Credit Risk and Credit Modeling

Credit Risk and Credit Modeling Mingsung Tang mingsung.tang@bofasecurities.com April 26, 2004 Banc of America Securities, Credit Strategy Group 1 Two different views of credit risk  Credit risk for buy-and-hold investors  Typical users: bank loan portfolios, insurance company portfolios  Mission: control and manage ultimate losses  Concerns: economic / agency / regulatory capital  Tools: risk ratings / scores, risk limits, industry concentrations  Preference: stability, predictability, not be “arb”-ed  Credit risk for total-return investors  Typical players: mutual funds, hedge funds, trading desks  Mission: mark-to-market value gains / losses  Concerns: relative value considerations  Tools: hedging, rating arbitrage, capital structure arbitrage, relative value  Preference: volatility, “arb” 2 High grade corporate bond market Ticker F GE GM C HSBA LN BAC VZ MWD GS DCX GR JPM TWX CMCSA WFC ONE CSGN VX FON LEH AIG WB MER COP DTE GR WMT CIT Issuer Mdy / SP $MV (billion) Ford Motor Co A3 / BBB$62.745 General Elec Co Aaa / AAA $56.175 General Motors Corp A3 / BBB $54.212 Citigroup Inc Aa1 / AA$46.632 HSBC Hldgs Plc Aa3 / A+ $35.514 Bank Of America Corp Aa2 / A+ $30.689 Verizon Comm Inc A2 / A+ $27.883 Morgan Stanley Aa3 / A+ $25.462 Goldman Sachs Grp Inc Aa3 / A+ $23.936 Daimlerchrysler Ag A3 / BBB $23.883 Jp Morgan Chase & Co A1 / A+ $23.747 Time Warner Inc Baa1 / BBB+ $22.982 Comcast Corp Baa3 / BBB $22.281 Wells Fargo & Co Aa1 / AA$21.117 Bank One Corp Aa3 / A $19.226 Credit Suisse Grp Aa3 / A+ $17.490 Sprint Corp Baa3 / BBB$17.071 Lehman Brothers Hldgs Inc A1 / A $16.989 American Intl Grp Aaa / AAA $16.471 Wachovia Corp Aa3 / A $15.685 Merrill Lynch & Co Inc Aa3 / A+ $15.602 Conocophillips A3 / A$15.543 Deutsche Telekom Baa2 / BBB+ $14.059 Wal-Mart Stores Inc Aa2 / AA $13.653 CIT Grp Inc A2 / A $12.757 Highly concetrated credit market Rest 17% Top 25 36% Next 100 17% Next 25 14% Next 50 16% 3 Recent defaults of high grade issuers … Defaulted Issuer WorldCom Qwest Capital Funding Enron Corp Finova Corp Pacific Gas & Electric Co Southern California Edison Co AT&T Canada Comdisco Inc NRG Energy Inc Kmart TXU Eastern Funding Co Ladlaw Inc Owens Corning Teleglobe Default Date Year Ago Rtg $Par (billion) 31-Jul-02 A3 / BBB+ $29.007 31-Dec-02 Baa1 / BBB+ $12.903 31-Dec-01 Baa2 / BBB+ $9.668 28-Feb-01 Baa1 / A$6.305 30-Apr-01 A3 / A $4.972 31-Jan-01 A2 / A $4.620 30-Sep-02 Baa3 / BBB $2.959 31-Jul-01 Baa1 / BBB+ $2.822 30-Sep-02 Baa3 / BBB$2.455 31-Jan-02 Baa3 / BB+ $2.383 29-Nov-02 Baa1 / NA $2.139 31-May-00 Baa3 / BBB $1.999 31-Oct-00 Baa3 / BBB$1.329 31-May-02 Baa1 / BBB+ $1.224 $85 billion 4 … and fallen angels Fallen Angels El Paso Corp Williams Cos Inc Tyco Intl Ltd Georgia-Pacific Corp Calpine Corp HCA Inc JC Penney Co Inc Tenet Healthcare Corp Dynegy Inc Abitibi-Consolidated Inc Xerox Corp Delhaize Grp Rite Aid Corp Lucent Technologies Inc Mdy / SP Caa1 / BB3 / B+ Ba2 / BBBBa3 / BB+ Caa1 / CCC+ Ba1 / BBBBa3 / BB+ B1 / BBCaa2 / CCC+ Ba1 / BB+ B1 / B+ Ba1 / BB+ Caa1 / BCaa1 / BHighest Rtg $MV (billion) Baa2 / BBB+ $12.428 Baa2 / BBB+ $9.183 Baa1 / A$8.933 A1 / AA $8.061 Baa3 / BB+ $7.991 A3 / A$7.336 A1 / AA $4.660 A3 / A$3.868 Baa1 / BBB+ $3.838 Baa3 / BBB$3.538 AA2 / AA $3.275 A3 / A$3.251 A3 / A+ $2.545 A2 / A $2.507 $81 billion 5 Historical default rates (source: Moody’s) 6 Corporate Default and Spread Incom ($ in billions) $10 $15 $20 $25 $30 $35 $40 $0 $5 Feb-99 Apr-99 Jun-99 Aug-99 Oct-99 Dec-99 Feb-00 Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01 Apr-01 Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Corporate Default (Notional) Spread Income Risk and reward 7 We didn’t start the fire … That was then (December, 1996) 600 Spread to Treasury (bps) 500 400 300 >Aa3 A1 A2 A3 Baa1 Baa2 Baa3 200 100 0 This is now (December, 2001) 600 Spread to Treasury (bps) 500 400 >Aa3 300 200 100 0 A1 A2 A3 Baa1 Baa2 Baa3 8 A real world example Portfolio Overview Client vs. US High Grade Tracking Index March 15, 2004 Portfolio Spread Spread Pickup Portfolio Duration Number of Issuers # of Issuers Account for 80% Weight 5% Spread Tightening 5% Spread Widening 5% Upside Tail 5% Downside Tail 5% Upside Tracking Tail 5% Downside Tracking Tail Sector Aerospace&Defense Autos&Autoparts Banks - European+ Banks - North American Basic Industries Brokerages Capital Goods - Manufacturing Consumer Products Energy Finance Food&Beverage Gaming&Lodging Healthcare Insurance - Life Insurance - P&C Media Pharmaceuticals REITs Retail Supermarkets Technology Telecom - European+ Telecom - North American Tobacco Transportation Utilities - Electric Utilities - Natural Gas NonCorp - Higher Rated NonCorp - Lower Rated Index %$D 54 bps NA 5.71 yrs 366 147 -19 bps 26 bps 1.10% -1.49% NA NA Index 2.49% 6.86% 3.21% 9.45% 4.71% 3.99% 1.81% 1.24% 5.61% 5.84% 4.45% 0.24% 0.59% 1.80% 2.00% 5.73% 2.05% 1.32% 2.25% 0.96% 2.02% 3.47% 6.11% 0.30% 2.13% 5.32% 1.48% 6.64% 5.94% Client %$D 103 bps 50 bps 6.03 yrs 78 38 -29 bps 37 bps 1.73% -2.26% 0.53% -0.66% Client 4.69% 9.68% 1.18% 1.66% 6.54% 5.55% 7.03% 1.03% 2.49% 1.15% 2.40% 1.41% 0.31% 1.24% 2.90% 11.20% 0.41% 3.06% 5.53% 1.48% 0.00% 0.31% 13.78% 1.82% 0.00% 4.01% 2.22% 0.00% 6.92% Index %$D Client %$D Utilities - Natural Gas NonCorp - Higher Rated NonCorp - Lower Rated Telecom - European+ Telecom - North American Tobacco Transportation Utilities - Electric Retail Supermarkets Technology Food&Beverage Gaming&Lodging Healthcare Insurance - Life Insurance - P&C Media Pharmaceuticals REITs Brokerages Capital Goods - Manufacturing Consumer Products Energy Finance Banks - European+ Banks - North American Basic Industries Aerospace&Defense Autos&Autoparts 0% 2% 4% 6% 8% 10% 12% 14% 16% 9 Portfolio tail risk Client Portfolio Tail Risk Allocation (sorted by risk contribution) Issuer FON F PEMEX-z CVC DISH GM VZ CCK YUM GR GS AM TWX LTR ED TYC WY OI KR DHI TGT SFI MEX-z CMCSA NS CN RCI/B CN DPH CCU DCX GR WMI ICI LN AWE BLL KRB MO L MWD DF TOL KFT ASN LNR POLAND-z OCR BA ASD BP/ LN TRP CN RTN BSY LN HLT NVR RCL CZR A CN AABA NA THX CAT AIG %$D 6.005% 3.010% 4.398% 2.078% 1.978% 4.314% 6.503% 0.932% 2.668% 2.512% 3.701% 0.874% 1.970% 1.989% 3.658% 1.364% 1.739% 0.443% 1.480% 0.920% 2.862% 1.206% 1.242% 1.329% 0.462% 0.717% 1.010% 1.096% 1.345% 2.045% 1.029% 1.268% 1.134% 0.707% 1.816% 0.677% 1.084% 0.611% 0.592% 1.550% 0.804% 0.790% 1.282% 0.415% 1.094% 0.923% 2.092% 1.742% 1.073% 1.116% 0.664% 0.636% 0.453% 0.295% 0.226% 1.179% 0.395% 1.091% 1.240% Spread 5%Dn 77 bps -3.62% 204 bps -6.08% 139 bps -3.63% 271 bps -6.46% 204 bps -5.22% 126 bps -3.08% 25 bps -1.45% 403 bps -10.25% 112 bps -3.15% 66 bps -3.12% 29 bps -1.56% 521 bps -6.24% 98 bps -2.78% 187 bps -2.90% 36 bps -1.29% 100 bps -3.54% 104 bps -2.42% 455 bps -8.96% 52 bps -2.65% 158 bps -4.60% 8 bps -1.29% 218 bps -2.81% 108 bps -2.85% 78 bps -2.33% 567 bps -7.58% 185 bps -4.14% 145 bps -3.52% 56 bps -2.42% 96 bps -2.79% 35 bps -1.54% 72 bps -2.97% 118 bps -2.01% 179 bps -2.44% 51 bps -2.98% 136 bps -2.57% 111 bps -3.57% 28 bps -1.86% 202 bps -3.59% 123 bps -4.00% 34 bps -1.23% 39 bps -2.15% 257 bps -2.36% 56 bps -1.55% 286 bps -3.99% 38 bps -1.72% 117 bps -2.11% 5 bps -0.72% 68 bps -1.16% 35 bps -1.71% 68 bps -1.39% 159 bps -4.08% 141 bps -2.67% 210 bps -4.83% 234 bps -6.19% 245 bps -6.00% 17 bps -1.42% 210 bps -2.74% 10 bps -1.15% 23 bps -0.96% P-5%Dn -3.33% -4.53% -2.93% -5.72% -4.55% -2.08% -1.28% -8.50% -2.66% -2.51% -1.58% -5.61% -2.45% -2.09% -1.08% -2.84% -1.98% -7.28% -2.17% -3.47% -1.05% -2.48% -2.27% -1.98% -5.60% -3.57% -2.46% -2.21% -1.79% -1.16% -2.14% -1.73% -1.91% -3.03% -1.14% -3.02% -1.87% -3.16% -2.81% -1.06% -1.98% -1.99% -1.17% -3.59% -1.29% -1.52% -0.65% -0.78% -1.24% -1.18% -1.94% -1.96% -2.57% -3.60% -4.53% -0.83% -2.46% -0.88% -0.71% P-Sprd 4.6 bps 6.1 bps 6.1 bps 5.6 bps 4.0 bps 5.4 bps 1.6 bps 3.8 bps 3.0 bps 1.7 bps 1.1 bps 4.6 bps 1.9 bps 3.7 bps 1.3 bps 1.4 bps 1.8 bps 2.0 bps 0.8 bps 1.5 bps 0.2 bps 2.6 bps 1.3 bps 1.0 bps 2.6 bps 1.3 bps 1.5 bps 0.6 bps 1.3 bps 0.7 bps 0.7 bps 1.5 bps 2.0 bps 0.4 bps 2.5 bps 0.7 bps 0.3 bps 1.2 bps 0.7 bps 0.5 bps 0.3 bps 2.0 bps 0.7 bps 1.2 bps 0.4 bps 1.1 bps 0.1 bps 1.2 bps 0.4 bps 0.8 bps 1.1 bps 0.9 bps 1.0 bps 0.7 bps 0.6 bps 0.2 bps 0.8 bps 0.1 bps 0.3 bps 226 bps P-Tail 20.0 bps 13.6 bps 12.9 bps 11.9 bps 9.0 bps 9.0 bps 8.3 bps 7.9 bps 7.1 bps 6.3 bps 5.8 bps 4.9 bps 4.8 bps 4.2 bps 3.9 bps 3.9 bps 3.4 bps 3.2 bps 3.2 bps 3.2 bps 3.0 bps 3.0 bps 2.8 bps 2.6 bps 2.6 bps 2.6 bps 2.5 bps 2.4 bps 2.4 bps 2.4 bps 2.2 bps 2.2 bps 2.2 bps 2.1 bps 2.1 bps 2.0 bps 2.0 bps 1.9 bps 1.7 bps 1.6 bps 1.6 bps 1.6 bps 1.5 bps 1.5 bps 1.4 bps 1.4 bps 1.4 bps 1.4 bps 1.3 bps 1.3 bps 1.3 bps 1.2 bps 1.2 bps 1.1 bps 1.0 bps 1.0 bps 1.0 bps 1.0 bps 0.9 bps Ratio 21% 33% 38% 42% 39% 41% 17% 39% 35% 21% 18% 84% 35% 64% 27% 28% 43% 51% 20% 34% 6% 78% 38% 34% 75% 45% 41% 23% 34% 23% 24% 59% 73% 17% 53% 31% 15% 56% 31% 28% 18% 109% 36% 72% 22% 55% 7% 59% 21% 49% 39% 53% 44% 38% 41% 12% 77% 9% 24% P-Ratio 23% 45% 47% 47% 45% 61% 20% 47% 42% 26% 18% 93% 40% 89% 33% 35% 52% 63% 24% 46% 8% 88% 48% 40% 101% 52% 59% 25% 53% 30% 34% 68% 94% 17% 119% 37% 15% 64% 44% 32% 20% 129% 48% 80% 29% 77% 7% 87% 29% 57% 82% 72% 82% 65% 54% 20% 85% 11% 33% Portfolio Tail Risk Allocation (by issuer) FON 9% F 6% PEMEX-z 6% CVC 5% Rest 47% DISH 4% GM 4% VZ 4% CCK 4% YUM 3% GR 3% GS 3% AM 2% Portfolio Tail Risk Allocation (by sector) Media 16.5% Rest 25.2% Telecom - North American 13.5% Aerospace&Defense 4.0% Retail 4.5% Autos&Autoparts 12.2% Basic Industries 7.4% NonCorp - Lower Rated 7.6% Capital Goods Manufacturing 9.1% 10 Tracking tail risk Client Portfolio Tracking Tail Risk Allocation Issuer FON CVC PEMEX-z DISH CCK YUM VZ GR AM LTR TYC ED GS OI DHI GM SFI NS CN RCI/B CN TGT KR BLL WY ICI LN DPH WMI CCU MO DF TOL LNR F ASD ASN OCR KRB POLAND-z HLT BSY LN NVR TRP CN BP/ LN RCL AWE L CZR KFT A CN TWX THX RTN FME GR AABA NA BA PL Spread 77 bps 271 bps 139 bps 204 bps 403 bps 112 bps 25 bps 66 bps 521 bps 187 bps 100 bps 36 bps 29 bps 455 bps 158 bps 126 bps 218 bps 567 bps 185 bps 8 bps 52 bps 179 bps 104 bps 72 bps 145 bps 35 bps 56 bps 136 bps 202 bps 123 bps 257 bps 204 bps 117 bps 39 bps 286 bps 51 bps 56 bps 159 bps 68 bps 141 bps 68 bps 5 bps 210 bps 118 bps 111 bps 234 bps 34 bps 245 bps 98 bps 210 bps 35 bps 276 bps 17 bps 38 bps 8 bps Client 6.005% 2.078% 4.398% 1.978% 0.932% 2.668% 6.503% 2.512% 0.874% 1.989% 1.364% 3.658% 3.701% 0.443% 0.920% 4.314% 1.206% 0.462% 0.717% 2.862% 1.480% 1.134% 1.739% 1.029% 1.010% 2.045% 1.096% 1.816% 0.611% 0.592% 0.790% 3.010% 0.923% 0.804% 0.415% 0.707% 1.282% 0.664% 1.116% 0.636% 1.742% 2.092% 0.453% 1.268% 0.677% 0.295% 1.550% 0.226% 1.970% 0.395% 1.073% 0.314% 1.179% 1.094% 0.915% Index 1.022% 0.000% 0.698% 0.000% 0.000% 0.000% 1.612% 0.087% 0.000% 0.095% 0.000% 0.144% 1.313% 0.000% 0.000% 2.774% 0.000% 0.000% 0.000% 0.578% 0.393% 0.000% 0.692% 0.079% 0.118% 0.382% 0.226% 0.227% 0.000% 0.000% 0.000% 2.788% 0.000% 0.051% 0.000% 0.221% 0.155% 0.000% 0.065% 0.000% 0.188% 0.164% 0.000% 0.657% 0.332% 0.000% 0.519% 0.000% 1.648% 0.000% 0.407% 0.000% 0.198% 0.509% 0.000% OW/UW 4.98% 2.08% 3.70% 1.98% 0.93% 2.67% 4.89% 2.43% 0.87% 1.89% 1.36% 3.51% 2.39% 0.44% 0.92% 1.54% 1.21% 0.46% 0.72% 2.28% 1.09% 1.13% 1.05% 0.95% 0.89% 1.66% 0.87% 1.59% 0.61% 0.59% 0.79% 0.22% 0.92% 0.75% 0.41% 0.49% 1.13% 0.66% 1.05% 0.64% 1.55% 1.93% 0.45% 0.61% 0.35% 0.29% 1.03% 0.23% 0.32% 0.40% 0.67% 0.31% 0.98% 0.59% 0.91% Pickup 3.8 bps 5.6 bps 5.1 bps 4.0 bps 3.8 bps 3.0 bps 1.2 bps 1.6 bps 4.6 bps 3.5 bps 1.4 bps 1.2 bps 0.7 bps 2.0 bps 1.5 bps 1.9 bps 2.6 bps 2.6 bps 1.3 bps 0.2 bps 0.6 bps 2.0 bps 1.1 bps 0.7 bps 1.3 bps 0.6 bps 0.5 bps 2.2 bps 1.2 bps 0.7 bps 2.0 bps 0.5 bps 1.1 bps 0.3 bps 1.2 bps 0.2 bps 0.6 bps 1.1 bps 0.7 bps 0.9 bps 1.1 bps 0.1 bps 1.0 bps 0.7 bps 0.4 bps 0.7 bps 0.3 bps 0.6 bps 0.3 bps 0.8 bps 0.2 bps 0.9 bps 0.2 bps 0.2 bps 0.1 bps 66 bps T-Tail 13.9 bps 9.8 bps 8.8 bps 7.1 bps 6.1 bps 5.6 bps 4.9 bps 4.8 bps 3.7 bps 3.0 bps 2.9 bps 2.8 bps 2.7 bps 2.5 bps 2.5 bps 2.4 bps 2.2 bps 2.0 bps 2.0 bps 1.8 bps 1.7 bps 1.7 bps 1.6 bps 1.5 bps 1.5 bps 1.5 bps 1.5 bps 1.4 bps 1.4 bps 1.3 bps 1.1 bps 1.1 bps 1.1 bps 1.1 bps 1.1 bps 1.0 bps 1.0 bps 1.0 bps 1.0 bps 1.0 bps 0.9 bps 0.9 bps 0.9 bps 0.8 bps 0.8 bps 0.8 bps 0.8 bps 0.8 bps 0.7 bps 0.7 bps 0.6 bps 0.6 bps 0.6 bps 0.6 bps 0.5 bps T-Ratio 27% 58% 58% 57% 61% 53% 25% 33% 125% 117% 47% 45% 26% 81% 58% 80% 120% 130% 68% 10% 33% 122% 66% 45% 86% 40% 33% 150% 86% 58% 179% 41% 100% 28% 112% 24% 62% 108% 74% 94% 119% 10% 108% 87% 46% 85% 44% 74% 44% 122% 38% 147% 28% 38% 13% Portfolio Tracking Tail Risk Allocation (by issuer) FON 21% Rest 23% YUM 8% CVC 15% CCK 9% PEMEX-z 13% DISH 11% Portfolio Tracking Tail Risk Allocation (by sector) Rest 24% Media 31% Capital Goods Manufacturing 22% Telecom - North American 23% 11 The efficiency frontier Spread to Swap vs 5% Tail Risk 350 300 Spread to Swap (bps) 250 200 150 100 50 0 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0% 5% Downside Risk 12 The landscape of credit risk models Fundamental Credit Research Rating Agencies Wall Street Research Fundamental credit worthiness Financial ratios Statistical Default Explanatory Model Altman Z-score BondScore, RiskCalc Estimate default risk First Generation Structural Model Moody's KMV, CreditGrade Long term default risk and implied spread Equity price and price history Default risk estimate Implied credit spread Second Generation Structural Model Credit OAS Model Implementation Example Model Objective Market Data Input Model Output Short term MTM risk and relative value Equity price, option price, credit spread Credit Risk Credit OAS Financial ratios Rating letter Rating watch/outlook Credit risk score 13 New tools for credit and portfolio analysis  Credit OAS Model  Links credit market with equity market and option market through Merton’s model (1974)  Generates forward-looking credit risk and relative value measures that help to avoid credit “blow-ups” before they happen  Well-suited to bank and finance companies  A step up from traditional equity based credit models  Lighthouse  Credit OAS Model for portfolios  Saddle-Point Methodology provides semi-closed form solution for portfolio tail risk without restrictions on distribution assumption  Calculates portfolio’s tail risk and each underlying credit’s contribution to portfolio tail risk  Customized optimization module that generates optimal hedging allocations 14 Risk concentration on the move … 15 … or not 16 The valuation of debt in Merton’s model Issuer’s Asset: Current Value = $10 billion Value Change = “Random Walk” Asset Volatility = 50% Dividend Distribution = 0% Risk Free Rate = 3% $16 $14 Potential Payoff to Debt Payoff to Debt Asset Value Distribution $12 $10 $8 $6 $4 $2 $0 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 Asset Value on Maturity Date Proposed Debt Issue: Face Amount = $5 billion Maturity = 5 years Coupon = 0% Question: Value of Debt? Debt Value = $4.30 - Put = $4.30 - BS ( S, X, r, T,  ) Assume that r = 3%, Debt Value = $4.30 - $0.87 = $3.43, Credit Spread = 454 bps 17 The credit “cliff” … 800 bps 700 bps 600 bps Ford Spread to LIBOR (bps) Oct. 2002 500 bps 400 bps 300 bps Current 200 bps Jan. 2000 100 bps 0 bps $0 $5 $10 $15 $20 $25 $30 $35 Ford Equity Price 18 Use equity price to predict credit spread … 200 bps 11-Oct-2002 180 bps US High Grade Average ASW 160 bps 140 bps 120 bps 100 bps 30-Apr-2003 80 bps 25 27 29 31 33 35 37 39 US High Grade Average Equity Price 19 Implied volatility tells more about credit … 200 bps 11-Oct-2002 180 bps US High Grade Average ASW 160 bps 140 bps 120 bps 100 bps 30-Apr-2003 80 bps 30 35 40 45 50 55 60 65 US High Grade Average Option Implied Volatility 20 Credit OAS illustrated 48% 2000 bps 38% 1500 bps Model Projected Spread Change 21 Equity Return Distribution 28% 1000 bps 18% 500 bps 8% -2% 0 bps -12% 20% 35% 50% 65% -500 bps 80% Firm Leverage (Debt over Debt + Equity Market Cap) Defining Credit Risk Expected Spread Widening 40% 30% Probability 20% 10% 0% -200 bps -100 bps 0 bps 100 bps 200 bps 300 bps 400 bps Spread Widening / Tightening Scenarios Credit Risk = Expected Spread Widening x Duration 22 Credit OAS in action: WCOM 160% $16 Option Implied Volatility Equity Price $14 $12 $10 $8 $6 $4 $2 $0 1/16/02 1/30/02 2/13/02 2/27/02 3/13/02 3/27/02 4/10/02 1,600 Spread to Swap 500 Credit Risk 1,400 1,200 400 300 200 100 0 1/2/02 600 Spread to Swap 500 Credit OAS 1,000 800 600 400 200 0 1/16/02 1/30/02 2/13/02 2/27/02 3/13/02 3/27/02 4/10/02 0 -100 -200 -300 -400 300 200 100 0 1/2/02 -500 -600 -700 -800 -900 -1,000 1/16/02 1/30/02 2/13/02 2/27/02 3/13/02 3/27/02 4/10/02 Option Implied Volatility (%) 140% 120% 100% 80% 60% 40% 20% 0% 1/2/02 600 Credit Spread (bps) Credit Spread (bps) 400 Credit OAS (bps) Credit Risk (bps) Equity Price 23 Credit OAS on the Web (www.bofa.com/coas) 24 Sector summary 25 Issuer Home Page 26