Themes of second half 2007

New supply will be primary focus -given recent headline of the investors' pushback of leveraged loans, such as U.S Foodservcie, and loans with loose proections, it is helpful to view how investors confidence impact the demand for new issue supply Fed is on hold through year-end -Eco growth is slowing down, 0.8% in 1Q 2007 and 0.7% in 2Q and subprime has not spreaded into broader economy -Inflation is under contrain -No reason to cut interest rate soon Corp profit growth continues to slow -U.S. corp profit growth slowed sharply as highlighted by the deceleration of Y-o-Y growth from 18% in the fourth quarter to 6.5% in 1Q 2007. -But strong oversea profit growth and highe energy prices might offset profit weakness for big companies Housing weakness continue, consumer -2Y High mortgage rate (6.8%) -Rising deliquency rate in subprime (15%) and Alt-A(4%) -$500 mil subprime mortage need to be refinanced this year because their ARM terms expire -Housing bubble has accumulated for years given the magnitude of appreciation in real estate market. It will take a while to unwind the market bubble Global growth remains strong but hint of slowing by year-end -recent interest rate spikes along with slowing U.S. demand will cool foreign market Negative Credit Quality Events, Trends Continue, But No Credit Crunch Yet -with real borrowing cost still cheap historically, an abundance of debt capital still available, management will continue to pursure shareholder friendly initiatives that will leverage company BS. -Resistence from credit markets to blindly fund increasing corp borrowing will impose a discipline Credit derivatives growth slows, long only Investors re-emerg as a force -Rebounding profit growth and financial policy discipline following the credit marekt debt binge and implosion over the period 1998 through 2002 produced dramatic balance sheet deleveraging and restructuring that drove a nealy five-year bull market for crdit product. -the absence of new corproate debt to meet growing demand, U.S and global especially hedge funds, led to the use of credit derivatives to create synthetic corporate credit products.