Investment Strategies

 

                      Distressed Securities 
                      o   Bank debt or bonds of companies that are in economic distress. The underlying factors causing distress
                           include: 
                           •  	Macro-economic issues 
                           •   	Competitive issues
                           •    Technological obsolescence 
                           •  	Accounting or legal issues 
                           •  	Management issues 
                          Oftentimes, there is more than one issue at play. At the time that investors perceive the additional
                          risk in holding securities that are becoming distressed, there is a redistribution of these securities
                          to new investors, such as Redwood, that have more analytical capabilities and a greater risk 
                          appetite. Our objective is to invest in those situations where we believe we are investing at low
                          valuations and where we believe there is a reasonable expectation of a recovery in values.
                          The time frame for these investments is usually one to three years.

Related Equity Investments o Public equities that have traded down due to the same factors that are causing economic
distress. Oftentimes, there is change in the outlook for an entire industry and we focus on all of
the companies involved, not just those that are over-leveraged. Sometimes, the less leveraged
public companies reflect a lower valuation than the debt securities of leveraged companies.

Undervalued Credit o Bank debt or bonds of performing companies that have traded down due to negative
perceptions, earnings declines or technical supply/demand issues in the marketplace.

Capital Structure Arbitrage o Hedged investments within a capital structure – typically long a senior layer of debt and short a
more junior layer of debt in some ratio. This strategy can be used to express a bullish or bearish
expectation depending on the ratio employed. o Hedged investments within an industry – typically long a bond and short the debt or equity of
another company in the same industry. All capital structure trades are designed to exploit pricing
discrepancies between different securities. Leveraged Loans o Bank debt of leveraged companies. These are lower risk investments in the top layer of a
company’s balance sheet. Typically this layer represents 30%-50% of the company’s value.
With the use of one to two times leverage, an investment in this layer can produce attractive
returns.

Designated Investments o Iliquid investments in special situations with high return potential. These are usually private
equity investments in companies or industries in which we have a good research background,
and where the situation presents an attractive transactional dynamic.

Loan Origination / New Issue Debt o Newly issued debt of leveraged companies. This category encompasses the following: • High interest loans to companies that cannot arrange traditional financing. These loans must
have either some good collateral or some other strong valuation underpinning. • New issue bonds from traditional underwriters that are offered with greater than market yield
due to one of many factors.





Distressed Securities o Bank debt or bonds of companies that are in economic distress. The underlying factors causing distress include: • Macro-economic issues • Competitive issues • Technological obsolescence • Accounting or legal issues • Management issues Oftentimes, there is more than one issue at play. At the time that investors perceive the additional risk in holding securities that are becoming distressed, there is a redistribution of these securities to new investors, such as Redwood, that have more analytical capabilities and a greater risk appetite. Our objective is to invest in those situations where we believe we are investing at low valuations and where we believe there is a reasonable expectation of a recovery in values. The time frame for these investments is usually one to three years. Related Equity Investments o Public equities that have traded down due to the same factors that are causing economic distress. Oftentimes, there is change in the outlook for an entire industry and we focus on all of the companies involved, not just those that are over-leveraged. Sometimes, the less leveraged public companies reflect a lower valuation than the debt securities of leveraged companies. Undervalued Credit o Bank debt or bonds of performing companies that have traded down due to negative perceptions, earnings declines or technical supply/demand issues in the marketplace. Capital Structure Arbitrage o Hedged investments within a capital structure – typically long a senior layer of debt and short a more junior layer of debt in some ratio. This strategy can be used to express a bullish or bearish expectation depending on the ratio employed. o Hedged investments within an industry – typically long a bond and short the debt or equity of another company in the same industry. All capital structure trades are designed to exploit pricing discrepancies between different securities. Leveraged Loans o Bank debt of leveraged companies. These are lower risk investments in the top layer of a company’s balance sheet. Typically this layer represents 30%-50% of the company’s value. With the use of one to two times leverage, an investment in this layer can produce attractive returns. Designated Investments o Iliquid investments in special situations with high return potential. These are usually private equity investments in companies or industries in which we have a good research background, and where the situation presents an attractive transactional dynamic. Loan Origination / New Issue Debt o Newly issued debt of leveraged companies. This category encompasses the following: • High interest loans to companies that cannot arrange traditional financing. These loans must have either some good collateral or some other strong valuation underpinning. • New issue bonds from traditional underwriters that are offered with greater than market yield due to one of many factors.