Slide 1: Credit and Financial Market Concerns
Credit and Financial Market Concerns December 10, 2007 Pershing Square Capital Management, L.P.
Slide 2: Discussion Topics
Discussion Topics Current credit markets trends: Rising risk Credit Card Issuers: Tough road ahead Going forward: Why the worse may be yet to come 3
Slide 3: Current Credit Markets Trends: Rising Risk
Current Credit Markets Trends: Rising Risk
Slide 4: Corporate Spreads Have Widened Significantly
7 Corporate Spreads Have Widened Significantly ________________________________________________ Source: Bloomberg Investment grade corporate spreads, as measured by the Investment Grade CDX-IG-8 Index, have more than doubled since October, increasing from ~35bps to 86bps CDX-IG-8 Index 5-yr CDS Spre
Slide 5: Target CDS Spreads Have Tripled Since June
9 Target CDS Spreads Have Tripled Since June ________________________________________________ Source: Bloomberg Target's CDS spreads have more than tripled since June (and doubled since early October) to nearly 50bps Target 5-yr CDS Spread (June 2007 - December 2007) 46 bps
Slide 6: Financial Institution CDS Spreads Up Significantly
Financial Institution CDS Spreads Up Significantly Financial Index 5-yr CDS Spread (1) (June 2007 - December 2007) CDS spreads on large financial institutions with material credit card assets have significantly widened from ~20bps to ~100bps since June _______________________________________________
Slide 7: Credit Card Issuers: Tough Road Ahead
Credit Card Issuers: Tough Road Ahead
Slide 8: Credit Card Issuers: Tough Road Ahead
Credit Card Issuers: Tough Road Ahead Cost of funding rising Credit card securitizations spreads have increased considerably over the last several months Liquidity risk has increased Access to securitization markets remains a top concern for issuers Charge-off risk is escalating Charge-offs are expe
Slide 9: Cost of Funding is Rising Rapidly
17 Source: Deutsche Bank Cost of Funding is Rising Rapidly Spreads for credit card securitizations have more than quadrupled in recent months, with 5-year AAA spreads widening more than 50bps to approximately 60bps AAA Credit Card ABS Fixed-rate Spreads to Swaps (bp) 5-year AAA spreads
Slide 10: Liquidity Risks: Securitization Market Access
19 Liquidity Risks: Securitization Market Access During 2006 and 2005, Discover experienced a "temporary disruption in [its] ability to access the securitization markets. This disruption last approximately 5 months." - Discover Financial Services Prospectus, 6/1/07 "On November 26, CTC [Canadian Tir
Slide 11: Liquidity Risks: Discover's Excess Cash on Hand
21 Liquidity Risks: Discover's Excess Cash on Hand Due to concerns regarding access to the securitization market, Discover maintained excess cash on hand (1) equal to approximately 17% of its gross receivables as of Q3 2007 ________________________________________________ (1) Represents cash and cas
Slide 12: Liquidity Risks: Discover CFO Commentary
23 Liquidity Risks: Discover CFO Commentary "And at the end of August we held over $8 billion of cash liquidity on the balance sheet....We'll most likely continue to maintain this elevated level of cash liquidity on the balance sheet until we get a better sense as to when we will see more normalized
Slide 13: Charge-Offs Are Expected to Increase
Charge-Offs Are Expected to Increase Credit card charge-off rates are currently significantly below historical averages and at 10-year lows. With home prices falling and home equity refinancing markets tightening, consumer credit is expected to deteriorate and charge-offs are expected to rise Curren
Slide 14: Retail Credit Card: Potentially More Charge-Off Risk
Retail Credit Card: Potentially More Charge-Off Risk "Borrowers who are feeling cash-pinched and who have come to rely on their credit cards to provide financing for their day-to-day expenses, will be more likely to keep a general-purpose card current than their retail card. Thus retail cards may be
Slide 15: Credit Card Issuers: Relative Stock Performance
Credit Card Issuers: Relative Stock Performance Credit Card Issuers' Stock Prices Are Falling... 29 ________________________________________________ (1) Equal-weighted index of Discover, Advanta and Capital One. Source: Capital IQ. Credit card companies' stock prices have traded down more than 40% o
Slide 16: Credit Card Issuers: LTM P/E Multiples
Credit Card Issuers: LTM P/E Multiples ....And Valuation Multiples Are Dropping 31 ________________________________________________ (1) Equal-weighted index of Discover, Advanta and Capital One. Source: Capital IQ. (1) Credit card issuers LTM P/E multiples have steadily declined since September, dec
Slide 17: Wall Street's Bearish View on Credit Card Companies
Wall Street's Bearish View on Credit Card Companies Several research analysts have downgraded credit card companies in recent days due to bearish outlooks on the U.S. credit environment 33
Slide 18: Why the Worse May Be Yet to Come
Why the Worse May Be Yet to Come
Slide 19: Housing: We Are Still In The Early Innings - Delinquencies
37 Subprime and Alt-A delinquencies continue to escalate Sources: LoanPerformance, Deutsche Bank Housing: We Are Still In The Early Innings
Slide 20: Housing: Home Prices Falling With More Stress Ahead
39 Home prices are already falling with more stress still ahead Sources: S&P, Deutsche Bank Housing: We Are Still In The Early Innings
Slide 21: Housing: Many Months of Loan Resets Ahead
41 Many months of loan resets in front of us We are here Sources: LoanPerformance, Deutsche Bank Housing: We Are Still In The Early Innings
Slide 22: Housing: Foreclosures Predicted to Disrupt Markets Through Mid-2010
43 Foreclosures predicted to disrupt housing markets through mid-2010 Sources: LoanPerformance, Deutsche Bank Housing: We Are Still In The Early Innings Rate Resets Ultimate Foreclosures Additional Information In connection with Target’s 2009 Annual Meeting of Shareholders, Pershing Square Capital M