CONTRARIAN CAPITAL MANAGEMENT, L.L.C.

U.S. and Global Distressed Investing

G R E E N W I C H

P A R I S

S O

P A U L O

H O N G

K O N G

Contrarian Capital Fund I, L.P.

2nd Quarter 2012
July 16, 2012
Annualized Net Returns

CCI

i,ii

S&P 500

iii

Credit Suisse
iv
Levered Loan Index
(Inception: Jan-92)

Q2 2012
YTD
1 Year
3 Year
5 Year
Since 01/01/01
Since Inception (Aug-1986)

0.31%
9.36%
3.30%
13.96%
3.45%
11.81%
12.14%

-2.75%
9.49%
5.45%
16.40%
0.22%
2.21%
9.49%

1.01%
4.52%
3.33%
10.08%
3.50%
4.72%
5.94%

Dear Investor:
We are very pleased to report that Contrarian Capital Fund I, L.P. (CCI) rose 0.31% in Q2
despite turbulent global markets that saw a 2.75% decline in U.S. equities and sharp declines in
emerging market and developed world stock markets. We have now returned 9.36% YTD. We
entered the quarter confident in our specific long positions so it is particularly gratifying that our
post-reorganization equity holdings and bankruptcy/trade claim investments both produced
positive returns, as did our performing U.S. debt investments.
On the short side, we foresaw the risk of dislocation early in the quarter. We therefore
opportunistically increased our short exposure early in the quarter to greater than our historical
levels, peaking at 25% on May 31st and ending the quarter at 15%. Our short exposure
contributed significantly to our positive results, with returns attributable to corporate bonds,
sovereign bonds, as well as market-index shorts against U.S. equities. As a firm, we now have a
number of people working to identify asymmetric bond short opportunities, defined as those
where our potential profit from our being correct in our analysis and the security collapsing is
much greater than the downside risk of our being wrong and the debt security rising. We are
pleased that this strategy is yielding fruit and we are confident that we can continue to
incorporate the strategy successfully in the future.
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We entered Q3 cautiously optimistic that the worst of the market volatility is behind us. We
therefore began to reduce our short exposure toward the end of Q2, though we remain more short
than our historic norm. Our portfolio is well-positioned to benefit from a moderate, albeit erratic
recovery. The average price of performing debt in our portfolio was about 75% at quarters end
compared to 81% one year ago. Invested capital stands at 92% long and 15% short. We have
continued to harvest investments that reach target prices in a disciplined fashion. Our view
remains that the distressed cycle, which started on December 1, 2008, has many more years of
above normal opportunities of which we will take advantage.
Q2 Reviews
The six main asset classes composing the buckets that make up the CCI portfolio performed as
follows over the past three months:
% of Q2
Average Assets

Q2 Gross
Returns

Q2 Attributable
Gross Returns

% of 6/30/2012
Assets

27.61%
11.55%
26.74%
16.21%
-11.65%
8.91%
11.65%

2.24%
-0.34%
1.06%
0.74%
7.02%
-7.32%
0.00%

0.67%
-0.04%
0.28%
0.10%
0.54%
-0.70%
0.00%

28.12%
11.00%
27.20%
16.31%
-15.25%
8.40%
15.25%

Cash/ Other

8.98%

-0.28%

-0.03%

8.97%

CCI Total

100.00%

0.82%

100.00%

U.S. Performing Debt

European Performing Debt
Bankruptcy/Trade Claims
Post Reorganized Equities
Shorts
Emerging Market Debt
Cash/ Restricted from Shorts

1. Short Positions
One unique aspect of our performance this past quarter was the extent to which we successfully
increased our short exposure in anticipation of a resurgence of sovereign risk in Europe coupled
with a fear of slowdown in the U.S. recovery. Short positions (excluding currency hedging)
averaged 11.65% of average assets over the quarter, as compared to just over 1% in Q1. Our
short positions contributed 7.02% in gross returns.
Spanish Sovereign Debt Shorts
We entered the second quarter with a short position in the ten year Spanish sovereign bond and
added to the Spanish short over the quarter as more detailed work led us to conclude that Greece
was likely a sideshow and that Spain would more likely be at the forefront of any subsequent
credit flare-up in Europe. We reached this conclusion based on the following:
1. While other countries (such as Italy) may have higher headline sovereign debt / GDP
ratios, Spains total debt ratio is amongst the highest in Europe once financial and
household debt are factored in;
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2. Spains debt load is likely understated due to chronic overspending by the autonomous
regions;
3. Spain has a significant primary deficit, implying a greater perceived need for fiscal
tightening and a likely deterioration in credit metrics in the coming years;
4. Spains unemployment rate is approaching 25% with over 50% youth unemployment,
potentially leading to severe social issues should the country attempt to tighten fiscally;
and
5. Spain had a housing bubble that has only been partially deflated, as a result of which
Spanish banks have large quantities of property-related loans on their books which have
not been appropriately provisioned and which will in all probability eventually result in
bank recapitalizations by the sovereign and/or EU.
Second quarter events confirmed our analysis. As expected, the catalyst was the banks
specifically, a bailout for Bankia that came just two weeks after the conversion of a loan from the
Spanish bank bailout fund and which eroded what little credibility the government retained. The
Spanish bond traded down from around 104 at 3/31 to around 93 in mid-June. At that point the
yield was around 7% which has historically been the point at which there has been some form of
policy or central bank response. We covered around half of our short at that level, locking in
some gains while keeping some optionality going forward. The bonds have bounced around
between 92 and 97 since that point, and are currently indicated around 95.
Also during the quarter, we started to focus on long opportunities in debt issued by Spains
autonomous regions, specifically Catalonia, which is the wealthiest such region. Our thesis is
that it would be almost inconceivable for the regions to default while Spanish sovereign bonds
do not, especially when one considers that the majority of Catalonian debt is owned by residents,
regional banks and insurance companies. We focused on bonds with the protection of
international law, believing that this would make it harder for the government to attempt to force
through a Greek-style restructuring. Of these international bonds, one stood out, namely a 2014
maturity Swiss Franc-denominated bond which we started buying in the low 70s for a yield in
the high teens. As of quarter end, this bond had traded up a few points to the 78 context, and we
anticipate a strong return from this long-Catalonia/short-Spain trade. Finally, in July there have
been numerous reports about some form of central government guarantee for regional debt which
if confirmed would be a strong positive for both legs of this trade.
Patriot Coal Short
A short position that we implemented in Patriot Coals 3.25% convertible bonds offers an
excellent example of an asymmetric company-specific short initiated based on industry and
granular company analysis. We shorted these converts in May in the high 90s while the market
was expecting their imminent refinancing. Our industry and company-specific credit analysis
suggested to us this refinancing was at high risk.

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With regard to the coal industry, our analysis convinced us of a rapidly deteriorating
fundamental outlook for thermal coal based on record low natural gas prices resulting in
dramatically reduced coal demand and a conversion of coal plants to natural gas, coupled with
threats to costly Central Appalachian coal mining profitability resulting from the expansion of
significantly cheaper mining sources in the Powder River Basin and elsewhere. We were further
convinced that metallurgical coal prices would collapse in the wake of a fall in European output,
significant weakening of Chinese demand, and the resumption of shipments from competitive
Australian mines after a season of flooding and reduced output.
With regard to Patriot, we believed the market was underestimating leverage on the company by
excluding legacy liabilities requiring material annual cash contributions from the analysis of
Patriots credit profile. Given that the coal industry operates on an annual contract basis, we also
correctly presumed that Patriot would struggle to obtain contractual counterparties in 2013 due to
its unstable credit position.
We anticipated that if PCX were to fail to refinance its converts the company would be forced to
file for bankruptcy. The PCX convertible bonds were issued at a holdco level and are
structurally subordinated to all of the funded debt and the legacy liabilities. As such, we
anticipated a recovery of 0-5% for the convertibles in a bankruptcy scenario.
Our thesis was proven correct as Patriot Coal failed to arrange a successful financing and
ultimately filed for bankruptcy on July 9th. We covered our last bond in the short position at 7%
of par. We are currently evaluating opportunities in more senior components of the capital
structure on the long side.
Market Index Shorts
Several factors led us to put on an S&P 500 spyder short position this quarter that was
significantly larger than positions we have established in the past. First, we wanted to protect
our post-reorg and EM distressed exposure. Second, our work on global industrial sectors that
are a harbinger for global economic trends led us to believe there were signs of a pause in global
growth. Finally, our work on the ground in emerging markets, such as by our Hong Kong and
So Paulo-based analysts, drew our attention to the risk of a real or perceived slowdown in
China.
2. United States Performing Credits
CCIs U.S. performing credits accounted for 27.6% of average assets during the second quarter
and returned 2.24% on a gross basis for the quarter.
Among performing credits, term debt in Audio Visual Services, which provides audio visual
equipment to hotel and business center customers for presentations and customers, was a solid
performer. Q1 EBITDA was up nearly 80% year-over-year, and the company has consistently
outperformed its own projections by a healthy margin.

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Debt in power generator TXU rose during the quarter. An upwards turn in gas prices suggests
pricing may improve for TXUs largely coal-powered generating assets. In addition, there is
increasing concern that capacity shortages in TXUs Texas-based markets will become endemic,
forcing power price increases. We continue to like the underlying value of TXUs assets.
This quarter we sold in the low $90s a position in NYC Industrial Development Agency Bonds
that we had purchased in the low $70s. The bonds were used to finance the construction of
Mets/Citi Field. We purchased them after we concluded they were being unfairly discounted due
to the 2Q11 lawsuit filed by the Madoff trustee against the owners of the Mets. The bonds are
collateralized by a gross pledge of revenue from the stadium which we had always believed
covered our purchase price under even worst case scenarios.
In RMBS, we began purchasing non-agency bonds guaranteed by AMBAC. We continue to view
the bonds as compelling investments at current levels, as many of them are covered on a
standalone basis without the benefit of the guarantee. Additionally, we believe the bonds trade at
a discount to the potential value in their rehabilitation plan. AMBACs guaranteed portfolio also
has greater visibility than other guarantors, affording a more detailed underwriting of their claims
paying ability. The modeling of these bonds requires analysis of the underlying risk (residential
loans), the structures the loans were securitized into, as well as the insurers ability to pay
(AMBAC declared chapter 11 in November of 2010 and is currently in rehabilitation).
Looking forward, we continue to follow the numerous litigation plays in the RMBS sector. In
these various pending cases the securitization trusts would be the beneficiary of any monetary
damages assessed due to breaches of representations made by the originators at the inception of
the deals.
3. European Performing Credits
European performing credits accounted for 11.5% of average assets over the quarter and returned
negative (0.34%) on a gross basis. We attribute the relatively stable performance in the face of
Europes credit crisis to the concentration of our holdings in global, asset-rich companies based
in central and northern Europe.
Over the quarter we began to sell down the Bank of Ireland unsecured note position which we
have written about in past letters. The Notes now trade at 92 as our thesis regarding the
resiliency of Irelands economy and the value of the government guarantee has proven correct.
Global concessions operator SSP continued to be a strong performer, and we began to sell down
our holdings in SSPs bank debt as it reached target prices in the 90s.
Global shipping has become an increased focus as the sector continues to suffer under the weight
of several years of overbuilding and overcapacity. We believe in certain cases asset values are
now at a level relative to capacity projections where we can begin to invest with a margin of
safety and enjoy an incipient upturn in pricing. We began to purchase the bonds of CMA CGM
SA, a France-based container shipping company, over the quarter, and expect shipping to be at
the center of our work in coming quarters.
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4. Bankruptcies and Reorganizations

Securities in bankrupt and reorganizing entities enjoyed gross returns of 1.06% over the past
quarter. Bankruptcy-linked securities and trade claims averaged 26.74% of CCIs assets.
Claims and securities against Lehman Brothers affiliates remained our single best group of
investments over the quarter. We received our first distribution of some $18.5 million in cash
from the U.S. debtors which represents approximately 20% of what we think is yet to come as
Lehman winds down over several years. Lehmans British affiliate distributed to us another $3.5
million in securities that we are owed on account of claims that we purchased, and we continue
the work of negotiating claims recognition on a line-by-line basis. Week-by-week the complex
claims which we purchased at significant discounts to on-the-run securities are being
recognized at close to full value by the Lehman affiliates against which we hold those claims.
Tribune remained a good portfolio performer with comparable sales of related media properties
confirming our expectations regarding underlying asset values. We continued to find new
bankruptcy situations in which to invest, such as textbook and educational media company
Education Media, in which we initiated a position as the company entered a pre-packaged
bankruptcy. We did extensive research on the usage and value of Education Medias content, the
cycle of state and municipal-based textbook acquisition and replacement, and the opportunities
and challenges posed by the transition to digital textbooks and materials. Education Media in
our view has a controlling market position and a wealth of valuable content in the textbook space
that should allow the delevered company to perform strongly in coming years.
5. Post Reorganization and Distressed Equities
It is particularly gratifying that our holdings of post-reorganized equities and distressed equity
securities offered positive gross returns of 0.74%. Our returns convince us that the right
selection of post-reorganized equities can outperform and reduce correlation to the markets in
general. Equities represented 16.21% of average assets over the quarter.
Capmark remained a strong performer as the company contained to progress in liquidating its
portfolio of real estate assets. Safety Kleen, the industrial fluids company in which we are a
major shareholder, also contributed strongly to our book.
6. Distressed Emerging Market Debt
Our emerging market debt holdings averaged 8.91% of our portfolio in Q2, and returned
negative (7.32%) on a gross basis.
We remain confident in our emerging market holdings and continued to take advantage of
market turbulence to accumulate certain positions that we like, such as Argentinean untendered
bonds in anticipation of a new tender offer. We remain cautious on peripheral European
corporate credits but continue to devote extensive resources to those opportunities so that we can
seize them when the time is ripe.

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Meanwhile we are initiating new positions outside of sovereign Europe. We have begun to
purchase the debt of Drydocks, a Dubai-based ship-repair and shipbuilding yard. Drydocks is
being restructured with former creditors receiving takeback debt securities as well as a security
that will convert over time into the equity of the reorganized company if it is not repurchased.
After extensive research on the enterprise we believe its debt values the company at a fraction of
asset value and a low multiple of achievable cash flow once the business is right-sized and
managed appropriately.
Looking ahead
Going into Q3 we are cautiously optimistic that the next few quarters will be a period of slow
growth, with no systemic crisis posed by Europe, no collapse in U.S. GDP, and the successful
engineering of a soft-landing in China. As such we have begun to reduce our short positions
while slowly initiating new holdings. We continue to believe that the high number of mid-cap
corporate names facing refinancing needs over the next several years will afford us many
opportunities for profitable distressed investing.
Please feel free to contact Jon Bauer, Janice Stanton, Jonathan Neiss, Ethan Schwartz, Josh
Trump, Karim El-Khoury, Sven Hagemann, Xiao Song, Keith McCormack, Graham Morris, Bill
Raine, or Mark Crawley for additional information.
Sincerely,
Jon R. Bauer
CEO and Chief Investment Officer

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THIS DOCUMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN ANY OF THE FUNDS
MANAGED BY CONTRARIAN CAPITAL MANAGEMENT, L.L.C., (CONTRARIAN) INCLUDING BUT NOT LIMITED TO, CONTRARIAN CAPITAL
FUND I, L.P., CONTRARIAN CAPITAL SENIOR SECURED, L.P., CONTRARIAN DISTRESSED REAL ESTATE DEBT FUND II, L.P., CONTRARIAN
EMERGING MARKETS, L.P., OR CONTRARIAN CAPITAL TRADE CLAIMS, L.P. ANY SUCH OFFER OR SOLICITATION WILL BE MADE ONLY BY
MEANS OF THE CONFIDENTIAL PRIVATE OFFERING MEMORANDUM, WHICH SHOULD BE READ CAREFULLY PRIOR TO MAKING AN
INVESTMENT. AN INVESTMENT IN ANY OF THE CONTRARIAN FUNDS IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
OPPORTUNITIES FOR WITHDRAWAL AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE ACCESS TO
CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS EXPECTED TO DEVELOP. THE PORTFOLIO,
WHICH IS UNDER THE SOLE TRADING AUTHORITY OF CONTRARIAN, IS A DISTRESSED STRATEGY AND THIS LACK OF DIVERSIFICATION MAY
RESULT IN HIGHER RISK. A SUBSTANTIAL PORTION OF THE TRADES EXECUTED MAY TAKE PLACE ON NON-U.S. EXCHANGES. LEVERAGE MAY
BE EMPLOYED IN THE PORTFOLIO, WHICH CAN MAKE INVESTMENT PERFORMANCE VOLATILE. AN INVESTOR SHOULD NOT MAKE AN
INVESTMENT, UNLESS IT IS PREPARED TO LOSE ALL OR A SUBSTANTIAL PORTION OF ITS INVESTMENT. THE FEES AND EXPENSES CHARGED IN
CONNECTION WITH THIS INVESTMENT MAY BE HIGHER THAN THE FEES AND EXPENSES OF OTHER INVESTMENT ALTERNATIVES AND MAY
OFFSET PROFITS.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. PLEASE REFER TO THE APPLICABLE CONFIDENTIAL PRIVATE OFFERING
MEMORANDUM (AVAILABLE UPON REQUEST) FOR IMPORTANT RISK INFORMATION.
ANY PROJECTIONS, MARKET OUTLOOKS OR ESTIMATES IN THIS LETTER ARE FORWARD LOOKING STATEMENTS AND ARE BASED UPON
CERTAIN ASSUMPTIONS. OTHER EVENTS WHICH WERE NOT TAKEN INTO ACCOUNT MAY OCCUR AND MAY SIGNIFICANTLY AFFECT THE
RETURNS OR PERFORMANCE OF ANY CONTRARIAN FUND. ANY PROJECTIONS, OUTLOOKS OR ASSUMPTIONS SHOULD NOT BE CONSTRUED
TO BE INDICATIVE OF THE ACTUAL EVENTS WHICH WILL OCCUR. THE EXAMPLES OF SPECIFIC DISCRETE INVESTMENTS ARE INCLUDED
MERELY TO ILLUSTRATE THE INVESTMENT PROCESS AND STRATEGIES WHICH HAVE BEEN UTILIZED BY CONTRARIAN. THIS MATERIAL IS NOT
AN ADVERTISEMENT. IT IS NOT INTENDED FOR PUBLIC USE OR DISTRIBUTION.
THE INFORMATION PRESENTED ABOVE SHOULD NOT BE CONSIDERED A RECOMMENDATION TO PURCHASE OR SELL ANY PARTICULAR
SECURITY. THERE CAN BE NO ASSURANCE THAT ANY SECURITIES DISCUSSED HEREIN WILL REMAIN IN A FUNDS PORTFOLIO OR IF SOLD WILL
NOT BE REPURCHASED. THE SECURITIES DISCUSSED IN THIS LETTER DO NOT REPRESENT A FUNDS ENTIRE PORTFOLIO AND IN THE
AGGREGATE MAY REPRESENT ONLY A SMALL PERCENTAGE OF A FUNDS PORTFOLIO HOLDINGS. IT SHOULD NOT BE ASSUMED THAT ANY OF
THE HOLDINGS IDENTIFIED IN THIS LETTER HAVE BEEN OR WILL BE PROFITABLE, OR THAT RECOMMENDATIONS MADE IN THE FUTURE WILL
BE PROFITABLE OR WILL EQUAL THE INVESTMENT PERFORMANCE OF THE SECURITIES DISCUSSED HEREIN.

The Composite Performance of the flagship strategy consists of all funds under management that were ultimately consolidated into CCI on
April 30, 2001. Fiscal year 1986/1987. Periods measured are Quarter ended 10/30/86, Quarter ended 01/31/87 and 6 Months ended 01/31/87.
Fiscal year 1987. Periods measured are Quarter ended 04/30/87, Quarter ended 07/31/87, 2 Months ended 09/30/87, Quarter ended 12/31/87
and 11 Months ended 12/31/87.The performance information set forth in this table reflects the net annual compounded rate of return after
the deduction of all management fees, including any incentive allocation made to the general partner, and other expenses and includes the
reinvestment of distributions and other earnings. The period from 7/30/86 through 8/31/90 is the un-weighted average of Jon Bauers
management of an Oppenheimer proprietary investment account from 7/23/86 through 9/30/87, his portion of Horizon Partners that he
managed individually from inception (9/23/87) through 12/31/89 and the average return from the portion that he managed individually of
Horizon Partners and his portion of Institutional Horizon from inception (1/1/90) through 8/31/90. The period from 8/31/90 to 3/31/96 is the
weighted average of Horizon Partners and Institutional Horizon Partners during the period. The period from 4/01/96 to 4/30/01 is the weighted
average of both Horizon funds and CCI, that began on 4/10/96. Jon Bauer and other portfolio managers co-managed the funds during the
period from 8/31/90 through 12/31/00.
ii

Past performance is not indicative of future results. You should not assume that the performance of any specific investment or investment
strategy will be profitable or equal to corresponding past performance levels. Any investment or investment strategy can be impacted by
numerous factors, including market and economic conditions, and may result in a loss to investors. Please refer to the Confidential Private
Offering Memorandum (available upon request) for important risk information.
iii

Source: Standard & Poors. The S&P 500 is a market cap-weighted index which includes 500 of the leading companies in leading industries of
the U.S., representing approximately 75% of the U.S. equities market. Index constituents have a market capitalization of at least $3 billion with
a public float of at least 50%. The S&P 500 dates back to 1923, and is maintained by the S&P Index Committee, whose members include
Standard & Poor's economists and index analysts. It follows a set of published guidelines and policies that provide the transparent
methodologies used to maintain the index. The S&P 500 Index rate of return reflects the percentage increase (or decrease) for each period for
the Standard & Poors Composite Stock Price Index. The index has been adjusted to reflect reinvestment of dividends. The performance of CCI
and the performance of the index may not be comparable.
iv

Source: Credit Suisse. The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the $US-denominated leveraged
loan market. The index inception is January 1992. The index frequency is daily, weekly and monthly. The performance of CCI and the
performance of the Index may not be comparable.

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