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IN THIS ISSUE OF DISTRESSED DEBT INVESTOR

BIG PICTURE

RECESSION SEVERITY AND DEFAULT RATES

Controversy surrounds our contention that the peak default rate was lower in the 2001 recession than in the 1990-1991 recession mainly because the more recent recession was less severe than the earlier one. That difference, we believe, offset the severe deterioration in the ratings mix of the speculative grade universe in the expansion years between the two recessions. The controversy arises from the fact that if our analysis is correct, the implication of another recession on the scale of 1990-1991 is a peak default rate not seen since the Great Depression. In this report, we explain why the next recession should settle the question. We introduce a methodology for quantifying a recession’s severity according to its duration, depth, and diffusion. This new analysis enables investors to estimate where the default rate should land as a function of recession severity. Like Albert Einstein after he predicted the amount by which the sun’s gravity would bend starlight, we eagerly await the event that will confirm or refute our model’s validity.

Distressed Debt Investor - February 22, 2007

BIG PICTURE

RECOVERIES AT NON-RECORD HIGH

The high recovery rates of 2006 have created concerns about the upside potential for buyers of defaulted bonds. Pessimists suggest that this is no short-term phenomenon but rather the reflection of some fundamental change in the system. Our analysis indicates, however, that 2006’s rate is not unprecedented, is within the range of statistical expectation, and probably will have only a minor effect on vulture managers’ returns over the next several years.

RECOMMENDATION

SELL: TEKNI-PLEX 12.75% SENIOR SUB NOTES

THIS RECOMMENDATION IS VALID ONLY FOR THE PUBLICATION DATE – OCTOBER 18, 2007

We recommend that investors short the 12.75% Senior Subordinated Notes due 2010 of Tekni-Plex, Inc. (“Tekni-Plex” or the “Company”). In our view, Tekni-Plex’s packaging business is more than sufficient to cover the Company’s secured debt in a restructuring scenario, but the Company’s other businesses are unlikely to cover the 12.75% Senior Subordinated Notes - even at prevailing prices. As a result, we expect further declines in the 12.75% Senior Subordinated Notes.

SELL: FINLAY ENTERPRISES 8.375% SENIOR NOTES

THIS RECOMMENDATION IS VALID ONLY FOR THE PUBLICATION DATE – AUGUST 23, 2007

We recommend that investors initiate a short position in the 8.375% Senior Notes due 2012 issued by Finlay Fine Jewelry Corporation, a wholly owned subsidiary of Finlay Enterprises, Inc. (“Finlay” or the “Company”). Finlay, which operates licensed fine jewelry departments in major department store chains and a smaller number of freestanding luxury-priced jewelry stores, has become overlevered due to a substantial decline in licensed departments and gross margin contraction. As a result, operating profitability has declined in recent years, despite gains in same-store sales. Given our relatively pessimistic view of Finlay’s prospects, we recommend that investors short the 8.375% Senior Notes.

Research Selections 2006/2007

The following selections illustrate the types of value-added research we provide for investors in the securities of financially troubled companies:

• Analysis of broad trends within the distressed debt sector, including pertinent economic and financial developments.
  
  
• Detailed fundamental analysis and valuation of distressed companies and their obligations, culminating in BUY and SELL recommendations.