BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2010

The Current Stateof the Capital MarketsBreakfast Forum

September 10, 2010

www.boyarmiller.com

Equity and thePublic MarketsAndrew D. Kanaly – Kanaly TrustChairman & CEO

2010 Market Performance

Index Performance as of July 31, 2010

EQUITIES July YTD 12 Months S&P 500 7.0 (0.1) 13.8 DJIA 7.2 1.9 17.3 Nasdaq 6.9 (0.1) 15.0 Russell 2000 6.9 4.8 18.4 MSCI EAFE 9.5 (4.7) 6.7 MSCI Emerging Mkts 8.4 1.8 20.2

FIXED INCOME BarCap US 1-3yr Govt 0.3 2.2 2.9 BarCap Int Govt/Credit 1.1 5.7 8.0 BarCap High Yield 3.6 8.2 23.7 BarCap 5yr Muni 1.5 4.0 6.5

ALTERNATIVES HFRI Global Hedge Fund 1.2 0.0 5.8 DJ Wilshire REIT 9.9 15.7 54.9 DJ UBS Commodity 6.8 (3.5) 6.3 Gold (4.9) 7.7 26.4 Crude Oil 4.4 (0.5) 17.9

Copyright 2010 Kanaly Trust. All rights reserved.

4

Recession Ends?

Inventory Rebuilding

• The “V”-shaped recovery was driven by inventory rebuilding• What will drive sustainable growth from here?

Unemployment is a Lagging Indicator?

• After 2001 recession, unemployment continued to rise until early 2003• Stocks did not sustain a recovery employment stabilized in 2003

Initial Claims Signal a Double Dip?

• Initial Claims Stay in Recession Levels

Lack of Credit Prevents Robust Recovery

• Credit is the lifeblood of economic growth• The largest banks have reduced lending by over 25%

Housing Market Not Out of the Woods

• Monthly Resets on troubled mortgages will pressure housing for two more years

Source: Credit Suisse

$B

After Gov’t Program Ends..Home Sales Decline

Too Much Debt is the Long-term Problem

Copyright 2010 Kanaly Trust. All rights reserved.

12

Where does the stimulus come from if the Gov’t is tapped out?

Key Economic Issues in 2010

Markets are anticipating continued improvement in the economy, which likely hinges on a recovery in business spending and employment. Some of the key economic issues to watch include:

• Withdrawal of fiscal and monetary stimulus programs

• Efforts by China to slow economic growth

• Potential for mortgage resets, commercial real estate troubles, and sovereign debt to create fresh credit concerns

• Continued deleveraging of consumer balance sheets

• Tax increases coming at both federal and local levels

• Potential for higher interest rates to entice investors to buy Treasuries

Earnings Estimates Likely to Come Down

S&P 500 Annual Operating Earnings

38.2345.17

52.0047.24

54.15

67.01

87.7282.54

49.51

81.32

95.59

62.20

77.08

44.2339.56

0

20

40

60

80

100

120

19971998

19992000

20012002

20032004

20052006

20072008

20092010E

2011E

The “BUBBLE” is Likely in Bonds….

……….Not in Stocks

Back to the 1970s?

Source: Strategas Research

Investment Strategy

Portfolios should be geared more toward capital preservation to manage significant downside risks:

• Pursue ultra-diversification, utilizing traditional asset classes as well as alternative investment strategies (stocks & bonds are not the only choices)

• Actively manage the asset mix, and look for opportunities to hedge

• Equity exposure should focus on high quality global businesses trading at attractive valuations (bias to large caps, emerging markets)

• Be highly selective with fixed income: avoid high yield debt, and invest in only the most creditworthy municipal issuers

• Add to inflation protection when it is cheap

Current Allocations

Traditional 30% Equity60% Equity 30% Fixed

ASSET CLASS 40% Fixed 40% AltsLarge Cap Equity 30.00% 8.50% Small Cap Equity 15.00% 6.25% Micro Cap Equity 3.25% International Equity 10.00% 8.00% Emerging Markets 5.00% 4.00% Fixed Income 40.00% 30.00% Liquid Alternatives 11.00% Hedged Equity 6.00% Commodities 5.00% MLPs 5.00% REITs 3.00% Managed Futures 10.00% Expected Return 7.60% 8.60%Standard Deviation 10.74% 8.16%Sharpe Ratio 0.34% 0.56%

Kanaly Trust Investment Model Performance – 2010

2010 YEAR TO DATE MODELS INVESTMENT PERFORMANCE as of 7/31/2010(Equity/Fixed Income/Alternatives/Cash)

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Year to Date

Balanced ModelsGrowth (35/25/33/7) -0.6% 0.9% 2.8% 1.4% -3.6% -1.0% 3.2% 2.9%Growth - Taxfree FI (35/25/33/7) -0.9% 1.3% 2.6% 1.3% -3.6% -1.3% 3.3% 2.6%Balanced MF Portfolio (30/30/33/7) -0.6% 0.9% 2.5% 1.4% -3.3% -0.8% 2.9% 3.0%Balanced MF Portfolio - Taxfree FI (30/30/33/7) -0.9% 1.3% 2.2% 1.2% -3.1% -1.1% 3.0% 2.6%Conservative (15/50/24/11) 0.1% 0.7% 1.5% 1.3% -2.0% 0.1% 2.0% 3.7%Conservative - Taxfree FI (15/50/25/11) -0.6% 1.2% 1.1% 1.0% -1.7% -0.6% 2.0% 2.4%

Small Model - Aggressive -2.5% 5.3% 2.6%Small Model - Balanced -1.1% 4.8% 3.6%Small Model - Conservative 0.8% 3.7% 4.5%Small Model - < $25K -0.5% 5.5% 4.9%

Equity Only -3.2% 2.2% 6.4% 1.2% -8.3% -3.7% 6.9% 0.6%Fixed Income - Taxable 1.6% 0.0% 0.7% 1.4% -0.5% 1.4% 1.3% 5.8%Fixed Income - Tax Free 0.2% 0.5% -0.5% 0.5% 0.3% -0.2% 0.7% 1.5%ALTs - No MLPs -0.7% 2.0% 1.0% 1.0% -1.8% -0.3% 1.4% 2.6%ALTs - With MLPs -0.5% 1.2% 1.4% 1.9% -2.2% 0.5% 2.2% 4.5%

S&P 500 (60%) / Intermediate Taxable (40%) -1.6% 2.0% 3.5% 1.3% -4.3% -2.6% 4.5% 2.6%

S&P 500 (60%) / Intermediate Muni (40%) -1.9% 2.2% 3.4% 1.2% -4.5% -3.0% 4.7% 1.6%

S&P 500 Index -3.6% 3.1% 6.0% 1.6% -8.0% -5.2% 7.0% -0.1%

Barclays Aggregate Bond Index 1.5% 0.4% -0.3% 0.9% 1.2% 1.5% 0.8% 6.1%

BarCap 1-10Yr Muni Index 0.6% 0.8% -0.6% 0.7% 0.7% 0.3% 1.2% 3.7%

* The asset allocation models above represent an approximation of how the portfolios perform; actual results may differ from the models. Returns are shown before fees and are not AIMR/GIPS compliant. The return information provided above represents past performance and is not necessarily indicative of future results. Further, specific client portfolio(s) investment returns and results may vary from figures noted above based on account-specific circumstances.

Equity and the Public MarketsSeptember 10, 2010

www.boyarmiller.com

Private Equity and Mergers & AcquisitionsDavid W. Sargent – Growth Capital PartnersPresident & CEO

23

I. GCP’s View of the U.S. Economy and Capital Markets

II. Private Equity

III. Debt Markets

IV. Mergers & Acquisitions

V. Conclusions

Table of Contents

GCPGCP’’ss View of the View of the U.S. Economy and Capital MarketsU.S. Economy and Capital Markets

Sept 7

Federal takeover of Fannie Mae and Freddie Mac

Sept 14

Merrill Lynch is sold to Bank of America

Sept 15

Lehman Brothers files for bankruptcy

Sept 17

Federal Reserve injects $85 billion into AIG

Sept 18

$700 billion emergency bailout bill is proposed

Sept 19

Federal Reserve guarantees money market funds

Sept 25

Washington Mutual is seized by FDIC; assets are sold to JP MorganChase

Sept 29

Citigroup Inc. to acquire Wachovia

SEPTEMBER 2008,SEPTEMBER 2008, AA SEPTEMBER TO REMEMBERSEPTEMBER TO REMEMBER

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke tell key legislators: "If we don't do this, we may not have an economy on Monday."

26

Slow growth economy “new normal” (1% to 2% growth vs. 3% to 5%)

Historically high employment will last for several years

“Deleveraging” the financial system will take time

Record deficits and low interest rates leave fewer traditional “tools” for the government and Federal Reserve to accelerate the U.S. economy

Demographics also add to U.S. growth challenges

Higher taxes, healthcare costs and "reregulation" will add additional head winds to the U.S. economy

Consumer related businesses will continue to face challenges (except Apple!)

Global growth will partially offset a slow growth U.S. economy

Several industries can grow faster than projected U.S. GDP, including energy, infrastructure, security, business services, food, healthcare and technology

Texas economy continues to fare better than those of many other states . Texas has an ideal combination of low taxes, diversity of economy, low cost of living and above vs. average population growth

GCP’s View of the U.S. Economy

27

Investors/lenders/buyers will not need a dramatically improving economy to make investment/acquisition decisions but will need to be convinced that the economy has bottomed out and stabilized – started to happen in early 2010

Strategic buyers (primarily public companies) will be compelled to complete acquisitions to offset slow organic growth

Substantial amounts of committed, but un-invested, private equity capital are finding ways to participate in the current market environment

Baby boomer entrepreneurs are anxious to realize liquidity and will not miss the next opportunity

Smaller transactions (lower middle-market) have begun to represent a larger portion of overall M&A activities

GCP’s View of the Capital Markets

28

The spread between the 3-Month LIBOR and 3-Month Treasury bills often suggests the perceived credit risk in the general economy.

1. The 3-Month Treasury Bill rate is regarded as risk-free.2. The 3-Month LIBOR rate reflects the credit risk of lending to commercial banks.

The long-term average spread between the 3-Month LIBOR and 3-Month Treasury is between 30 to 50 basis points. In October of 2008, the spread rose above 300 basis points indicating a wide-spread fear of an economic meltdown.

Source: Federal Reserve

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Spread (percent)LI

BOR

and

Tre

asur

y R

ate

(per

cent

)

3-Month LIBOR 3-Month Treasury Spread

Record High

Interest Rates

29

Sources: U.S. Department of the Treasury, Federal Reserve Board

U.S. Federal Debt as Percent of GDP and U.S. Household Debt as Percent of Disposable Personal Income, 1980–2008 and Projected 2010

The federal public debt totals $8.2 trillion today, and it's headed toward $20.3 trillion in 2020, according to CBO's deficit estimates. That figure would equal 90% of the estimated gross domestic product in 2020, up from 83% at the end of fiscal 2009.

U.S. household debt as a percent of disposable personal income has doubled since the early 1980’s. In late 2007, household debt was $12.5 trillion, which was 133% of disposable income.

20

40

60

80

100

120

140

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 ?

(in p

erce

ntag

es)

US Federal Debt as % of GDP U.S. Household Debt as % of Disposable Income

122% of Disposable

Income

94.3% of GDP

U.S. Federal and Consumer Debt

30

Source: Capital IQ

S&P 500 Aggregate Cash and Cash Equivalents Balances (1994 – June 2010) ($ in Billions)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

($ in

bill

ions

)

Record Level at

$1.6 trillion

S&P 500 companies are holding a record amount of cash totaling a record $1.6 trillion. During the same period, the debt to equity ratio for those S&P 500 companies is down to the 2000 level of 1.3x from a peak of 1.9x in 2008.

Strategic Buyers – Record Amount of Cash on the Sidelines

Private EquityPrivate Equity

32

The proliferation of institutional private investment funds has continued to create a significant buildup of un-invested capital as a result of record fund raising in 2007 and 2008 combined with suppressed deal activity during the credit crisis.

In the near term, reduced fund raising, combined with an accelerated investing environment and higher equity contributions, will diminish the build up of private equity overhang.

Source: PitchBook Data, Inc.

Private Equity Raised and Overhang ($ in billions)

$0

$100

$200

$300

$400

$500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD Q22010

Cumulative Overhang Equity Raised Equity Invested

Private Equity Environment

33

Source: PitchBook Data, Inc.

Years to Invest Dry Powder at Annual Rates (Cumulative Overhang / Annual PE Capital Investment)

At levels of investment similar to 2009, the current private equity overhang would take 11 years to invest.

Most private equity capital has a 5-year investment period, meaning the capital will have to be invested at a faster rate than 2009 or private equity firms will have to return un-invested capital to investors.

With the record un-invested private equity overhang and challenging bank lending environment, many traditional LBO/majority recapitalization investors are seeking more creative ways to deploy capital, including over-equitizing the capital structure, investing in smaller transactions and seeking minority and growth capital investments.

8.4

4.33.3

2.71.9

0.7

3.0

11.0

4.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006 2007 2008 2009 Annualized2010

Private Equity Environment

34

American Central Gas Technologies, Inc. – Range of Indications of Interest Through GCP’s aggressive sale process, we received a high level of interest and were able to significantly

ratchet up the final price to $240 million.

Of the four top bids, three were financial sponsors, which illustrates the growth in private equity that has resulted in higher than normal valuations paid by private equity groups.

Indications of Interest ($ in millions)

$210.0 $207.5

$180.0 $175.0$160.0

$151.0 $150.0 $150.0$140.0 $137.5

$125.0 $120.0

$94.0

$225.0 $220.811.1x

10.3x 10.2x

7.4x

4.6x

5.9x6.2x6.8x6.9x

7.4x7.4x7.9x

8.6x8.9x

10.9x

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

A B C D E F G H I J K L M N O

Ent

erpr

ise

Val

ue

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

EB

ITD

A M

ultiple

Financial Buyer Strategic Buyer

GCP Case Study

35

Debt MarketsDebt Markets

36

The average debt multiple for LBO loans declined from 2007 through 2009, with Total Debt/EBITDA for transactions with companies below $50 million of EBITDA at 3.4x at the end of 2009, down from 5.3x at the beginning of 2008 and 4.4x at the beginning of 2009. Debt multiples have shown an increase this year as of June 30, 2010.

Average Pro Forma Adjusted Credit Statistics of Middle-Market LBO Loans (EBITDA <$50 million)

Sources: Dealogic, William Blair & Company, and S&P LCD

3.8x 4.0x3.6x 3.5x

3.9x 4.1x4.4x

5.0x 4.9x5.3x

4.4x

3.4x

4.2x

3.1x 3.2x 3.0x3.3x 3.4x

2.4x

3.9x4.4x

4.8x 4.6x

3.3x 3.1x 3.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 6/30/10

Total Debt / EBITDA Senior Debt / EBITDA

Middle-Market Credit Statistics

37

($ in thousands)3.0x 4.0x 5.0x

Valuation:TTM EBITDA $10,000 $10,000 $10,000Valuation Multiple 5.0x 6.6x 8.3xEnterprise Value $49,816 $66,421 $83,026

Sources & Uses:Debt $30,000 $40,000 $50,000Equity $19,816 $26,421 $33,026Total Capitalization $49,816 $66,421 $83,026

Equity Returns with 7.5% Annual Growth 25.0% 25.0% 25.0%

Equity Returns at $83MM Valuation with Less Debt 14.6% 19.0% 25.0%

Required Annual Growth to Satisfy Min 25% Equity Returns 19.2% 13.8% 7.5%

Total Leverage2x

Additional Leverage

67%Increase in Enterprise

Value

Use of Leverage in Recapitalization (Example)

38

Syndicated loans have decreased dramatically from the 2006/2007 time period.

The bond market, in particular the high-yield market, has rebounded strongly as investors are seeking higher yields in the historic low interest rate environment.

U.S. High-Yield Debt Issuance ($ in billions)

Source: Thomson Reuters

($ in billions)U.S. Syndicated Loans and Bonds

$1,673 $1,687

$764

$531

$1,191

$137 $136

$648

$-

$400

$800

$1,200

$1,600

$2,000

2006 2007 2008 2009

$ in

Bill

ions

Syndicated Loans Bonds

$34

$78

$57

$131 $138

$96

$146$136

$43

$147

$104

$0

$20

$40

$60

$80

$100

$120

$140

$160

2000 2001 2002 2003 2004 2004 2006 2007 2008 2009 1H2010

Debt Markets

Mergers & AcquisitionsMergers & Acquisitions

40

Although larger transaction volume was down considerably in 2009, transaction volume began rebounding in the later months of the year and is up significantly through June 2010.

Overall, the lowest end of the middle-market showed the most strength in the 2nd half of 2009. This trend has been primarily driven by the lack of syndicated financing for large size deals, making it easier

to finance smaller middle-market deals.

Sources: Dealogic and William Blair & Company

U.S. Middle-Market M&A Activity

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20092007-2009 % Change

6/30/09 YTD

6/30/10 YTD

6/30/09 - 6/30/10YTD % Change

< $50 MM 4,524 3,396 4,686 3,317 2,827 2,846 2,895 2,757 2,695 2,535 3,102 3,021 19.2% 1,531 2,487 62.4%$50-$250 MM 1,446 1,419 1,581 1,009 889 1,064 1,216 1,266 1,292 1,327 1,190 775 (41.6%) 341 494 44.9%

$250-$750 MM 429 527 512 296 289 314 403 425 533 624 417 267 (57.2%) 107 192 79.4%Total Deals 6,399 5,342 6,779 4,622 4,005 4,224 4,514 4,448 4,520 4,486 4,709 4,063 (9.4%) 1,979 3,173 60.3%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 6/30/09YTD

6/30/10YTD

# of

Tra

nsac

tions

< $50 MM $50-$250 MM $250-$750 MM

60% Increase

Middle-Market M&A Activity

41

During the first two quarters of 2010, the market displayed a heightened appetite for lower middle-market transactions as made evident by increased deal volumes.

M&A activity outlook over the next 6 to 12 months is expected to be positive due to:1. Resurgence in financial sponsor activity (to avoid return of un-invested funds).2. Corporations seeking growth through acquisitions.3. Increasing Debt/EBITDA multiples.

Sources: Dealogic and William Blair & Company

U.S. M&A Activity ($ in Billions)

$226

$181

$137 $157

$209

$274

$337 $353

$219 $209

$211 $159

$0

$50

$100

$150

$200

$250

$300

$350

$400

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 6/30/09YTD

6/30/10YTD

Average D

eal Value

Dea

l Vol

ume

> $750MM Middle-Market Undisclosed Average Deal Value

25% Decrease inAvg. Deal

Value

U.S. M&A Activity

42

Sources: William Blair & Company

Valuation Multiple -- Strategic vs. Financial Buyers

EV/EBITDA multiples were driven up in 2007 because buyers were able to maintain targeted returns with the use of leverage.

The 2009 M&A environment saw tighter credit conditions which forced buyers to use higher equity contributions in transactions – lowering valuation multiples.

Strategic Peak: 12.6x in Q3 2007

Financial Peak: 13.1x in Q4 2008

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009

Strategic Financial

Strategic vs. Financial Buyers – Valuation Multiple

43

Sources: William Blair & Company, PitchBook

% of M&A Deal Value -- Strategic vs. Financial Buyers

Strategic buyers have increased their acquisition activity relative to financial groups.

88% 88% 87% 82%

64%

81%93% 95% 91%

12% 12% 13% 18%

36%

19%7% 5% 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 6/30/09 YTD 6/30/10 YTD

Strategic Financial

Strategic vs. Financial Buyers – M&A Activity

ConclusionsConclusions

45

Representative Recent Transactions

46

U.S. economic challenges are structural vs. cyclicalDeleveraging process takes time

Formidable global competition

Demographics

Smaller is betterEasier to finance

Less “strategic” risk for buyer

Less integration risk for buyer

M&A activities (assuming no major economic shock) will accelerateOverhang of private equity

Strategic buyers (with record amounts of cash) will need acquisitions to offset slower organic revenue growth

Demographics

Be preparedEasier to slow process down than speed process up

React quicker to strategic or private equity inquiry

Audits, management, ownership transfers

Conclusions

www.boyarmiller.com

Real Estate FinanceThomas J. Melody – Jones Lang LaSalleManaging Director / Co-Head Capital Markets Real Estate Investment Banking

US Debt & Equity

September 2010

• It’s all about the banks (50%) and CMBS (20%)• Significant gap between bid and asking prices• 80% reduction in transaction volume (institutional

sales and financings) 2007-2010• Loan defaults/delinquencies continue to increase• Delays in working through distressed situations,

especially on large loans…restructures• Note Sales (performing/non-performing loans

and auction process) are increasing

How has the recession impacted the overall availability of capital for commercial real estate?

Commercial Banks, 51%

CMBS & CDO, 21%

Life Companies, 9%

Agency / GSE Portfolios, 9%

State & Federal Gov’t, 5%

Finance Companies, 5%REITs, 1% All Other, 2%

$3.4 trillion

Distressed property levels are highNet growth in level of outstanding troubled properties has at least temporarily stalled as lenders boost pace of workouts

Source: Real Capital Analytics, Jones Lang LaSalle

• Troubled deals are in “limbo”…owners cannot respond to tenants needs (new leases, TI’s, Commissions)

• The Restructured loans are primarily short term solutions and not a “fix”

• Financial Institutions do not want to foreclose

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

No

v-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun

-09

Jul-

09

Au

g-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-10

May

-10

Jun-

10

billi

ons

Troubled REO Restructured

Deleveraging has forced recapitalization

2004 – 2007• Value changes reflect NCREIF data

(adjusted 4 quarters to account for the lag in the index)

2010• 100% of the Equity & Mezz and $21.6 MM

of the B-Note of the 2007 deal is wiped out, as prices return to 2004 levels

• Borrower needs to invest 1.2x their original equity in order to refinance asset

ADDITIONAL EQUITY TO REFI DEAL: $5.0 MM

Source: Jones Lang LaSalle

$160 MM

$100 MM

2004 DEAL: $100.0 MM 2007 DEAL: $152.2 MM

LOST VALUE: $52.2 MM

EQUITY: $7.6 MM

NEW EQUITY: $5.0 MM

DEBT: $70.0 MM

B-NOTE: $42.6 MM

MEZZ: $22.8 MM

EQUITY: $25.0 MM

DEBT: $75.0 MM

EQUITY: $25.0 MM

A-NOTE: $79.2 MM

LOST VALUE: $52.2 MM

EQUITY: $7.6 MM

NEW EQUITY: $5.0 MM

DEBT: $70.0 MM

B-NOTE: $42.6 MM

MEZZ: $22.8 MM

EQUITY: $25.0 MM

DEBT: $75.0 MM

EQUITY: $25.0 MM

A-NOTE: $79.2 MM

2010 DEAL: $100.0 MM

• Recapitalization is a loan restructure, refinance and/or sale… 2004-2010!

• 35-40% value loss… depending when existing debt was placed, may not be possible to sell or refinance

• The issue: “value” has been the problem, not capital availability… hard to sell or refinance

• Today: “Tale of Two Cities”… Core assets in D.C., SF, NY, Boston and Houston faring very well thank you!

Source: Morgan Stanley, MBA, FDIC, FFIEC, Intex, PPR, and Jones Lang LaSalle

Commercial real estate debt maturities by lenderBank maturities dominate landscape and will be most challenged

• There is about $1.5 trillion of debt maturing in the next 3 years, $1 billion of which is banks debt

• Life Companies ($40 billion annually) and the GSE’s ($50 billion annually) will account for less than 20%

• There will be no option other than foreclosure or loan restructuring/modification for many loans

• GOOD NEWS: There is a lot of inexpensive debt/equity (L+ 250 or fixed at sub 6%) available with LTV up to 75%

-

100

200

300

400

500

600

2010 2011 2012 2013 2014

($ B

illio

ns)

Life Insurance Companies

GSEs

CMBS

Others (including pension funds)

Banks (construction loans)

Banks (income-producingproperties)

How and why are loans being restructured?

Source: Jones Lang LaSalle

• Start the process of talking with lenders well before problems occur!

• It depends on the lender: banks, life companies and CMBS (master/special servicers)

• Success in restructuring/modifying loans depends on a number of factors:

• Is the loan non-recourse or recourse?

• Is the loan “current”?

• How is the owner/sponsor viewed by the lender?

• What is the owner/lender relationship (bank lines or one off)?

• What is the owner/sponsor ability to “share in the pain”?

• What is the “size” of the loan and “magnitude” of the problem?

• Strategic Defaults: Borrowers with lots of cash option to default because it makes business sense

• Cost of Capital: pricing is as aggressive as it has ever been with fixed rate loans as low as 3.5% (5 year term) and LIBOR floaters at L+175

• Leverage: debt levels up to 85% LTV…depends on product, sponsor and market

• Capital Provides:

• Life companies/pension funds: Met Life, Cornerstone, TIAA

• German Banks: Deutsche Bank, West Immo, Helaba Bank

• Domestic Banks: Wells Fargo, JP Morgan, Bank of America

• Agencies: Fannie Mae and Freddie Mac, HUD

• Private Equity Funds: Blackstone, Blackrock, Fortress

• REITs: KBS, Starwood, Dividend Capital

• CMBS: Goldman Sachs, Barclay’s, Morgan Stanley

• Other: GE Capital, Mesa West, Apollo

Who are the lenders?

• Equity markets are “open” and off the sidelines…belief we are at the bottom

• Low cost of capital (debt and equity) “drives” value

• Roughly $250 billion of equity earmarked for real estate

• Everyone chasing CORE assets in select markets, and “distressed” asset plays with very high yields and low cost per pound

• Capital is tired of yielding less than 1%

• Institutional equity moves in “herd mentality”, and the herd is moving

What is happening in the equity markets?

Source: Bloomberg, Jones Lang LaSalle

0

200

400

600

800

1,000

1,200

1,400

7/6/

07

8/17

/07

9/28

/07

11/9

/07

12/2

1/07

2/1/

08

3/14

/08

4/25

/08

6/6/

08

7/18

/08

8/29

/08

10/1

0/08

11/2

1/08

1/2/

09

2/13

/09

3/27

/09

5/8/

09

6/19

/09

7/31

/09

9/11

/09

10/2

3/09

12/4

/09

1/15

/10

2/26

/10

4/9/

10

5/21

/10

7/2/

10

AAA 10-Year CMBS REIT Senior DebtA 10-Year Corporate

Rational pricing returning to market

• There has been a huge “spread” compression and this continues today

• Concern: money gets impatient when it is not deployed…are investors investing to invest or is there good reason?

• If spreads rise again there will be significant losses…cap rates definitely follow cost of debt

• Bank of America recently claimed that the 10 year treasury will be around 1.75% for a couple years

CMBS market slowly reemerging2010 issuance already exceeds 2009 with several deals upcoming

Source: Commercial Mortgage Alert, Jones Lang LaSalle; 2010 issuance is estimated

• CMBS was the “engine” that drove the RE market

• The banks and CMBS were part of an “assembly line”…CMBS stopped; the banks were left with the product

• The CMBS engine is again starting

• The deliverability of a CMBS loan is still less than other sources

• “The light at the end of the tunnel”…Goldman’s bonds were over-subscribed and traded at spreads lower than expected

• The emergence of new vintage CMBS results in the reduction in overall credit spreads

• Delinquency rates, according to Trepp LLC, rose to almost 9% in July 2010, the highest rate in the history of the CMBS industry

CMBS Issuance 1996 - 2010

$0

$23,500

$47,000

$70,500

$94,000

$117,500

$141,000

$164,500

$188,000

$211,500

$235,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(milli

ons)

Commercial RE Transaction volumes down 89% in 2009 from peakVolumes through first half of 2010 are well ahead of 2009 pace

Source: Real Capital Analytics, Jones Lang LaSalle

• Still a “product-starved” market

• Lots of debt and equity for CORE markets, stabilized product and/or great opportunities

• The market needs balance which will happen when RE is in new hands of new ownership

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Tran

sact

ion

Volu

me

in B

illio

ns

Cap rates have returned to 2004/2005 rangeOutlook is for bifurcated market with primary markets leading the charge

Source: Real Capital Analytics, Bloomberg, Jones Lang LaSalle

• Cap rates are declining and are very low for the top markets and the CORE product

• June 2010 market wide Cap rates were at 7.62%, well above the 6.39%of June 2007

• Note, there have been Cap rates/trades in the low 5% range & high 4% for CORE product

• Not likely that Cap rates will drop much further for CORE but may for other product

• RE fundamentals (consumer confidence and retail sales) declined in the second quarter

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%

9.50%

10.00%

10.50%

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Apartment Industrial Office Retail• Cap rates declined

from 2001-2007, increasing RE value without improved fundamentals

• Cap rates rose steadily over the past two years, however, we really do not know how high they went since very few trades

Bank charge-off rates: commercial vs. residentialCharge-off rates for CRE loans have now surpassed those at height of the S&L crisis

Source: Federal Reserve, Jones Lang LaSalle

• As you would suspect, “charge offs” with banks are climbing with increasing troubled assets

• A “charge off” is the first step toward balancing the asset/building’s capital structure to reflect the current marketplace

• Once this balancing occurs, the asset /building hold/sell/recapitalization decision is rational and “deal” will flow back into the marketplace

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

1991

Q4

1992

Q2

1992

Q4

1993

Q2

1993

Q4

1994

Q2

1994

Q4

1995

Q2

1995

Q4

1996

Q2

1996

Q4

1997

Q2

1997

Q4

1998

Q2

1998

Q4

1999

Q2

1999

Q4

2000

Q2

2000

Q4

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

Ove

rall

char

ge-o

ff ra

te, a

ll co

mm

erci

al b

anks

(%) Residential Charge-Off Rate Commercial Charge-Off Rate

• According to the WSJ (Sept. 1, 2010), more than 10% of US banks remain at risk of failure

• Banks won’t sell until they have accumulated enough reserves to withstand the losses they will incur and stop “extending and pretending”

• Small banks have more exposure to commercial RE with 40% of their bank loans

• Until the FDIC and the OCC are comfortable that the banking system can withstand the losses, they will continue to kick the can down the road

• Banks 2nd quarter profits totaled $22 billion, as compared to $4 billion in 2009…balance sheets have stabilized?

• Banks are willing to sell “distressed” assets, non-performing notes and smaller unattractive REO since values have bounced back from their lows

• The larger the loss, the longer the bank will try to extend

• Banks are utilizing the “Auction” process (JLL/REOs)

Source: July 2010 Commercial Markets: Publication 1941

When will banks begin to foreclose on their “broken” real estate loans and sell back to the market?

Take Aways:

Source: Federal Reserve, Jones Lang LaSalle

• Lots of capital for stabilized RE

• Declining fundamentals in second quarter

• Increasing values have resulted from low cost of capital

• Debt restructurings will continue

• Banks will begin to sell more notes and take losses

About Jones Lang LaSalleJLL is in business to develop enduring client relationships built on quality service, collaboration and trust. JLL creates and delivers real value for clients, shareholders and our own people.

• JLL is a financial and professional services firm specializing in real estate services and investment management.

• JLL has more than 30,000 people in 750 locations in 60 countries serve the local, regional and global real estate needs of clients.

• JLL assembles teams of experts who deliver integrated services built on market insight and foresight, sound research and relevant market knowledge.

• Real Estate Services: Agency Leasing, Consulting, Corporate Capital Markets, Investment Sales and Acquisitions, Real Estate Investment Banking, Project and Development Services, Property and Asset Management, Research, Tenant Representation, Valuation, Value Recovery Services

About Jones Lang LaSalle Capital MarketsJLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers

• JLL has in-depth local market and global investor knowledge — whether a sale, financing, repositioning, advisory or recapitalization execution.

• JLL Capital Markets completed more than $143 billion of transactions globally. In the last three years, JLL’s Capital Markets team comprises approximately 700 specialists, operating in 180 major markets worldwide.

About JLL Real Estate Investment Banking (REIB)JLL REIB is a trusted advisor who helps owner clients navigate the capital markets in order to ensure that clients make informed decisions as it relates to best capital solutions

• JLL REIB offers expertise in:

• Debt and equity capital raising

• Restructuring and recapitalization strategies

• Distressed asset workouts

• Valuation and strategic advisory

• Programmatic and asset specific joint ventures

• Equity “Fund” raising via JLL Securities

• Note sales

• Investment Sales

• Auction capabilities

• JLL REIB is headquartered in Houston with offices in New York, Washington D.C., Chicago, Los Angeles and Miami

www.boyarmiller.com

Commercial BankingSteve Stephens – Amegy Bank of TexasPresident

2010 Amegy Bank N.A. Member FDIC.

• FINANCIAL REFORM ACT IS THE PRICE FOR GOVERNMENT SUPPORT YET A HINDRANCE TO GROWTH

• MONEY TO LEND BUT LESS WILLING AND QUALIFIED TAKERS

• SMART TO BE CAUTIOUS, DANGEROUS TO BE OVERLY PESSIMISTIC


FINANCIAL REFORM ACT IS THE PRICE FOR GOVERNMENT SUPPORT YET A HINDRANCE TO GROWTH

• The key implications of the Frank-Dodd Financial Reform Act are growth limits on the largest banks, less leveraging of industry, increased regulatory compliance burden, new consumer protection laws, and better FDIC insurance coverage.

• Outside reform act, the national and state regulatory agencies continue to examine banks’ credit quality and require adequate capital and loss reserves. To date, the large banks have received the most scrutiny.

• All banks are in various stages of recovery from credit problems. The good news is most banks have built up meaningful loss reserves from operations and capital markets to offset growing losses and resume lending.

Dodd-Frank Wall Street Reform and Consumer Protection Act


• New Financial Stability OversiteCouncil created

• Designates “systemically important”financial companies

- Automatic for all BHCs of $50+ B assets*

- Non-bank financial companies specifically identified

• Federal Reserve assesses “systemic regulation fees”

* Includes off-balance sheet assets

• Federal Reserve required to establish enhanced risk-based capital, leverage, liquidity, overall risk management requirements, credit exposure reporting for systemically important firms.

- Must be more stringent than standards applicable to non-systemically important firms.

- Fed is permitted to require “contingent capital”

- Firms must have Resolution Plans (“Living Wills”)

- Firms must have “Risk Committee of the Board

Systemic Risk Regulation


• Prohibits any banking entity from engaging in proprietary trading, or sponsoring or investing in a hedge fund or private equity fund.

• Exceptions:- Treasuries, Agencies, Munis- Risk-mitigating hedging- Trades “on behalf of customers”- SBIC investments- Selling or securitizing loans

• Establishes current bank capital standards as statutory “floors”

• U.S. regulators could not implement any Basel III standards that are less stringent

• Potentially higher capital requirements for firms with significant volumes of derivatives activity, securitized products, and assets for which reported values are model-based

• Hybrid capital, e.g., trust preferred securities disallowed as Tier 1 capital for BHCs of >$15B in assets. Existing TRUPS phased out 2013-2016.

The Volker Rule Bank Capital (Collins Amendment)


• New Executive Compensation requirements– All Comp Committee members must be independent– Stricter determination of comp consultant independence– Pay and Performance disclosure: Disclose relationship between a company’s

executive compensation actually paid and its financial performance– Internal Pay Equity disclosure: Disclose median compensation of all employees

(ex-CEO) compared to CEO– Broker discretionary voting eliminated for directors, exec comp or any other

“significant matter” as determined by SEC– Say on Pay and Say on Golden Parachutes: non-binding shareholder votes

required– Clawback: required disclosure of incentive compensation based on publicly

reported financial results, and pay clawback policies following restatement– Financial institutions: additional statutory compensation disclosures (appear to

be similar to what already is required by TARP and Fed)

Investor Protection


• Assessment based on assets minus tangible equity, rather than deposits (shifts burden toward larger banks)

• Minimum FDIC reserve ratio increased to 1.35% of insured deposits (up from 1.15%).

• Effect of increased assessments must fall on banks larger than $10 B in assets.

• Maximum deposit insurance amount permanently increased to $250,000.

• Non-interest bearing transaction account balances fully insured up to any amount through 2012.

• Counter-cyclical capital and leverage requirements: banking regulators must require higher capital in times of economic expansion and lower capital in times of economic contraction.

• Expansion of nationwide deposit cap: 10% cap is now based on all insured depository institutions.

• New liability concentration cap: No financial company can acquire another if its resulting total consolidated liabilities would exceed 10% of aggregate liabilities of all financial companies.

• “Source of Strength” doctrine: now established by statute.

FDIC Insurance Reforms Regulation of Bank...Institutions


• New Federal agency with very broad powers and a substantial budget– Within the Federal Reserve, but completely autonomous– Exclusive rulemaking, examination and primary enforcement authority under

Federal consumer financial law for banking organizations with assets > $10 B– For smaller institutions, prescribes rules, may participate in examinations, but

has no enforcement authority– Budget = 10% of Fed’s total operating budget, plus an additional $200 million if

the Bureau Director determines that it is inadequately funded• Rules may only be set aside by 2/3’s vote of 15 person Financial Stability Council (Chair is this Bureau is one of the 15)

• OCC Federal preemption of state consumer laws is weakened.• States attorneys-general may bring civil action against national banks to enforceregulations prescribed by the Bureau

• Bureau is authorized to prohibit or limit mandatory pre-dispute arbitration provisions

Bureau of Consumer Financial Protection


• Interchange fee regulation: Federal Reserve must prescribe regulations requiring that interchange transaction feed must be “reasonable and proportional to the cost of the card network’s expense for processing the transaction, include the cost of fraud to card issuers.

• Paying interest on commercial DDA accounts will become legal.• Rating Agency ratings: appears to direct bank regulatory agencies to develop credit standards that do not reference rating agency ratings, but the summaries that we have are not clear.

Other Notable Provisions

2010 Amegy Bank N.A. Member FDIC.All FDIC Insured Institutions


Reserve Coverage Ratio*

2007-2010*Loan-loss reserves to

noncurrent loans.

The industry's "coverage ratio" of reserves to noncurrent loans improved for a second consecutive quarter, from 64.9 percent to 65.1 percent, as the decline in noncurrent loans outpaced the reduction in loss reserves.

All FDIC Insured Institutions


MONEY TO LEND BUT LESS WILLING AND QUALIFIED TAKERS

• Broad financial deleveraging combined with regulatory impact create significant loan and fee revenue pressure for banks.

• Bank credit is contracting at an unprecedented 15% annual rate as lenders sit on a record $1.3 trillion of cash.

• Banks are anxious to lend money. Yields on investment securities are unattractive and, contrary to public perception, it is punitive for banks to invest deposits in fed funds at .25% when their direct costs are well in excess of that.

• Banks’ enthusiasm to lend is tempered by more restrictive underwritingtests to prove cash flow capacity to service debt.


Problem C&I Loans by Market Segment

Includes loans rated special mention, substandard, doubtful and loss


• 707 financial institutions received TARP funds.

• $245 billion in TARP funds were distributed to banks in FY2009.

• Through May, 2010, TARP repayments totaled about $194 billion, surpassing the outstanding TARP funds by $4 billion.

• The projected lifetime cost of the TARP program has decreased by $11.4 billion to $105.4 billion since the FY2011 President's Budget.

Troubled Asset Relief Program (TARP)

TAR

P Fu

nds

Loans Outstanding

Loans Repaid

$190 billion

$194 billion


Federal Deposit Insurance CorporationEquity Capital

FDIC-Insured Commercial Banks United States (50 states and DC)

Balances at Year End, 1966 - 2009 (Dollar amounts in thousands)

$1,135,571,923 7,2832007

$1,147,063,944 7,0862008

$1,303,870,821 6,8392009

Total Equity CapitalNo. of InstitutionsYear


SMART TO BE CAUTIOUS, DANGEROUS TO BE OVERLY PESSIMISTIC

• Unlike the 1980s, Houston is relatively well-positioned to withstand economic stress. Two of the primary reasons are a quicker rebound of energy prices in this cycle and a faster and more successful response by the business community to changing conditions.

• Similar to the 1980s, Real Estate exposure is biggest concern in banks, yet better contained.

• The business community must strive for a good balance between caution about the economy and confidence to invest and expand. Money velocity (the average frequency of money spent) must increase by private sector to avoid inflationary surplus money supply, or worse, a downwarddeflationary spiral.


Questions & Answers

Business

BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2010