Jefferies & Company, Inc.

2. Jefferies & Company, Inc. • A leading investment banking firm – led by one of the most powerful capital markets trading platforms in the industry • Principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF), a holding company with an equity market capitalization of over $2.0 billion and over 1,600 employees in 20 offices worldwide

3. Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates: A Global Law Firm CANADA EUROPE ASIA USA • Toronto • Brussels • Frankfurt • London • Moscow • Paris • Vienna • Beijing • Hong Kong • Singapore • Tokyo • Boston • Chicago • Houston • Los Angeles • Newark • New York • Palo Alto • San Francisco • Washington, D.C. • Wilmington AUSTRALIA • Sydney

4. Speakers • John Wm. Butler, Jr. Partner and Co-Practice Leader Corporate Restructuring Skadden, Arps, Slate, Meagher & Flom LLP • William Q. Derrough Managing Director & Group Co-Head Recapitalization & Restructuring Jefferies & Company, Inc. • N. Lynn Hiestand Partner Corporate Restructuring and Cross-Border Transactions Skadden, Arps, Slate, Meagher & Flom (UK) LLP

5. Definition of Distressed Debt • Bank debt, private placements or public debt of companies that: • have defaulted on their debt obligations; • have initiated insolvency or reorganization proceedings; • are in such financial distress that their debt is trading more than 1000 basis points above comparable US Treasury bonds; OR • have debt trading below 70%

6. Scope of Investments • Distressed Debt Investors (DDIs) invest across distressed entities’ capital structure: • Bank and bond debt (e.g., typically defined as “distressed debt”) • Trade claims • Equity • Investment allocations across an entity’s capital structure may be used to hedge risk and to foster change of control transactions

7. Sector Analysis • DDIs invest across industry sectors • Risk analysis includes prevalence of defaults within industry sector

8. Defaults by Sector • Source: Moody's; Fitch; Standard & Poor's; Deloitte & Touche LLP, Distressed Debt Marketplace: Opportunities & Challenges as the Economy Improves, Turnaround Management Association (March 12, 2004)

9. Defaults by Volume • Source: Moody's; Deloitte & Touche LLP, Distressed Debt Marketplace: Opportunities & Challenges as the Economy Improves, Turnaround Management Association (March 12, 2004)

10. Company Analysis • DDIs also conduct due diligence to analyze company risk: • Depressed or declining markets/sales • Shrinking margins • Operating losses/unanticipated losses • Cash crunch • Covenant violations • Aging accounts receivable/payable • Accounting irregularities • Management initiatives

11. Japan Banking Crisis Russia, CIS, and Czech Republic Europe Others? US REITS 1970s 1975 1989 1993 1997 1998 2002 2004 US Savings & Loan Crisis; Canada & Mexico Argentina; India; Philippines; Taiwan; China Asian Financial Crisis; Mexico Latin America Historically Significant Global Defaults

12. Developed, efficient market Currently developing Early stages of development Undeveloped Stages of Global Development in the Distressed Debt Market

13. Cerberus Capital Management Major Distressed Debt Investors (“DDIs”) • Private equity investors and hedge funds are the major players in the industry • Mutual funds are newer participants Soros Fund Management Elliott Associates

14. Vibrant US Distressed Debt Market • Source: http://www.loanpricing.com

15. Vibrant US Distressed Debt Market • Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

16. Forecasts for the US Market • Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

17. Distressed Debt is Cyclical • Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004

18. Possibilities for Growth Exist in the US • Source: McKinsey Quarterly, 2003 No. 1

19. Opportunities Exist in Other World Markets • With some exceptions (notably, the UK), these markets are highly undeveloped in comparison to the US market • Inaccurate or unavailable data provide the greatest obstacle to market analysis outside the US • As a result, non-performing loan market data provides best indicator of forward trends in the international distressed debt market • This data may also be more relevant outside of the US since non-US companies typically use bank debt as their primary form of financing (due to less developed public debt markets)

20. Nonperforming Loans: Asia (aggregate) • Source: McKinsey Quarterly, 2002 No. 1

21. Nonperforming Loans: Asia (percentage of total) • Source: From Cyclical Recovery to Long Run Growth, World Bank, Oct. 2003

22. Secondary Market: Asia • Source: McKinsey Quarterly 2002 No. 1

23. Nonperforming Loans:Europe • Source: McKinsey Quarterly 2002, No. 1

24. USD EUR Secondary Market: Europe Estimated Bank Debt Trading Volume in Europe and the Middle East (US$ billions) • Source: Loan Pricing Corporation. Change in reporting currency in 2002

25. Exceptions to Undeveloped International Markets • United Kingdom • Market has grown in the past 5 years • Europe’s cable and telecom industry • Debt more accessible as companies raising capital through corporate bonds rather than bank debt because these companies do not have the typical assets banks are able or willing to accept as security • For example, Apollo Advisor invested in the publicly traded bonds of German cable company Kabel Hessen GmbH

26. Value of the Market to Corporate Restructuring • Provides risk capital to the marketplace • Offers liquidity • Strengthens banking system • Important as countries prepare for stricter requirements under Basel II and some countries prepare to open their borders to global competition under agreements with the World Trade Organization • Provides a group of investors willing to take creative recoveries in contrast to traditional banks

27. Value of the Market to Corporate Restructuring • Provides expertise to the procedure • Experienced investors add value by restructuring debt or improving management of the operations • Provides impartial outsiders • Resolves conflicted relationships, for example where a bank is the creditor, shareholder and is running the distressed company • May be in a better position to compromise claim

28. Many Types of Entities Cannot Work Out Debt Themselves • Many have constraints which limit ability to hold bad debt, including: • Covenant restrictions • Regulation • Risk profiles • Should be more likely to write off debt/sell at a discount than risk taking an equity stake in a restructured entity

29. Types of Entities Typically Subject to Bad Debt Constraints • Insurance companies • Certain investment firms/funds • Commercial and/or public banks • Collateralized debt obligations (CDOs)

30. Why Markets Have Flourished in North America & the UK • Predictable outcomes • Permissive trading under Chapter 11 in US • Currently not regulated under Securities Laws • Experienced professionals • Fair process • Significant returns to DDIs • Developed financial markets • Both in distressed securities and in post-restructured securities

31. Distressed Indices Performance • Historically distressed debt returns are negatively correlated with the stock market • Source: Edward I. Altman, Defaults & Returns on High Yield Bonds: The Year 2002 in Review & the Market Outlook, NYU Salomon Center Stern School of Business, Feb. 2004; CSFB/Tremont

32. Historical High Yield Spread to Treasury > Spread correlates to default risk in market • Source: Thomson Financial

33. Post Chapter 11 Equity • Post-bankruptcy equities that trade over-the-counter tend to be overvalued in the plan of reorganization (1=Plan Price) (1=IPO Price) • Source: Jefferies

34. Drawbacks of DDIs • Short investment horizon of some DDIs • Contentious and aggressive constituencies • Confidentiality and insider problems • Constantly changing group

35. Obstacles to Emerging Distressed Debt Markets Reorganization/Insolvency Law • Europe: • Reorganization/insolvency law focuses on liquidation • Senior lenders often control the process • No consistent reorganization/insolvency regime across Europe • Lesser-Developed Countries • Undeveloped reorganization/insolvency law: little precedent makes outcomes unpredictable for investors • Outside influences on judicial/administrative process: political pressure • Enforcement of judgments often difficult

36. Obstacles to Emerging Distressed Debt Markets Regulatory Impediments • Unaccommodating/inconsistent tax structure • For example, in Germany, the tax law contains provisions unfavorable to distressed debt investors. Further, the government continually changes the tax law affecting distressed debt investors, making it difficult to structure deals • Inefficient government approval process • For example in China, Huarong AMC’s first distressed debt sale took almost 3 years to complete because of government delays

37. Obstacles to Emerging Distressed Debt Markets Transparency • Europe • In some countries banks control the majority of corporate debt so pricing and transaction information are difficult to obtain • Asia • Difficult to get information from the AMCs, particularly where mass loans are sold • Necessary because AMCs are subject to intense political and social pressures to favor certain borrowers

38. Obstacles to Emerging Distressed Debt Markets Limited Players • Few players have expertise to invest • Europe: investing requires knowledge across multiple legal and regulatory regimes • Asia: must rely on foreign investors as domestic investors do not have the institutional knowledge and resources

39. Possibilities for Growth • The distressed debt market is likely to grow rapidly over the next few years • The availability of distressed debt to investors will likely increase as governments and banks become committed to dealing with the problem • Investors are seeking new frontiers as traditional investment opportunities are limited

40. Asian High Yield Issuance • The Asian HY market has yet to show much of a pattern, but as markets integrate the HY market should develop. • Source: Thomson Financial. Converted to US Dollars

41. European and German Investment-Grade • Due to the scarcity of data outside the US, corporate debt provides a proxy for predicting future defaults • Source: Thomson Financial. Converted to US Dollars

42. European and German High Yield Issuance > High yield debt provides a particularly useful proxy for predicting defaults • Source: Thomson Financial. Converted to US Dollars

43. Latin American High Yield Issuance • Having been in emerging doldrums the last few years, Latin America also has yet to show the development that European markets have. • Source: Thomson Financial. Converted to US Dollars

44. Fund Flows into CDOs by Region • The growth of CDOs, particularly overseas, indicates an increasing appetite for alternative fixed income products. • Source: JPMorgan

45. International Trends & Solutions • Denial and fear of selling assets at less than their originally perceived value • Xenophobia • Establishment of Asset Management Companies in Asia • Creation of Bad Banks recently in Germany • Growing understanding of going concern value vs. liquidation

46. New Trends in Insolvency Laws

47. New Trends in Insolvency Laws

48. New Trends in Insolvency Laws Though it will take time for the spirit of these reforms to take effect, the regulatory groundwork is in place.

49. Examples of Success • DDIs gained initial successes through litigation arbitrage of defaulted sovereign debt in emerging markets. As a result, governments became aware of workouts. (Peru, Russia & Asian crisis countries) • A consortium led by Morgan Stanley and Goldman Sachs purchased $1.5 billion in face value of distressed debt from Huarong Asset Management • Sumitomi Mitsui Financial Group and Goldman Sachs entered into a $1.2 billion deal • Dresdner Bank sold €511 million bundle of credits to Deutsche Bank

50. Developed, efficient market Currently developing Early stages of development Undeveloped Stages of Global Development in the Distressed Debt Market