ALVAREZ & MARSAL READINGS IN QUANTITATIVE RISK MANAGEMENT

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1 ALVAREZ & MARSAL READINGS IN QUANTITATIVE RISK MANAGEMENT The Collapse of Crude Oil Prices: How Low and For How Long? Part One: Impacts of Falling Prices

2 THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? Bruce Stevenson Managing Director Alvarez & Marsal INTRODUCTION The dramatic movement in the price of crude oil was one of the major stories, and major surprises, of 2014 and Prices of crude oil fell by 50 percent in 2014 and the trend continued in 2015 (see Figure 1). For example, on December 31, 2015, the spot price of West Texas Intermediate (Cushing, OK) crude oil (WTI) was $37.13 per barrel, down nearly 66 percent from a peak of $ on July 20, Thus far in 2016, the lowest daily spot price for WTI was $26.19, 75.7 percent below the July 2014 peak. While most American consumers welcome the declines in gasoline prices that have accompanied falling crude oil prices, the impacts are not uniformly beneficial. In this two-part series, we examine the causes for collapsing oil prices, the impacts of persistently low prices on energy producers, and the consequences for U.S. banks that lend to energy exploration and production (E&P) companies, oil field service (OFS) companies, and the households and individuals that live in regions dominated by oil and gas exploration. Part One focuses on the impacts of falling prices on individual companies and on the real estate markets of energy-dependent areas. Part Two emphasizes the increased likelihood of default by these companies and individuals as well as the consequences for their lenders. We conclude that variable oil prices are the natural consequence of changing supply and demand, as one would expect. Companies that extract, process and distribute crude oil, as well as companies that provide services to energy E&P companies, have operating profits that are closely correlated with oil prices. Share prices of these firms also vary closely with oil prices. As such, these companies will have a higher risk of default with falling oil prices and, if those prices fall far enough or stay low long enough, default and bankruptcy become certain. Also, as expected, investors that take long positions in oil, in oil E&P companies and in oil field services companies can expect to see the value of those positions drop with falling oil prices. Banks and other lenders to the energy sector are effectively long oil prices and the value of their investments (e.g., loans) falls as oil prices fall. For these lenders, higher levels of defaults, rising loan loss reserves, and falling revenues and share prices are inevitable consequences. The question for both energy companies and their lenders is not how low can oil prices go or how long will they remain low but both: how low will they go and how long will they stay there? The answer to this two-part question can only come from scenario analysis in which the oil companies and/or their lenders test the impacts of various scenarios of oil prices on individual E&P and OFS companies on the resultant expected defaults and loss and, for the lenders, the implications of these losses to their own capital. Fortunately, the steps to complete such stress tests are mathematically tractable and, thus, within the scope of most institutional investors, especially those that already conduct stress tests under the Dodd Frank Act Stress Tests. Mathematical testing of the impact of changing oil prices on real estate values, and the associated risk of mortgage defaults and foreclosures, in oilsensitive regions is also feasible. 2 PART ONE: IMPACTS OF FALLING PRICES

3 PRICE OF CRUDE OIL Cushing OK West Texas Intermediate 1Q1986 to 1Q2016 PRICE PER BARREL 1Q1986 4Q1986 3Q1987 2Q1988 1Q1989 4Q1989 3Q1990 2Q1991 1Q1992 4Q1992 3Q1993 2Q1994 1Q1995 4Q1995 3Q1996 2Q1997 1Q1998 4Q1998 3Q1999 2Q2000 4Q2001 3Q2003 4Q2004 2Q2006 4Q2007 2Q2009 4Q2010 2Q2012 4Q2013 2Q2015 1Q2016 WTI Spot Price - 11 February $26.19 / barrel Figure 1: Historical Monthly Prices of West Texas Intermediate Crude Oil from 1986 to 2016 (source: U.S. Energy Information Administration) CAUSES OF FALLING OIL PRICES There are a number of reasons for this dramatic collapse in oil prices. First, oil demand in Asia has dropped as the economies of this region have slowed. In the third quarter of 2014, China s economy grew at the slowest rate in five years (7.3 percent) as a result of a slumping real estate market and weak domestic demand and industrial production. For the first time since 1999, the growth rate of oil consumption in the U.S. exceeded that of China in China also became a net exporter of oil in October 2014, as imports dropped 22 percent and exports surged 30 percent. Second, production of oil in the U.S. grew exceptionally fast in the last five years. As shown in Figure 2, U.S oil production declined consistently from the mid-1980s until the late 2000s, but between and its peak in 2Q2015, U.S. production of crude oil doubled. U.S. crude oil production is a lagged response to oil price (Figure 2). As world oil supplies tightened in the late 1990s and early 2000s, prices rose dramatically commencing in Oil prices grew exponentially until 2008, at which point the WTI reached $145 in July The financial crisis and Great Recession temporarily reduced demand for crude oil such that the price fell to $25 per barrel in December Only in recent months has the dramatic decline in oil prices caused U.S. oil production to decline, albeit very slightly (Figure 2). THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? 3

4 10,000 PRICE AND U.S. PRODUCTION OF CRUDE OIL U.S. Energy Information Administration 1Q1986 to 4Q2015 9,000 8,000 U.S. Field Production (left axis) Price of Cushing OK WTI (right axis) THOUSAND OF BARRELS PER DAY 7,000 6,000 5,000 4,000 3,000 2,000 1,000 PRICE PER BARREL 0 1Q1986 4Q1986 3Q1987 2Q1988 1Q1989 4Q1989 3Q1990 2Q1991 1Q1992 4Q1992 3Q1993 2Q1994 1Q1995 4Q1995 3Q1996 2Q1997 1Q1998 4Q1998 3Q1999 2Q2000 4Q2001 3Q2003 4Q2004 2Q2006 4Q2007 2Q2009 4Q2010 2Q2012 4Q2013 2Q2015 1Q2016 Figure 2: Oil Production in the United States in Relation to West Texas Intermediate Oil Price from 1986 to 2015 Major improvements in hydraulic fracturing ( fracking ) and horizontal drilling in the first decade of the new millennium were the major factors for this growth. Until recently, sustained higher prices have enabled production growth from these techniques. Their growth has been higher than other sources of oil and their share of world oil supply rose to 3.7 percent at year-end 2014, up from 0.5 percent in As of 2015, the U.S. had the highest production of crude oil and related liquids of any country, including Saudi Arabia. 1 The price-induced growth in oil production in the U.S. occurred just as global energy prices, and the advent of new extraction technologies, prompted increases in production elsewhere in the world. Since 2008, Russia s daily oil production has grown by 11 percent and Canada, also using the new technologies, experienced a 33 percent increase in daily production. A third reason why oil prices have fallen, as denominated in U.S. dollars, is that oil prices and the value of the U.S. dollar are inversely related. As the dollar began to weaken in early 2002, the price of oil increased exponentially and, once the dollar began to recover in both mid-2008 and early 2015, the price of oil fell (Figure 3). The relationship of oil price to the value of the dollar is especially strong since Specifically, the correlation of the quarterly average of the WTI oil price to the quarterly average value of the U.S. dollar against major currencies was between 1Q2000 to 4Q2015. CONSEQUENCES OF FALLING ENERGY PRICES If oil prices remain low in 2016, there will be significant consequences to E&P companies, oil field services firms, the communities in which oil dominates economic activity, and the lenders and investors in these companies and communities. We see primary and secondary impacts resulting either directly or indirectly from falling oil prices. Primary direct effects are those that occur immediately or in the short term as direct consequences of falling energy prices. These effects include reduced profitability of oil and gas E&P companies and elevated default probabilities and default rates among these companies. Other primary direct effects are reduced capital expenditures by E&P companies as new exploration and drilling 1 Source: U.S. Energy Information. Data include crude oil, lease condensate, natural gas plant liquids and refinery processing gain. 4 PART ONE: IMPACTS OF FALLING PRICES

5 TRADE WEIGHTED U.S. DOLLAR INDEX: MAJOR CURRENCIES Value of U.S. Dollar WTI (Cushing OK) CRUDE OIL PRICE AND THE VALUE OF THE U.S. DOLLAR 1Q1986 to 4Q2015 1Q1986 4Q1986 3Q1987 2Q1988 1Q1989 4Q1989 3Q1990 2Q1991 1Q1992 4Q1992 3Q1993 2Q1994 1Q1995 4Q1995 3Q1996 2Q1997 1Q1998 4Q1998 3Q1999 2Q2000 4Q2001 3Q2003 4Q2004 2Q2006 4Q2007 2Q2009 4Q2010 2Q2012 4Q2013 2Q2015 PRICE PER BARREL OF WEST TEXAS INTERMEDIATE CRUDE OIL (CUSHING, OK) Figure 3: Value of the U.S. Dollar in Relation to West Texas Intermediate Oil Price from 1986 to 2015 is halted, even though production at existing wells is maintained. Restructurings of these companies, including layoffs of employees, are inevitable consequences. Primary indirect effects are those that occur immediately or in the short term but are indirect consequences of falling prices. Among these effects are higher default probabilities and default rates among OFS companies and other firms servicing E&P regions as well as higher loan loss provisions and charge-offs at banks that have loans to such companies. Banks lending to these companies will experience reduced demand for loans, and in turn, reduced loan revenues as energy companies scale back investment and capital expenditures. Finally, counterparties long oil price swaps will see the value of those swaps fall with falling oil prices. Secondary indirect effects include those that result from the impact of oil prices cascading through local economies affecting sectors not directly related to energy exploration, production or distributions. Within geographic areas in which oil and gas exploration dominates economic activity, elevated defaults and losses on loans tied to real estate are likely as the values of assets (principally real estate) fall with contraction of that activity. Foreclosures on residential mortgages are one example. We address these secondary effects in more detail in the second paper. We examine each of these effects in detail. PRIMARY DIRECT EFFECTS. A direct effect of falling oil prices is reduced operating profits for oil and gas E&P companies. As an example, we focus on Occidental Petroleum. Occidental s primary business is the extraction and production of crude oil and, as a global E&P firm, it has direct exposure to the variability in crude oil prices. In Figure 4, the operating profits 2 of Occidental Petroleum are strongly correlated with oil prices over the last 26 years (r-squared = 0.892). In fact, one can easily build a mathematical equation to predict Occidental Petroleum s earnings before interest, taxes, depreciation and amortization (EBITDA) as a function of oil prices. 3 2 During 2014 and 2015, Occidental Petroleum reported a number of major restructuring activities including the sale of significant properties and operations in which the firm recognized the decline in value due to the reduced price of oil. For this analysis, the losses on these transactions are excluded from our estimate of profits from normal operations; our estimate then is earnings before taxes, depreciation, amortization and asset impairments. 3 Quarterly EBITDA = ( * Spot WTI Price) +1, This equation is a simplification of a complete forecasting model that would take into account the lag structure of oil price and it does not take into account any future restricting that might be undertaken by the firm. THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? 5

6 OCCIDENTAL PETROLEUM OPERATING PROFITS ($ MILLIONS) $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 OCCIDENTAL PETROLEUM Earnings Before Interest, Taxes, Depreciation, Amortization and Asset Impairments 1Q1999 to 4Q2015 Occidental Petroleum Operating Profits (left axis) WTI Crude Oil Price (right axis) 1Q1999 3Q1999 1Q2000 3Q2000 2Q2001 1Q2002 3Q2002 1Q2003 3Q2003 3Q2004 1Q2005 1Q2006 2Q2006 3Q2007 1Q2008 1Q2009 3Q2009 3Q2010 1Q2011 1Q2012 3Q2012 3Q2013 1Q2014 1Q2015 3Q2015 PRICE PER BARREL OF WEST TEXAS INTERMEDIATE CRUDE OIL (CUSHING OK) Figure 4: Operating Profits for Occidental Petroleum and the Price of West Texas Intermediate Crude Oil, 1999 to 2015 The strong correlation between oil price and operating profits for E&P companies implies that the ability of these companies to service debt will be constrained as their operating profits fall in the current market. If such a company is highly leveraged with high debt burdens, the probability of default will increase as its debt service capacity declines with falling oil prices and falling profits. The equity markets recognize the strong correlation between energy prices and operating profits of E&P companies and, as a result, share prices of publicly-traded E&P companies are also strongly correlated with oil price. As shown in Figure 5, the correlation between the share price of Occidental Petroleum and WTI is very strong (r-squared = 0.864). Notably since the beginning of the collapse of oil prices, the equity markets value these shares at a premium to the WTI, perhaps because of the extensive activities undertaken by Occidental to eliminate or restructure underperforming businesses. OCCIDENTAL PETROLEUM SHARE PRICE ($ PER SHARE) $90 $70 $50 $30 $10 Occidental Petroleum Share Price WTI Crude Oil Price OCCIDENTAL PETROLEUM Relationship of Share Price to Crude Oil Price Q1986 4Q1986 3Q1987 2Q1988 1Q1989 4Q1989 3Q1990 2Q1991 1Q1992 4Q1992 3Q1993 2Q1994 1Q1995 4Q1995 3Q1996 2Q1997 1Q1998 4Q1998 3Q1999 2Q2000 4Q2001 3Q2002 2Q2003 4Q2004 2Q2006 4Q2007 2Q2009 4Q2010 2Q2012 4Q2013 2Q2015 1Q2016 WEST TEXAS INTERMEDIATE CRUDE OIL PRICE ($ PER BARREL) Figure 5: Relationship of Share Price for Occidental Petroleum and West Texas Intermediate Oil Price, PART ONE: IMPACTS OF FALLING PRICES

7 Why do we focus on the impact of oil prices on operating profits and on share prices? First, operating profits are the source of funds from which companies repay debt. If those profits fall too far, default is possible, and even likely. Second, a company s falling equity price also means higher default risk because, with falling share prices, the company s leverage increases in market value terms. Occidental Petroleum is a good barometer of the impact of falling oil prices on investment-grade E&P companies and the fact that markets remain unsettled on their view of this sector. The major rating agencies still rate the company s senior unsecured debt as investment-grade (A from S&P and A3 from Moody s) while they have downgraded several other large U.S. E&P firms (e.g., Chevron, Devon Energy, Apache Corporation). Occidental s debt trades at par or at slight premiums and yields to maturity are close to coupon rates. Equity investors are unconvinced with some analysts taking a very bearish view as the company s share price continues to drift down. The A&M default probability models take a somewhat bearish view. Our logistic regression estimates Occidental s one-year default probability at 3.45 percent as of December 31, 2015, up from 1.66 percent on December 31, These probabilities are consistent with observed default rates of non-investment U.S. corporates. The higher default risk is a material issue for banks and other lenders to E&P companies and this is a theme that we explore in detail in Part Two. IF OIL PRICES REMAIN LOW IN 2016, THERE WILL BE SIGNIFICANT CONSEQUENCES TO E&P COMPANIES, OIL FIELD SERVICES FIRMS, THE COMMUNITIES IN WHICH OIL DOMINATES ECONOMIC ACTIVITY, AND THE LENDERS AND INVESTORS IN THESE COMPANIES AND COMMUNITIES. WE SEE PRIMARY AND SECONDARY IMPACTS RESULTING EITHER DIRECTLY OR INDIRECTLY FROM FALLING OIL PRICES. For other publicly-traded E&P companies, similar relationships exist between oil prices and operating profits and between oil prices and share prices with the consequence of elevated default probabilities. PRIMARY INDIRECT EFFECTS. As noted above, declining oil prices will have an impact on the companies that provide products and services to E&P firms, especially oil field services companies. We focus on Schlumberger Ltd, the world s largest oil field services firm. It employs approximately 105,000 people representing more than 140 nationalities working in more than 85 countries and has four principal executive offices located in Paris, Houston, London and The Hague. As we would expect, the EBITDA 4 of Schlumberger is strongly correlated with crude oil prices (correlation coefficient = 0.903; quarterly results from 1Q1990 to 4Q2015) (see Figure 6). In fact, one can develop statistical forecasting models that predict EBITDA of Schlumberger as a function of crude oil prices just as we saw for Occidental Petroleum. 5 4 One-time accounting events that impact EBITDA are eliminated in this analysis. 5 The simplified equation for Schlumberger is: Quarterly EBITDA = ( * Spot WTI) Same caveats for the model of Occidental Petroleum EBITDA apply here. THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? 7

8 SCHLUMBERGER QUARTERLY EBITDA ($ MILLIONS) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 -$500 SCHLUMBERGER LTD Share Price and Earnings Before Interest, Taxes, Depreciation, and Amortization Compared to West Texas Intermediate Oil Prices Schlumberger EBITDA WTI Crude Oil Price Schlumberger Share Price 1Q1990 4Q1990 3Q1991 2Q1992 1Q1993 4Q1993 3Q1994 2Q1995 1Q1996 4Q1996 3Q1997 2Q1998 1Q1999 4Q1999 3Q2000 2Q2001 1Q2002 4Q2002 3Q2003 2Q2004 1Q2005 4Q2005 3Q2006 2Q2007 1Q2008 4Q2008 3Q2009 2Q2010 1Q2011 4Q2011 3Q2012 2Q2013 1Q2014 4Q2014 3Q2015 WTI CRUDE OIL PRICE ($ PER BARREL) / SCHLUMBERGER SHARE PRICE ($ PER SHARE) Figure 6: Relationship of the Price of West Texas Intermediate Crude Oil to the Operating Profits and Share Price of Schlumberger, LTD In addition to the strong adverse impact of falling oil prices on Schlumberger s operating profits and share price, the firm is changing in other ways. In 2015, Schlumberger announced 21,000 layoffs accounting for 15 percent of its total workforce. Also in 2015, Schlumberger agreed to acquire struggling oil field equipment manufacturer Cameron International. Other publicly-traded OFS companies show similar correlations between oil prices and operating profits and between oil prices and share prices. SECONDARY INDIRECT EFFECTS. Bernard L. Weinstein, an associate director of the Maguire Energy Institute at Southern Methodist University s Cox School of Business, noted that U.S. states with hydraulic fracturing and horizontal drilling had faster economic turnarounds after the recession in 2008 when compared to those who have no drilling activity. This economic growth has put real pressure on limited resources in some of these areas and it has led to dramatic increases in the level of deposits and lending within regions not used to such growth. With the collapse of oil prices, that economic growth is in jeopardy as companies cut capital expenditures, lay off employees and sell assets. Rapid growth in the oil shale regions has created upward pressure on housing prices where demand has exceeded supply. North Dakota is a very good barometer of these effects within a single state. The Bakken Formation is a series of sedimentary rock occupying about 200,000 square miles of the subsurface of the Williston Basin that underlies parts of Montana, North Dakota, Saskatchewan and Manitoba. It is named after Henry Bakken, a farmer in Tioga, North Dakota, who owned the land where the formation was initially discovered while drilling for oil. The application of hydraulic fracturing and horizontal drilling technologies has caused a boom in oil production from the Bakken. Since 2000, the explosion of oil exploration and drilling in the Bakken shale formation following the financial crisis permitted a huge increase in the number of drilling rigs in the state (Figure 7). By the end of 2010, oil production rates had reached 458,000 barrels per day, thereby outstripping the pipeline capacity to ship oil out of the Bakken. 8 PART ONE: IMPACTS OF FALLING PRICES

9 250 NORTH DAKOTA Number of Active Oil & Gas Rigs NUMBER OF ACTIVE OIL & GAS RIGS IN NORTH DAKOTA Q2000 3Q2000 Active Rigs Statewide WTI Crude Oil Price Figure 7: Relationship of Active Oil & Gas Rigs in North Dakota The dramatic increase in active rigs caused a boom in the number of people working on these rigs, most of whom have traveled to North Dakota for jobs on the rigs or for other jobs supporting this exploration and production. So many people traveled to towns such as Williston, North Dakota that the new arrivers overwhelmed the towns hotels and other guest quarters. In the areas with the most active oil E&P, temporary living quarters consisting of rows of trailers and modular steel boxes, termed man camps, housed thousands of workers. With the collapse of oil prices, layoffs have occurred in large numbers and many man camps are empty and have closed. Williston s hotels, formerly booked solid for months, had 50 percent occupancy rates in March In Williston, as in many such towns, the spending on new roads, schools, hotels and developments during the booms now seems excessive and revenue is down nearly 25 percent from In North Dakota overall, there is a $1 billion shortfall in the state s budget and the governor has ordered four percent cuts in the budget and has tapped almost $500 million from a rainy day fund formed in the boom years. 3Q2001 1Q2002 3Q2002 1Q2003 3Q2003 3Q2004 1Q2005 1Q2006 3Q2006 3Q2007 1Q2008 1Q2009 3Q2009 3Q2010 1Q2011 1Q2012 3Q2012 3Q2013 1Q2014 1Q2015 3Q2015 1Q2016 We believe that there are bubbles in housing prices in the shale oil regions and housing prices will continue to contract if oil prices remain low. In North Dakota, home prices track oil prices quite closely from 1986 to 2011 (Figure 8). However, beginning in mid-2012, home prices continue to accelerate while WTI oil prices stabilize at about per barrel. The shortage of housing in areas with high levels of drilling and production activity undoubtedly put upward pressure on home prices. For other states in which oil production is a significant component of economic activity, contraction in oil prices also means a loss of jobs and a loss of revenue. For example, the oil industry makes up about 30 percent of Wyoming s revenue and a price drop of $5 per barrel means a $35 million loss in revenue to the state, impacting in roughly equal measure the state s general funds for its schools. Although Texas is a more diversified economy, contraction in oil prices have brought layoffs to Houston, an important oil city, as well as significant pressure on the prices of both commercial and residential real estate. Similar impacts have occurred in other Texas cities as well. WEST TEXAS INTERMEDIATE CRUDE OIL PRICE ($ PER BARREL) THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? 9

10 OIL PRICES AND HOME PRICES North Dakota 1Q1986 to 4Q2015 WEST TEXAS INTERMEDIATE CRUDE OIL PRICE ($ PER BARREL) Cushing OK WTI North Dakota State HPI 1Q1986 4Q1986 3Q1987 2Q1988 1Q1989 4Q1989 3Q1990 2Q1991 1Q1992 4Q1992 3Q1993 2Q1994 1Q1995 4Q1995 3Q1996 2Q1997 1Q1998 4Q1998 3Q1999 2Q2000 4Q2001 3Q2002 2Q2003 4Q2004 2Q2006 4Q2007 2Q2009 4Q2010 2Q2012 4Q2013 2Q NORTH DAKOTA STATE-LEVEL ALL TRANSACTIONS HOME PRICE INDEX Figure 8: Relationship of Crude Oil Price to State-Level All Transactions Home Price in North Dakota CONCLUSIONS Boom and bust is a consistent feature of the crude oil markets. The geometric increase in oil prices that led to the recent dramatic growth in oil production in the U.S. would almost certainly lead to a reduction in price when supply caught up with demand. However, a confluence of forces, including very significant increases in supply not only in the U.S. but in other parts of the world, coupled with a contraction in demand, has caused the price of crude to decline at a historically unprecedented rate. The collapse in oil prices has direct impacts on oil E&P companies and OFS firms since their operating profits are directly correlated with oil prices. Declining profits mean these companies will experience higher probabilities of default as lower profits mean more difficulty meeting interest and principal payments on outstanding debt. For publicly-traded companies, equity investors recognize the stress created by declining oil prices and discount the value of their investments accordingly. Falling share prices also mean high risk of default as a company s financial leverage increases in market value terms. In Part Two, we investigate the impact of falling prices on the default risk of these companies and the impact of these defaults on the bond market and on banks that have lent to these firms. Communities in which oil exploration, development and production dominates economic activity will also struggle as oil prices fall. Many towns in the U.S. shale oil regions have experienced both the boom of drilling associated with rising prices and the bust when oil prices collapse. For the regions in which development, such as building new real estate, occurred to match the peak of the boom, as in some towns in North Dakota, the contraction accompanying falling oil prices will be severe. 10 PART ONE: IMPACTS OF FALLING PRICES

11 THE COLLAPSE OF CRUDE OIL PRICES: HOW LOW AND FOR HOW LONG? 11

12 Bruce Stevenson is a Managing Director with A&M in New York, with more than 27 years of experience in applying quantitative technology to challenges within the financial services industry. He has a unique blend of experience developing analytical solutions within banks and as a financial services consultant. An industry thought-leader, Mr. Stevenson has published nearly 20 papers on risk management, portfolio management and quantitative analytics in lending and risk management journals. Bruce G. Stevenson Managing Director Alvarez & Marsal Financial Industry Advisory Services, LLC 600 Madison Avenue New York, New York (Office) (Mobile) Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change and achieve results. LEADERSHIP. PROBLEM SOLVING. VALUE CREATION. Follow us on: Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action. Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm s restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage. For more information, visit Alvarez & Marsal Holdings, LLC. All rights reserved. PART ONE: IMPACTS OF FALLING PRICES