In This Issue: Recovery Ratings Three Years On: Benign Leveraged Market Or Investor Amnesia?: The leveraged debt markets, dominated by continuing growth of the syndicated loans in the U.S. and Europe, have wrapped up the most successful year in history, by most commercial standards. But from a credit perspective, the very success of the current market raises a striking and potentially troubling pattern: credit spreads at the lower end of the rating spectrum remain flat or declining.Recovery Ratings: Highlights Of The Class Of 2006: A quick review of several of the more highly visible loans rated in the past year demonstrates the variety of structures, analytical approaches, and rating outcomes that have emerged as Standard & Poor's assigned more than 700 new recovery ratings in 2006. European Second-Lien Loan Portfolio Review: Corresponding with the growth of the second-lien market, we are now seeing significantly more second-lien tranches within highly leveraged structures, particularly in LBOs. This increase in appetite is not surprising as institutional investors represent an ever-growing proportion of the market. Request For Comment: Introduction Of Sovereign Recovery Ratings: Standard & Poor's sovereign foreign currency recovery ratings will reflect our opinion on the extent to which a sovereign government will be willing and able to repay creditors under one or more scenarios where there is a future default on commercial foreign currency debt obligations. Introduction Of Sovereign Recovery Ratings: For speculative-grade issuers, Standard & Poor's assesses the likely default scenario and the fiscal, economic, and political profile of the issuer in a default situation, and draws relevant and distinctive conclusions on recovery given default. A Declining Road Ahead For European Recovery Ratings?: Market conditions have undoubtedly had an impact on credit dynamics. Average LBO purchase price multiples have risen by about a turn of EBITDA over the past two years in Europe, leading to greater leverage ratios. This indicates that most of the higher purchase price paid is being financed by debt and not equity. Record-Setting Leveraged Loan Market Shows No Sign Of Slowing (Yet): The market absorbed vast growth with hardly a speed bump. The reason was strong demand radiating from the structured finance market, where CLO issuance jumped to $86 billion during the first 11 months of 2006 from $44 billion during the same period in 2005. The Swelling Flow Of Global Capital To The U.S.: Danger Ahead?: Capital should move from rich countries to poor, since the returns on capital should be highest where capital is most scarce. But in recent years, inflows are defying trade theory, moving instead into the most capital-intensive economy in the world-the U.S. U.S. Leveraged Finance Market Set To Grow In 2007, Even Amid Some Signs Of A Peak In The Credit Cycle: There are signs that the credit cycle in the U.S. may be nearing its peak as leveraged loan originations are rising sharply, with the simultaneous narrowing of credit spreads, especially at the low end of the recovery rating spectrum. U.S. Credit Cycle Shows Signs Of Peaking After Prolonged Influx Of International Funds: In addition to the increased fund flows into the U.S. from abroad, there are no signs that a traditional macroeconomic catalyst will cause a surge in defaults in 2007-with the number of failures merely drifting higher as the result of company-specific problems. Frequently Asked Questions On Using Corporate Recovery Ratings In CDOs: It's important to remember that recovery rates are only one element of the cash flow/credit support analysis. The crucial aspect to remember is that the net effect on credit enhancement/ subordination is determined by a combination of scenario default rates, recovery rates, cash flow stresses, and the corresponding breakeven default rates obtained by running the cash flows. Europe's Leveraged Loan Market Keeps Up Its Blistering Pace: Even before all the numbers have been reported and added up, it's clear that 2006 will be another record year for the European leverage loan market. The second half alone, hit €59.4 billion from 118 transactions through the end of November. Second-Lien Recovery Ratings Remain Clustered At Low End In Second Half Of 2006: Since the inception of our recovery ratings, a majority of second-lien deals have received a '5'. Still, the recent increase in that number is notable, even as the reasons for comparatively low recovery ratings remain the same. | 
