Introduction to the Bank Debt Introduction to the Bank Debt Portfolio GroupPortfolio Group

Presentation to Presentation to

January 13, 2006January 13, 2006

2

AgendaAgenda

I.I. IntroductionIntroduction

II.II. Introduction to the Bank Loan MarketIntroduction to the Bank Loan Market

III.III. The GS Bank Loan FranchiseThe GS Bank Loan Franchise

IV.IV. Q&AQ&A

I. IntroductionI. Introduction

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What is the Bank Debt Portfolio Group What is the Bank Debt Portfolio Group (BDPG)?(BDPG)?

A joint venture between…A joint venture between…

Credit Risk Management & Advisory (Finance)

Leveraged Finance (IBD)

Bank Debt Portfolio Group

II. Introduction to the Bank II. Introduction to the Bank Loan MarketLoan Market

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Bank Loan Market OverviewBank Loan Market Overview

Goldman Sachs (GS) is a major participant in the bank loan marketGoldman Sachs (GS) is a major participant in the bank loan market

GS originates both investment grade and non-investment grade GS originates both investment grade and non-investment grade bank debtbank debt

The non-investment grade market for bank debt is called the The non-investment grade market for bank debt is called the Leveraged Loan MarketLeveraged Loan Market

GS originates leveraged loans for leveraged buy-out (LBO) and GS originates leveraged loans for leveraged buy-out (LBO) and merger transactions, as well as for corporate borrowersmerger transactions, as well as for corporate borrowers

Leveraged loans are typically senior secured obligations of the Leveraged loans are typically senior secured obligations of the borrowerborrower

GS syndicates leveraged loans to institutional investors such as GS syndicates leveraged loans to institutional investors such as loan funds (prime rate funds and CLO’s) and hedge fundsloan funds (prime rate funds and CLO’s) and hedge funds

GS actively trades bank debt in the secondary marketGS actively trades bank debt in the secondary market

Par loans are loans that trade at or around 100 cents on the Par loans are loans that trade at or around 100 cents on the dollar; stressed and distressed loans trade at discounts to par dollar; stressed and distressed loans trade at discounts to par (i.e., 70%)(i.e., 70%)

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U.S. Syndicated Loan MarketU.S. Syndicated Loan Market

Source: Source: LPC

329480 534398

494 405

489 346

462604

672

562

419

820 684

479

595540

683619

782

914 890

699748

1,3001,218

137218

310

81 101 135 194273 320

0

300

600

900

1,200

1,500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

($ i

n b

illi

on

s)

Investment GradeLeveraged Loans

Source: LPC and Bloomberg

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Leveraged Bank Loan Market Leveraged Bank Loan Market Larger than U.S. Equity MarketLarger than U.S. Equity Market

$534bn$534bnLeveraged Loan Leveraged Loan

MarketMarket

Source: GS Debt and Equity Capital Markets, Loan Pricing Corporation and BloombergSource: GS Debt and Equity Capital Markets, Loan Pricing Corporation and Bloomberg(1) U.S. new equity issuance(1) U.S. new equity issuance

$145bn$145bnU.S. EquityU.S. EquityNew IssueNew Issue

MarketMarket11

$684bn$684bnInvestment Grade Loan Investment Grade Loan

MarketMarket

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(1) 2(1) 2ndnd lien loans have a second priority interest in pledged collateral; high yield bonds are usually unsecured and/or lien loans have a second priority interest in pledged collateral; high yield bonds are usually unsecured and/or subordinated.subordinated.

Structural ConsiderationsStructural Considerations

LiabilitiesLiabilities

40 - 60%40 - 60%

20 - 30%20 - 30%

20 - 30%20 - 30%

Sr. Secured Loans Sr. Secured Loans (1(1stst Lien) Lien)

22ndnd Lien/ Lien/High YieldHigh Yield(1)(1)

EquityEquity

Current AssetsCurrent Assets Cash Cash Accounts Accounts

ReceivableReceivable InventoryInventory

PropertyProperty PlantPlant EquipmentEquipment IntangiblesIntangibles Subsidiary Stock Subsidiary Stock

AssetsAssets

Loans are the most senior debt in the typical leveraged capital structureLoans are the most senior debt in the typical leveraged capital structure

% of Total % of Total CapitalizationCapitalization

Pledged to:Pledged to:

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U.S. Leveraged Loan InvestorsU.S. Leveraged Loan Investors

19951995 20042004

Domestic Domestic Banks Banks

32.8%32.8%

Asian Banks Asian Banks 14.1%14.1%

Canadian Banks Canadian Banks 4.7% 4.7%

Insurance Cos. Insurance Cos. 6.2%6.2%

European European Banks Banks 19.1%19.1%

Loan & Loan & Hybrid Hybrid Funds Funds 16.4%16.4%

Finance Cos. Finance Cos. 3.4%3.4%

Leasing Cos. Leasing Cos. 1.7%1.7%

Securities Securities Firms Firms 1.4%1.4%

Thrifts Thrifts 0.3%0.3%

BanksBanks 24%24%Non-BanksNon-Banks 76%76%

BanksBanks 24%24%Non-BanksNon-Banks 76%76%Source: Source:

S&P Leveraged S&P Leveraged Lending ReviewLending Review

Domestic Domestic Banks Banks

14.4%14.4%

Insurance Cos. Insurance Cos. 4.6%4.6%

European European Banks Banks 6.5%6.5%

CLOs & CLOs & Prime, Hedge Prime, Hedge & High-Yield & High-Yield

FundsFunds

62.0%62.0%

Finance Cos. Finance Cos. 9.2%9.2%

Canadian Canadian Banks Banks

1.6%1.6%

Asian Banks Asian Banks 1.1%1.1%

Securities Securities Firms Firms 0.6%0.6%

BanksBanks 71%71%Non-BanksNon-Banks 29%29%

BanksBanks 71%71%Non-BanksNon-Banks 29%29%

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The Power of LeverageThe Power of LeverageSimple Mortgage ExampleSimple Mortgage Example

Debt $75

Equity $25

Debt $25

Equity $75

Use little equity and borrow funds (leverage) to buy asset

Pay down debt over time

All excess returns accrue to the equity

Today 5 years later

$100$100

IRR = 25%

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Turbo-Charge the ReturnsTurbo-Charge the ReturnsValue Added by the Equity OwnersValue Added by the Equity Owners

Align the Interests ofOwners and Managers

+Improve the Asset

=

Bigger House

Debt $50

Equity $150

$200

Today 5 years later

Debt $75

Equity $25

$100

IRR = 43%

III. The GS Bank Loan FranchiseIII. The GS Bank Loan Franchise

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The GS Bank Loan FranchiseThe GS Bank Loan Franchise

Bank Debt Bank Debt Portfolio GroupPortfolio GroupSales and TradingSales and TradingLeveraged FinanceLeveraged Finance Capital MarketsCapital Markets

Advise clients on Advise clients on strategic and financing strategic and financing alternativesalternatives

Originate financing Originate financing transactionstransactions

Structure transactions Structure transactions (with Capital Markets)(with Capital Markets)

Negotiate and execute Negotiate and execute transactions (with transactions (with BDPG) BDPG)

Monitor market trends Monitor market trends and comparable new and comparable new issuesissues

Determine likely price Determine likely price for loansfor loans

Identify potential Identify potential investorsinvestors

Market dealMarket deal Execution/ClosingExecution/Closing

Market primary new Market primary new issue to investorsissue to investors

Ongoing sales and Ongoing sales and “marketing” for “marketing” for secondary marketsecondary market

Proprietary tradingProprietary trading

Borrower, Sponsor Borrower, Sponsor and Investor Relations and Investor Relations

Manage credit Manage credit exposure and track exposure and track operating performanceoperating performance

Manage workoutsManage workouts Update sales and Update sales and

trading desk on trading desk on company eventscompany events

Assist in negotiation Assist in negotiation and execution of loansand execution of loans

Execute amendments, Execute amendments, waivers, additional waivers, additional financingsfinancings

OriginationOriginationMarketing / Marketing / SyndicationSyndication TradingTrading

Primary MarketPrimary MarketPrimary MarketPrimary Market Secondary MarketSecondary MarketSecondary MarketSecondary Market

Senior Bank Debt OperationsSenior Bank Debt OperationsSenior Bank Debt OperationsSenior Bank Debt Operations

Risk Risk Mgmt/Client Mgmt/Client

ServiceService

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BDPG FunctionalityBDPG Functionality

BDPG / GSAG

Portfolio Management

Sales & Trading Research &

SupportWorkout Restructuring

Advisory

Borrower, Investor and

Sponsor Relations

Bank Loan Closing

Risk ManagementLevFin

Origination & Execution

§ Manage GS commitments of over $4bn and over 140 GS arranged bank deals

§ Ongoing credit risk management & assessment of credit exposures

§ Lead amendments and waivers

§ Help originate add-on business with portfolio companies

§ Maximize recoveries on stressed and distressed loan, high yield and derivative exposures

§ Help bank loan desk originate and structure rescue and other structured loans, DIP and exit financings

§ Assist IBD advisory teams in connection with restructuring assignments and distressed M&A

§ Support bank loan sales, trading & research

§ Maintain, enhance and penetrate relationships with borrowers, sponsors and bank loan investors

§ Assist LevFin teams in connection with structuring, negotiating and closing bridge loans and bank credit agreements

§ Build relationships with sponsors in connection with negotiating loan documentation

§ Provide LevFin deal team staffing as needed

Bank Debt Portfolio Group (BDPG)

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BDPG’s Principal ConstituentsBDPG’s Principal Constituents

BDPG

InvestorsLegal

Counsel

OtherAdvisors

Credit

Legal

Operations

Other IBD

LeveragedFinance

Bank DebtCap. Mkts.

Bank DebtSales &Trading

Borrowers

Sponsors

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BDPG Analyst ResponsibilitiesBDPG Analyst Responsibilities

Monitor portfolio creditsMonitor portfolio credits

Prepare in-depth analyses on companies in the portfolioPrepare in-depth analyses on companies in the portfolio

Review company performance and quarterly covenant compliance Review company performance and quarterly covenant compliance

Confer with management/sponsorConfer with management/sponsor

Post internal and external clients on borrower Post internal and external clients on borrower performance/developmentsperformance/developments

Post bank loan sales & trading desk on developments with portfolio Post bank loan sales & trading desk on developments with portfolio credits via e-mail and morning sales meetingscredits via e-mail and morning sales meetings

Coordinate and dialogue with bank loan investors about company Coordinate and dialogue with bank loan investors about company performance and amendment requestsperformance and amendment requests

Write periodic credit updates for discussions with capital markets/sales Write periodic credit updates for discussions with capital markets/sales & trading, credit and leveraged finance& trading, credit and leveraged finance

Organize and participate in meetings and calls with bank loan investorsOrganize and participate in meetings and calls with bank loan investors

Support other client service initiatives with portfolio companies, Support other client service initiatives with portfolio companies, including ratings advisory, refinancing, and other mattersincluding ratings advisory, refinancing, and other matters

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BDPG Analyst Responsibilities, cont.’dBDPG Analyst Responsibilities, cont.’d

Help to structure and execute amendments/waivers (including Help to structure and execute amendments/waivers (including refinancings and add-on financings) for portfolio creditsrefinancings and add-on financings) for portfolio credits

Coordinate with external constituents (borrowers, sponsors and Coordinate with external constituents (borrowers, sponsors and investors) and internal parties (capital markets, sales & trading and investors) and internal parties (capital markets, sales & trading and credit) in connection with structuring and executing amendments and credit) in connection with structuring and executing amendments and refinancingsrefinancings

Participate and assist with new loan origination and executionParticipate and assist with new loan origination and execution

Coordinate with counsel on preparation of documentationCoordinate with counsel on preparation of documentation

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Bank Loan Execution GroupBank Loan Execution Group

The Bank Loan Execution Group (“BLE”) was initially established to help support, The Bank Loan Execution Group (“BLE”) was initially established to help support, streamline and improve Goldman’s loan negotiation and marketing processstreamline and improve Goldman’s loan negotiation and marketing process

BLE has two elements:BLE has two elements:

Bank Loan Negotiation Team: Works with borrowers, investors and co-Bank Loan Negotiation Team: Works with borrowers, investors and co-arrangers to draft and negotiate commitment papers, credit agreements and arrangers to draft and negotiate commitment papers, credit agreements and associated itemsassociated items

Bank Loan Transaction Team: Works with clients, advisors and sponsors to Bank Loan Transaction Team: Works with clients, advisors and sponsors to build rating agency presentations, bank offering circulars, investor slides build rating agency presentations, bank offering circulars, investor slides and internal sales memosand internal sales memos

BLE’s mission has been expanded to coordinate bank loan execution efforts BLE’s mission has been expanded to coordinate bank loan execution efforts throughout the financing process:throughout the financing process:

Build and communicate investment rationale to the marketBuild and communicate investment rationale to the market

Responsible for the marketing materials for new financingsResponsible for the marketing materials for new financings

Serve as a common point of contact for issuers and investorsServe as a common point of contact for issuers and investors

Coordinate the efforts of capital markets, leveraged finance, credit and legalCoordinate the efforts of capital markets, leveraged finance, credit and legal

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BDPG: A Unique OpportunityBDPG: A Unique Opportunity

Great learning opportunityGreat learning opportunity

Exposure to leveraged loans, LBO’s, and primary and secondary sales and Exposure to leveraged loans, LBO’s, and primary and secondary sales and tradingtrading

Opportunity to work directly with a variety of clientsOpportunity to work directly with a variety of clients External clients: financial sponsors, hedge funds, loan funds, well-recognized External clients: financial sponsors, hedge funds, loan funds, well-recognized

companiescompanies

Internal clients: industry investment banking teams, leveraged finance, sales Internal clients: industry investment banking teams, leveraged finance, sales and trading, capital markets, credit risk management & advisory, PIA / and trading, capital markets, credit risk management & advisory, PIA / merchant bankingmerchant banking

Small teamSmall team Flat organizational structure: work directly with senior peopleFlat organizational structure: work directly with senior people Exposure to numerous industriesExposure to numerous industries

Broad range of experiences Broad range of experiences Build fundamental credit and analytical skillsBuild fundamental credit and analytical skills Coordinate disclosure between management teams, sponsors and investorsCoordinate disclosure between management teams, sponsors and investors Model different capital structures for a companyModel different capital structures for a company Develop a view on what drives a company or an industryDevelop a view on what drives a company or an industry Blend of portfolio management and transactional experiencesBlend of portfolio management and transactional experiences Execute new financing transactionsExecute new financing transactions

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BDPG Sample Portfolio CompaniesBDPG Sample Portfolio Companies

Coleto Coleto CreekCreek

IV. Q&AIV. Q&A