U.S.

Convertible Research EQUITY RESEARCH

State of the Convert Market - Category 5

Venu Krishna, CFA
Tel: 212-526-7328
October 7, 2008
Manoj Shivdasani, CFA
Tel: 212-526-5995

William Gioielli
Tel: 212-526-6379

Barclays Capital Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Barclays Capital Inc. in the United States can receive independent, third-party research on the company or companies covered in
this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can
call 1-800-253-4626 to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 44 AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 44
Table of Contents

I. Macro Economic Backdrop

II. Convert Market Performance

III. Valuation Leak

IV. Technicals

V. Primary Issuance

VI. Volatility Trends

VII. Credit Trends

VIII. Market Structure

IX. Positioning

2
Macro Economic Backdrop

3
Unprecedented Macro Weakness – Equities Sell-Off Dramatically, Valuations
Lower But Value Call Elusive

ƒ S&P 500 down 29.8% from its 10/07 highs. Equity forward P/Es are low relative to historical trend – suggesting value
ƒ However, value call elusive given earnings growth and recession fears.
ƒ $700 billion TARP bailout appears to be a necessary but insufficient plan to prop up the markets
ƒ Global decoupling clearly hasn’t panned out and world markets are mired collectively. On a positive note, it appears
that coordinated global intervention is likely to try and thaw the credit freeze and the issue is front and center at the
highest political and economic levels globally.

S&P 500 Price Graph S&P 500 Forward P/E

1600 32

1500 30

28
1400
26
1300
24
1200
22
1100
20
1000
18
900 16
800 14

700 12
Jan 98

Jan 99

Jan 00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Apr 00
Aug 00

Apr 01

Apr 03
Aug 03
Jul 98

Jul 99

Jul 00

Jul 01

Jul 02

Jul 03

Jul 04

Jul 05

Jul 06

Jul 07

Jul 08

Dec 99

Dec 00

Aug 01
Dec 01
Apr 02
Aug 02
Dec 02

Dec 03
Apr 04
Aug 04
Dec 04
Apr 05
Aug 05
Dec 05
Apr 06
Aug 06
Dec 06
Apr 07
Aug 07
Dec 07
Apr 08
Aug 08
Source: Barclays Capital, Factset.
4
Money Market Assets Rise Sharply as Risk Aversion Remains High, Earnings
Expectations Revised Lower
Money Market Assets as a Percent of S&P 500 Market Cap

40% 1600
35% 1500
1400
30% 1300
25% 1200
20% 1100
1000
15% 900
10% 800
May 00
Aug 00
Nov 00
Feb 01
May 01
Aug 01
Nov 01
Feb 02
May 02
Aug 02
Nov 02
Feb 03
May 03
Aug 03
Nov 03
Feb 04
May 04
Aug 04
Nov 04
Feb 05
May 05
Aug 05
Nov 05
Feb 06
May 06
Aug 06
Nov 06
Feb 07
May 07
Aug 07
Nov 07
Feb 08
May 08
Aug 08
Money Market as % of SPX Market Cap S&P 500

Q3 08 S&P 500 Ex Fin. Earnings Growth Q4 08 S&P 500 Ex Fin. Earnings Growth
Expectations Expectations

14% 18%

16%
12%
14%

12%
10%

10%

8% 8%
08/01 08/08 08/14 08/22 08/29 09/12 09/19 09/26 08/01 08/08 08/14 08/22 08/29 09/12 09/19 09/26

Source: Barclays Capital.

5
 3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
40
45
50
55
60
65
Jan 01 Jan 01

May 01 May 01

Sep 01 Sep 01

Jan 02 Jan 02

May 02 May 02

Sep 02 Sep 02

Jan 03 Jan 03

May 03 May 03

Sep 03 Sep 03

Jan 04 Jan 04

May 04 May 04

Sep 04 Sep 04

Jan 05 Jan 05

May 05 May 05

to 2003 Highs
Sep 05 Sep 05

Jan 06 Jan 06

May 06 May 06

Sep 06 Sep 06

Jan 07 Jan 07

May 07 May 07

Sep 07 Sep 07
ISM Manuf. PMI – Dropping to Post 9/11 Levels

US Unemployment Rate – Increased Sharply Close

Jan 08 Jan 08

May 08 May 08

Sep 08

0
20
40
60
80
100
120
140
150
200
250
300
350
400
450
500

Jan 01 Jan 01
May 01 May 01
Sep 01 Sep 01
Jan 02 Jan 02
May 02 May 02
Sep 02 Sep 02
Jan 03 Jan 03
May 03 May 03
Sep 03 Sep 03
Jan 04 Jan 04
May 04 May 04
Sep 04 Sep 04
Jan 05 Jan 05
May 05 May 05
Sep 05 Sep 05
Jan 06
on Growth Concerns

Jan 06
May 06 May 06
Macro Indicators Kindle Recession Fears; Economy Front and Center

Sep 06 Sep 06
Jan 07 Jan 07
May 07 May 07
Consumer Confidence – Near Multi Year Low

Sep 07 Sep 07
RJ/CRB Commodity Price Index – Sharp Declines

Jan 08 Jan 08
Source: Barclays Capital.

May 08 May 08
Sep 08 Sep 08
6
 0
50
100
150
200
250
300
350
400
450

0
20
40
60
80
100
120
140
160
Sep 98
Sep 98
Mar 99
Mar 99
Sep 99
Sep 99
Mar 00
Mar 00
Sep 00
Sep 00
Mar 01
Mar 01
Sep 01
Sep 01
Mar 02
Mar 02
Sep 02
Sep 02
Mar 03
Mar 03
Sep 03
Sep 03
Mar 04
Mar 04
Sep 04
Sep 04
Mar 05
Mar 05
Sep 05
Sep 05
Mar 06
Mar 06
Sep 06
Sep 06 3yr Swap Spreads – Significantly Wider
Mar 07
Mar 07
Sep 07
Lehman US Credit Index – Inv Grade Now at Pre-
Crisis High Yield Levels & Much Higher Than 2002

Sep 07
Mar 08
Mar 08
Sep 08
Sep 08

0
50
100
150
200
250
0
200
400
600
800
1000
1200

Dec 01
Sep 98
Apr 02 Mar 99

Aug 02 Sep 99

Dec 02 Mar 00

Apr 03 Sep 00

Aug 03 Mar 01

Dec 03 Sep 01

Apr 04 Mar 02

Aug 04 Sep 02

Dec 04 Mar 03

Apr 05 Sep 03

Aug 05 Mar 04

Dec 05 Sep 04

Apr 06 Mar 05

Aug 06 Sep 05
As Credit Continues Its Dramatic Selloff and Conditions Deteriorate…

Dramatically, Near 2002 Levels

Dec 06 Mar 06

Sep 06
Apr 07
3M LIBOR OIS – Reflecting Market Fears

Mar 07
Aug 07
Lehman HY Index OAS – Continues to Widen

Sep 07
Dec 07
Source: Barclays Capital.

Mar 08
Apr 08
Sep 08
7

Aug 08
…Volatility Spikes Higher
ƒ The S&P 500 12M ATM Implied Vol has spiked and is now at 29 % close to its 2002 highs of 30.3%
ƒ The table below shows the significant increase in single name listed volatility over the past few months
ƒ The skew is quite flat (see S&P 500 3M skew trend) in spite of the magnitude of equity declines. This has been a
common theme this year suggesting that the market is positioning for violent rallies.
ƒ Term structures at least at the index level are close to their most inverted in the last decade (only three comparable
cases).
ƒ While the VIX is at its highest levels since 1990, implied correlation while climbing higher isn’t near its peak.
suggesting that the market is factoring in a fair bit of idiosyncratic risk.

S&P 500 12M ATM Implied S&P 500 12M ATM Imp Vol Change

35%
S&P 500 12M S&P 500 12M
30% ATM Imp Vol ATM Imp Vol
5/15/08 10/2/08 Change
25% 25th Percentile 27.2 37.3 10.1
Mean 35.0 50.7 15.8
20% Median 33.2 47.2 14.1
75th Percentile 39.6 58.8 19.2
15%

10%
Jan 00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08
Jul 00

Jul 01

Jul 02

Jul 03

Jul 04

Jul 05

Jul 06

Jul 07

Jul 08

Source: Barclays Capital.

8
 15%
17%
19%
21%
23%
25%
27%
29%
31%
33%

0%
10%
20%
30%
40%
50%
60%
70%
Jan 07
Feb 00
Feb 07
Jun 00
Mar 07
Oct 00
Feb 01 Apr 07
Jun 01 May 07
Oct 01
Jun 07
Feb 02
Jul 07
Jun 02
Oct 02 Aug 07

21%
Feb 03 Sep 07
Jun 03
Oct 07
Oct 03
Nov 07
Feb 04
Jun 04 Dec 07

Oct 04 Jan 08
Feb 05
Feb 08
S&P 500 3M Skew

Jun 05
Mar 08
Oct 05
Feb 06 Apr 08

26%
Jun 06 May 08
Oct 06
Jun 08
Feb 07 S&P 500 3M & 12M Implied Correlation
Jul 08
Jun 07
Oct 07 Aug 08

Feb 08 Sep 08
Jun 08
Oct 08
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%

0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00

Jan 00 Jan 96
Jul 96
Jul 00
Jan 97

Jan 01 Jul 97
Jan 98
Jul 01
Jul 98

Jan 02 Jan 99
Jul 99
Jul 02
Jan 00

Jan 03 Jul 00
Jan 01
Jul 03
Jul 01

Jan 04 Jan 02
Jul 02
Jul 04
3M plot)

Jan 03
VIX Index

Jan 05 Jul 03
Jan 04
Jul 05
Jul 04

Jan 06 Jan 05
Jul 05
Jul 06
Jan 06

Jan 07 Jul 06
Jan 07
Jul 07
S&P 500 3M – 12M Term Structure (12M minus

Jul 07
Source: Barclays Capital.
Skew Quite Flat, Term Structure Inverted, Implied Correlations Climb Higher

Jan 08 Jan 08
Jul 08
9

Jul 08
Economic Outlook Weakens With GDP Growth Decelerating
ƒ Clearly we are in a weak macro environment
ƒ Our Economists (Ethan Harris’ Team) are forecasting a Real GDP growth rate of 1.8% in 2008 and just 0.8% in 2009.
They expect the Fed Funds rate to be cut to 1.25% in 2009 and 10 Year yields to climb back to 4%.

Barclays Capital Economic Forecasts

2Q08 3Q08E 4Q08E 1Q09E 2Q09E 2004 2005 2006 2007 2008E 2009E
Real GDP 3.3 1.5 (0.5) (0.5) 1.0 4.2 3.2 2.9 2.0 1.8 0.8

Core C PI 2.3 2.5 2.5 2.4 2.5 1.8 2.2 2.5 2.3 2.4 2.2

Fed Funds Rate 2.00 2.00 1.75 1.25 1.25 2.25 4.25 5.25 4.25 1.75 1.25

10-year Treasuries 3.97 3.50 3.50 3.70 3.80 4.16 4.39 4.70 4.02 3.50 4.00

Source: Barclays Capital Economics Team.

10
Convert Market Performance

11
Challenging Return Environment – Outright & Arbitrage

ƒ The past 12M has been very challenging for the convert market reflecting broader equity and credit weakness
ƒ Since Oct 07, the market has had 10 ‘down’ months with several precipitous monthly declines. September 2008 has
been especially tough with an outright decline of 13.1% (the highest monthly decline since we’ve started tracking the
returns (Jan ‘03).
ƒ Arbitrage returns have been fairly weak too and while September 2008 data is not yet available going by past history
the poor outright returns seen last month don’t bode well for arbitrage returns in our opinion.

Monthly Total Returns of the Convert Market

6% 4.7%

4% 2.1%2.0%
1.3% 1.7%
2% 0.8%

0%
-0.3% -0.3%
-2% -1.0% -1.4% -1.4%
-0.5%
-0.8% -1.2%
-1.7%
-2.4% -2.3%
-4% -3.4% -2.8% -2.8%
-4.2% -4.3%
-6%
-8%
-10%
-12%
-14% -13.1%
Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08
LEH Cvt Composite HFRI Index

Source: Barclays Capital, Hedge Fund Research.

12
This Year’s Been Ugly
ƒ In 2008 YTD (as of 4/21/08), the US convertible market declined by 18.94% only slightly better than the S&P 500 (-
19.29%).
ƒ At the beginning of 2008 the market had a delta of 60.8% and the atypical near 100% downside participation was
due to the credit sell off (IG down 6.83% and HY down -10.08%)
ƒ Clearly this year convertibles haven’t dampened downside risk as one would have expected (additional reasons
discussed later)
ƒ 2008 YTD the convert arb strategy has dramatically underperformed other hedge fund strategies due largely to the
credit weakness (unstable bond floors wrecking the convert arb strategy)
ƒ Note the strong outright performance in 2006 after the decline during the 2005 sell-off and in 2003 after the tech
bubble crash.

Outright Returns Hedged Strategy Returns

2008 2008
YTD 2007 2006 2005 2004 2003 YTD* 2007 2006 2005 2004 2003
Lehman U .S. Convert Composite (18.94) 5.62 13.33 2.02 9.61 27.68 HFRX Convertible Arbitrage (24.45) (0.95) 9.57 (5.69) (0.14) 8.85

S&P 500 (19.29) 5.49 15.79 4.91 10.87 28.68 HFRX Distressed Securities (7.92) 3.99 9.56 1.21 8.95 20.90
Russell 2000 (10.38) (1.56) 18.44 4.63 18.44 47.29 HFRX Equity Hedge (13.61) 3.21 9.23 4.19 2.18 14.47
Nasdaq (20.64) 10.65 10.39 2.13 9.15 50.77 HFRX Equity Market Neutral 0.10 3.11 4.76 0.21 0.32 (2.38)
Lehman U.S. High Yield (10.08) 1.87 11.85 2.74 11.13 28.97 HFRX Event Driven (12.72) 4.88 10.32 2.81 6.93 18.74
Lehman U.S. Credit (6.83) 5.11 4.26 1.96 5.24 7.70 HFRX Macro 2.59 3.19 5.61 6.67 (0.32) 14.61

7-10yr Treasury 5.14 10.20 2.67 2.43 4.41 1.88 HFRX Merger Arbitrage 1.18 4.85 10.73 3.72 2.80 4.26
HFRX Relative Value Arbitrage (18.87) 5.80 10.65 (0.97) 1.98 9.15

* Most recent data available

Past Performance is No Guarantee of Future Results

Source: Barclays Capital, Hedge Fund Research.

13
Weakness Across All Sectors as Convert Market Value Collapses Dramatically
ƒ Year to date all sectors in the convert market have declined. Basic Industry, Financials and Consumer Cyclical were
particularly affected. Convert market cap has declined from $372.3 billion on 5/15/08 to $275.1 billion on 9/30/08
ƒ Note the precipitous declines for preferreds and mandatories which has significant Financials representation
ƒ Returns have been weak across the credit spectrum in 2008 YTD. Investment grade returns were skewed to the
downside due to the presence of several IG financial preferreds/mandatories.
Convert Market Performance Breakdown – Lehman Brothers US
Market Breakdown 5/15/08 Convert Composite (9/30/08)
Mkt Val % of Mkt Val % of 2008 YTD 2007 Total 2006 Total 2005 Total 2004 Total
Index/Sub Index ($Bln) Index Index/Sub Index ($Bln) Index Return Return Return Return Return
Lehman Convertible Compos $372.3 100% Lehman Convertible Composite $275.1 100% (18.9) 5.6 13.3 2.0 9.6
Type
Type
Cash Pay Bonds $206.8 75% (12.6) 5.3 13.3 1.5 8.4
Cash Pay Bonds $264.9 71% Zero Cpn/OID $12.9 5% (7.1) 0.9 8.6 0.6 9.2
Zero Cpn/OID $19.4 5% Preferreds $38.7 14% (32.3) 6.7 18.9 (0.9) 7.7
Preferreds $56.7 15% Mandatories $16.7 6% (48.3) 12.0 14.9 11.8 17.2
Mandatories $31.3 8% Credit Quality
Credit Quality Investment Grade $96.9 35% (20.6) 6.6 9.1 1.4 5.6
Investment Grade $130.5 35% Intermediate Grade $74.9 27% (21.8) 7.8 15.4 3.2 13.6
Junk $22.2 8% (27.9) (2.1) 29.1 (6.7) 16.1
Intermediate Grade $98.4 26%
Non-Rated $81.1 29% (11.4) 4.9 12.6 3.9 9.5
Junk $29.2 8% Sector
Non-Rated $114.2 31% Basic Industry $14.8 5% (31.6) 45.4 27.4 16.9 10.4
Sector Cap Goods $11.4 4% (11.1) 21.4 10.4 (3.5) 16.7
Basic Industry $23.6 6% Communications $17.1 6% (15.5) (2.9) 15.0 (0.0) 10.1
Cap Goods $15.3 4% Consumer Cyclical $16.9 6% (24.9) (0.7) 24.7 (14.9) 3.8
Communications $19.6 5% Consumer Noncyclical $54.9 20% (7.1) 6.0 7.2 3.9 10.0
Energy $12.7 5% (13.5) 24.8 14.2 20.1 9.8
Consumer Cyclical $25.7 7%
Technology $45.8 17% (18.2) 4.7 11.0 1.0 6.6
Consumer Noncyclical $59.0 16% Transport $5.8 2% (15.8) (9.2) 26.7 3.2 0.5
Energy $22.2 6% Industrial Other $3.8 1% (5.4) 17.9 11.8 (10.5) 6.6
Technology $62.6 17% Utilities $16.2 6% (17.4) 22.7 11.0 11.1 22.2
Transport $6.7 2% Finance Institutions $66.2 24% (26.7) (5.0) 12.1 5.9 10.8
Industrial Other $4.0 1%
Utilities $23.7 6%
Finance Institutions $103.3 28%

Source: Barclays Capital.

14
Valuation Leak

15
Convertible Asset Class – In a Perfect Storm

Equities
Plummeting

Credit
Redemptions
Significantly
Liquidity Scarcer
Wider

Short Sale Rule Financial

Funding Higher Pfd/Mandatories
Borrow Difficult Collapsing

De-Levering
Flight to Quality

Source: Barclays Capital.

16
Valuation Dampens Amidst Credit Downturn and Technical Selloff…

ƒ The current market decline has proven worse for the convert market than many we have tracked in
the past. During the 5/15/08 – 9/30/08 period our delta neutral analysis estimates that of the 513
securities, the market has leaked $11.6B in value
ƒ We estimate the downside participation of the current decline at 84% vs. an estimated delta of 55%.

Recent Performance vs. Historical Sell-Offs Delta Neutral Analysis

12/31/04 - 7/19/07 - 11/09/07 - 05/15/08 -

12/31/04 - 7/19/07 - 11/09/07 - 05/15/08 - $ in Billions 5/13/05 7/27/07 4/14/08 09/30/08
5/13/05 7/27/07 4/14/08 09/30/08
Securities 536 665 459 513
# of Securities 752 802 751 753
Mkt Val Beginning $213.3 $296.9 $216.2 $253.5
Change in Mkt Val ($27.8) ($15.4) ($21.5) ($81.3)
Mkt Val Ending $189.5 $283.7 $206.2 $197.4
Percent Change (9.9%) (4.4%) (6.8%) (24.0%)
Dollar Neutral Estimate $196.5 $283.6 $204.4 $209.0
Parity Value Percent Change (11.7%) (8.4%) (12.1%) (28.6%)
Est. Value Leak $7.00 ($0.03) ($1.74) $11.63

Change in Premium ($2.6) $9.1 $8.1 ($7.7) Premium Beginning $38.5 $42.9 $32.4 $46.3
Change in % Premium 2.8% 5.2% 7.7% 8.6%
Premium Beginning 22.0% 16.9% 17.6% 22.4%

Downside Participation 84.0% 52.7% 56.3% 83.8% Premium Ending $36.7 $48.1 $35.3 $43.6
Avg. Beginning Delta 61% 68% 55% 55% Premium Ending 24.0% 20.4% 20.7% 28.3%

Est. Dollar Neutral Premium $43.7 $48.1 $33.6 $55.2

Est. Dollar Neutral Premium 28.6% 20.4% 19.6% 35.9%

Premium Leak $7.0 ($0.0) ($1.7) $11.6

Premium Leak 4.6% (0.0%) (1.0%) 7.6%

Source: Barclays Capital.

17
Many Securities Trading Below Dollar-Neutral Levels Despite Dramatic Stock
Declines Defying Traditional Convexity…

ƒ We compare the security level valuation leak during the current sell-off with that of what happened in the past.
ƒ Our analysis included a total of 513 typical and equity sensitive securities excluding mandatories
ƒ Relative to its dollar neutral estimates which we believe should be a conservative estimate of downside value –
especially for sharp equity declines, only 37% have retained value. 165 securities lost between 0 to 5 points, 124
securities lost between 5 and 10 points and 35 securities lost greater than 10 points.
ƒ The analysis clearly shows the value leak in the convertible market.

Delta Neutral Points Leaked (Typical & Equity Sensitive Converts, Excluding Mandatories)

$ Billions
500 472
450
400
350
300
250 225
192 189
200 165
150 112 124 124

100
45 35
50
0 1
0
> 10 Points 5 to 10 Points 0 to 5 Points Retained Value

12/31/04 - 5/13/05 7/19/07 - 7/27/07 5/15/08 - 9/30/08

Source: Barclays Capital.

18
As Converts Underperform Relative to Expectations this Year

ƒ Model explains returns of US Convertible Composite using equity returns (S&P 500, Russell 2000), credit spreads (LEH
US Credit) and equity volatility (wt. avg. 24-month listed vol of SPX constituents)
ƒ Cumulative deviations from fair value provide a measure of relative performance of converts
ƒ Throughout 2007, converts held up better than expected given changes in credit spreads, equity returns and equity
volatility
ƒ But much of the outperformance has been reversed during the recent selloff

Cumulative Convertibles Outperformance

Relative to Expected Performance (Equities,
US Convertibles vs. Expected Returns Equity Volatility and Credit)

10%
5%

4%
5%
3%

0% 2%

1%

-5% 0%

-1%
-10% -2%

-3%
-15%
-4%
Jan 03

Apr 03

Oct 03

Jan 04

Apr 04

Oct 04

Jan 05

Apr 05

Oct 05

Jan 06

Apr 06

Oct 06

Jan 07

Apr 07

Oct 07

Jan 08

Apr 08
Jul 03

Jul 04

Jul 05

Jul 06

Jul 07

Jul 08

Jan 03

Apr 03

Jul 03

Oct 03

Jan 04

Apr 04

Jul 04

Oct 04

Jan 05

Apr 05

Jul 05

Oct 05

Jan 06

Apr 06

Jul 06

Oct 06

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08
US Convertibles Expected Returns

Source: Barclays Capital.

19
 The Rise and Fall of Financial Convertible Preferreds/Mandatories Severely
Impacted the Convert Market…
ƒ Several large cap Financials tapped the convertible preferred/mandatory market over the past year. Of the $61.9 billion
new issuance this year 60% ($37.2 billion) was from Financials.
ƒ Compared to the cumulative face value of $45.3B the market value of these securities stands at just $17.3B ($28.0B loss)
ƒ Significant value destroyed through the Financials as markets turned south (see table below, >500MM face)
ƒ While equity and credit has impacted the convert market, these financial recap issues have only deepened the woes

Financial Preferred Value Destruction Examples of Financial Pfd Performance

Current Value
Issue Size Mkt Cap Drop C onvert Current
Counter CUSIP Ticker Issuer Coupon Issue Date ($MM) ($MM) ($MM) Price Stock Price Yield Premium OAS
Preferreds
Citi 6.5% Pfd
9006506 939322848 WM Washington Mutual 5.375 04/24/01 1,150 24 1,126
9008644 846048205 SOV Sovereign Bancorp Inc. 4.375 02/19/04 800 298 502
01/18/2008 $50.00 $16.44 6.50 27.8 513
9009747 313586810 FNM Fannie Mae 5.375 12/30/04 2,500 25 2,475 10/01/2008 $39.30 $20.51 8.27 29.3 1,242
9013728 939322814 WM Washington Mutual 7.750 12/12/07 3,000 7 2,993
9013837 172967598 C Citigroup 6.500 01/18/08 3,169 2,491 678 BofA 7.25% Pfd
9013867 060505682 BAC Bank of America 7.250 01/25/08 6,900 5,770 1,130 01/25/2008 $1,000.00 $40.00 7.25 25.0 442
9014175 52523J453 LEH Lehman Brothers 7.250 04/01/08 4,000 2 3,998 10/01/2008 $836.20 $35.00 8.67 19.5 1,105
9014258 929903219 WB Wachovia Corp. 7.500 04/14/08 4,025 1,531 2,494
9014270 446150401 H BAN Huntington Bancshares 8.500 04/17/08 569 481 88
9014287 125581603 CIT CIT Group 8.750 04/23/08 575 363 212
9014542 493267405 K EY KeyCorp 7.750 06/13/08 658 603 54
9014556 316773209 FITB Fifth Third Bancorp 8.500 06/19/08 1,108 1,184 (77)
Mandatories
9010172 59156R702 M ET MetLife Inc. 6.375 06/16/05 2,070 1,093 977
9010617 G98255121 XL XL Capital 7.000 12/07/05 745 211 534
9013493 125581405 CIT CIT Group 7.750 10/18/07 690 224 466
9013791 78442P700 SLM SLM Corp 7.250 12/28/07 1,150 735 415
9014348 524901303 LM Legg Mason 7.000 05/07/08 1,150 752 398
9014356 313586745 FNM Fannie Mae 8.750 05/09/08 2,588 120 2,467
9014364 026874115 AIG American International Grou 8.500 05/13/08 5,880 627 5,253
9014502 52520W218 LEH Lehman Brothers 8.750 06/09/08 2,000 119 1,881
9014672 G98255600 XL XL Capital 10.750 07/29/08 575 622 (47)
TOTAL 45,300 17,283 28,018

Source: Barclays Capital.

20
Autos: U.S. Light Vehicle Sales Continue to Fall as Consumers Retreat and
Financing Becomes Harder…

U.S. Light Vehicle Sales

20

18 R2 = 62%

16
SAAR (mil)

14

12
Peak Trough Contraction
December 1969(IV) November 1970 (IV) 11
November 1973(IV) March 1975 (I) 16
10 January 1980(I) July 1980 (III) 6
July 1981(III) November 1982 (IV) 16
July 1990(III) March 1991(I) 8
March 2001(I) November 2001 (IV) 8
8
Jun-67
Jun-68
Jun-69
Jun-70
Jun-71

Jun-72
Jun-73
Jun-74
Jun-75
Jun-76
Jun-77

Jun-78
Jun-79
Jun-80

Jun-81
Jun-82

Jun-83
Jun-84
Jun-85
Jun-86
Jun-87
Jun-88
Jun-89

Jun-90
Jun-91
Jun-92
Jun-93
Jun-94
Jun-95

Jun-96
Jun-97

Jun-98
Jun-99
Jun-00

Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06

Jun-07
Jun-08
SAAR Log. (SAAR)

Source: Barclays Capital.

21
Dragging 2 Big Components of the Convert Market (Ford and GM) Lower

ƒ Nearly $6 billion in market value wiped out between the Ford and GM converts.
ƒ The 5 large auto converts with a total face of ~$16 billion currently have a market value of ~$8 billion

Auto Convert Performance

Cvt Actual Cvt Percent Market Current YTM / Yrs to Put /

Price Price Stock Price Value ($MM) Yield (%) YTP / CY Maturity Delta Premium OAS* Delta Years to Put
F 4.25% due 2036
05/15/2008 $109.52 109.52 $8.17 5,421 3.88 3.88 8.6 87.7 23.3 1,001 87.7 8.6
10/01/2008 $65.11 65.11 $5.20 3,223 6.53 10.75 8.2 89.7 15.2 NM 89.7 8.2
Change (40.6%) (36.4%) (2,198)

F 6.5% due 2032

05/15/2008 $36.76 73.52 $8.17 2,112 8.84 9.26 23.7 61.6 59.3 988 61.6 N/A
10/01/2008 $23.93 47.86 $5.20 1,375 13.58 14.19 23.3 60.5 62.9 2,203 60.5 N/A
Change (34.9%) (36.4%) (737)

GM 5.25% due 2032 (GBM)

05/15/2008 $17.25 68.99 $21.23 1,794 7.61 13.03 5.8 30.8 110.9 1,030 30.8 5.8
10/01/2008 $8.59 34.35 $9.45 893 15.29 31.48 5.4 40.5 135.9 NM 40.5 5.4
Change (50.2%) (55.5%) (901)

GM 6.25% due 2033 (GPM)

05/15/2008 $17.82 71.30 $21.23 3,066 8.76 11.00 10.2 59.7 59.9 1,011 59.7 10.2
10/01/2008 $8.17 32.66 $9.45 1,404 19.14 25.93 9.8 73.6 64.6 NM 73.6 9.8
Change (54.2%) (55.5%) (1,661)

GM 1.5% due 2009 (GRM)

05/15/2008 $23.27 93.08 $21.23 1,392 1.61 8.56 1.0 20.9 60.3 838 20.9 N/A
10/01/2008 $20.00 80.00 $9.45 1,055 1.88 39.75 0.7 0.3 209.6 NM 0.3 N/A
Change (14.1%) (55.5%) (337)
*NM for OAS above 3000

Source: Barclays Capital.

22
Technicals

23
Convertible Arbitrage AUM – Past the Mid-2007 Peak, Looks Like We’re
Headed For a Cyclical Downturn

ƒ Assets under management declined sharply from 2004 to 2005 but then picked up into 2006 - 2007. That growth
however, appears to have slowed down. In the first quarter of 2008 AUM stood at $33.8 billion 13% lower than the
$38.8 level in 4Q 2007.
ƒ Asset flows turned positive in 1Q 2008 after a slight negative in 4Q 2007. After the last cycle when flows turned
slightly negative in 3Q 2004, the market experienced a wave of negative flows in the 6 -subsequent quarters. Given
recent performance of the asset class, we expect flows to turn negative over the next few quarters.

Convertible Arbitrage Assets Under Management ($B)

50
45
40
35
30
25
20
15
10
5
0
Dec-99

Mar-00

Jun-00

Dec-00

Mar-01

Jun-01

Dec-01

Mar-02

Jun-02

Dec-02

Mar-03

Jun-03

Dec-03

Mar-04

Jun-04

Dec-04

Mar-05

Jun-05

Dec-05

Mar-06

Jun-06

Dec-06

Mar-07

Jun-07

Dec-07

Mar-08
Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07
Source: Barclays Capital, Tremont.

24
Poor Performance > Redemptions/Flight to Quality > Selling > Poor Performance

ƒ Given the poor performance of the strategy relative to other hedged fund strategies, we anticipate selling pressure on
the back of redemptions, reducing fund leverage, and flight to quality

HFRX Convertible Arbitrage Returns vs. Fund Flows

15% 4

10%
3
5%
2
0%

-5% 1

-10% 0

-15%
-1
-20%
-2
-25%

-30% -3
Jun 01

Jun 02

Jun 03

Jun 04

Jun 05

Jun 06

Jun 07

Jun 08
Mar 01

Sep 01

Dec 01

Mar 02

Sep 02

Dec 02

Mar 03

Sep 03

Dec 03

Mar 04

Sep 04

Dec 04

Mar 05

Sep 05

Dec 05

Mar 06

Sep 06
Dec 06

Mar 07

Sep 07

Dec 07
Mar 08

Sep 08
Convert Arb Fund Flows LTM HFRX Index Return

Source: Barclays Capital, Tremont.

25
Volatility Higher but Liquidity is Being Tested…
ƒ Typically we would expect volumes to go up in volatile markets, however TRACE volumes have been
steadily declining since the beginning of 2008
ƒ However, given the significant volatility this time around, liquidity is becoming scarcer
ƒ Reasons for lower volumes and liquidity include
 Broad market weakness leading to significant risk-aversion with bids drying up
 Broker-dealer risk reduction, de-levering and consolidation
 Negative convert arb performance leading to the diminished hedge fund activity
 Imposition of the short-sale rule
 Widening Bid-Ask spreads discouraging active trading / rebalancing of portfolios
Monthly Convert TRACE Volumes ($B)

60

50

40

30

20

10

0
05-Nov

06-Nov

07-Nov
06-Jan

06-Jun

07-Jan

07-Jun

08-Jan

08-Jun
06-Jul

07-Jul

08-Jul
06-Mar
06-Apr

07-Mar
07-Apr

08-Mar
08-Apr
06-Feb

06-Aug
06-Sep

07-Feb

07-Aug
07-Sep

08-Feb

08-Aug
08-Sep
05-Oct

06-Oct

07-Oct
05-Dec

06-May

06-Dec

07-May

07-Dec

08-May
Cvt HY Cvt IG Cvt Total

Source: Barclays Capital.

26
Primary Issuance

27
After a Financials Driven Strong First Half, New Issuance Slows to a Trickle and
Organic Growth Turns Negative
ƒ Over the past two months alone, organic
growth has fallen almost $20B leaving the Convertible New Issuance
YTD number at $9.8B of inflows $ Billions
120

ƒ We expect organic growth to remain 100

subdued as issuers hesitate to issue new

paper in a market where spreads have
80
20.6

widened and stocks have declined 60

considerably
96.4
88.3
40
70.3
61.9
54.1
47.6
ƒ A large part (60%) of the $62 billion raised 20
33.1

this year was from Financials 0

2002 2003 2004 2005 2006 2007 2008 YTD
NI Volume Annualized

Organic Growth of the Convert Market, LTM Organic Growth of the Convert Market Since 2003
$ Billions $ Billions
15 13.8 50

12.1 39.0
40
9.7
10
7.7 30
23.8

20
5
10.8 9.8
1.3 10
0.3
0 0
-0.6 -0.8 -1.1
-1.8
-10
-5
-20 -17.4
-22.0
-10 -8.6 -8.7 -30
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2003 2004 2005 2006 2007 2008 YTD

Source: Barclays Capital.

28
Volatility Trends

29
 15
20
25
30
35
40
45
Aug 04

Oct 04
Dec 04

Feb 05
Apr 05
Jun 05

Aug 05
Oct 05

Implied Vol
Dec 05

Feb 06
Apr 06
Jun 06

Aug 06
Oct 06

Dec 06

-30
-25
-20
-15
-10
-5
0
5
10

Realized Vol
Dec 03
Feb 07

Volatility Trends
Apr 07 Mar 04
Jun 07
Jun 04
Aug 07
Sep 04
Oct 07
Dec 07 Dec 04

Opt Vol
Feb 08 Mar 05
Apr 08
Jun 05
Jun 08
Aug 08 Sep 05

Dec 05

Mar 06

Jun 06

-20
-15
-10
-5
0
5
10

Aug 04
Sep 06
Oct 04
Dec 06
Dec 04

Feb 05 Mar 07

Apr 05 Jun 07
Jun 05
Sep 07
Implied vs. 90D Realized Vol Spread

Aug 05
Dec 07
Oct 05

Dec 05 Mar 08

Feb 06 Jun 08
Apr 06
Sep 08
Jun 06

Aug 06

Oct 06

Dec 06

Feb 07

Apr 07

Jun 07
Listed and Realized Vol has Spiked but Convert Implieds Are Lagging

Aug 07
Implied vs. Option Vol Spread

Oct 07

Dec 07

Feb 08
Source: Barclays Capital.

Apr 08
Jun 08

Aug 08
30
Credit Trends

31
Convert Market OAS Widens in Tandem With the Broader Credit Selloff

ƒ Over the past year Convert OAS has widened significantly in line with Credit.
ƒ While the Non IG segment has largely tracked the HY OAS, in the recent past IG Convert OAS appears to have
widened much more than the Credit Index
ƒ Both IG (541 bps) and Non-IG Convert OAS (1076 bps) at the widest levels since we started our Index in 2003.

Non IG Converts vs. HY B Index IG Converts vs. US Credit Index

1200
600
1100
550
1000
500
900
450
800
400
700
350
600
300
500
250
400
200
300
150
200
100
Jan 08
Jan 08

Jun 08
Jun 08
Oct 07
Oct 07

Feb 08
Feb 08
Nov 07
Nov 07
Nov 07
Dec 07
Dec 07

Mar 08
Mar 08
Apr 08
Apr 08
May 08
May 08
May 08

Jul 08
Jul 08
Aug 08
Aug 08
Sep 08
Sep 08

Jun 08
Jun 08
Oct 07
Oct 07

Jan 08
Jan 08
Nov 07
Nov 07
Nov 07
Dec 07
Dec 07

Feb 08
Feb 08
Mar 08
Mar 08
Apr 08
Apr 08
May 08
May 08
May 08

Aug 08
Aug 08
Sep 08
Sep 08
Jul 08
Jul 08
Non IG Cvts HY B Index
IG Cvts US Credit

Source: Barclays Capital.

32
Market Structure

33
Changing Market Structure & Profile

ƒ Bond structures account for 80% of the market, largely unchanged from end 2006. Financial and
mandatory pfd issuance rose meteorically but then declined equally fast this year.
ƒ On the back of sharp equity market declines, the market has become less equity sensitive. The ‘equity-
sensitive’ segment now accounts for 37% of the market from a high of 56% at the beginning of 2007.
Premiums have increased sharply to 41.0% from 23.4% over the same period.
ƒ The number of distressed converts has increased from 11 in 2006 to 19 in 2007 and 91 currently.
ƒ The large cap segment is lower given the collapse of Financial preferred issues.
ƒ The ‘price’ of the market currently at 82% is the lowest since we launched the index on Jan ’03.
ƒ The convert market has shrunk significantly and is now has a market cap of just $271B relative to
$345B at the beginning of 2008
ƒ Yields have increased significantly. The current yield now stands at 4.6% relative to 3.1% at the
beginning of 2008. Overall yield (greater of YTM/YTP/CY) has nearly doubled from 4.3% to 8.3%.
ƒ Sector concentration - The Financial, Healthcare, and Information Technology sectors account for
61% of the convert market value outstanding and 59% of the underlying equity exposure.
ƒ Vol and credit risk exposure: The average vega for the market is 0.29% while the average Rho
(100bps) is 1.73%. Should credit weaken further it would take a vol expansion of 6 points to offset
every 100bps of widening

Source: Barclays Capital.

34
Bond Structures & Small/Mid-Caps Dominate; Equity Sensitivity Sharply Lower

Convert Market Breakdown by Type Convert Market Breakdown by Profile

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
2003 2004 2005 2006 2007 2008 YTD 2003 2004 2005 2006 2007 2008 YTD
Cash Pay Zero Cpn Preferred Mandatory Equity Sensitive Typical Busted Distressed

Convert Market Breakdown by Market Cap Convert Market Breakdown by Credit Quality
100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
2003 2004 2005 2006 2007 2008 YTD 2003 2004 2005 2006 2007 2008 YTD
Large Cap Mid Cap Small Cap Investment Grade Intermediate Grade Speculative Grade Not Rated

Source: Barclays Capital.

35
Premiums Expand Significantly; Yields Up Sharply…As Market Value Shrinks

Price of the Convert Market (Mkt Val / Face) Premium of the Convert Market (%)
45
120% 1600
41.0
40 39.3
115% 1500

35
110% 1400
30.9 31.2

105% 1300 30
25.8
100% 1200 25 23.4

95% 1100 20

90% 1000 15

85% 900 10

80% 800
5
Jun 03

Jun 04

Jun 05

Jun 06

Jun 07

Jun 08
Dec 02
Mar 03

Sep 03

Dec 03
Mar 04

Sep 04
Dec 04
Mar 05

Sep 05
Dec 05
Mar 06

Sep 06
Dec 06
Mar 07

Sep 07

Dec 07
Mar 08

Sep 08
0
Price of Convert Market (LHS) S&P 500 (RHS) 2003 2004 2005 2006 2007 2008 YTD

Size of the Convert Market Yield & Current Yield of the Convert Market
$ Billions 9
8.3
400
8
345
350 331
308 314 7
303 303
300 279 280
270 271 271 6
250 257
250
219 5 4.6
4.4 4.3
200
4 3.7
3.5
3.0 3.2 3.0 3.1
150
3

100 2

50 1

0 0
2002 2003 2004 2005 2006 2007 2008 YTD 2004 2005 2006 2007 2008 YTD
Face Market Value Current Yield YTP / YTM /CY

Source: Barclays Capital.

36
Relatively Short Duration a Positive; Short Sale Rule a Negative

Maturity Profile of the Convert Market

ƒ We view the short to intermediate maturity profile of the
market as a positive. 0- 1 1-3 3 -5
> 5 Years
Years Years Years
ƒ 69% of the market matures or is puttable within the next
five years Count 91 228 265 218

Face ($B) 35.2 91.0 88.7 118.4

Mkt Val ($B) 35.1 74.9 77.6 86.0

Percent (%) 12.8% 27.4% 28.3% 31.4%

Restricted Short Sale Convertible Market

Statistics
ƒ Once could argue that the short sale restrictions were
needed to stabilize the broader markets.
Market
Face Value
ƒ That said the rule has had a negative impact on the ($MM ) ($MM)
convert arb strategy. 330,868 271,275
Total Market
ƒ The uncertainty with regards to the duration of this rule Short Sale Restricted List 84,929 52,003
and the scope (# of stocks covered) is negatively Percent Affected 25.7% 19.2%
impacting convert arb funds and broadly leading to lower
valuations in our opinion.

Source: Barclays Capital.

37
Sector Concentration High; Credit Exposure Relatively High

Market Value Breakdown Delta Stock Exposure Breakdown

MATERIALS TELECOM UTILITIES MATERIALS TELECOM UTILITIES

5% 3% 7% 2% CONSUMER
2% 2%
CONSUMER DISC
INFO TECH DISC INFO TECH 8%
16% 11% 14%
CONSUMER
CONSUMER STAPLES
INDUSTRIALS INDUSTRIALS 3%
STAPLES
7% 9%
2% ENERGY
ENERGY 10%
HEALTH CARE 9%
20% HEALTH CARE
23% FINANCIALS
FINANCIALS
22%
25%

Vega Exposure by Sector Rho Exposure by Sector

Market Wt Avg % Average % Market Wt Avg % Average %

GICS Sector Issues Value ($B) Vega Vega GICS Sector Issues Value ($B) Rho Rho
CONSUMER DISCRETIONARY 64 $13.8 0.27% 0.24% CONSUMER DISCRETIONARY 64 $13.8 (1.68%) (1.68%)
CONSUMER STAPLES 14 $3.8 0.45% 0.38% CONSUMER STAPLES 14 $3.8 (2.82%) (2.85%)
ENERG Y 34 $10.2 0.32% 0.32% ENERG Y 34 $10.2 (1.71%) (1.76%)
FINANCIALS 72 $19.8 0.33% 0.30% FINANCIALS 72 $19.8 (2.12%) (2.02%)
HEALTH CARE 110 $41.2 0.36% 0.33% HEALTH CARE 110 $41.2 (1.35%) (1.54%)
INDUSTRIALS 56 $13.0 0.23% 0.28% INDUSTRIALS 56 $13.0 (1.15%) (1.56%)
INFORMATION TECHNOLOGY 123 $33.2 0.33% 0.27% INFORMATION TECHNOLOGY 123 $33.2 (1.76%) (1.72%)
MATERIALS 14 $4.1 0.35% 0.35% MATERIALS 14 $4.1 (1.66%) (1.84%)
TELECOMMUNICATION SERVICES 19 $6.9 0.24% 0.26% TELECOMMUNICATION SERVICES 19 $6.9 (1.66%) (1.63%)
UTILITIES 6 $1.5 0.14% 0.16% UTILITIES 6 $1.5 (0.75%) (1.28%)
TOTAL 512 $147.6 0.32% 0.29% TOTAL 512 $147.6 (1.64%) (1.73%)

*Excludes Distressed and Perpetual Preferreds *Excludes Distressed and Perpetual Preferreds

Source: Barclays Capital.

38
Positioning

39
Issues Facing the Convertible Market

Liquidity
Liquidity ƒ Liquidity is likely to remain low and Bid-Asks wider in a one-way market over the short term
Scarcer
Scarcer // Bid
Bid
Ask
Ask Wider
Wider

ƒ Given convert arb weakness we believe that the balance of power is likely to shift
Outright
Outright // Arb
Arb incrementally to the outright and cross-over buyer base who will have a larger impact on the
Balance Shift
Balance Shift asset class

Broker ƒ Move to reduce leverage will likely cause continued selling pressure in the near term.
Broker &
&
Hedge-fund Marginal arb trades that depended on higher leverage and attractive financing would likely
Hedge-fund
De-levering be forced out.
De-levering
ƒ Broker dealers likely to curtail capital commitment in the short term

ƒ Marginal arb trades that depended on higher leverage and attractive financing would likely
Funding
Funding && be forced out.
Margin Higher/
Margin Higher/
Borrow
Borrow Costs
Costs ƒ Borrow costs likely to be higher given trend of long-only funds’ reluctance to lend and
regulator focus on ‘abusive’ short-selling

ƒ Past trends lead us to believe that redemptions are likely persist in the near future negatively
Redemptions
Redemptions impacting valuation
Likely
Likely ƒ A significant reduction in convertible arbitrage funds is a likely outcome over the next six
months

40
Recap & Outlook
Positioning, Outlook and Investment Thesis

ƒ Clearly the convert market both (outright and hedged) has been under tremendous pressure over
the past year. This has largely been due to plummeting equities, a significant widening in spreads, a
valuation collapse and significant negative technicals.
ƒ Currently we are seeing heightened risk aversion, uncertainty and pessimism. Liquidity has
diminished greatly and the threat of redemption, de-leveraging and continued flight to quality
based selling pressure is underway.
ƒ Given the cyclical nature of fund flows and the poor performance of the asset class we expect a
wave of fund redemptions especially from convertible arbitrage.
ƒ In 2005 the weakness was convert market specific. This time around the issues are clearly much
larger. The issue is systemic and needs to get sorted out first.
ƒ That said, the convertible asset class is cheap on a relative value basis. The keyword being ‘relative’.
ƒ The collapse of Financial preferreds / mandatories has brought the market significantly lower but
we believe that there are other pockets (bond structures) that could be a source of relative value.

41
Key Themes
Positioning, Outlook and Investment Thesis
ƒ The markets are in a frozen state as we speak. That said when things clear up we expect the following to be
important themes in the convert market.
ƒ Yield Returns to the Market. Coupon return is much higher. The convert market now yields 9.2% (CY 4.8%)
compared to a dividend yield of 2.5% for the S&P500.
ƒ Equity Volatility has clearly spiked to significantly higher levels. However, the convert market sell-off has created
the opportunity to potentially buy cheap vol. IG convertible bonds are a good starting point.
ƒ If and when the credit markets begin to stabilize, gamma trading opportunities should emerge.
ƒ Call overwriting as a strategy could be considered by long-only investors given the flat skew and elevated vols.
ƒ Gaining Equity Exposure in a Risk Controlled Manner by owning securities much higher up in the capital structure.
Equity investors should actively consider a convertible market allocation given the valuation collapse - right
convert structures/profiles offer balanced and less volatile exposure to equities – affording decent potential upside
participation and a higher coupon income while greatly dampening downside risk.
ƒ Credit Opportunities: Credit spreads have widened significantly over the past year and the market is becoming less
equity-sensitive affording credit based investment opportunities. Both IG and non-IG bonds will present
opportunities.
ƒ Potential Rate Cuts would add incremental value to the convert market.
ƒ Potential Dividend Cuts would be another source of value especially given their increased likelihood in a weakening
economy and a deteriorating capital raising/credit environment.
ƒ Call Risk plays – In the money converts that are net-share settled will be less likely to be called while all stock settled
converts would be more likely to get called in a weak financing / capital raising environment
ƒ While preferred structures have experienced the greatest valuation collapse, they are likely to offer value at some
point - likely when credit markets begin to stabilize.

42
Key Themes
Positioning, Outlook and Investment Thesis

ƒ Primary Issuance Value: Primary issuance has declined across asset classes and the convert asset class is no
exception. We expect this to continue in the near future until the broader markets open up again. In our opinion,
once this happens the convertible asset class is going to be an attractive capital raising source in a high spread –
high vol environment. 2003 serves as a useful case in point when primary issuance hit $88 billion in a high spread-
high vol environment.
ƒ Opportunities for Cross-Over Buyers: convert funds are clearly under pressure and technicals are playing an
important factor in the sell-off. Cross over buyers both from the equity side as well as the credit side should actively
consider scouring the convert market for relative value opportunities.
ƒ Convertibles though often clumped as one large amorphous asset class are in fact quite unique when diced by
sector, maturity profile, credit quality, structure, equity/credit sensitivity etc. Sub-strategies within the large
umbrella of convertibles is going to be important going forward.
ƒ Given the higher levels of systematic as well as idiosyncratic risk, the investment processes would have to be more
involved and at a single name level. Broad diversified strategies might not be optimal in the short term.
ƒ Credit focus: The market is trading at a price of 85%, with significantly higher yields. ~80% of the market now
consists of bond structures – many of which have short/intermediate puts. Spreads are significantly wider
suggesting value. Managers with strong credit skills would be better positioned to invest in the asset class in the
short term. Volatility based trades would be important too but only once the credit markets have stabilized. At this
point in the cycle credit concerns far outweigh and vol related angle.
ƒ Our focus in this report is from a macro perspective. We will be exploring many of these themes in detail in the near
future.

43
Analyst Certifications and Important Disclosures

Analyst Certification
We, Venu Krishna and Manoj Shivdasani, hereby certify (1) that the views expressed in this research email accurately reflect our personal views about any or all of the subject
securities or issuers referred to in this email and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed
in this email.

Important Disclosures
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm's total revenues, a portion of which is generated by
investment banking activities.

For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Inc. Control Room, 1271
Avenue of the Americas, 42nd Floor, New York, NY 10020 or refer to the firm's disclosure website at www.lehman.com/disclosures. On September 20, 2008, Barclays Capital Inc.
acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. During this transition period, we have
endeavored to provide our respective conflicts of interest disclosures on a combined basis. All ratings and price targets prior to the acquisition date relate to coverage under
Lehman Brothers Inc.

Risk Disclosure(s)
The convertible valuations are based on Lehman’s proprietary convertible valuation model, under which key assumptions relate to credit spread and volatility metrics. Material
changes in any of these variables can have a significant impact on valuation. Upside/downside analysis takes into consideration likely future valuation and expected trading
patterns, among others. It is based on a total return participation of the convertible relative to a +/- 25% change in the common stock’s price over a one-year investment horizon.
A material change in the company’s financial situation can significantly alter this assessment.

44
Important Disclosures (continued)

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Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for
the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly,
you should seek advice based on your particular circumstances from an independent tax advisor. This publication has been prepared by Barclays Capital, Inc., a US registered
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offering to buy or sell or soliciting offers to buy or sell any financial instrument. Other than disclosures relating to Barclays Capital, the information contained in this publication
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discussed herein should do so only by contacting a representative of ABSA Capital in South Africa, ABSA TOWERS NORTH, 180 COMMISSIONER STREET, JOHANNESBURG, 2001.
ABSA CAPITAL IS AN AFFILIATE OF BARCLAYS CAPITAL. Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home
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Finanzdienstleistungsaufsicht.© Copyright Barclays Bank PLC (2008). All rights reserved. No part of this publication may be reproduced in any manner without the prior written
permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional
information regarding this publication will be furnished upon request.

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