C O L T -

Covenant Optimized Leverage Trading

Covenant Technology Services, LLC

www.ctechnologyservices.net2005

Covenant Optimized Leverage Trading

What is COLT ?

Portfolio Financing System.

Aggregate Trading & Position Management• Securities Financing (Equity Repo, Stock Loan)

• Synthetic Financing (Portfolio Swaps)

Optimized multi-broker allocation engines.

Embedded Rule-Based Margin Calculator• Margin Financing (Rule Based).

• What-if Scenario Evaluator - WISE

Risk Based Margin

What is rule-based margin ?

Beyond Reg-T, NYSE and House Requirement. Standard Framework – Eliminated inconsistencies

Rule-based model supports Pair-Trading – Basket Enhancement Cross-margin across all asset/security types. Support Multi-Trading Strategies

Convertible Arbitrage with CDSSynthetic Prime-Brokerage – Portfolio Swaps

Equity Long/Short – Pair Trading

Equity Margin – Adjustment Based Volatility Risk Liquidity Risk Concentration Risk

Basket Enhancement Weight Average Liquidity Sector Concentration Country Tier

Long/Short Basket

  SUMMARY   SECTOR NMV %GMV QUALIFY

LMV

8,477,431 18 Basic Materials (250,761) 1.55% YES

SMV

(7,722,183) 25 Communications

833,976 5.15% YES

GMV 16,199,615 43

Consumer, Cyclical

(594,549) 3.67% YES

NMV

755,248  Consumer, Non-cyclical

(1,208,959) 7.46% YES

  BASKET   Energy

665,610 4.11% YES

MATCH

7,722,183   Financial

428,064 2.64% YES

UNMATCH

755,248   Industrial

2,015,078 12.44% YES

BSK_AVG_LIQ

0.04   Technology

(1,133,210) 7.00% YES

  MARGIN  

INDIVIDUAL REQ 2,206,688  

BASKET REQ 847,743  

Convertible Arbitrage TradingConvertible Arbitrage Trading

Convertible Bond Bond Investment Value - Credit/Interest Risk Embedded Call Option - Volatility Risk

Convertible Arbitrage Strategy Naked Convertible Hedged with Equity Hedged with Equity and CDS

CDS Reference Asset.

Con

vertible P

rice

Stock Price

JunkJunk Out of the MoneyOut of the Money At the MoneyAt the Money In the MoneyIn the Money DiscountDiscount

Conversion RatioConversion Ratio

PremiumPremium

Issue PriceIssue Price

ParityParity

Convertible PriceConvertible Price

Bond FloorBond Floor

Convertible in the secondary marketConvertible in the secondary market

Hedged with CDSHedged with CDSSymbol: Symbol: OAK 4.875 03/01/2008OAK 4.875 03/01/2008Price:Price: 104.03125104.03125Conversion Ratio:Conversion Ratio: 64.432964.4329Credit Rating:Credit Rating: S&P – BB- / Moody – Ba3 S&P – BB- / Moody – Ba3 Naked Credit Requirement: Naked Credit Requirement: 20 %20 %

Underlying Price:Underlying Price: 12.2512.25Parity:Parity: 789.30789.30Premium %:Premium %: 24.13%24.13%Equity Hedged:Equity Hedged: Yes Yes Hedge Ratio:Hedge Ratio: 10%10%

Margin w/o CDS Requirement:Margin w/o CDS Requirement: 20.00%20.00%

CDS Hedged:CDS Hedged: YesYesCDS Notional Pct:CDS Notional Pct: 100%100%CDS Reference Asset:CDS Reference Asset: Cheapest to delivery.Cheapest to delivery.

Margin w/CDS Requirement:Margin w/CDS Requirement: 13.75%13.75%

Capital Structure Arbitrage TradingCapital Structure Arbitrage Trading

Trading asset class of same issuer. Xerox Example – Long Bond / Short Equity.

Credit versus Earning Improvement.

Debt Arbitrage – Credit Risk / Duration Debt Structure - Senior versus Junior Hybrid Hedged – Advantage.

Hybrid Credit Hedged AdvantageHybrid Credit Hedged AdvantageIssuer:Issuer: Dynegy Yes EnergyDynegy Yes Energy

Debt Arbitrage:Debt Arbitrage: Senior vs SeniorSenior vs Senior

Long / Short: Long / Short: DYN 8.316 2027DYN 8.316 2027 DYN 7.125 2018 DYN 7.125 2018Quantity:Quantity: 2,000,0002,000,000 (1,500,000)(1,500,000)Duration:Duration: Long TermLong Term Long TermLong TermCredit Rating: Credit Rating: S&P – CCC / Moody – CaS&P – CCC / Moody – Ca CCC / CaaCCC / CaaNaked Credit Margin:Naked Credit Margin: 50%50% 50%50%

Debt Arbitrage:Debt Arbitrage: Junior vs JuniorJunior vs Junior

Long / Short: Long / Short: DYN 9.875 2010DYN 9.875 2010 DYN 8.75 2012DYN 8.75 2012Duration:Duration: Long TermLong Term Long TermLong TermQuantity:Quantity: 1,000,0001,000,000 (3,500,000)(3,500,000)Credit Rating: Credit Rating: S&P – B / Moody – BS&P – B / Moody – B CCC / CaaCCC / CaaNaked Credit Margin:Naked Credit Margin: 30%30% 50%50%

Hedged Hedged Unhedged Unhedged Hybrid HedgedHybrid HedgedSenior vs Senior: Senior vs Senior: Long / Margin Long / Margin 1,400,000 / 7.50%1,400,000 / 7.50% 600,000 / 10.00%600,000 / 10.00%Short / MarginShort / Margin (1,500,000) / 7.50%(1,500,000) / 7.50%

Junior vs Junior:Junior vs Junior:Long / MarginLong / Margin 1,000,000 / 15.00 %1,000,000 / 15.00 %Short / Margin:Short / Margin: (1,143,243) / 15.00 %(1,143,243) / 15.00 % (1,870,270) / 50.00% (1,870,270) / 50.00% (486,486) / 10.00 %(486,486) / 10.00 %

Portfolio SwapsPortfolio Swaps

What is it? Total Return Swap vs CFDs Synthetic Financing Vehicle. Integrated with risk-based margin.

Supports –Multi Trading Strategies/Cross-Margining. Equity Long / Short Convertible Arbitrage Credit Default Swap Capital Structure Arbitrage

COLT AdvantageCOLT Advantage

Optimized Leverage Trading. Support and Optimized multi-trading strategy.

Netting across prime-brokerage houses Best Scenario Analysis

What-if Scenario Evaluator - WISE Upfront decision making