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1/ GE / August 17, 2011 Greater Uncertainty Threatens Expansion U.S. Economic Assessment & Interest Rate Outlook August 18, 2011 GE Capital, Americas Robert Podorefsky (617) 973-4091

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Page 1: Greater Uncertainty Threatens Expansion

1 /GE /

August 17, 2011

Greater Uncertainty Threatens Expansion

U.S. Economic Assessment &Interest Rate Outlook

August 18, 2011

GE Capital, AmericasRobert Podorefsky (617) 973-4091

Page 2: Greater Uncertainty Threatens Expansion

2 /GE /

August 17, 2011

U.S. economy weakens �…Amid uncertainty and more policy risk

Extraordinary factors contributed �• Inflation hurt demand, shortages from Japan impacted manufacturing, Q1 weather disrupted comps while unemployment and Washington�’s messy budget handling weakened confidence

Key downside risk - financial market developments�• Market volatility �– raises business & consumer anxiety�• Unfavorable fiscal/geopolitical considerations �– Europe, Mid-East

Key to maintaining expansion�• Continued government backstop ideology, contained oil prices

Key challenges�• Housing sector and employment situation remain weak�• Federal budget �‘super committee�’ must find solutions to deficit

Page 3: Greater Uncertainty Threatens Expansion

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August 17, 2011

Watch the negative equity drivers �…Monthly Change in S&P 500 Equity Index

-125

-100

-75

-50

-25

0

25

50

75

100

AprM

ayJunJulAugSepO

ctN

ovD

ecJan '10FebM

arAprM

ayJunJulAugSepO

ctN

ovD

ecJan '11FebM

arAprM

ayJunJulAug so far

Data source: Bloomberg and Federal Reserve

Australiabegan to tighten

Chinabegan to tighten

Fiscal & economic worries

U.S. household wealth fell $1.3 tn in Q2 '10, then up $4.0 tn thru Q1 '11

Up 30% thru Apr 30 after Bernanke outlined "options for further easing" on Aug 27, '10

Page 4: Greater Uncertainty Threatens Expansion

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August 17, 2011

Parallel crises dominate while impact varies �…Total Marketable Sovereign Debt

in trillions of U.S. dollars

$0.13 $0.20 $0.42$0.92

$2.28

$9.34

0

2

4

6

8

10

Ireland Portugal Greece Spain Italy UnitedStates

Data source: Bloomberg

% of total that comes due through 2013Ireland = 18%

Portugal = 32%Greece = 33%Spain = 41%Italy = 36%

United States = 46%

Page 5: Greater Uncertainty Threatens Expansion

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August 17, 2011

Messy deficit debate dispirits the nation �…U.S. Federal Budget Gap

0.0

0.6

1.1

1.7

2.2

2.8

3.3

3.9

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

Data source: U.S. Treasury

Gov't Spending in $Tn'sGov't Revenues in $Tn's

Fiscal year 2010Outlays = $3.45 tnRevenues = $2.16 tnDeficit = $1.29 tn

White House estimate 2011Outlays = $3.82 tnRevenues = $2.17 tn

Page 6: Greater Uncertainty Threatens Expansion

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August 17, 2011

U.S. rate structure benefits significantly �…U.S. Treasury Yields Compared

3.67%

2.22%

0.93%

0.18%0.01%

4.33%

3.29%

2.01%

0.59%0.12%

0.0%

1.5%

3.0%

4.5%

3-month 2-year 5-year 10-year 30-yearData source: Bloomberg

Aug 16, 2011 Dec 31, 2010

Page 7: Greater Uncertainty Threatens Expansion

7 /GE /

August 17, 2011

Public debt surged, will keep rising yet rates fell �…

1.1

3.2

5.2

7.3

9.4

Aug-98

Nov-01

Feb-05

May-08

Aug-11

Data sources: U.S. Treasuryand Bloomberg

0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

Marketable Treasury Debt Outstanding - $'s Tn's (left axis)5-yr U.S. Treasury yield (right axis)

Fed tightened

Since Q4 '07The debt's more than doubled

Fed tightened

Page 8: Greater Uncertainty Threatens Expansion

8 /GE /

August 17, 2011

In �’10, less inflation eased transition to lower rates �…

Data source: Bureau of Labor Statistics

-2.1%

-0.6%

1.0%

2.5%

4.0%

5.6%

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

0.6%

1.2%

1.9%

2.5%

Headline U.S. CPI yoy (left axis)Core U.S. CPI yoy (right axis)

(June '11)Headline: 3.6% yoy

Core: 1.6% yoy - highest since Jan '10

Page 9: Greater Uncertainty Threatens Expansion

9 /GE /

August 17, 2011

In �’11, a complex path to lower rate expectations �…

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Data source: Bloomberg

Expectation for 3m Libor - June 20133m U.S. Libor

Aug 9: FOMC says conditions warrant an exceptionally low fed

funds rate through mid -2013

Jul 29: Q2 U.S. GDP disappoints

Jul 8: June U.S. employment data

disappoints

Apr: Europe's debt crisis worsens May & June: Weaker U.S. economic data July: U.S. budget impasse

Apr 18: S&P lowered its long-term U.S. ratings outlook to negative

Mar 11: Tsunami

devastates Japan May 2:

Oil falls after bin Laden's

death

Page 10: Greater Uncertainty Threatens Expansion

10 /GE /

August 17, 2011

Disinflation ends. Commodity surge hits a wall �…CRB Commodty Price Index

flat y-t-d- in 2011 as of Aug 17up 17% in 2010up 23% in 2009

down 36% in 2008

180

259

338

417

Aug-08

Mar-09

Oct-09

May-10

Dec-10

Aug-11

Data source: Bloomberg

End May '10 - end Apr '11, + 45%

Live cattle: + 29% - 1%Crude oil: + 54% - 23%Wheat: + 68% - 5%Corn: + 110% - 5%Cotton: + 123% - 39%

Since Apr '11

CRB - 10%

Page 11: Greater Uncertainty Threatens Expansion

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August 17, 2011

Watch gasoline, price direction reflects outlook �…

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Data source: Nymex and DOE

1.60

2.10

2.60

3.10

3.60

4.10

Avg U.S. retail gasoline price per gallon (right axis)Wholesale gasoline - Nymex price (left axis)

Page 12: Greater Uncertainty Threatens Expansion

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August 17, 2011

Extraordinary stimulus remains key policy stance �…

FOMC Statement �– August 9th

�• Inflation: �“Recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable�”

�• Economic conditions: �“Somewhat slower pace of recovery�” is expected over coming quarters compared to previous (June) estimates. �“Downside risks to the economic outlook have increased�”

�• Policy: Economic conditions are likely to warrant an �“exceptionally low�” fed funds rate �“at least through mid-2013�”

Page 13: Greater Uncertainty Threatens Expansion

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August 17, 2011

Expectations for Libor fall dramatically �…Expectation for 3m U.S. Liborimplied yield per futures market

3.61%3.18%

2.53%

1.70%

0.85%0.49%0.46%

0.61%

1.95%

4.92%5.17%

4.50%3.85%

3.00%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Sep '11

Dec '11

Mar '12

Jun '12S

ep '12D

ec '12M

ar '13Jun '13S

ep '13D

ec '13M

ar '14Jun '14S

ep '14D

ec '14M

ar '15Jun '15S

ep '15D

ec '15M

ar '16Jun '16S

ep '16D

ec '16M

ar '17Jun '17S

ep '17D

ec '17

17-Aug-11 31-Mar-11with December implied yields

31-Dec-10

Data source: Bloomberg

with December implied yields

Page 14: Greater Uncertainty Threatens Expansion

14 /GE /

August 17, 2011

Pass-through inflation pressures muted overall �…

-8.0%

-5.0%

-2.0%

1.0%

4.0%

7.0%

10.0%

Jun-91

Jun-95

Jun-99

Jun-03

Jun-07

Jun-11

Data source: Bureau ofLaborStatistics

Consumer Price Index (yoy)Producer Price Index (yoy)

Page 15: Greater Uncertainty Threatens Expansion

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August 17, 2011

Easing in gov�’t interest expense won�’t last �…

5

7

9

11

13

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 (*)

Data source: U.S. Treasury

300

340

380

420

460

U.S. Public Debt ($ Tn's) - left axisInterest Expense ($ Bn's) - right axis

Fiscal 2007 - 2010Public debt: + 51%

Annual interest expense: - 4%

(*) Fiscal 2011: (based on Oct '10 - July '11 actual data plus estimate)

Page 16: Greater Uncertainty Threatens Expansion

16 /GE /

August 17, 2011

But interest burden is still very manageable �…U.S. Gov't Interest Expense as a Percent of Nominal GDP

Fiscal Year (Sept) Comparison

2.5%

3.1%

3.6%

4.2%

4.7%

1989

1990

19911992

1993

19941995

1996

19971998

1999

20002001

20022003

2004

20052006

2007

20082009

2010

2011 (*)

Data sources: U.S. Treasury and Bureau of Economic Analysis

(*) 2011 Estimate - End Sept '11:Nominal GDP = $15.083 Tn

Interest expense = $462.5 Bn

Page 17: Greater Uncertainty Threatens Expansion

17 /GE /

August 17, 2011

Fortunately, foreign demand for Treasurys holds up �…Foreign Holdings of U.S. Treasurys

in trillions of dollars

0.92

1.64

2.36

3.08

3.80

4.52

Oct-01

Oct-03

Aug-05

Aug-07

Jul-09

Jun-11

Data source: U.S. Treasury

Up 11% yoy Jun (*)vsUp 20% in '10vs Up 20% in '09

Top 2 Foreign Holders as of June '11 1. China @ $1,166 bn, + 5% yoy - was + 71% yoy in Jul '09 2. Japan @ $911 bn, + 14% yoy - was + 22% yoy in Dec '09

Page 18: Greater Uncertainty Threatens Expansion

18 /GE /

August 17, 2011

Economic composition �– U.S. GDP �…

Data source: BEA

Personal consumption, 70.7% vs 70%

Q4 '07

Private investment,

13.4% vs 15.9% Q4 '07

Net exports, -3.1% vs -4.2%

Q4 '07

Gov't spending,

18.9% vs 18.4% Q4 '07

Q2 2011 U.S. Real GDP Breakout

Page 19: Greater Uncertainty Threatens Expansion

19 /GE /

August 17, 2011

Consumption trend has stalled �…U.S. Real Personal Consumption Expenditures

-2.7%

-1.7%

-0.7%

0.3%

1.3%

2.3%

3.3%

4.3%

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Data source: Bureau of Economic Analysis

yoy change3-month change - annualized

Page 20: Greater Uncertainty Threatens Expansion

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August 17, 2011

Amid unimpressive payroll gains �…

in 000's

-850

-632

-413

-195

23

242

460

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Data source: Bureau of Labor Statistics

Monthly Change in Private PayrollsMonthly Change in Nonfarm Payrolls

Private: + 1.8mnHeadline: + 1.3mn

Past 12 months

Page 21: Greater Uncertainty Threatens Expansion

21 /GE /

August 17, 2011

While income improved, inflation saps wages �…

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Data source: Bureau of Economic Analysis

U.S. Personal Income (yoy)Real Personal Income Less Transfer Payments (yoy)Real Wages (yoy)

Page 22: Greater Uncertainty Threatens Expansion

22 /GE /

August 17, 2011

Watch import prices from China �…U.S. Import Prices from China

y-o-y change

-4%

-2%

0%

2%

4%

6%

Aug-05

Feb-07

Aug-08

Jan-10

Jul-11

Data source: Bureau of Labor Statistics

July '11+3.5% yoy

Through early '07, the U.S. imported

deflation from China

Page 23: Greater Uncertainty Threatens Expansion

23 /GE /

August 17, 2011

Consumers take on some more borrowing �…

-20

-10

0

10

20

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Data source: Federal Reserve

U.S. Consumer Credit, Ex-Real Estate ($ Bn's)3-Month Average

Monthly ChangeLargest increase

in 4 years

Page 24: Greater Uncertainty Threatens Expansion

24 /GE /

August 17, 2011

Investment growth trend is moderating �…Change in Real Private Business Investment

-42%

-32%

-22%

-12%

-2%

8%

18%

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

Data source: Bureau of Economic Analysis

Quarterly outcome - annualizedHalf year outcome - annualized

Page 25: Greater Uncertainty Threatens Expansion

25 /GE /

August 17, 2011

Key �‘services�’ sector gauge signals modest growth �…

36

42

48

54

60

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Data source: Bloomberg

30

36

43

49

56

ISM non-manufacturing index (left axis)Non-manufact employment sub-index (right axis)

above 50 (left axis index) signals service sector expansion

Page 26: Greater Uncertainty Threatens Expansion

26 /GE /

August 17, 2011

While manufacturing sector expansion slows �…

32

40

47

55

62

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Data source: Bloomberg

16

41

67

92

ISM manufacturing index (left axis)Prices paid for purchases (right axis)

above 50 signals expansion

July 50.9

Page 27: Greater Uncertainty Threatens Expansion

27 /GE /

August 17, 2011

Amid auto production adjustment �…

67%

73%

79%

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Data source: Federal Reserve

30%

49%

68%

US Capacity Utilization - left axisCap U for Motor Vehicles - right axis

Page 28: Greater Uncertainty Threatens Expansion

28 /GE /

August 17, 2011

Overall business inventory backdrop is favorable �…U.S. Inventory-to-Sales Ratio

number of months

1.20

1.33

1.46

1.59

1.72

May-82

Aug-89

Nov-96

Feb-04

Jun-11

Data source: U.S. Commerce Dept

Q1 '09

= Worst of U.S. recession Q1 '11

Page 29: Greater Uncertainty Threatens Expansion

29 /GE /

August 17, 2011

As is backdrop for private credit expansion �…Commercial and Industrial Loans

at U.S. Commercial Banksin trillions of dollars

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Dec-90

Jan-95

Mar-99

Apr-03

Jun-07

Aug-11

Data source: Federal Reserve

- Oct '08 peak: $1.62 tn- Most recent: $1.28 tn Decrease: $340 bn

Fed tightening cycle began

Fed tightening cycle began

Since post crisis

low in Sep '10,

up $70 bn

Page 30: Greater Uncertainty Threatens Expansion

30 /GE /

August 17, 2011

Still dealing with residential mortgage burden �…U.S. Residential Mortgages Outstanding

in trillions of dollars

0.0

2.7

5.3

8.0

10.7

Mar-80

Dec-87

Sep-95

Jun-03

Mar-11

Data source:Federal Reserve

Q4 '98

Q3 '01

6.0 tn

8.0 tn

10.0 tn

Peak: 10.6 tn Q1 '08

Page 31: Greater Uncertainty Threatens Expansion

31 /GE /

August 17, 2011

And too many homes �…Ratio of U.S. Existing Housing Units to Number of U.S.

Households

1.070

1.075

1.080

1.085

1.090

1.095

1.100

1.105

1.110

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 (*)

2011 (*)

Data source: U.S. Census Bureau. Estimates based on Census Bureau and nielsenw ire (*) 2010 & 2011 estimated

Page 32: Greater Uncertainty Threatens Expansion

32 /GE /

August 17, 2011

Causing home prices to fall �…U.S. Home Prices are 3% Below the 5-Year Average

and 20% Below July '06 PeakSingle Family Home Prices in $000's

0

77

154

231

Jul-69

Jan-80

Jul-90

Dec-00

Jun-11

Data source: Nat'l Association of Realtors

Median Home Prices5 year moving average

- Past 30 years, prices averaged 8% above the 5-year average

- In June 2005, prices exceeded the 5-year average by 33%

Page 33: Greater Uncertainty Threatens Expansion

33 /GE /

August 17, 2011

In all, some moderate growth still expected �…

2.5%2.2%

2.5%

1.3%in Q2

2.1%

-9.0%

-5.8%

-2.5%

0.8%

4.0%

Q3 '08

Q4 '08

Q1 '09

Q2 '09

Q3 '09

Q4 '09

Q1 '10

Q2 '10

Q3 '10

Q4 '10

Q1 '11

Q2 '11

Q3 '11 *

Q4 '11 *

Q1 '12 *

Q2 '12 *

Data source: Bureau of Economic Analysis

U.S. Real GDP1 year average

(*) Bloomberg consensus forecasts

(Aug 12 survey)

Page 34: Greater Uncertainty Threatens Expansion

34 /GE /

August 17, 2011

In summary

Near-term - 2011 & 2012

�• Policymakers focus on boosting near-term dynamics

�• U.S. real GDP subject to energy and equity prices

�• Equities vulnerable to extraordinary uncertainties

�• Fed�’s key focus is jobs - watch employment data

Beyond the moment

�• Budget deficit will force tough decisions on spending and taxes

�• Deeper fiscal erosion has risky inflation consequences

�• Less stimulus does not have to derail growth

Page 35: Greater Uncertainty Threatens Expansion

35 /GE /

August 17, 2011

Appendix

Answers to some recently asked questions

Page 36: Greater Uncertainty Threatens Expansion

36 /GE /

August 17, 2011

Magnitude of U.S. fiscal deterioration post crisis �…

Fiscal '10 Fiscal '08 PeakKey budget receipts:Individual Income Tax * $ 899 bn $ 1,146 bn $ 1,163 bn '07Corporate Income Tax $ 191 bn $ 304 bn $ 370 bn '07

Key budget outlays:Defense-Military $ 667 bn $ 595 bn Fiscal '10Health & Human Services $ 854 bn $ 701 bn Fiscal '10Interest on Treas Debt $ 414 bn $ 451 bn $ 451 bn '08Dept of Labor $ 173 bn $ 59 bn Fiscal '10

Social Security $ 754 bn $ 658 bn Fiscal '10

Data source: www.fms.treas.gov

Page 37: Greater Uncertainty Threatens Expansion

37 /GE /

August 17, 2011

How fiscal 2011 is shaping up for the US �…

First 10 months of Fiscal �’10 & �’11 compared �– through July

Total receipts (*):

Total outlays:

Deficit:

Fiscal 2011

$1.893 Tn

$2.993 Tn

$1.100 Tn

$0.891 Tn

$0.141 Tn

Fiscal 2010

$1.753 Tn

$2.922 Tn

$1.169 Tn

$0.719 Tn

$0.140 Tn

(*) includes:Indiv. income tax receipts:

Corp. income tax receipts:Data source: www.fms.treas.gov

Individual income tax receipts up, corporate tax receipts near flat and total outlays higher

Page 38: Greater Uncertainty Threatens Expansion

38 /GE /

August 17, 2011

Average maturities for Treasury debt are rising �…

Average Maturity of Total Outstanding Marketable U.S. Treasury Debt - in months

past 10 years

48

56

64

72

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Data source: U.S. Treasury

Recent ComparisonJun '08: 56 monthsJun '09: 51 monthsJun '10: 58 monthsJun '11: 62 months

Page 39: Greater Uncertainty Threatens Expansion

39 /GE /

August 17, 2011

FOMC�’s views on a normalization policy �…

1st step �– FOMC would likely first cease reinvesting some or all payments of maturing principal on its securities holdings

2nd step �– At the same time or thereafter, the FOMC will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations.

3rd step �– When economic conditions warrant, the FOMC will begin raising its target fed funds rate, and from that point on, changing the target rate will be the primary means of adjusting monetary policy. During the normalization process, adjustments to interest rates on excess reserves and to the level of reserves will be used

4th step �– Sales of agency securities from the Fed�’s balance sheet will likely begin sometime after the 1st fed funds rate increase

Per Minutes of the June 21-22 FOMC Meeting

Page 40: Greater Uncertainty Threatens Expansion

40 /GE /

August 17, 2011

After QE2, no buying & run-off would look like this �…Fed's Balance Sheet - U.S. Treasury Holdings (*)

0

30

60

90

120

150

180

mid-2011

2011

2012

2013

2014

2015

2016

2017

2018Data source: Federal Reserve& N.Y.Fed

-.15

.05

.25

.45

.65

.85

1.05

1.25

1.45

1.65

Maturing Treasury Debt ($ Bn's) - left axisPotential Treasury Balance ($ Tn's) - right axis$'s Bn $'s Tn

Fed's Treasury balance Now: $1.63 Tn

With run-off & no adds End 2018: $460 Bn

(*) Includes Bills, Notes, Bonds and TIPS

Page 41: Greater Uncertainty Threatens Expansion

41 /GE /

August 17, 2011

State & local government tax receipts edge higher �…State & Local Tax Revenues

$1.02

$1.07

$1.12

$1.17

$1.22

$1.27

$1.32

Sep-06

Jun-07

Mar-08

Dec-08

Sep-09

Jun-10

Mar-11

Data source: U.S. Census Bureau

$235

$250

$265

$280

$295

$310

Total: 4-qtr avg, annualized in Tn's (left axis)Individual income tax: 4-qtr avg, annualized in Bn's (right axis)

Page 42: Greater Uncertainty Threatens Expansion

42 /GE /

August 17, 2011

DisclaimerDisclaimer: This report is for information purposes only and is not intended as an offer, solicitation, or recommendation for the purchase or sale of a financial instrument or to effect a transaction. The information contained within this report has been obtained from and is based upon sources believed to be reliable. General Electric Capital Corporation and any of its affiliates (collectively �“GECC�”) do not guarantee the accuracy or completeness of the information and make no express or implied representations, but reasonable steps have been taken to determine the accuracy and completeness of the information. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. Market rates, valuations and availability of financial instruments also are subject to change without notice. Nothing contained within the materials constitutes financial, legal, tax, accounting or other advice, nor should any investment or any other decisions be made solely based on this report. You should obtain advice from qualified experts before making any investment decision. The GECC Interest Rate Management Team (�“IRM�”) acts solely in the role of an arranger for interest rate management transactions, and is not and makes no representations to being an agent for or advisor to any party involved, nor does IRM have any reporting, fiduciary or financial obligations to the parties.

This research report is produced separately from any other activity of GECC and was completed without access to non-public information that may have been received by other units of GECC. This report may not be reproduced or redistributed in any form without prior written permission from GECC. The use of this report in connection with the writing, marketing or promotion of any financial instruments, services or products is prohibited.