1. Presentation to JSLA Tokyo, Japan November 18, 2004

2. 2 Confidential Highland is one of the Premier Loan Managers Introduction  Founded in 1993, Highland is a market leading Investment Advisor, specializing in credit, structured product and special situation investing  Fundamental research-driven approach to inefficient markets  Highly successful value-oriented investment style  Approximately US$11 billion in assets under management  US$9.5 billion in senior secured loans  US$1 billion in high yield bonds  Collateral manager for 12 structured vehicles  Market-leading performance through all markets since inception  10 year senior secured loan return of 8.24%, versus 5.95% for CSFB Leveraged Loan Index*  Positive returns in 45 of the last 47 quarters  Average CLO Equity return of 25%  Only Morningstar “5 star” rated manager of floating rate funds  Pioneered Development of Institutional Loan Market  Leading manager of senior secured loans in a US$1.075 trillion market  12 Structured/Synthetic Funds  4 Institutional Separate Accounts  4 Retail Funds  5 Hedge Funds

3. 3 Confidential Highland Current US Economic Outlook Economic Outlook  US economy recovery is mature  Likely to maintain at trend economic growth (3.5%)  Modest overall inflation, but selective hot spots  Budget deficit is here to stay  Weak dollar  Rising Interest Rates  Company profits mixed  Consumer spending flagging/high consumer debt Impact on Traditional Investment Classes Bad for longer duration assets Fixed Income Equities Interest Rates: Constrains progress the broad market The current S&P 500 PE ratio is 20.0 The current dividend yield of the S&P 500 is 1.6% Growth Interest Rates

4. 4 Confidential Implications for Investment Portfolio Asset Allocations Economic Outlook Interest Rates  Move from longer duration asset class (De- allocate from Bonds)  Move into Floating Rate instruments  Inflation Linked Bonds  Loans – an expanding asset class Growth  De-allocate from Equities and find alternative sources of Alpha  Increase allocations to higher yielding securities  Enhanced cash  Structured products  High Yield  Convertibles – Limited supply of quality securities  Diversify alternative investment allocations  Hedge Funds  Other

5. 5 Confidential Investment Climate Many Asset Classes Have Underperformed Expectations Alternative Asset Performance Equity and Fixed Income Performance Source: Pertrac/Bloomberg. – 09/03 Source: CSFB/Tremont Hedge Fund Index – 09/03

6. 6 Confidential Investment Climate US Public Pension Funds Percent of state pension plans that are underfunded Distribution of 123 state pension systems by funded ratio –97 of 123 state pension funds are underfunded –Nine states have underfunded pension liabilities that exceed their entire annual state budgets –With an average actuarial earnings assumption of 8%, Wilshire forecasts that underfunded state pension shortfalls will grow by $10 billion per year State pension funds Financial overview of state retirement systems (in billions) Note: Funded ratio = (market value of plan assets) / PV(plan liabilities), the discount rate is equal to the actuarial earnings assumption Source: Wilshire report on state retirement systems, March 2003 100% funded Source: Wilshire report on state retirement systems, March 2003

7. 7 Confidential Investment Climate US Corporate Pension Funds Corporate pension funds “The nation’s corporate pension plans are $300 billion short of what they will eventually need to cover the benefits for 44 million active and retired workers, according to federal government estimates.” Workforce Management, September 2003 “By the end of the year it is expected that 70% of the companies in the S&P will have underfunded pension plans -- the highest level in 10 years.” Reuters, November 2003 “Pension costs for S&P 500 companies are expected to balloon to $19 billion from $4 billion last year per annum.” Reuters, November 2003 Examples of corporate funding—2003 ($ millions) 1 Announcement of intent. Full contribution has not been made to date. Source: Company 2002 financial reports and press releases

8. 8 Confidential  Senior secured collateral offers excellent risk adjusted returns  Floating rate coupon offers protection from rising interest rates and attractive current income  Callability, amortization, and prepayments result in short average lives, short duration  Unique product attributes lead to low correlation to other asset classes  Significant secondary market liquidity  Low price volatility is well suited to leverage  6-8% return via structured notes  15-20% return via CLO equity  CLOs outperform other types of CDOs  Loans enhance the returns and reduce the volatility of traditional fixed income portfolios Senior Secured Loans Have Historically Offered Attractive Returns Through all Types of Market Conditions Loans As Alternative Investments This page contains general information concerning the characteristics of senior secured loans as an asset class. There can be no assurance that senior secured loans will continue to exhibit each of these characteristics as an asset class, or that each of the senior secured loans in which Highland invests (or in which Highland has invested) will exhibit each of these characteristics.

9. 9 Confidential Risk Adjusted Returns Outperform Other Asset Classes Loans As Alternative Investments Source: Scotia Capital/Bloomberg. Index returns assume reinvestment of all dividends and distributions, if any. Indices are unmanaged, have no fees or costs and are not available for investment.

10. 10 Confidential Low Correlation with Other Asset Classes Loans As Alternative Investments

11. 11 Confidential Loans As Alternative Investments Loans Outperform Other Asset Classes Risk vs. Returns of Various Asset Classes: 1992 - 2003 Source: CSFB, Ibbotson Associates, Bloomberg

12. 12 Confidential Loans As Alternative Investments Loans Dramatically Outperform in a Rising Interest Rate Environment Risk vs. Returns of Various Asset Classes: 1994 Source: CSFB, Ibbotson Associates, Bloomberg

13. 13 Confidential  Reduced duration/interest rate risk  Lower portfolio volatility  Positive incremental returns  Significant current income  Reduced correlation among portfolio investments Loans As Alternative Investments Benefits of Adding Loans to Fixed Income Portfolios

14. 14 Confidential Loans As Alternative Investments Loans Significantly Enhance the Risk/Return Profile of Investment Grade Portfolios Efficient Allocation of the LB Aggregate with Loans & High Yield Bonds: 1992-2003 Source: CSFB, Ibbotson Associates, Bloomberg

15. 15 Confidential CLO Equity An Attractive Alternative Investment  Attractive Absolute Returns: Average primary market CLO Equity returns have been 15%, with Highland CLOs averaging 25%.  Low Volatility: CDO returns have demonstrated low standard deviation of returns compared to other asset classes.  Low Correlation: CDO Equity has low correlation to other alternative investments, as returns are driven by defaults and loss.  Significant Current Income: Quarterly distributions provide faster, more consistent returns and quick payback compared to other asset classes.  Diversity & Transparency: CDOs have company, industry and rating diversity requirements and regularly provide investors detailed information on holdings.  Low Management fees Compared to private equity and hedge funds

16. 16 Confidential Typical CLO Structure CLO Equity (unrated) Collateral / Assets Highly Diversified Portfolio of Senior Secured Loans ( BB- Average Rating ) Liabilities Class A Notes ( AAA rated ) Yield on assets = LIBOR + 300 bps  In this example, the fund is leveraged 9 times, thus the total excess spread to the equity is approximately 16.5% over LIBOR Excess spread* = 150 bps Liabilities Weighted Avg. Coupon = LIBOR + 150 bps 10% 100% 90% Class B Notes ( A rated ) Class C Notes ( BBB rated ) Senior rated notes issued to Capital Market Investors CLO Equity

17. 17 Confidential  Investments underlying a Collateralized Loan Obligation (“CLO”) are funded through the issuance of several classes of securities  The securities issued by the CLO are tranched into rated and unrated classes. The rating of each class is primarily determined through the priority of interest in the cash flows generated by the collateral.  The most subordinated notes, or equity, of the CLO are generally unrated and are the residual of the transaction  CLO Equity seeks to leverage the excess spread between the lower-rated/higher interest collateral and the relatively lower blended cost of the liabilities issued by the CLO.  Returns are a function of the excess spread, less any collateral losses incurred during the life of the fund  Equity returns are a function of quarterly cash flow distributions, with return of principal in approximately 5 years  To the extent collateral defaults occur as or less than expected, the total returns received by the equity investors can be quite attractive Product Overview CLO Equity

18. 18 Confidential 0 2 4 6 8 10 12 14 16 18 20 22 24 26 5.36%8.71%12.05%15.40%18.74%22.08%25.43%More Range Frequency Average: 17.39% Standard Deviation: 4.78% Source: CSFB, Moody’s 1996 – 2002 Cohorts (as of 2Q03) Average Annual Returns CLO Equity

19. 19 Confidential Source: CSFB, Ibbotson Associates, Venture Economics, HFR Very Low Correlation to Other Asset Classes CLO Equity

20. 20 Confidential CLO Equity Versus Traditional Alternative Investments CLO Equity

21. 21 Confidential Investor Demand Who are the Investors and Asset Managers? High net worth Individuals Individual Investors Pension Funds Investors Collateralized Loan Obligations Hedge Funds Institutional Accounts Prime Funds Insurance Companies Asset Managers (institutional investors) New IssuesSecondary Market $$$$$ Loan Market Hybrid Funds Synthetic Loan Exposures Endowments Non-US Banks Insurance Companies Distressed

22. 22 Confidential Investor Demand Ongoing Product/Market Challenges  Assignment fees  Settlement logistics  Issuer and agent transfer consents  Public versus private information consideration  Regional market differences  Documentation  Practices  Bankruptcy laws  Product/collateral availability

23. 23 Confidential Summary Why Loans Now, More than Ever Before? Product  Attractive risk-adjusted returns  Low volatility  No interest rate risk  CLOs  Indexes  Derivatives Market  Mark-to-market  Ratings  Secondary market liquidity  Research  Quality  Quantity  Documentation Standardization  LSTA Leadership  Practices  Problem solving + Investor Confidence =

24. 24 Confidential Summary Why has this been Good for Borrowers? A large, liquid market-driven loan system provides  Access to more capital within the loan market  Speed compared to public securities registration  Confidentiality  Flexible, customizable terms  Calleability  Lower cost of capital  Relative  Absolute  Optionality/diversification among capital markets and investors

25. 25 Confidential Senior Secured Loans Offer a Broad Range of Attractive Investment Options Volatility Return 5.0x Levered Total Return Swap L + 500 5.0x Levered Total Return Swap L + 500 Unlevered B+ Term Loan Fund L + 300 Unlevered B+ Term Loan Fund L + 300 Unlevered BB Term Loan Fund L + 250 Unlevered BB Term Loan Fund L + 250 6.7x Levered Total Return Swap L + 700 6.7x Levered Total Return Swap L + 700 CLO Equity 18-25% CLO Equity 18-25% Unlevered Distressed Loan Fund 25-30% Unlevered Distressed Loan Fund 25-30% Risk/Return can be varied by: 1.Credit risk of underlying assets 2.Varying the degree of leverage used to acquire the assets Summary Alternative Investment Alternative Fixed Income

26. Presentation to JSLA Tokyo, Japan November 18, 2004 Back to Main Screen