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What it means across the

Capital Structure
Craig Dawson
May 2009
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estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are
based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.

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(Presented in Israel)
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I. Historical Backdrop – Secular Trends and
Impact on Asset Returns

II. Initial Conditions – Where Are We Today?

III. Opportunities – Where in Capital Structure

Should Investors Focus Now?

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 The Debt “Supercycle”

Debt Outstanding as a Percent of GDP

400
§ The 20 years+ of economic growth
leading up to 2007 were characterized Financ ials
by massive growth in private sector 300 Corporate
debt levels, providing the fuel for real

Percent (%)
Household
GDP growth Government
200

100

0
1947 1960 1972 1984 1996 2008

Personal Income vs. Household Debt

16000

§ In the latter stages of the “supercycle”, 14000 Personal Inc ome

household debt was used to 12000
supplement the shortfall in consumers’ Household Debt
Percent (%)

10000
personal income
8000

6000

4000
2000

0
Dec - 84 Dec - 90 Dec - 96 Dec - 02 Dec - 08

SOURCE: Haver Analytics

2
 Financial Innovation Supported the
Excesses
As of December 31, 2008

§ Traditional banks are systematically important, § During the moderation, the shadow banking
making them too big to fail or in some cases system grew as the major source of financing,
too big to rescue now the shadow has vanished

Total Assets as % of Host Country GDP

Growth in US Securities Market
UBS
25
Credit Suisse
Agenc y Alt A
HSBC
RBS
Barc lays Jumbo Subprime
Kaupthing Bank 20
Danske Bank
Other
Swedbank
Dexia Bank

USD (Billions)
Bank of Ireland 15
Bank Santander
Deutsc he Bank
Credit Agric ole
DNB 10
Unic redito
Swiss EMU
Soc gen
BBVA UK US
Intesea Sanpaolo 5
JP Morgan Nordic s
Citigroup
Bank of Americ a
Wells Fargo
-
95 96 97 98 99 00 01 02 03 04 05 06 07 08
0 100 200 300 400
Perc ent (%)

SOURCE: Bloomberg, As of December 31, 2008

3
 The Dual Asset Price Bubbles:
Equities and Housing
Debt Service Ratio/Equity
15 16,000
§ Continued household debt
accumulation provided a favorable Household Debt Servic e Ratio (LHS) 14,000
14
environment for assets that benefit DJIA (RHS) 12,000
from spending patterns of a levered

Percent (%)
13 10,000
consumer with access to easy money

DJIA
8,000
12 6,000

4,000
11
2,000

10 0
Jan- 85 Jan- 91 Jan- 97 Jan- 03 Jan- 09

Ratio of Home Prices to Rents

120
Home Price Index/CPI-U Rents

§ Access to cheap mortgage financing

allowed home price appreciation to 100
far outpace rental inflation
80

60

40
88 90 92 94 96 98 00 02 04 06 08

SOURCE: Haver Analytics, S&P

The Home Price Index is represented by the S&P-Case/Shiller Home Price Index.

4
 A Crisis of the System, Not
within the System

§ September 15th served as the turning point and

broke the super cycle of debt

§ The crisis is at the epicenter of the global economy,

not the periphery

§ The collateral damage and consequence are

astronomical

SOURCE: Bureau of Economic Analysis, Federal Reserve, Bloomberg, Goldman Sachs

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 Where Are We Today: Synchronized,
Severe Global Recession
G5 GDP Growth
6%
§ Global Economy in recession, but policy
may not be enough to turn it around soon
4%
§ Unlike 2001, can’t count on U.S.
consumer to come to the rescue
2%

% Change - YoY
§ Trade and capital spending are not filling
the gap 0%

§ No easy choices for the Central Banks

- 2%
U.S. U.K. Europe

- 4% Japan Australia

- 6%
Dec - 99 Dec - 01 Dec - 03 Dec - 05 Dec - 07

SOURCE: Haver Analytics

SOURCE: Bloomberg 6
 The Deleveraging Process

§ Four inter-related downward spirals

- Deleveraging the American homeowner
- Deleveraging the global banking system
- Deleveraging the leveraged investor
- Deleveraging the shadow banking system and securitized markets

§ Collateral damage throughout the global financial system

§ Dramatic public sector responses

- Fiscal policy offset by lack of private sector “will”
- Monetary policy offset by declining velocity

7
 Business & Household Borrowing
Plummet as Shadow Banking System
Seizes Up
Business vs. Household Borrowing
400
§ Consumer Borrowing is contracting for
the first time in Business Borrowing
300
50 years Household Borrowing

US$ (Billions)
200
§ Business Borrowing the next likely
candidate to de-lever, headwinds to
100
GDP growth persist
0

- 100
Sep- 60 Sep- 68 Sep- 76 Sep- 84 Sep- 92 Sep- 00 Sep- 08

Total "Private" Credit Market Debt

% of Private Credit Market Debt 45
§ Bank lending has remained fairly steady 40
over the past 50 years while the
35
“Shadow” System provided the fuel for
30
credit market growth
25 Bank Loans and Advanc es
T otal Sec uritization (Shadow Banking System)
§ While bank lending has picked up in 20
recent months, it hasn’t yet replaced the 15
hole left behind by Shadow Banking 10
system 5
0
Sep- 52 Sep- 60 Sep- 68 Sep- 76 Sep- 84 Sep- 92 Sep- 00 Sep- 08

SOURCE: Bureau of Economic Analysis, Federal Reserve, Bloomberg

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 The Credit Market Impact
As of December 31, 2008
Investment Grade Trades At All-Time Wides*
600
§ Spreads on credit remain near all-
time wides 500

400

Spread (bps)
300

200

100

0
Apr- 97 Apr- 99 Apr- 01 Apr- 03 Apr- 05 Apr- 07 Apr- 09

Barclays Capital Bank Capital Index* Spread by Seniority (OAS)

§ Spread levels on Bank Capital 2,500
T ier 1
represent more than four standard Upper T ier 2
deviation move from historical 2,000
Lower T ier 2
averages
Spread (bps)

1,500

§ All seniority levels have been

1,000
punished in the recent sell-off amid
waves of indiscriminate forced
500
liquidations
0
Apr- 02 Apr- 03 Apr- 04 Apr- 05 Apr- 06 Apr- 07 Apr- 08 Apr- 09
SOURCE: Bloomberg, Barclays Capital
* The U.S. Credit OAS is represented by the Barclays Capital U.S. Credit Index
and the Investment Grade Banking is represented by the Barclays Capital U.S. Credit Investment Grade index.

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 Implications: A New Normal

Old Normal New Normal

Government Referee Referee/Player

De-
De-leveraging De-
De-globalization
Banking Casino Financing Utility Model

Re-
Re-Regulation
Consumer Age of Entitlement Age of Thrift

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 Can Investment Grade Default
Rates Really Be This Bad?
IG Default Rates - Current Implied vs.
Depression Era Record
§ Implied default rates are now far in 14%

Default Rate (5Y Cumulative) (%)

excess of Depression era defaults 12%

§ Implied cumulative default rate over 5 10%

years is about 14%, using CDX spreads 8%
of +250 bps and a 20% recovery rate
6%

4%

2%

0%
1933 1934 1935 1936 1937 1938 1939
Depression Era IG Default Current Market Implied
Rate (5Y Trailing Cumulative) (5Y Cumulative)

Decomposing IG Cash Bond Spreads

§ Implied default rates are inflated by 5%
liquidity premium in corporate bond Spreads vs. Government Bonds (%)
market 4%
Liquidity Premium
= 2.0%
3% Total Spread
= 4.5%**

2%
Default Risk Premium*
= 2.5%
1%

* Implied by Credit Default Swap premiums 0%

** As measured by Barclays Capital US Investment Grade Credit Index.
SOURCE: Moody’s, Bloomberg, Barclays Capital

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 Defaults Are Rising, But Low Recovery
Rates Will Be Most Challenging
As of 30 April 2009
Historicaly Global High Yield Default Rate

12-month issuer weighted default rate

16
§ Global high yield default rates have
14 Default Rate
surpassed their long-term average
12 Moody's Forecast
§ Moody’s expects default rates to peak
10
at 14.8% in the four quarter of 2009
8
6

4
2

0
May-89 May-93 May-97 May-01 May-05 May-09

§ Recent defaults in high yield market

point to low recovery rates in this cycle
- More senior debt now Company Sector Recovery Rate *
- Lack of Debtor-In-Possession Millenium America Basic Materials 6.00
(“DIP”) financing Merisant Co. Consumer Non-cyclical 10.00
- Low multiples on underlying Merisant Worldwide Consumer Non-cyclical 0.10
assets Tronox Worldwide Basic Materials 11.50
Nortel Networks Telecom 12.20
Smurfit-Stone Container Industrial 9.50
Spectrum Brands Consumer Non-cyclical 21.50
Aleris International Industrial 0.03
Young Broadcasting Telecom 0.01
Charter Communications Holdings Telecom 0.60
SOURCE: Moody’s, Goldman Sachs Idearc Inc Telecom 2.00
Refer to Appendix for additional forecast information.
* Recovery rate are calculated as the value-weighted average of bond prices 30-days after default

1cs_HY_market_review_02 12
Capital Structure Opportunity:
Secured Loans vs. Senior Unsecured Debt
Investment Opportunity Asset Coverage Waterfall Analysis

§ Credit default swap on first lien bank loan (LCDS) of B- Stress Test Scenarios
rated Orthopedic Implant company quoted 100 bps EV/EBITDA Multiple 6x 7x 8x
cheap relative to structurally junior cash bond
Asset Value $3772.8M $4401.6M $5030.4M
§ Positive basis and “Up-in-Capital Structure” positioning
achieved by moving from cash bonds into synthetic first %EV Erosion 66% 62% 56%
lien
Bank Debt & Other Sr $4350. 0M $4350.0M $4350.0M
Secured
Key Investment Considerations Bank Debt Asset Coverage 87% 101% 116%
§ At the time of LBO in Fall 2007, the company $786MM Value Remaining -$577.2M $51.6M $680.4M
in EBITDA and was acquired for 14.4 times EV/EBITDA
Sr. Unsecured Notes $1550.0M $1550.0M $1550.0M
§ Credit Default Swaps generally trading rich to Cash
Bonds (negative basis) due to premium demanded for Sr. Notes Asset Coverage 0% 3% 4%
liquidity Value Remaining -$2127.2M -$1498.4M -$869.6M
§ Instances of positive basis between cash bonds (junior
Sr. Subordinated Bonds $1015.0M $1015.0M $1015.0M
to first-lien bank debt) and LCDS (first lien) are almost
unbelievable Sr. Sub Notes Asset 0% 0% 0%
§ Notable limitation: liquidity in LCDS is limited Coverage

Implementation and Outcome Senior Unsecured Note vs. First Lien LCDS
840 Option Adjusted Spread (OAS) (LHS) Leverage Ratio (RHS) 7x
Option Adjusted Spread (OAS)

§ PIMCO favors first lien bank loans at wider spreads to 5.8x 800
structurally subordinated unsecured bonds in this 800 6x
environment 5x

Leverage Ratio
760 4.1x
§ At time of trade, bonds were bid at approximately
LIBOR+700 bps (based on $101 dollar price), while sell 4x
720
protection LCDS were quoted at 800 bps 3x
677
§ The spread between LCDS and Cash Bond tightened 680
2x
125 bps in first two weeks after
640 1x
SOURCE: PIMCO, Capital IQ, Bloomberg
Refer to Appendix for additional risk information. 600 0x
Sample for illustrative purposes only. Senior Unsecured Note First Lien LC DS

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 PIMCO’s Investment Approach Across
Credit Sectors
As of March 31, 2009

Credit Sector Fundamentals Technicals Valuations Policy Support

Mortgage-Backed Positive Positive Positive Positive

Securities Agency MBS Policy initiatives Spreads on highest Fed MBS program
enjoys implicit U.S. have helped to quality MBS remain aimed at supporting
Government- unfreeze MBS elevated, but are off mortgage finance
backing trading recent highs
Investment Negative Neutral Positive Positive
Grade Continued Market technicals Spreads at historical Government capital
Credit weakness given are mixed but highs injections into
deteriorating improving financial institutions
earnings aimed at stabilizing
markets
Emerging Neutral Negative Positive Positive
Markets Select EM credits Spillover from Country Fed/IMF liquidity
have sufficient financial crisis differentiation facilities extended to
self-insurance, poses significant likely to remain systemically important
others have near-term threat dominant economies
deteriorated rapidly
High Yield/ Negative Negative Positive Neutral
Bank Loans Defaults to High Yield credit Spreads are No policy response
surpass their long market remains significant wider than specific to these
term average frozen; de- historical peak levels sectors to date
leveraging process
continues

Refer to Appendix for additional risk information.

1cs_DI_review_04 14
same as diversified_income_review_11
 Summary

§ We are on a journey to a “new normal” -- markets are not likely

to resemble the experience of the past 20+ years

§ Seniority in the capital structure makes the most sense in

today’s environment

§ High quality investment grade credit may serve as attractive

return engine while dampening the volatility associated with
equities

§ Sector choices matter -- some investment grade sectors are

attractive, but many are likely to suffer downgrades and may
even default

§ Moving lower in the capital structure to equities will be

attractive once the pace of deleveraging slows
Refer to Appendix for additional opinion and outlook information.
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 Appendix

Past performance is not a guarantee or a reliable indicator of future results.

Forecast
Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or
a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.

OAS
The Option Adjusted Spread (OAS) measures the spread over a variety of possible interest rate paths. A security's OAS is the average return an investor
will earn over Treasury returns, taking all possible future interest rate scenarios into account.

Outlook
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment
strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of
downturn in the market. Outlook and strategies are subject to change without notice.

Risk
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or
less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency
fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to
changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness;
while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-
yield, lower-rated, securities involve greater risk than higher-rated securities. Equities may decline in value due to both real and perceived general market,
economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk
that a position could not be closed when most advantageous. Convertible securities may be called before intended, which may have an adverse effect on
investment objectives. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted
according to the rate of inflation; ILBs decline in value when real interest rates rise. Credit default swap (CDS) is an over-the-counter (OTC) agreement
between two parties to transfer the credit exposure of fixed income securities; CDS is the most widely used credit derivative instrument. Swaps are a type of
privately negotiated derivative; there is no central exchange or market for swap transactions and therefore they are less liquid than exchange-traded
instruments.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for
informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment
product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be
reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840
Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2009, PIMCO.

It is not possible to invest directly into an unmanaged index.

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