Collateral Debt Obligations (CDO)

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Collateral Debt Obligations (CDO) Collateral
Loan Obligations (CLO)
A Quick Overview
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Review of the CDO/CLO Asset Class Portfolio
Investment Management
Portfolio of Investments
Leverage Loan Fund

Investments (Leveraged Loans / HY Bonds)
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Leverage Bond / Loan Fund (Special Purpose
Company) Equity 50,000,000 5 x Leverage Factor
1 Debt (Loan) 250,000,000 _at_ Libor Rate 0.75
or (1,875,000) Total Fund300,000,000
Investment Management
Portfolio of Investments
300M

Investments (Leveraged Loans/Bonds)
1
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Portfolio of Investments (Loans / Bonds)
Leverage Loan / Bond Fund Equity
50,000,000 5 x Leverage Factor Debt
(Loan/Bond) 250,000,000 _at_ Libor Rate 0.75 or
(1,875,000) Total Fund300,000,000
Investment Management
300 million
2 m
3 m
5 m
4 m
6 m
5 m
2 m
4 m
4 m
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Portfolio of Investments (Loans/Bonds)
Leverage Loan/Bond Fund Equity
50,000,000 Debt (Loan) 250,000,000 _at_ Libor
Rate 0.75 or (1,875,000)
Investment Management
300 million
300 million Average LIBOR 2.8 8,400,000
2 m
3 m
5 m
4 m
6 m
5 m
2 m
4 m
4 m
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Leverage Loan/Bond Fund Equity
50,000,000 Debt (Loan) 250,000,000 _at_ Libor
Rate 0.75 or (1,875,000)
Investment Management
Portfolio of Investments (Loans/Bonds)
300 million
300 million Average LIBOR 2.8 8,400,000
0.75 Management Fee 1,875,000
2 m
3 m
5 m
4 m
Gross Income 8,400,000 Less Mgmt
Fee 2,250,000
Loan 1,875,000 Net Income 4,275,000 4,275,00
0 /50,000,000 8.50 Net 1
6 m
5 m
2 m
4 m
4 m
1 At a higher leverage-ratio-fund the returns
will be more than doubled due to half the Equity
required despite the higher cost and higher
amount of debt.
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Leverage Loan/Bond Fund
Investment Management
Portfolio of Investments

Investments (Leveraged Loans / HY Bonds)
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Executive Summary
Fund Overview

• Leverage Loan Fund Invests in the senior bank
  loan asset class which has
• Considerable attraction at this point in the
  economic and interest rate cycle
• Unique recovery characteristics
• No interest rate risk due to floating rate
  characteristics
• Low correlation to other asset classes
• Low price volatility

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Fund Summary Term Sheet
Executive Summary
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Cypress Tree Leverage Alternative Fund (CLAIF)
Cypress Tree Investment Management
Cypress Tree Portfolio of Investments

Investments (Leveraged Loans)
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Portfolio Selection Monitoring
Portfolio Selection Criteria

• Reference Portfolio will be managed to maintain
  or exceed standards consistent with prudent
  portfolio management theory
• Weighted average rating factor (WARF) less than
  2000 (equivalent to the Ba3/B1 midpoint
  on an inverse scale)
• Issuer concentration not to exceed 3 of the
  aggregate portfolio (post ramp-up)
• Industry concentration not to exceed 10 of the
  aggregate portfolio (post ramp-up)
• Real estate loans will not be permitted
• Portfolio will be marked to market weekly
• Companies subject to more scrutiny
• Significant exposure to single or multiple
  highly correlated commodities
• Lack of tangible assets
• Loans priced below 95 / Bonds priced below 80
• Dependency on asset sales or refinancing for
  repayment
• Exposure to highly cyclical industries
• Significant government regulation

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The Fund
Expected Portfolio Statistics
Total Loan Portfolio 250 Million Average
Holding 1.3 Average Spread Loan LIBOR
325 bps. Average Fixed Yield 8.0 Weighted
Average Rating Ba3/B1 of Industries 20-25
of Issuers 60-75 Average Maturity 5
Years Maximum Industry Concentration 10
Maximum Issuer Concentration 3
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Portfolio Selection Monitoring
U.S. Loan Market Distribution by Industry
By Amount
By Issuer
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Leverage Loan/Bond Fund
Investment Management
Portfolio of Investments
Investments (Leveraged Loans / HY Bonds)

Company
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Typical Leveraged Company Transaction

• Typical Leveraged Company
• Average Revenues of 1 Billion
• Total Assets of 1 Billion
• BB- rated by Standard and Poors
• 1 or 2 in its industry (market share)
• Private Company ( Sometimes Public)
• Equity Sponsor involved
• Typical Leveraged Transaction
• 500 million Bank Debt (Leveraged Loan)
• 300 million Corporate High Yield Bonds
• 200 million Equity
• Loan is secured by all the assets and the stock
  of the Company
• Bank Debt / EBITDA 3.0x
• Total Debt / EBITDA 5.0x

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The Case for Loans
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Why Invest in Floating Rate Loans?
The Case for Loans

• Over a 12-year period, leveraged loans have
  outperformed all other asset classes on a
  risk/return basis. Some of the reasons are
• Insulation from Interest Rate Risk Interest
  rates are currently at 40-year lows. Because each
  loans rate of interest is reset at least every
  90 days, loan rates rise with market rates and
  inflation.
• Low Price Volatility - Reduced volatility results
  from a low correlation/covariance with other
  assets. The floating rate nature of leveraged
  loans contributes to its low correlation with
  other security types. Only short-term Treasury
  Bills, consistently exhibit lower volatility.
• Defensive Strategy Senior loan funds have
  historically provided consistent, higher
  risk-adjusted returns compared to other asset
  classes which may be attractive for investors
  during volatile markets. Given the current low
  rate climate, floating rate loan funds offer
  significant downside protection, especially with
  a weaker dollar and a potentially strengthening
  economy. Rising rates usually imply a stronger
  economy which in turn reduces the risk of
  default.

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Why Invest in Floating Rate Loans?
The Case for Loans

• Increased Efficiency Leveraged loans are highly
  efficient portfolio assets with the highest
  Sharpe ratio and return per unit of risk of any
  major asset class. Adding loans to any portfolio
  offers the investor the opportunity for
  meaningful portfolio diversification due to their
  extremely low correlation with the performance of
  other major asset classes.
• Lower Loss Characteristics Loans represent the
  senior claim in a borrowers capital structure
  and usually are secured by the bulk of the
  borrowers assets. Because of this seniority
  protection, loans are the last to be impacted by
  any weakening in the financial condition of the
  borrower.
• Liquidity in the Secondary Market The size of
  the leveraged loan market has grown substantially
  over the last 9 years. At the end of 2003 the
  size of the leveraged loan market totaled
  approximately 1 trillion versus only 150
  billion at the end of 1993. All of this growth
  has contributed to greater liquidity and better
  pricing in the secondary market.

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The Case for Loans

• Timing is Right for Leveraged Loans

• Peak of the default cycle has passed
• New transactions are more conservatively
  structured and remain attractively priced for the
  risk
• Interest rates are likely to increase from this
  point in the economic cycle
• Supply of new issues expected to grow in 2010
• Projected returns represent excellent value on
  both a relative and absolute basis

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The Case for Loans
Rates of Recovery on Defaulted Assets
Asset Type 1988-2003
1998-2003
Bank Debt 80.1 76.1
Senior Secured Notes 65.8 50.2
Senior Unsecured Notes 46.5 41.2
Senior Subordinated Notes 32.5 23.6

• Excluding Telecom
• 2079 Observation
• 897 Observation

• Bank Loans have very high recovery rates
  relative to Notes

Source SP
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The Case for Loans
Return/Risk Profile 1992-2010
Source CSFB
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The Case for Loans
Correlation of Various Asset Classes 1992-2010

• Loans have low correlation to other asset classes

Source CSFB
Correlation based on the 1992-2003 market data
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The Case for Loans
Summary Statistics of Various Asset
Classes 1992-2010
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Leverage Loan / Bond Fund
Investment Management
Portfolio of Investments
Investments (Leveraged Loans / HY Bonds)

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Overview
Company Overview

• Specialization / Expertise in the inefficient
  markets of leveraged loans, high yield bonds, and
  distressed securities
• Successful track record managing over a
  cumulative total of approximately through various
  market and economic cycles
• Portfolio managers experience of loan/high yield
  management experience
• Low default experience
• Proven investment strategy
• Institutional credit culture with proactive
  infrastructure