The Fall of Commercial (Wholesale) Underwriting Standards Kevin M. Blakely The Risk Management Association

Purchase Price multiples Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Total debt to EBITDA multiples Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Spread per unit of leverage

Factors Contributing to decline in Underwriting Standards  Low Interest Rates  Rise of Private Equity Funds

Growth in private equity since 1992 Source: Merrill Lynch, Somerset Capital Limited, Watson Wyatt estimates.

Factors Contributing to decline in Underwriting Standards  Originate to Distribute Model  CLOs  Low Interest Rates  Rise of Private Equity Funds

The Fallout  Credit Crunch  Banks Tighten Internal Procedures  More Pain to Come  Increased Regulatory Interest

Summary  Underwriting standards Slipped to Unprecedented Levels  New Forces at Work  Expect a strong regulatory response