Collateral Debt Obligations (CDO)
Collateral Loan Obligations (CLO)
A Quick Overview
1
Review of the CDO/CLO Asset Class Portfolio
Investment
Management
Portfolio of
Investments
Leverage Loan Fund
Investments:
(Leveraged Loans /
HY Bonds)
2
Leverage Bond / Loan Fund
Investment
Management
(Special Purpose Company)
Portfolio of
Investments
Equity: $50,000,000
5 x Leverage Factor 1
Debt (Loan):
$250,000,000 @ Libor Rate +
0.75% or ($1,875,000)
$300M
Investments:
(Leveraged
Loans/Bonds)
Total Fund:$300,000,000
1
3
Portfolio of
Investments
Leverage Loan / Bond Fund
Investment
Management
$300 million
Equity: $50,000,000
(Loans / Bonds)
5 x Leverage Factor
Debt (Loan/Bond):
$250,000,000 @ Libor Rate +
0.75% or ($1,875,000)
Total Fund:$300,000,000
$2 m
$3 m
$5 m
$4 m
$6 m
$5 m
$2 m
$4 m
$4 m
4
Investment
Management
Leverage Loan/Bond Fund
Portfolio of
Investments
$300 million
(Loans/Bonds)
Equity: $50,000,000
Debt (Loan):
$300 million
$250,000,000 @ Libor Rate +
0.75% or ($1,875,000)
Average
LIBOR + 2.8%
$2 m
$8,400,000
$3 m
$5 m
$4 m
$6 m
$5 m
$2 m
$4 m
$4 m
5
Investment
Management
Leverage Loan/Bond Fund
Equity: $50,000,000
Portfolio of
Investments
$300 million
(Loans/Bonds)
Debt (Loan):
$250,000,000 @ Libor Rate +
0.75% or ($1,875,000)
0.75%
Management Fee
$1,875,000
$300 million
Average
LIBOR + 2.8%
$2 m
$8,400,000
Gross Income
$8,400,000
Less: Mgmt Fee
$2,250,000
Loan
$1,875,000
Net Income
$3 m
$5 m
$4 m
$6 m
$5 m
$2 m
$4 m
$4 m
$4,275,000
$4,275,000 /$50,000,000 = 8.50% Net 1
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.
6
Investment
Management
Leverage Loan/Bond Fund
Portfolio of
Investments
Investments:
(Leveraged Loans /
HY Bonds)
7
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
8
Executive Summary
Fund Summary Term Sheet
Name:
Portfolio Management Company
Issuer:
Fund Incorporated f
Objective:
High current income with preservation of capital
Minimum Fund Size:
USD $25 million
Target Fund Size:
USD $50 million.
Investment Advisor:
Advisor
Redemptions:
Monthly, subject to a 2% redemption fee in year 1
Cash Dividends:
Paid quarterly
Minimum Subscription:
USD $1 Million
Subscriptions:
Monthly
Management Fee:
0.75% per annum on assets (based on reference portfolio
size)
Administrative Fees:
30 basis points per annum (estimated)
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Cypress Tree
Cypress Tree
Cypress Tree
Investment
Management
Leverage Alternative Fund
(CLAIF)
Portfolio of
Investments
Investments:
(Leveraged Loans)
10
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
11
The Fund
Expected Portfolio Statistics
Total Loan Portfolio:
Average Holding:
Average Spread Loan:
Average Fixed Yield:
Weighted Average Rating:
#of Industries:
#of Issuers:
Average Maturity:
Maximum Industry Concentration
Maximum Issuer Concentration
$250 Million
1.3%
LIBOR + 325 bps.
8.0%
Ba3/B1
20-25
60-75
5 Years
10%
3%
12
Portfolio Selection & Monitoring
U.S. Loan Market
Distribution by Industry
By Amount
UTILITY
8%
TRANSPORTATION
7%
AEROSPACE
2%
By Issuer
CHEMICALS CONSUMER DURABLES
1%
4%
CONSUMER NON-DURABLES
3%
ENERGY
1%
UTILITY
4%
TRANSPORTATION
7%
FINANCIAL
0%
FOOD AND DRUG
2%
SERVICE
6%
RETAIL
2%
SERVICE
6%
FOOD/TOBACCO
6%
METALS/MINERALS
2%
RETAIL
2%
FOREST PROD/CONTAINERS
5%
METALS/MINERALS
2%
AEROSPACE
3%
CHEMICALS
5%
CONSUMER DURABLES
1%
CONSUMER
6%
NON-DURABLES
ENERGY
2%
FINANCIAL
1%
FOOD AND DRUG
2%
FOOD/TOBACCO
7%
GAMING/LEISURE
3%
FOREST
PROD/CONTAINERS
4%
HEALTHCARE
8%
HOUSING
2%
MEDIA/TELECOM
32%
INFORMATION TECHNOLOGY
2%
MEDIA/TELECOM
24%
MANUFACTURING
5%
GAMING/LEISURE
5%
HEALTHCARE
8%
HOUSING
3%
INFORMATION
TECHNOLOGY
3%
MANUFACTURING
5%
13
Investment
Management
Leverage Loan/Bond Fund
Portfolio of
Investments
Investments:
(Leveraged Loans /
HY Bonds)
Company
14
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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The Case for Loans
Why Invest in Floating Rate 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 loan’s 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.
17
The Case for Loans
Why Invest in Floating Rate 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 borrower’s
capital structure and usually are secured by the bulk of the borrower’s 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.
18
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
19
The Case for Loans
Rates of Recovery on Defaulted Assets*
Asset Type
Bank Debt
1988-2003**
1998-2003***
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: S&P
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The Case for Loans
Return/Risk Profile
1992-2010
12.00%
S&P 500
10.00%
Annualized Return
CSFB HY Index
8.00%
U.S. LT Gvt
ML Corp
CSFB Leveraged Loan Index
U.S. IT Gvt
6.00%
4.00%
U.S. 30 Day TBill
195 bp
Outperformance
U.S. Inflation
2.00%
0.00%
0.00%
Gold
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Annualized Return Volatility
Source: CSFB
21
The Case for Loans
Correlation of Various Asset Classes
ML Corp
S&P 500
JPM Emerging Markets
Gold
U.S. Inflation
CSFB High Yield Index
U.S. IT Gvt
ML Corp
S&P 500
JPM Emerging Markets
Gold
U.S. Inflation
CSFB High Yield Index
CSFB Leveraged Loan Index
U.S. IT Gvt
1992-2010
U.S. 30 Day TBill TR
1992-2010
0.11
0.07
0.08
-0.01
-0.22
0.11
-0.14
-0.03
0.86
-0.06
0.26
0.06
0.03
-0.02
-0.16
0.16
0.46
0.11
0.00
0.36
0.07
0.52
-0.07
-0.08
0.50
0.14
0.24
-0.01
0.52
0.05
0.02
0.06
0.03
-0.02
-0.09
0.49
 Loans have low correlation to other asset classes
Source: CSFB
Correlation based on the 1992-2003 market data
22
The Case for Loans
Summary Statistics of Various Asset Classes
1992-2010
Asset 1992-2003
CSFB Leveraged Loan Index
ML Corp
U.S. Intermediate Govt
CSFB HY Index
JPM Emerging Markets
S&P 500
Gold
Annual Return
6.84%
8.04%
6.86%
9.14%
17.03%
10.68%
1.47%
Annual Volatility
Return/ Risk
2.51%
2.73
5.16%
1.56
4.96%
1.38
6.86%
1.33
18.45%
0.92
16.37%
0.65
12.70%
0.12
Source: CSFB
*Monthly Returns
23
Investment
Management
Leverage Loan / Bond Fund
Portfolio of
Investments
Investments:
(Leveraged Loans /
HY Bonds)
24
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
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