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Skadden www. skadden. com Jefferies & Company, Inc. Skadden, Arps, Slate, Meagher & Flom LLP March 23, 2004 Corporate Restructuring: International Best Practices Developing Markets for Distressed Corporate Debt www.jefco.com

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Skadden www.skadden.com www.jefco.com 1 Jefferies & Company, Inc. >A leading investment banking firm led by one of the most powerful capital markets trading platforms in the industry >Principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF), a holding company with an equity market capitalization of over $2.0 billion and over 1,600 employees in 20 offices worldwide

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Skadden www.skadden.com www.jefco.com 2 Boston Chicago Houston Los Angeles Newark New York Palo Alto San Francisco Washington, D.C. Wilmington Brussels Frankfurt London Moscow Paris Vienna Beijing Hong Kong Singapore Tokyo CANADAEUROPE ASIA AUSTRALIA Sydney USA Toronto Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates: A Global Law Firm

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Skadden www.skadden.com www.jefco.com 3 Speakers >John Wm. Butler, Jr. Partner and Co-Practice Leader Corporate Restructuring Skadden, Arps, Slate, Meagher & Flom LLP >William Q. Derrough Managing Director & Group Co-Head Recapitalization & Restructuring Jefferies & Company, Inc. >N. Lynn Hiestand Partner Corporate Restructuring and Cross-Border Transactions Skadden, Arps, Slate, Meagher & Flom (UK) LLP

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Skadden www.skadden.com www.jefco.com 4 Definition of Distressed Debt >Bank debt, private placements or public debt of companies that: have defaulted on their debt obligations; have initiated insolvency or reorganization proceedings; are in such financial distress that their debt is trading more than 1000 basis points above comparable US Treasury bonds; OR have debt trading below 70%

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Skadden www.skadden.com www.jefco.com 5 Scope of Investments >Distressed Debt Investors (DDIs) invest across distressed entities capital structure: Bank and bond debt (e.g., typically defined as distressed debt) Trade claims Equity >Investment allocations across an entitys capital structure may be used to hedge risk and to foster change of control transactions

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Skadden www.skadden.com www.jefco.com 6 Sector Analysis >DDIs invest across industry sectors >Risk analysis includes prevalence of defaults within industry sector

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Skadden www.skadden.com www.jefco.com 7 Defaults by Sector Source: Moody's; Fitch; Standard & Poor's; Deloitte & Touche LLP, Distressed Debt Marketplace: Opportunities & Challenges as the Economy Improves, Turnaround Management Association (March 12, 2004)

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Skadden www.skadden.com www.jefco.com 8 Defaults by Volume Source: Moody's; Deloitte & Touche LLP, Distressed Debt Marketplace: Opportunities & Challenges as the Economy Improves, Turnaround Management Association (March 12, 2004)

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Skadden www.skadden.com www.jefco.com 9 Company Analysis >DDIs also conduct due diligence to analyze company risk: Depressed or declining markets/sales Shrinking margins Operating losses/unanticipated losses Cash crunch Covenant violations Aging accounts receivable/payable Accounting irregularities Management initiatives

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Skadden www.skadden.com www.jefco.com 10 Historically Significant Global Defaults 1970s1975198919931997199820022004 Latin America US REITS US Savings & Loan Crisis; Canada & Mexico Asian Financial Crisis; Mexico Japan Banking Crisis Russia, CIS, and Czech Republic Europe Others? Argentina; India; Philippines; Taiwan; China

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Skadden www.skadden.com www.jefco.com 11 Stages of Global Development in the Distressed Debt Market Developed, efficient market Currently developing Early stages of development Undeveloped

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Skadden www.skadden.com www.jefco.com 12 >Private equity investors and hedge funds are the major players in the industry >Mutual funds are newer participants Major Distressed Debt Investors (DDIs) Cerberus Capital Management Elliott Associates Soros Fund Management

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Skadden www.skadden.com www.jefco.com 13 Vibrant US Distressed Debt Market Source: http://www.loanpricing.com

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Skadden www.skadden.com www.jefco.com 14 Vibrant US Distressed Debt Market Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

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Skadden www.skadden.com www.jefco.com 15 Forecasts for the US Market Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

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Skadden www.skadden.com www.jefco.com 16 Distressed Debt is Cyclical Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

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Skadden www.skadden.com www.jefco.com 17 Possibilities for Growth Exist in the US Source: McKinsey Quarterly, 2003 No. 1

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Skadden www.skadden.com www.jefco.com 18 Opportunities Exist in Other World Markets >With some exceptions (notably, the UK), these markets are highly undeveloped in comparison to the US market >Inaccurate or unavailable data provide the greatest obstacle to market analysis outside the US >As a result, non-performing loan market data provides best indicator of forward trends in the international distressed debt market This data may also be more relevant outside of the US since non-US companies typically use bank debt as their primary form of financing (due to less developed public debt markets)

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Skadden www.skadden.com www.jefco.com 19 Nonperforming Loans: Asia (aggregate) Source: McKinsey Quarterly, 2002 No. 1

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Skadden www.skadden.com www.jefco.com 20 Nonperforming Loans: Asia (percentage of total) Source: From Cyclical Recovery to Long Run Growth, World Bank, Oct. 2003

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Skadden www.skadden.com www.jefco.com 21 Secondary Market: Asia Source: McKinsey Quarterly 2002 No. 1

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Skadden www.skadden.com www.jefco.com 22 Nonperforming Loans: Europe Source: McKinsey Quarterly 2002, No. 1

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Skadden www.skadden.com www.jefco.com 23 Secondary Market: Europe Estimated Bank Debt Trading Volume in Europe and the Middle East (US$ billions) Source: Loan Pricing Corporation. Change in reporting currency in 2002 USDEUR

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Skadden www.skadden.com www.jefco.com 24 Exceptions to Undeveloped International Markets >United Kingdom Market has grown in the past 5 years >Europes cable and telecom industry Debt more accessible as companies raising capital through corporate bonds rather than bank debt because these companies do not have the typical assets banks are able or willing to accept as security For example, Apollo Advisor invested in the publicly traded bonds of German cable company Kabel Hessen GmbH

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Skadden www.skadden.com www.jefco.com 25 Value of the Market to Corporate Restructuring >Provides risk capital to the marketplace >Offers liquidity >Strengthens banking system Important as countries prepare for stricter requirements under Basel II and some countries prepare to open their borders to global competition under agreements with the World Trade Organization >Provides a group of investors willing to take creative recoveries in contrast to traditional banks

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Skadden www.skadden.com www.jefco.com 26 Value of the Market to Corporate Restructuring >Provides expertise to the procedure Experienced investors add value by restructuring debt or improving management of the operations >Provides impartial outsiders Resolves conflicted relationships, for example where a bank is the creditor, shareholder and is running the distressed company May be in a better position to compromise claim

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Skadden www.skadden.com www.jefco.com 27 Many Types of Entities Cannot Work Out Debt Themselves >Many have constraints which limit ability to hold bad debt, including: Covenant restrictions Regulation Risk profiles >Should be more likely to write off debt/sell at a discount than risk taking an equity stake in a restructured entity

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Skadden www.skadden.com www.jefco.com 28 Types of Entities Typically Subject to Bad Debt Constraints >Insurance companies >Certain investment firms/funds >Commercial and/or public banks >Collateralized debt obligations (CDOs)

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Skadden www.skadden.com www.jefco.com 29 Why Markets Have Flourished in North America & the UK >Predictable outcomes >Permissive trading under Chapter 11 in US Currently not regulated under Securities Laws >Experienced professionals >Fair process >Significant returns to DDIs >Developed financial markets Both in distressed securities and in post- restructured securities

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Skadden www.skadden.com www.jefco.com 30 Distressed Indices Performance >Historically distressed debt returns are negatively correlated with the stock market Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004; CSFB/Tremont

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Skadden www.skadden.com www.jefco.com 31 Historical High Yield Spread to Treasury Source: Thomson Financial > Spread correlates to default risk in market

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Skadden www.skadden.com www.jefco.com 32 Post Chapter 11 Equity >Post-bankruptcy equities that trade over-the-counter tend to be overvalued in the plan of reorganization Source: Jefferies (1=Plan Price) (1=IPO Price)

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Skadden www.skadden.com www.jefco.com 33 Drawbacks of DDIs >Short investment horizon of some DDIs >Contentious and aggressive constituencies >Confidentiality and insider problems >Constantly changing group

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Skadden www.skadden.com www.jefco.com 34 Obstacles to Emerging Distressed Debt Markets Reorganization/Insolvency Law >Europe: Reorganization/insolvency law focuses on liquidation Senior lenders often control the process No consistent reorganization/insolvency regime across Europe >Lesser-Developed Countries Undeveloped reorganization/insolvency law: little precedent makes outcomes unpredictable for investors Outside influences on judicial/administrative process: political pressure Enforcement of judgments often difficult

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Skadden www.skadden.com www.jefco.com 35 Obstacles to Emerging Distressed Debt Markets Regulatory Impediments >Unaccommodating/inconsistent tax structure For example, in Germany, the tax law contains provisions unfavorable to distressed debt investors. Further, the government continually changes the tax law affecting distressed debt investors, making it difficult to structure deals >Inefficient government approval process For example in China, Huarong AMCs first distressed debt sale took almost 3 years to complete because of government delays

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Skadden www.skadden.com www.jefco.com 36 Obstacles to Emerging Distressed Debt Markets Transparency >Europe In some countries banks control the majority of corporate debt so pricing and transaction information are difficult to obtain >Asia Difficult to get information from the AMCs, particularly where mass loans are sold Necessary because AMCs are subject to intense political and social pressures to favor certain borrowers

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Skadden www.skadden.com www.jefco.com 37 Obstacles to Emerging Distressed Debt Markets Limited Players >Few players have expertise to invest Europe: investing requires knowledge across multiple legal and regulatory regimes Asia: must rely on foreign investors as domestic investors do not have the institutional knowledge and resources

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Skadden www.skadden.com www.jefco.com 38 Possibilities for Growth >The distressed debt market is likely to grow rapidly over the next few years The availability of distressed debt to investors will likely increase as governments and banks become committed to dealing with the problem Investors are seeking new frontiers as traditional investment opportunities are limited

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Skadden www.skadden.com www.jefco.com 39 Asian High Yield Issuance >The Asian HY market has yet to show much of a pattern, but as markets integrate the HY market should develop. Source: Thomson Financial. Converted to US Dollars

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Skadden www.skadden.com www.jefco.com 40 European and German Investment-Grade Source: Thomson Financial. Converted to US Dollars >Due to the scarcity of data outside the US, corporate debt provides a proxy for predicting future defaults

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Skadden www.skadden.com www.jefco.com 41 European and German High Yield Issuance Source: Thomson Financial. Converted to US Dollars > High yield debt provides a particularly useful proxy for predicting defaults

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Skadden www.skadden.com www.jefco.com 42 Latin American High Yield Issuance >Having been in emerging doldrums the last few years, Latin America also has yet to show the development that European markets have. Source: Thomson Financial. Converted to US Dollars

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Skadden www.skadden.com www.jefco.com 43 Fund Flows into CDOs by Region >The growth of CDOs, particularly overseas, indicates an increasing appetite for alternative fixed income products. Source: JPMorgan

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Skadden www.skadden.com www.jefco.com 44 International Trends & Solutions >Denial and fear of selling assets at less than their originally perceived value >Xenophobia >Establishment of Asset Management Companies in Asia >Creation of Bad Banks recently in Germany >Growing understanding of going concern value vs. liquidation

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Skadden www.skadden.com www.jefco.com 45 New Trends in Insolvency Laws

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Skadden www.skadden.com www.jefco.com 46 New Trends in Insolvency Laws

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Skadden www.skadden.com www.jefco.com 47 New Trends in Insolvency Laws Though it will take time for the spirit of these reforms to take effect, the regulatory groundwork is in place.

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Skadden www.skadden.com www.jefco.com 48 Examples of Success >DDIs gained initial successes through litigation arbitrage of defaulted sovereign debt in emerging markets. As a result, governments became aware of workouts. (Peru, Russia & Asian crisis countries) >A consortium led by Morgan Stanley and Goldman Sachs purchased $1.5 billion in face value of distressed debt from Huarong Asset Management >Sumitomi Mitsui Financial Group and Goldman Sachs entered into a $1.2 billion deal >Dresdner Bank sold 511 million bundle of credits to Deutsche Bank

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Skadden www.skadden.com www.jefco.com 49 Stages of Global Development in the Distressed Debt Market Developed, efficient market Currently developing Early stages of development Undeveloped