Loan Market Update 2009 CIPA Conference

Loan Market Update 2009 CIPA Conference

The Credit Crisis Round One The loans we dated We didn t lose the game, we just ran out of time Vince Lombardy Beginning in the summer of 2007, cracks started to form in the system Collateralized loan obligations ( CLOs ) were the first big problem area Sub-prime mortgages were a significant piece of the CLO market Unlike traditional loans, CLO loans were designed to be warehoused and quickly securitized into the global market Less credit due diligence vs. traditional loans Accounted for as an investment Credit concerns caused liquidity in CLO market to disappear Large mark to market write-downs on investment grade securities Impact was wide spread, but many banks were not directly affected 1

The Credit Crisis Round Two The loans we married If you owe the bank $100, that s your problem. If you owe the bank $100 million, that s the bank s problem J. Paul Getty The credit crisis has now spread to traditional bank loan portfolios Commercial real estate Commercial / industrial (particularly in troubled industries) Consumer debt (mortgages, home equity lines, credit cards) Fed announced up to $599 billion in losses from 19 largest banks WSJ reported up to $206 billion in losses from 940 regional banks This round of the credit crisis has impacted the entire banking industry 2

Losses from write downs and provisions have caused banks to: Seek government bail-out funds Nearly $600 billion committed to date in TARP and other government relief Raise new equity Several banks have either completed or announced plans to raise $8 billion in new equity Conserve capital Exit / curtail lending activities particularly in troubled / non-core segments Consolidate Fallout From the Credit Crisis Impact to the banking industry Oliver Wyman estimates that the current 8,000 banks in the U.S. will reduce by 2,000 or more Fail Since 01/01/08, regulators have seized 58 banks - 33 so far this year 3

Fallout From the Credit Crisis Impact to the banking industry Nothing is so permanent as a temporary government program - Milton Freedman REGULATION Greater oversight of lending practices More frequent / thorough reviews of portfolio quality Greater general business oversight including appropriate compensation Much tighter internal oversight Frequent portfolio reviews / stress tests Banks must balance external reputation / client relations with need to pro-actively manage capital and credit risk 4

Fallout From the Credit Crisis Impact to oil and gas lending Positives Despite precipitous drop in commodity prices, oil and gas remains relatively strong vs. other sectors High quality collateral which can be readily evaluated Proven borrowing base structure with low historical loss content Relatively transparent industry identifiable risks Faint signs of life in bank originations and syndications Negatives Extreme price volatility = credit uncertainty Increased credit exposure on commodity derivatives Fallout from isolated credit issues in sector Many banks are sidelined due to overall capital constraints, credit issues Several banks active in the sector are merging 5

Fallout From the Credit Crisis What to expect from your banks With scarce capital, shorter tenors have become more common Borrowers are refinancing existing 5 year loans with max. 3 year tenors 364-day facilities accounted for more than 70% of broad industry investmentgrade issuances in 1Q09 Going forward, a selective and cautious lending environment is expected to prevail Smaller deals with shorter tenors Reliance on club of relationship lenders but clubs harder to form Longer response time on requests Less flexibility on terms / advance rates Greater pricing at all levels of the credit spectrum Substantial fees for waiver consents Expectation of significant long term ancillary business Borrowers will probably have to spread commodity hedging exposure to more counterparties potential future exposure calculations are being revised 6

Volume ($Billions) Oil & Gas Transaction Issuance Amid continued weakness in the economy and lack of M&A activity, 2nd quarter 09 lending conditions are expected to remain tight 600 500 Loan Issuance $482 $535 400 300 $254 $299 200 100 0 $166 $165 $179 $140 $151 $121 $88 $99 $55 $56 $22 $4 2002 2003 2004 2005 2006 2007 2008 1Q09 Oil & Gas Volume Total Leveraged Loan Volume Source: LPC 7

Oil & Gas Transaction Issuance 2007 Deal Composition $178.7 Billion of Issuance 2008 Deal Composition $99.3 Billion of Issuance 1st Qtr 2009 Deal Composition $3.9 Billion of Issuance Debt Repay 0.4% CPB 1.0% Other 3.1% M&A CPB 0.7% Other 2.6% M&A 16.2% Debt Repay 2.7% M&A 10.6% 28.1% GCP/WC 67.4% GCP/WC 80.5% GCP/WC 86.7% 2007 Deal Composition $178.7 Billion of Issuance Integrated 11.4% Downstream 9.5% Upstream 37.2% Midstream 22.0% Services 20.0% 2008 Deal Composition $99.3 Billion of Issuance Integrated Downstream 8.0% 5.3% Midstream 10.4% Services 13.6% Upstream 62.8% 1st Qtr 2009 Deal Composition $3.9 Billion of Issuance Integrated 13.0% Downstream 4.1% Upstream Midstream 36.9% 13.5% Services 32.5% 8

Loan Market Update Oil & gas loan pricing 300 250 218 1Q-09 Oil & Gas Average Pricing by Borrowing Base (Avg Size $670 mm; Avg Tenor 2.77 yrs) 243 268 292 200 bps 150 100 50 45 45 46 48 0 < 50 >= 50 >= 75 >= 90 Source: LPC Drawn Cost (LIBOR +) Commitment Fees 9

LIBOR Spread Loan Market Update Oil & Gas Transaction Issuance 1,000 900 800 700 600 500 400 300 200 100 Average Secondary Spread, Oil & Gas Loans 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 Pricing and upfront fee increases were felt across the ratings spectrum, impacting even the highest-rated names For issuers with existing deals tied to marketbased pricing, new deals show a resetting of floors and caps Asset buyers have begun to demand premium fees, margins, and terms across the credit spectrum Banks and non-bank lenders have witnessed an increased cost of capital 105.0 100.0 95.0 90.0 85.0 80.0 Some lenders are engaged in secondary market purchase programs to take advantage of familiar names at discount prices Average Bids, Oil & Gas Loans Source: LPC 75.0 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 10

Union Bank Overview Facts and figures With $69 billion in total assets, Union Bank is the 16th largest U.S. bank and among the best capitalized banks in the U.S. Rated A+ / A2 / A+ (S&P / Moody s / Fitch) Union Bank has experienced minimal impact from the disruption in the capital markets No sub-prime exposure No TARP money Healthy, growing deposit base No funding concerns Wholly-owned by Mitsubishi UFJ Financial Group, Inc., Japan s largest bank by market value 11

Union Bank Capabilities Petroleum Group Uninterrupted 27 year track record arranging financing transactions for the oil and gas industry Expertise in: Structuring, underwriting and syndication of 1 st lien and 2 nd lien transactions Commodity, interest rate and currency hedging Cross-border and Canadian $ transactions through our Calgary branch Direct equity investments Treasury management and investment products 1031 like-kind exchange services Commitments to the oil and gas industry totaling $5.2 billion Lending staff of 26 professionals, including four petroleum engineers Syndications & Placement consists of 11 professionals 12

Contact Information Dallas - Lending Houston - Lending Calgary - Lending Los Angeles - Engineering Carl Stutzman Senior Vice President & Manager 214-922-4202 carl.stutzman@uboc.com Randy Osterberg Paul Cornell Phil Taylor Dexter Yuen Senior Vice President Senior Vice President Senior Vice President Senior Vice President & Manager 214-922-4205 713-286-3065 403-233-4805 213-236-7578 randall.osterberg@uboc.com paul.cornell@uboc.com phil.taylor@uboc.com dexter.yuen@uboc.com Sean Murphy Damien Meiburger Senior Vice Presient Senior Vice President 214-922-4208 713-286-3059 sean.murphy@uboc.com damien.meiburger@uboc.com Address: Address: Address: Address: 500 North Akard, Suite 4200 1331 Lamar Street, Suite 1360 440 2nd Ave SW, Suite 730 445 S. Figueroa Street, 13th Floor Dallas, TX 75201 Houston, TX 77010 Calgary, Alberta T2P 5E9 Los Angeles, CA 90071 Fax: 214-922-4209 Fax: 713-286-3051 Fax: Fax: 213-236-5065 13

Contact Information Syndications Mezzanine Finance Fixed Income Brian Zimmer Ted McNulty Lee Schreibstein Senior Vice President Senior Vice President Senior Vice President 213-236-7201 213-236-4224 646-452-2117 brian.zimmer@uboc.com ted.mcnulty@uboc.com lee.schreibstein@uboc.com Address: Address: Address: 445 S. Figueroa Street, 16th Floor 445 S. Figueroa Street, 21st Floor 551 Madison Ave., 11th Floor Los Angeles, CA 90071 Los Angeles, CA 90071 New York, NY 10022 Fax: 213-236-6823 Fax: 213-236-7619 Fax: 646-452-2120 14