CDOs In The Heartland Middle Market Commercial Loan Securitization (Middle Market CLOs) March 2003

2 Panel Presentation Moderator: – Bill Brown - Director of Structured Credit Products, Wachovia Securities Panelists: – Elizabeth Russotto - Senior Director, Fitch Ratings – Darric Brambora - Managing Director, Banc One Capital Markets, Inc. – David Schmuck - CFO, Antares Capital Corporation – John Timperio - Partner, Mayer, Brown, Rowe & Maw Middle Market CLOs

3 Macro Trends Bank consolidation – Number of banks has declined from 15,000+ in 1990 to less than 9,000 in 2001 – Forced migration to high volume businesses, e.g., large syndicated loans Tightening credit environment – Total volume of non-investment grade loans is down 45% since 1998 – Senior debt-to-EBITDA multiples declined to 2.25x, down from 2.6x during the last recession Looming regulatory changes – Implementation of Basel projected for 2005 – FASB pronouncement on treatment of SPEs Middle Market CLOs

4 Credit Trends Banks scrutinize: – Credit quality – Liquidity – Fee income potential (relationship banking) – Regulatory capital and mark-to-market (Basel) Capital markets application for portfolio risk management – Single name credit default swaps – CLOs to manage balance sheet risk Middle Market CLOs

5 Major banks have exited the market – Bank consolidation – Lack resources or relationships – Historical mispricing – Capital concerns (Basel related) – Focus on fee opportunities (larger syndicated loans: $50+ million EBITDA) Non-bank lenders unwilling to take underwriting risk Absence of traditional bank lenders has returned loan pricing to risk-based levels –Demand for debt capital has significantly outpaced supply –Priced without expectation of capital markets fee income Formation of specialty lenders insufficient to meet demand Middle Market Sector Middle Market CLOs

6 Middle market (MM) segment of leveraged loan market not adequately served by new entrants – Continued exodus of traditional bank lenders, e.g., Fleet, LaSalle, and Wachovia – Large portion of market exceeds “hold” levels for new entrants Underwriting strategy requires infrastructure and significant equity exposure – Specialty lenders and funds lack balance sheet of traditional bank lenders – Optimal debt financing encourages smaller hold levels Influx of debt capital characterized by two (2) main groups: – Full service platforms (specialty lenders) > Independent, i.e., committed equity > Strategic partnerships, i.e., Antares Capital and Mass Mutual – Participants (investment funds) Investment funds represent the largest influx of capital to the middle market sector Middle Market CLOs Capital Influx

7 Participant “Groups” Albion Alliance GSC Partners Guggenheim Antares Capital (Mass Mutual) Highbridge/Zwirn CDC IXIS CMNA (CDC) J.H. Whitney Denali Capital (Bass Family)Ramius Capital Madison Capital (New York Life)Windjammer Capital STRATEGIC PARTNERSHIPS“OPPORTUNITY” FUNDS SPECIALTY FINANCE4 DEBT FUNDS: ~$1 BILLION Allied CapitalAbleCo Finance (Cerberus) American CapitalDymas Capital (Cerberus) CapitalSource Finance GE (Heller) Gladstone Capital MCG Capital Merrill Lynch Capital Group EQUITY CAPITAL FIRM COMMITMENT FLUID COMMITMENT Middle Market CLOs

8 Middle Market Loan Types Middle Market CLOs ASSET-BASED TRADITIONAL BANK LENDING LEVERAGED LENDING

9 Debt obligations to commercial companies with $ million in revenue ($5-50 million in EBITDA) – Market estimated at $900 billion (Source: The Bond Market Association) – Predominantly comprised of asset-based and cash flow loans – Market historically served by three (3) primary groups: > Asset-based lenders > Specialty lenders > Traditional bank lenders Typical borrower characteristics: – Primarily private companies – Non-rated or shadow rated – Repayment of debt through asset liquidation or operating cash flow – Lack recourse to shareholders, i.e., personal guarantees are atypical Primary loan types: – Asset-based loans – Cash flow loans, e.g., senior secured, “stretch” senior, “last out” senior, and mezzanine Middle Market CLOs Defining The Market

10 Asset-based loans finance working capital requirements  Collateralized by receivables and inventory, may have recourse to inventory  Revolver tied to borrower base  Expressed in terms of loan to liquidation value  Pricing: L or P to P+150 bps Cash flow loans finance needs ranging from working capital to private equity group (PEG) activities, e.g., leveraged buyouts, recaps, and acquisitions – Include senior secured, “stretch” senior, “last out” senior, and mezzanine financing – Traditional bank lenders target established companies in stable industries – Specialty lenders and select bank lenders focus on PEG related activity – Primarily collateralized by operating cash flow – Underwritten to a multiple of EBITDA or loan to enterprise value – Senior secured: L bps (floating); mezzanine: 11-12% (fixed) plus deferred interest and/or warrants to yield 18-22% Middle Market CLOs Loan Types

11 Large Syndicated Loans EBITDA:$50+ million Loan Size:$200 million - $1+ billion Rating:BB- / Ba3 Pricing:L bps “Club” Loans EBITDA:$25-50 million Loan Size:$ million Rating:Shadow Rated (B+ / B1) Pricing:L bps “One Stop” Loans EBITDA:$5-25 million Loan Size:$10-80 million Rating:Not Rated (Implied B area) Pricing:L bps Large Syndicated Loans “One Stop” Loans Leveraged Loan Market “Club” Loans Middle Market Sector Middle Market CLOs

12 Company XYZ 0x EBITDA 1x EBITDA 2x EBITDA 3x EBITDA 5x EBITDA 4x EBITDA Relative Recoveries Cash Flow Loan Types Senior Secured 70% Stretch Senior 58% “Last Out” Senior 40% Mezzanine 0% Middle Market CLOs

13 Significant equity capital Conservative operating leverage Experienced management teams Credit focus – Originate assets with intent to own the risk – Rarely purchase loans on a “whole loan” basis – Do not originate to a “box” for capital markets execution, e.g., diversity considerations – Underwriting not dictated by rating agency view of credit Loans priced on a risk-adjusted basis (no expectation of fee income) Securitization viewed as a financing rather than a vehicle for risk transfer Middle Market CLOs Market Participants

14 Middle Market CLOs Lenders by Focus Senior Secured Lenders Ableco Antares Capital BNP Paribas CapitalSource CDC IXIS CMNA Denali Capital Dymas Capital GE (Heller) Gladstone Capital Madison Capital MCG Capital Merrill Lynch Capital Group Ramius Capital Royal Bank of Scotland Asset-Based Lenders CapitalSource CIT Congress Financial Fleet Capital Foothill Capital GE Capital Merrill Lynch Capital Group Mezzanine Lenders Ableco Albion Alliance Allied Capital American Capital Antares Capital Capital Resource Partners CapitalSource CDC IXIS CMNA Dymas Capital J.H. Whitney MCG Capital Ramius Capital William Blair & Co. Windjammer Capital