1. Defaulted Bond & Bank Loan Markets and Outlook
Investing in Distressed Companies
GFA Seminar
NYU Stern School of Business
March 29, 2004
Dr. Edward Altman
NYU Stern School of Business

2. Historical Default Rates
Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, 1971 – 2004YTD (US$ millions)
Par Value Par Value Default
Year Outstandinga Defaults Rates (%)
2002 $757,000 $96,
2001 $649,000 $63,
$597,200 $30,
1999 $567,400 $23,
1998 $465,500 $7,
1997 $335,400 $4,
1996 $271,000 $3,
1995 $240,000 $4,
1994 $235,000 $3,
1993 $206,907 $2,
1992 $163,000 $5,
1991 $183,600 $18,
1990 $181,000 $18,
1989 $189,258 $8,
1988 $148,187 $3,
1987 $129,557 $7,
1986 $90,243 $3,
1985 $58,088 $
1984 $40,939 $
1983 $27,492 $
1982 $18,109 $
1981 $17,115 $
a As of mid-year
b Weighted by par value of amount outstanding for each year.
Source: Author’s compilation and Salomon Smith Barney
Par Value Par Value Default
Year Outstandinga Defaults Rates (%)
1980 $14,935 $
1979 $10,356 $
1978 $8,946 $
1977 $8,157 $
1976 $7,735 $
1975 $7,471 $
1974 $10,894 $
1973 $7,824 $
1972 $6,928 $
1971 $6,602 $
Standard Deviation (%)
Arithmetic Average Default Rate
1971 to %  3.161%
1978 to % 3.394%
1985 to 2003  %  3.515%
Weighted Average Default Rateb
1971 to 2003   5.352%
1978 to %
1985 to 2003   5.474%
Median Annual Default Rate
1971 to 2003   1.896%
2004YTD $856, $3,
$825, $38,

3. QUARTERLY DEFAULT RATE AND FOUR QUARTER MOVING AVERAGE
Historical Default Rates
QUARTERLY DEFAULT RATE AND FOUR QUARTER MOVING AVERAGE
1992 –2003

4. Filings for Chapter 11
Number of Filings and Pre-petition Liabilities of Public Companies
YTD
2003
95 filings and pre-petition liabilities of $110.4 billion
March 2004
15 filings and pre-petition liabilities of $9.1 billion
Note: Minimum $100 million in liabilities Source: NYU Salomon Center Bankruptcy Filings Database

5. Distressed And Defaulted Debt as a Percentage of Total High Yield Debt Market
Public deals only. Source: Citigroup Estimates.

6. Estimated Face And Market Values Of Defaulted And Distressed Debt
(1)  Calculated using: (2002 defaulted population) + (2003 defaults) - (2003 Emergences)
(2)     For 12/31/02 and 12/31/03, we use a private/public ratio of 1.40.
Source: Edward Altman, NYU Salomon Center, Stern School of Business

7. Size of Defaulted And Distressed Debt Market ($ Billions) (1990 – 2003)
9/15/2002
Source: E. Altman, NYU Salomon Center .

9. Defaulted Debt Indexes:
Market-to-Face Value Ratio
(Annual 1986 –2003)
Source: Altman-NYU Salomon Center Defaulted Debt Indexes

11. Distressed Debt Managers 2003

12. Investment Styles in Distressed Debt Investing

13. Forecasting Defaults and the Default Rate

14. Forecasting Defaults and the Default Rate
MODEL DRIVERS
Mortality Rate Estimates:
= f {bond rating, age, redemptions, defaults}
Historical New Issuance over last 10 years by credit quality
Bond-ratings
Z-score Bond-equivalent ratings
New Defaults and Default Rate in 2004
Estimate high yield market growth in 2004
New Defaults and Default Rate in 2005

15. Z’’ Score Model for Manufacturers, Non-Manufacturer Industrials, & Emerging Market Credits
Z’’ = X X X X4
X1 = Current Assets - Current Liabilities
Total Assets
X2 = Retained Earnings
X3 = Earnings Before Interest and Taxes
X4 = Book Value of Equity Z’’ > “Safe” Zone
Total Liabilities < Z’’ < “Grey” Zone
Z ” < “Distress” Zone

16. US Bond Rating Equivalent Based on Adjusted Z” Score Model
Z’’ = X X X X4
US Equivalent Rating
Average Z” Score
Sample Size
AAA
8.15 8
AA+
7.6 - AA
7.3 18
AA- 7 15 A+
6.85 24 A
6.65 42 A-
6.4 38
BBB+
6.25 38
BBB
5.85 59
BBB-
5.65 52
BB+
5.25 34 BB
4.95 25
BB-
4.75 65 B+
4.5 78 B
4.15
115 B-
3.75 95
CCC+
3.2 23
CCC
2.5 10
CCC-
1.75 6 D 14

17. Forecasted High Yield Market Size, Defaults and Default Rates for 2004 and 2005

18. Forecasted Face and Market Values of Defaulted and Distressed Debt 2004 – 2005 (US$billions)
(1)  Calculated using: (2003 defaulted population) + (2004 defaults) - (2005 Emergences), same for 2005
(2)   Based on 5.0% of size of high yield market (in 2004, $994 billion); 7.5% of market in 2005 ($1,041 billion) 
(3) For 12/31/04 and 12/31/05, we use a private/public ratio of 1.40.
Source: Edward Altman, NYU Salomon Center, Stern School of Business

19. Size of Defaulted And Distressed Debt Market ($ Billions) (1990 – 2005)
Source: E. Altman, NYU Salomon Center .