1. Dr. Edward Altman NYU Stern School of Business Defaults and Returns in the Corporate Bond Market and the Outlook for Defaults and the Distressed Debt Market Size in 2004/2005 TMA Luncheon Address Union League Club, NYC February 5, 2004

2. 2 Straight Bonds Only Excluding Defaulted Issues From Par Value Outstanding, 1971 – 2003 (US$ millions) Historical Default Rates Par ValuePar ValueDefault YearOutstanding a DefaultsRates (%) 2002 $757,000$96,85512.795 2001$649,000$63,609 9.801 2000 $597,200$30,2955.073 1999$567,400$23,5324.147 1998$465,500$7,4641.603 1997$335,400$4,2001.252 1996$271,000$3,3361.231 1995$240,000$4,5511.896 1994$235,000$3,4181.454 1993$206,907$2,2871.105 1992$163,000$5,5453.402 1991$183,600$18,86210.273 1990$181,000$18,35410.140 1989$189,258$8,1104.285 1988$148,187$3,9442.662 1987$129,557$7,4865.778 1986$90,243$3,1563.497 1985$58,088$9921.708 1984$40,939$3440.840 1983$27,492$3011.095 1982$18,109$5773.186 1981$17,115$270.158 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 ValuePar ValueDefault YearOutstanding a DefaultsRates (%) 1980$14,935$2241.500 1979$10,356$200.193 1978$8,946$1191.330 1977$8,157$3814.671 1976$7,735$300.388 1975$7,471$2042.731 1974$10,894$1231.129 1973$7,824$490.626 1972$6,928$1932.786 1971$6,602$821.242 Standard Deviation (%) Arithmetic Average Default Rate 1971 to 20033.292% 3.161% 1978 to 20033.656%3.394% 1985 to 2003 4.567% 3.515% Weighted Average Default Rate b 1971 to 2003 5.352% 1978 to 20035.382% 1985 to 2003 5.474% Median Annual Default Rate 1971 to 2003 1.896% 2003 $825,000 $38,451 4.661

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

4. 4 Filings for Chapter 11 Number of Filings and Pre-petition Liabilities of Public Companies 1989- 2003 2002 122 filings and pre- petition liabilities of $337.5 billion 2003 95 filings and pre- petition liabilities of $110.4 billion Note: Minimum $100 million in liabilities Source: NYU Salomon Center Bankruptcy Filings Database

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

6. 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. 7 Source: E. Altman, NYU Salomon Center. Size of Defaulted And Distressed Debt Market ($ Billions) (1990 – 2003) 9/15/2002

8. 8 Historical Default Rates and Recession Periods in the U.S. Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 – 12/01 Source: Figure 1, Appendix B & National Bureau of Economic Research Data HIGH YIELD BOND MARKET 1972 –2003

9. 9 Unadjusted for Only FallenAll exceptPrice Adjusted for Fallen AngelsAngelsFallen Angels BACKGROUND DATA AVERAGE DEFAULT RATE, 20034.661%5.873%3.957%4.844% AVERAGE PRICE AT DEFAULT (a)45.503%56.951%35.618%45.492% AVERAGE PRICE AT DOWNGRADE (a)61.781% AVERAGE RECOVERY45.503%92.183%35.618%66.003% AVERAGE LOSS OF PRINCIPAL54.497%7.817%64.382%33.997% AVERAGE COUPON PAYMENT9.554%8.200%10.720%9.554% DEFAULT LOSS COMPUTATION DEFAULT RATE4.661%5.873%3.957%4.844% X LOSS OF PRINCIPAL54.497%7.817%64.382%33.997% DEFAULT LOSS OF PRINCIPAL2.540%0.459%2.547%1.647% DEFAULT RATE4.661%5.873%3.957%4.844% X LOSS OF 1/2 COUPON4.777%4.100%5.360%4.777% DEFAULT LOSS OF COUPON0.223%0.241%0.212%0.231% DEFAULT LOSS OF PRINCIPAL AND COUPON2.763%0.700%2.760%1.878% (a) If default date price is not available, end-of-month price is used. Source: Author's Compilations and various dealer quotes. 2003 Default Loss Rate

10. 10 Default Rates and Losses a 1978 – 2003 Par Value Outstanding a Of Default Default Weighted PriceWeightedDefault Year ($MM)($MMs)Rate (%)After DefaultCoupon (%)Loss (%) 2003 $825,000$ 38,451 4.66%$45.59.55%2.76% 2002 $757,000$96,85812.79%$25.39.37%10.15% 2001$649,000$63,6099.80$25.59.187.76 2000 $597,200$30,2485.06$26.48.543.94 1999 $567,400$23,5324.15$27.910.553.21 1998 $465,500$7,4641.60$35.99.461.10 1997 $335,400$4,2001.25$54.211.870.65 1996 $271,000$3,3361.23$51.98.920.65 1995 $240,000$4,5511.90$40.611.831.24 1994 $235,000$3,4181.45$39.410.250.96 1993 $206,907$2,2871.11$56.612.980.56 1992 $163,000$5,5453.40$50.112.321.91 1991 $183,600$18,86210.27$36.011.597.16 1990 $181,000$18,35410.14$23.412.948.42 1989 $189,258$8,1104.29$38.313.402.93 1988 $148,187$3,9442.66$43.611.911.66 1987 $129,557$7,4865.78$75.912.071.74 1986 $90,243$3,1563.50$34.510.612.48 1985 $58,088$9921.71$45.913.691.04 1984 $40,939$3440.84$48.612.230.48 1983 $27,492$3011.09$55.710.110.54 1982 $18,109$5773.19$38.69.612.11 1981 $17,115$270.16$12.015.750.15 1980 $14,935$2241.50$21.18.431.25 1979 $10,356$200.19$31.010.630.14 1978 $8,946$1191.33$60.08.380.59 Arithmetic Average 1978-2003:3.66%$42.511.01%2.52% Weighted Average 1978-2003:5.38% 3.93% a Excludes defaulted issues. Source: Authors’ compilations and various dealer price quotes.

11. 11 Defaults by Original Rating Source: Authors' Compilations from S&P and Moody's records.

12. 12 Fallen Angels companies 2003

13. 13 Fallen Angel(FA) Vs Original Issue & All High Yield Default Rates : 1985-2003 (Issuer Based)

14. 14 Fallen Angels: an Analysis of Recovery Rates and Loss Rate on Default (1982-2003)

15. 15 Weighted Average Recovery Rates On Defaulted Debt by Seniority Per $100 Face Amount 1978 – 2003 YearNo.$No.$No.$No.$No.$No.$ 2003 57 $53.51108 $45.4029 $35.981 $38.008 $32.27203 $45.50 2002 37 $52.81254 $21.8221 $32.790 $0.0028 $26.47340 $26.48 20019$40.95187$28.8448$18.370$0.0037$15.05281$25.48 200013$39.5847$25.4061$25.9626$26.6217$23.61164$25.83 1999 14$26.9060 $42.5440 $23.562 $13.8811 $17.30 127 $31.14 1998 6 $70.3821 $39.576 $17.541 $17.0034 $37.27 1997 4 $74.9012 $70.946 $31.891 $60.002 $19.0025 $53.89 1996 4 $59.08 4 $50.11 9 $48.99 4 $44.23 3 $11.99 24 $51.91 1995 5 $44.64 9 $50.50 17 $39.01 1 $20.00 1 $17.50 33 $41.77 1994 5 $48.66 8 $51.14 5 $19.81 3 $37.04 1 $5.00 22 $39.44 1993 2 $55.75 7 $33.38 10 $51.50 9 $28.38 4 $31.75 32 $38.83 1992 15 $59.85 8 $35.61 17 $58.20 22 $49.13 5 $19.82 67 $50.03 1991 4 $44.12 69 $55.84 37 $31.91 38 $24.30 9 $27.89 157 $40.67 1990 12 $32.18 31 $29.02 38 $25.01 24 $18.83 11 $15.63 116 $24.66 1989 9 $82.69 16 $53.70 21 $19.60 30 $23.95 76 $35.97 1988 13 $67.96 19 $41.99 10 $30.70 20 $35.27 62 $43.45 1987 4 $90.68 17 $72.02 6 $56.24 4 $35.25 31 $66.63 1986 8 $48.32 11 $37.72 7 $35.20 30 $33.39 56 $36.60 1985 2 $74.25 3 $34.81 7 $36.18 15 $41.45 27 $41.78 1984 4 $53.42 1 $50.50 2 $65.88 7 $44.68 14 $50.62 1983 1 $71.00 3 $67.72 4 $41.79 8 $55.17 1982 16 $39.31 4 $32.91 20 $38.03 1981 1 $72.00 1 $72.00 1980 2 $26.71 2 $16.63 4 $21.67 1979 1 $31.00 1 $31.00 1978 1 $60.00 1 $60.00 Total/Average229 $53.02914$35.01397 $30.13248 $31.06138$21.091,926 $34.46 Median $54.63 $42.27 $32.35 $31.96 $18.25 $40.05 SeniorSeniorSeniorDiscount andAll DefaultSecuredUnsecuredSubordinatedSubordinatedZero CouponSeniorities

16. 16 Recovery at Default* on Public Corporate Bonds (1974-2003) and Bank Loans (1989-Q3-2003) Loan/Bond Seniorityof Issues Median Mean % Deviation Senior Secured Loans 155 73.00 68.50 24.40 Senior Unsecured Loans 28 50.50 55.00 28.40 Senior Secured Bonds 220 54.49 52.84 23.05 Senior Unsecured Bonds 910 42.27 34.89 26.62 Senior Subordinated Bonds 395 32.35 30.17 24.97 Subordinated Bonds 248 31.96 29.03 22.53 Discount Bonds 136 18.25 20.93 17.64 Total Sample Bonds1,909 40.05 34.31 24.87 *Based on prices just after default on bonds and 30 days after default on loans. Source: K. Emery (Moody’s), 2003 (Bank Loans) and Altman & Fanjul, 2004 (Bonds).

17. 17 Investment Grade vs. Non-Investment Grade (Original Rating) Prices at Default on Public Bonds (1974-2003) Number of Median Average WeightedStandard Bond Seniority Issues Price %Price % Price %Deviation % Senior Secured Investment Grade89 50.5054.50 56.39 24.42 Non-Investment Grade283 33.5036.63 31.91 26.04 Senior Unsecured Investment Grade299 42.7546.37* 44.05* 23.57 Non-Investment Grade598 30.0033.41 31.83 23.65 Senior Subordinated Investment Grade 11 27.3139.54 42.04 24.23 Non-Investment Grade411 26.5031.48 28.99 24.30 Subordinated Investment Grade 12 35.6935.64 23.55 23.83 Non-Investment Grade 238 28.0030.91 28.66 21.98 Discount Investment Grade -- -- -- -- --- Non-investment Grade 113 16.0020.69 21.24 17.23 Total Sample2,054 30.0434.76 30.78 24.38 Notes: (*) Including WorldCom, the Average and Weighted Average were 43.53% and 30.45% Non-rated issues were considered as non-investment grade

18. 18 Ultimate Recovery Rates on Bank Loan Defaults, Nominal and Discounted Values (1988-2Q 2003) Ultimate Ultimate Nominal Discounted Standard Observations Recovery Recovery Deviation Senior Bank Debt750 87.32% 78.8% 29.7% Senior Secured Notes222 76.03% 65.1% 32.4% Senior Unsecured Notes419 59.29% 46.4% 36.3% Senior Subordinated Notes350 38.41% 31.6% 32.6% Subordinated Notes343 34.81% 29.4% 34.1% Source: Keisman, 2003, from Standard & Poor’s LossStats™ Database, 2084 defaulted loans and bond issues that defaulted between 1987-2003. Recoveries are discounted at each instruments’ pre-default interest rate.

19. 19 Bank Loan Ultimate Recovery Rates are Declining Source: Standard & Poor’s.

20. 20 Recovery Rate/Default Rate Association Altman Defaulted Bonds Data Set (1982-2003) Dollar Weighted Average Recovery Rates to Dollar Weighted Average Default Rates Source: E. Altman, et. al., “The Link Between Default and Recovery Rates”, NYU Salomon Center, S-03-4. 2003

21. 21 Recovery Rates for Telecommunications and E-Commerce Industries* Source: Authors’ compilation from Various Dealer Quotes. 1998 – 2003 * Includes Wireless Equipment and Satellite Telecommunication companies in addition to Telecommunication Service companies. ** Dealer quotes not available for Energis PLC, Mpower Holding, Corp. and ITC DeltaCom, Inc.

22. 22 Marginal and Cumulative Mortality Rate Equation One can measure the cumulative mortality rate (CMR) over a specific time period (1,2,…, T years) by subtracting the product of the surviving populations of each of the previous years from one (1.0), that is, MMR (t) = Total value of defaulting debt in year (t) total value of the population at the start of the year (t) MMR = Marginal Mortality Rate CMR (t) = 1 -  SR (t), t = 1 hereCMR (t) = Cumulative Mortality Rate in (t), SR (t) = Survival Rate in (t), 1 - MMR (t)

23. 23 Mortality Rate Concept (Illustrative Calculation) For BB Rated Issues SecurityIssuedYear 1Year 2 No.AmountDefaultCallSFDefaultCallSF 150----5----5 25050-- --NENENE 3100--100 --NENENE 4100-- -- --100 -- -- 5150-- -- -- -- --15 6150-- -- -- -- -- -- 7200-- --20 -- --20 8200-- -- -- -- 200 -- 9250-- -- -- -- -- -- 10250-- -- -- -- -- -- Total1,500501002510020040 Amount Start of 1,5001751,325340985 Period ---=---= Year 1Year 2 Marginal Mortality50/1,500 = 3.3%100/1,325 = 7.5% Rate 1 - (SR1 x SR2 ) = CMR2 Cumulative Rate3.3%1 - (96.7% x 92.5%) = 10.55% NE = No longer in existence SF = Sinking fund

24. 24 All Rated Corporate Bonds a 1971-2003 Mortality Rates by Original Rating (a) Rated by S&P at Issuance Based on 1,719 issues Source: Standard & Poor's (New York) and Author's Compilation

25. 25 All Rated Corporate Bonds a 1971-2003 Mortality Losses by Original Rating (a) Rated by S&P at Issuance Based on 1,535issues Source: Standard & Poor's (New York) and Author's Compilation

26. 26 2001 5.44 4.01 1.43 12.31 5.04 7.27 2000 (5.68)14.45(20.13)14.565.129.44 1999 1.73(8.41)10.1411.416.444.97 1998 4.0412.77(8.73)10.044.655.39 199714.2711.163.119.205.753.45 199611.240.0411.209.586.423.16 199522.4023.58(1.18)9.765.584.18 1994(2.55)(8.29)5.7411.507.833.67 199318.3312.086.259.085.803.28 199218.296.5011.7910.446.693.75 1991 43.2317.1826.0512.566.705.86 1990(8.46)6.88(15.34)18.578.0710.50 19891.9816.72(14.74)15.177.937.24 198815.256.348.9113.709.154.55 19874.57(2.67)7.2413.898.835.06 198616.5024.08(7.58)12.677.215.46 198526.0831.54(5.46)13.508.994.51 19848.5014.82(6.32)14.9711.873.10 198321.802.2319.5715.7410.705.04 198232.4542.08(9.63)17.8413.863.98 19817.560.487.0815.9712.083.89 1980(1.00)(2.96)1.9613.4610.233.23 19793.69(0.86)4.5512.079.132.94 19787.57(1.11)8.6810.928.112.81 Arithmetic Annual Average 1978-200311.40 9.17 2.22 12.67 7.70 4.96 Compound Annual Average 1978-200310.73 8.56 2.17 a End-of-year yields. Source:Salomon Smith Barney and author’s compilations 2003 30.62 1.25 29.37 8.00 4.26 3.74 2002 (1.53) 14.66 (16.19) 12.38 3.82 8.56 Annual Returns Yields and Spreads on 10-Year Treasury (Treas) and High Yield (HY) Bonds 1978- 2003 Return (%)Promised Yield (%) a YearHYTreasSpreadHYTreasSpread

27. 27 Forecasting Defaults and the Default Rate

28. 28 Forecasting Defaults and the Default Rate MODEL DRIVERS Mortality Rate Estimates: 1971 - 2003 = 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

29. 29 Z’’ Score Model for Manufacturers, Non-Manufacturer Industrials, & Emerging Market Credits Z’’ = 6.56X 1 + 3.26X 2 + 6.72X 3 + 1.05X 4 X 1 = Current Assets - Current Liabilities Total Assets X 2 = Retained Earnings Total Assets X 3 = Earnings Before Interest and Taxes Total Assets X 4 = Book Value of EquityZ’’ > 2.60 - “Safe” Zone Total Liabilities 1.1 < Z’’ < 2.60 - “Grey” Zone Z ” < 1.1 - “Distress” Zone

30. 30 US Bond Rating Equivalent Based on Adjusted Z” Score Model US Equivalent RatingAverage Z” ScoreSample Size AAA8.158 AA+7.6- AA7.318 AA-715 A+6.8524 A6.6542 A-6.438 BBB+6.2538 BBB5.8559 BBB-5.6552 BB+5.2534 BB4.9525 BB-4.7565 B+4.578 B4.15115 B-3.7595 CCC+3.223 CCC2.510 CCC-1.756 D014

31. 31 Forecasted High Yield Market Size, Defaults and Default Rates for 2004 and 2005

32. 32 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

33. 33 Source: E. Altman, NYU Salomon Center. Size of Defaulted And Distressed Debt Market ($ Billions) (1990 – 2005)