an offer, solicitation, recommendation or a basis for any contract to purchase or sell any
securities or partnership interests of any investment fund managed by or affiliated with Siguler Guff Advisers, LLC (“Siguler Guff”) (each, a “Fund” and, collectively, the
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The Landscape of Debt Opportunities
May 2011
019