November 2007

Overview of Collateralized Loan Obligations

2

Table of Contents

I. The CDO Market

II. The CDO Structure

III.Current Opportunities

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The CDO Market 2004-2006

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Where are we now?

5

Where are we now?

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Overview of CDOs

• Collateralized Debt Obligations (“CDOs”) are securities issued to finance a diversified pool of credits.

• The portfolio of securitized assets in a CDO is typically financed by a credit-tiered capital structure, consisting of both investment grade and non-investment grade tranches of debt, supported by an equity tranche.

• The majority of the financing for a CDO is usually provided by a large AAA rated tranche of debt, thereby making the weighted average cost of capital significantly cheaper than the return on the portfolio of assets.

• Below the rated debt tranches in the structure of a CDO is a tranche of Equity. This tranche is the beneficiary of the spread differential between the returns on the portfolio of assets and the weighted average cost of financing.

What are CDOs?

7

Source: Bear Stearns CDO Research; as of September 2007.Issuance figures are as of closing date, and are subject to change as more information becomes available.

The CDO Market

449

49

98 96 97 106 107122

189

273

544

0

100

200

300

400

500

600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD 07

Global issuance since 1997 has totaled $2.68 trillion

Growth of the Global CDO Market ($Billions)

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Source: Bear Stearns CDO Research; funded issuance.* As of August 31, 2007.

The CDO Market

CDO Issuance by Sector – U.S. (MM)

Asset Class 2001 2002 2003 2004 2005 2006 2007*

Bank Loans 15,072$ 14,031$ 20,526$ 30,496$ 53,364$ 101,721$ 79,469$

ABS/ MBS 14,752$ 16,205$ 21,368$ 52,456$ 83,289$ 166,516$ 140,074$

CMBS 2,695$ 13,464$ 5,514$ 4,438$ 5,347$ 21,797$ 14,943$

Bank Trust Preferred Securities 3,742$ 4,416$ 7,574$ 8,002$ 6,610$ 12,056$ 5,719$

REIT Trust Preferred Securities -$ -$ -$ -$ 3,225$ 2,824$ 4,353$

ABS Synthetic 1,085$ 2,090$ 502$ 987$ 11,376$ 29,446$ 8,880$

Investment Grade Bond 6,250$ 3,398$ -$ -$ -$ -$ 100$

Investment Grade Bond Synthetic 3,738$ 11,948$ 17,398$ 11,973$ 4,703$ 18,336$ 19,110$

CDO of CDOs 3,275$ 1,667$ 2,307$ 10,440$ 6,059$ 12,288$ 15,272$

High Yield Bond 14,863$ 1,618$ 766$ 73$ -$ 238$ -$

Other 15,706$ 10,622$ 6,020$ 8,952$ 13,805$ 26,605$ 48,391$

Grand Total 81,177$ 79,460$ 81,974$ 127,816$ 187,778$ 391,827$ 336,311$

Asset Class 2001 2002 2003 2004 2005 2006 2007*

Bank Loans

$15,072

$14,031

$20,526

$30,496

$53,364

$103,733

$79,4

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9

Not All CDOs Are Created Equal

Lodging & casinos5.4%

Retailers (except food & drug)5.4%

Industrial equipment1.2%

Food products1.9%

Food/ drug retailers1.8%

Automotive1.0%

Equipment leasing0.5%

Chemical & Plastics2.3%

Utilities2.4%

Oil & gas4.2%

Conglomerates3.9%

Clothing/ textiles1.0%

Nonferrous metals/ minerals0.4%

Ecological services & equipment

1.4%

Containers & glass products1.3%

Financial intermediaries0.3%

Surface transport1.9%

Cable & satellite television3.4%

Forest products2.6%

Building & Development3.7%

Food service2.6%

Aerospace & Defense2.6%

Telecommunications/ cellular6.2%

Electronics/ electrical6.2%

Publishing6.7%

Health care8.1%

Radio & Television7.6%

Business equipment & Services7.3%

Leisure goods/ activities/ movies

6.7%

US Mezz ABS CDO US CLORMBS

Subprime62%

RMBS Midprime

26%

ABS CDO8%

RMBS Prime4%

Diversity in CDOs

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Not All CDOs Are Created Equal

RMBS Source: LPSLoan Source: S&P’s LCD

Subprime 60+ Delinquencies by Vintage Leveraged Loan Default Rates

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Dec-98

Sep-99

Jun-00

Mar-01

Dec-01

Sep-02

Jun-03

Mar-04

Dec-04

Sep-05

Jun-06

Mar-07

Def

ault

Rat

e (%

)

Leverage Loan Default Rate

0

2

4

6

8

10

12

14

16

18

20

0 6 12 18 24 30 36

Loan Age

% D

elin

quen

t

2003

2004

2005

2006

RMBS vs Leveraged Loans

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Debt ServiceLIBOR+0.50%

AndExpenses

0.60%-----------------

LIBOR+1.10%Total Costs =

Preferred Shares$40 mm 8.0

%

The CDO Structure

Assets

$500 mm

US Corporate Senior Secured

Bank Loans

Weighted AverageYield:

LIBOR+2.30%

CDOSpecial Purpose

Vehicle

Remaining Net

Spread1.20%

$372 mmAaa / AAA

LIBOR+0.26%

74.4%Of

TotalAsset

s

Liabilities

$33 mmAa2 / AA

LIBOR+0.40%6.6%

$31 mmA2 / A

LIBOR+0.70%6.2%

$20 mmBaa2 / BBB

LIBOR+1.65%4.0%

$20 mmBa2 / BB

LIBOR+3.75%4.0%

1. Capital structure modeled as of 7/2/2007

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The CDO Structure

1. Defaults begin 2 periods after collateral is purchased, and are the indicated rate thereafter. The call rate of the loans is assumed to be 25% per annum, beginning after 1 period. Assumes a reinvestment spread of 2.40% in year 1, 2.50% in year 2 and 2.60% thereafter. Forward LIBOR used.

To MaturityImmediate Recovery at 75% upon Default

TrancheConstant Default Rate at

which First Loss of Principal occurs

>100%

>100%

(BB/ Ba2) 14%

37%

22%

(AAA/ Aaa)

(AA/ Aa2)

(A/ A2)

(BBB/ Baa2)

Illustrative Sensitivity Analysis of Rated Debt Tranches1

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Immediate Recovery at 75% upon Default

Illustrative Preferred Share Returns1,2

1. Defaults begin 2 periods after collateral is purchased, and are the indicated rate thereafter. The call rate of the loans is assumed to be 25% per annum, beginning after 1 period. Assumes a reinvestment spread of 2.40% in year 1, 2.50% in year 2 and 2.60% thereafter. Forward LIBOR used.

2. Returns modeled as of 7/2/2007

Constant Default Rate 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

Preferred Share Returns

IRR 18.3% 16.7% 14.9% 12.9% 10.1% 6.6% 2.7% -1.6% -6.3% -12.1%

The CDO Structure

2.0% 3.0% 4.0%

14.9% 12.9% 10.1%

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The CDO Structure

1. Assumes transaction is called after 8.2 years, 3% Annual CDR, and Immediate Recovery at 75% upon default.2. Defaults begin 2 periods after collateral is purchased, and are the indicated rate thereafter. The call rate of the

loans is assumed to be 25% per annum, beginning after 1 period. Assumes a reinvestment spread of 2.40% in year 1, 2.50% in year 2 and 2.60% thereafter. Forward LIBOR used.

Quarterly Annualized Cumulative Quarterly Annualized Cumulative Period Periodic Return Return Period Periodic Return Return

1 0.00% 0.00% 17 26.06% 88.79%2 7.07% 1.77% 18 20.81% 94.00%3 25.96% 8.26% 19 25.72% 100.43%4 18.62% 12.91% 20 20.49% 105.55%5 27.26% 19.73% 21 25.74% 111.98%6 20.81% 24.93% 22 20.67% 117.15%7 24.78% 31.12% 23 20.22% 122.21%8 18.87% 35.84% 24 13.40% 125.56%9 27.16% 42.63% 25 18.06% 130.07%10 21.10% 47.91% 26 19.55% 134.96%11 25.32% 54.24% 27 19.92% 139.94%12 19.77% 59.18% 28 16.28% 144.01%13 26.53% 65.81% 29 14.42% 147.62%14 20.86% 71.03% 30 12.56% 150.76%15 25.27% 77.34% 31 12.84% 153.97%16 19.75% 82.28% 32 54.40% 167.57%

Hypothetical CDO Equity Cash Flows ( expected IRR: 12-15%)

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Source: Bear Stearns CDO Research. Simple average of monthly liability spreads for the given year.

The CDO Structure

Tranche

1999

2000

2001

2002

2003

2004

2005

2006

1H07

Current

AAA 50 44 44 47 54 37 26 25 24 70

AA 65 72 73 79 95 68 43 40 37 150

A148

135135

153 161 122 77 70 68 225

BBB240

219233

269 307 238 183 158 135 400

BB602

599661

747 811 650 481 395 335 700

New Issue Liability Spreads

1H07Curren

t

24 70

37 150

68 225

135 400

335 700

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0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

J an-99 J an-00 J an-01 J an-02 J an-03 J an-04 J an-05 J an-06 J an-07

Def

ault

Rat

e

0

10

20

30

40

50

60

70

Spread Over Libor (bps)

Loan Default Rate AAA (Spread Over LIBOR)

Current Opportunities

Loan Source: S&P/LCD CLO Liability Spread Source: Bear Stearns CDO Research1. 12-month lagging leveraged loan default rate by number of issuers.2. S&P occasionally revises its published historical default rate data, and so the values shown are subject to change. 3. Source: Leveraged Loan Index 12-month lagging leveraged loan default rate by number of issuers.

Opportunities for AAA investors

AAA CLO Liability Spreads and Leveraged Loan Default Rate through September 20071,2,3

• CLO spreads have moved with defaults in previous credit cycles. Because of the current market dislocation, spreads have increased significantly while defaults have remained low

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Current Opportunities

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-99

Jul-9

9

Jan-00

Jul-0

0

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

Jan-07

Jul-0

7

Def

ault

Rat

e

0

100

200

300

400

500

600

700

800

900

Spread Over Libor (bps)

Loan Default Rate BBB (Spread Over LIBOR) BB (Spread Over LIBOR)Loan Source: S&P/LCD CLO Liability Spread Source: Bear Stearns CDO Research1. 12-month lagging leveraged loan default rate by number of issuers.2. S&P occasionally revises its published historical default rate data, and so the values shown are subject to change. 3. Source: Leveraged Loan Index 12-month lagging leveraged loan default rate by number of issuers.

Opportunities for BBB & BB investors• CLO spreads have moved with defaults in previous credit cycles.

Because of the current market dislocation, spreads have increased significantly while defaults have remained lowBBB and BB CLO Liability Spreads and Leveraged Loan Default Rate

through September 20071,2,3

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Rating CLO Corporates1

Aaa 0.10% 3.50%

Aa2 1.50% 7.10%

Baa2 1.20% 12.00%

Ba2 2.40% 18.10%

Comparison of 1 Year Average Rating Transition, 1996-2006

Risk: Historical Average One Year Downgrade Risk• CLO liabilities have experienced significantly less downgrades than

comparably rated corporates

Current Opportunities

Downgrade Source: Moody’s Investor Services, “Credit Migration of CDO Notes, 1996 - 2006, for US and European Transactions” February 28, 2007

1. Baa3 and Ba3 ratings are deemphasized as debt rated at these levels is no longer commonly issued. Additionally, there were only 194 and 212 observations at the Baa3 and Ba3 levels, respectively, while there were 1230, 417, 684, and 363 observations for the Aaa, Aa2, Baa2, and Ba2 ratings, respectively.

2. Figures are from "theoretical" corporate transition matrix. Moody’s weighted each year’s one-year corporate transition rates by the number of CDO ratings outstanding at each rating level at the beginning of the year.

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Current Opportunities

• CLOs allow investors to access the corporate credit markets

• CLO performance is not directly tied to Residential Mortgage Backed Securities

• The CLO structure allows investors to participate across the capital structure based on their preference for risk

• Uncertainty in the credit markets have caused CLO spreads to widen significantly

In Conclusion