Transcript Market Industry Update

Charting New Territory
January 14, 2009
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Strength and Stability
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Wells Fargo continues to be one of the strongest and best
capitalized banks
Our unchanging vision, values and time-tested business model
will guide us into the future and are—now more than ever—a
competitive advantage as our industry evolves
Our capital ratios and credit ratings are among the strongest of
our industry peers
Our average products per retail and commercial customer are at
record highs
We’re known and admired for our conservative financial position
As a testament to our strength, Wells Fargo was able to raise
$12.6 billion of equity in the largest non-IPO offer ever
Based on third quarter results for peers.
About Wells Fargo Energy Group
 Year Established: Lending to the Energy industry for 30+ years
 Office Locations: Houston, Dallas, Denver, Charlotte, New York
 13 in-house engineers and technicians
 Total Commitments: exceed $20B
 Complimentary Strengths:
 Investment Banking Capabilities
 Strong Private Capital Focus
Powerful Combined Platform
On a pro forma basis, the
Wells Fargo and Wachovia
platforms form a leading
platform in the energy sector:
• #3 oil and gas lead
arranger of leveraged loans
• #5 bookrunning manager of
high yield transactions
• Balanced platform serving
the midstream, upstream,
and services sectors
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Risk/Return Matrix
Target Rate of Return %
35+
Equity
30
25
Mezzanine Debt
20
15
(including sub debt and
development loans)
10
5
0
Bank Loan
----------- Development/Exploitation -----------
----------- Exploration ------------
(Engineering Risk)
(Geologic/Geophysical Risk)
PDP
PDNP
PUD
Reserve Risk
Probable
Possible
Current Market Update
2nd Half
2007
Panic and
Losses Start
to Show
Q1 2008
Losses
continue to
rise
Q2 2008
Officially in
Bear Territory
 Sub-prime mortgage crisis hits CLO market in June / July, causing one of the largest corrections
in 20 years
 Bear Stearns, BNP and other institutions freeze funds; bank run on Northern Rock
 Strong credit borrowers tap CP back-up facilities as a result of instability in the credit markets
 Banks report billion dollars of write-downs, with UBS and Merrill leading the pack, and raise
capital from foreign sovereign funds, hedge funds and money managers to bolster their capital
bases
 Crude= $82.80/ NatGas= $6.57 (Average)
 Bear Stearns, once the fifth largest investment bank in the U.S., collapses and the Fed
intervenes to support JPMorgan’s purchase of the failed institution
 Fed cuts the Federal Funds target rate by another 200 bps collectively over three occasions and
opens the discount window to investment banks
 Banks continue to report huge write-downs, with Citi’s $18 billion and UBS’s $18.4 billion writedowns sending shock waves to the financial markets
 Auction rate security market fails, sending both holders and issuers of ARS scrambling for funds
 Crude= $97.91/NatGas= $8.66 (Average)
 Loan defaults rise to 2.58% as of June 30, up 232 bps since end of 2007
 Financial institutions sell off assets at prices significantly below par, cut dividends, and raise
more capital to shore up their capital bases
 Credit ratings of Morgan Stanley, Merrill, Lehman, MBIA and AMBAC get cut
 Crude oil prices rise exponentially (up 44.55% YTD), as investors flee to the commodities
market to combat inflation, causing more stress on the U.S. economy
 Crude= $124.06/NatGas= $11.39 (Average)
Source: Various news articles
Current Market Update
Q3 2008
A Bad Market
gets Worse
Q4 2008
A Bad Market
gets Worse
Source: Various news articles
 Third quarter will be remembered for the final weeks of September:
 Sept. 9th the government bails out Fannie Mae and Freddie Mac
 Sept. 15th Lehman files for bankruptcy
 Sept. 15th Bank of America acquires Merrill Lynch
 Sept. 16th the Fed lends $85 billion to AIG
 Sept. 18th Lloyds acquires HBOS
 Sept. 19th U.S. Treasury announced a temporary guarantee on money market mutual
funds
 Wells Fargo agrees to buy Wachovia
 Failure to pass $700 billion Troubled Asset Repurchase Plan (“TARP”) causes unprecedented
turmoil in the financial markets.
 Crude= $124.06/ NatGas= $11.39 (Average)
 Fourth quarter began with Congress passing the $700 billion Troubled Asset Repurchase Plan
 Passing of the TARP lead to the end of the Investment Bank era as Goldman Sachs and
Morgan Stanley applied to become bank holding companies in order to tap in to the
government funds
 In a coordinated move, the Federal Reserve and other central banks reduced lending rates
around the world
 The Fed’s benchmark interest rate was cut to the lowest in history at 0.0% to 0.25%
 S&P downgraded credit ratings of eleven top global banks
 Autos look to tap into TARP plan, with GMAC receiving $5 billion in funds
 Primary loan syndication market essentially closed
 Wells Fargo officially acquires Wachovia as of December 31, 2008
 Crude= $60.44/ NatGas= $6.67 (Average)
U.S. Overall Syndicated Loan Issuance by Purpose
1Q05-4Q08
Credit Crisis
Effect
Current Market Update
 Pro-rata (primarily bank only) volume. With institutional volume trending downward
even more quickly than overall activity, pro rata loans grabbed 61% of total loan volume
in the fourth quarter –up from 53% in the third quarter and from 53% during the first half.
For the full year, the pro rata loan share jumped to a six-year high of 53%, from a recordlow 28% last year.
 Institutional volume -down 94%. For all of 2008, institutional activity dropped 82%,
to a six-year low of $71 billion, from the record $387 billion established in 2007.
 LBO transaction volume. Total transaction volume fell to $3.2 billion in the fourth
quarter, a 97% drop from the final three months of 2007
 Amendments. While new-issue volume has fallen, amendment activity has exploded.
Amendments have caused spreads to increase by an average of 200.0 bps.
Source: LCD Quarterly Review
Crude Oil Price Deck Comparison Top 5 Banks
(August vs. Current)
$80.00
Average Competitors
Aug-08
$75.00
Average Competitors
Jan-09
$70.00
$65.00
$60.00
12%↓
$55.00
4%↓
4%↓
22%↓
$50.00
34%↓
$45.00
2009
2010
2011
2012
2013
Natural Gas Price Deck Comparison Top 5 Banks
(August vs. Current)
$7.30
Average Competitors
Aug-08
$7.10
Average Competitors
Jan-09
$6.90
$6.70
$6.50
$6.30
3%↓
>1%↓
>1%↓
$6.10
11%↓
$5.90
19%↓
$5.70
$5.50
2009
2010
2011
2012
2013
Bank Market Update (as of 2008)
Of the 23 banks we spoke to:
 Only 14 are in the market for new deals
 Of those 14, 10 say that they are open to deals only if priced “very well”
Comments heard across the board include:
 “More selective on first lien names, needs to be middle of fairway, no to stretch”
 “Accommodate existing loans and not encouraged to grow book for new lenders
until gets more direction in 2009”
 “Can't see anything changing/improving until at least the second half 2009 (not like
in past where each January gets a clean slate and a new budget)
 “Concerned about next Borrowing Base Redetermination season and tight liquidity
for some borrowers.”
 “Very high hurdles”
 “Even if return meets hurdle, needs ancillary business out of the blocks; leaning
more to public deals since more capital markets opportunities
Our View on the 2009 Bank Market
Where we are today:
 Hearing much of the same from last month
 Many lenders are conserving their capital to support only existing clients
 It is now “an understood” that pricing will go up
 Lenders with more levered borrowing bases being told that the price deck
could severely limit availability in 2009
 Beginning to see expected covenant breaches for 2nd and 3rd quarters
 Relative value continues to be a hot topic
Conclusion
What we are expecting from lenders still doing new money deals in 2009:
 3 year is the max on E&P (and likely for midstream) due to tenor premiums
 Big unknown unused commitment fees due to tenor premiums: Euro banks are expecting 2030% of drawn margin….37.5 to 50 bps may be the new floor.
 Price Decks for crude are down approximately 30% from September and 17% for natural gas.
 For next redetermination season, we expect significant decreases in borrowing bases…some
property sets will be hit more than others.
 E&P up front expectations are in the 75-125 range
 Pricing grids for E&P companies based on usage are up 75-100bps for new money deals
(L+200-300 for lenders that can actually do new money).
 Expect midstream to range from 350-450 bps
 Upfront fee for E&P 75-125 bps, Midstream 100-200 bps upfront
 Undrawn fees are up.
 Other structural aspects have tightened across the board (i.e. more and tighter covenants).