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EMPYREAN CAPITAL PARTNERS, LP 2012 Fourth Quarter Investor Letter

February 25, 2013

Net Fund Performance1 Empyrean Capital Overseas Fund, Ltd. Empyrean Capital Overseas ERISA, Ltd. Empyrean Capital Fund, LP

4Q12 1.1% 1.0% 1.4%

YTD 10.3% 10.2% 11.9%

Gross Performance Attribution2, 6 Special Situations Equity Special Situations Credit Merger Arbitrage Convertible Strategies Portfolio Level Hedges Total

4Q12 0.6 1.3 1.5 0.1 -1.4 2.1

YTD 6.9 6.0 2.6 1.3 -2.8 14.0

Long-Term Net Performance Results Empyrean Capital Overseas Fund, Ltd.

Since Inception Cumulative Annualized 77.0% 7.0%

Dear Investor: Empyrean Capital Overseas Fund, Ltd. (the Fund) posted net returns of 1.1% in the fourth quarter of 2012, bringing this year's performance to 10.3%. Given our market-neutral target, we are pleased to have generated solid results while exhibiting negligible beta and a slightly negative correlation to the S&P 500. The first few weeks of 2013 have already been characterized by a noticeable uptick in the volume of event-situations, and a corresponding increase in our level of capital deployment. Looking forward, we expect these high activity levels to persist and to drive our ability to generate differentiated returns. We devote the remainder of this letter to a discussion of our 2013 outlook, as well as a review of the fourth quarter and calendar year 2012 performance.


Current Outlook As mentioned above, 2013 has brought a surge in event-activity and a number of opportunities to initiate new investments. For several years now, we have written about the promising backdrop for a new event cycle underpinned by high corporate cash balances, plentiful and cheap financing and moderate equity valuations. Yet, at each turn, nascent signs of corporate activity have been stymied by a steady barrage of macro and policy concerns that kept likely participants on the sidelines. At the risk of again sounding premature, several factors have recently coincided which we believe will yield a substantially more interesting environment for our core event strategy. First, the recent uptick in activity levels is undeniable. We have seen $185 billion of M&A volume thus far in 2013 compared with only $58 billion at this same time last year.1 Notable transactions include the buyouts of Dell, Virgin Media, Heinz and OfficeMax, and the potential auctions of Life Technologies, Endo Pharmaceuticals and Clearwire. On the activist front, a number of new situations have emerged, including Herbalife, Hess and Sandridge. We also continue to see compelling idea flow from legal, regulatory and legislative/policy channels. In recent weeks, examples include the Department of Justice's lawsuit to block the InBev-Modelo transaction, legal actions against McGraw-Hill stemming from the rating agency crisis and Congressional budget/sequestration talks with particular implications for the defense and healthcare sectors. The root source of the increase in event volume is debatable. It may be improved CEO confidence, the perceived reduction in tail-risk from global central bank support, the deferral of the fiscal cliff and debt ceiling or pent-up pressure from shareholders amid high levels of stranded assets. No matter the source, activity is beginning to percolate and we believe this will prove to be more than a short-term phenomenon. Second, we believe it is particularly interesting that the surge in activity is happening at precisely the time when investors are growing increasingly confident and complacent about the market's direction. Over the past several years, there have been opportunities to source individual investments, but against a backdrop of volatile markets and relatively high hedging costs. There have also been intermittent periods of calm, but with relatively low activity levels. What we have not seen since before the financial crisis is an environment in which a broad set of prospective investment opportunities combines with the ability to offset increased risk with low hedging costs. In what seems to us an uncertain world (e.g., risks of sequestration and debt ceiling limits in the U.S., Middle East unrest, upcoming elections in Israel, Italy and Germany and Irans nuclear deadline), we do not subscribe to the market's prospective view of volatility. Still, as long as low levels of implied volatility persist, we believe the right playbook is to increase exposure to new event opportunities and increase concentration in our favorite ideas, while utilizing low hedging costs to protect the portfolio against downside risks. Accordingly, from year-end through February 21st, the Fund's LMV has moved from 153% to 197%, with equity exposure up nearly 40% during that time. Half of the top ten positions in the portfolio today were either initiated or fully sized in 2013 and the degree of concentration in our top 10 positions has moved from 41% to 55% of NAV over this same period.

Source: Gluskin Sheff Research, February 19, 2013


Our outlook on 2013 would not be complete without a word on our credit positioning (discussed at length in our 3Q12 letter). Over the past year, both absolute yields and credit spreads continued to grind to very low absolute levels, and we continue to feel opportunities in traditional performing names are quite scarce. That said, we have been able to source select credit investments with attractive risk-adjusted returns (typically distressed/takeout/refinancing plays and liquidation/windup situations) and are comfortable managing these discrete exposures on a hedged basis. We expect a number of our largest credit positions to run off over the next six to nine months and overall credit exposures to trend down in 2013. We continue to source opportunities across the capital structure, but are finding more compelling expected returns in the equity arena given less-extended valuations and the volume of corporate events.

Fourth Quarter Review The Fund's fourth quarter performance was driven by consistent position-level returns, offset somewhat by relatively high portfolio-level hedging costs. Although each of our strategy categories contributed positively, returns were paced by Merger Arbitrage (primarily open-ended situations) and Special Situations Credit. Top contributors within Merger Arbitrage included Yahoo! (+125bps, announced a large capital return to shareholders), CVR Energy (+31bps, announced a restructuring and an MLP conversion) and Dollar Thrifty (+31bps, obtained regulatory approval for its merger with Hertz). Within credit, Catalina Marketing was the top performing position (+46bps, reported improved operating results and balance-sheet positioning) followed by Spirit Finance (+44bps, successful debt-for-equity swap). Within Special Situations Equity, our top contributor was an alpha short in a recently consolidated IT consulting company that reported deal-related write-downs (+34bps). The Fund had two negative outliers during the quarter as well: Reader's Digest (-55bps, distressed position that sold off on disappointing operating results and the delayed sale of its European business unit) and Bally Technology (-52bps, poor market response to management turnover). Notwithstanding these results, we remain invested in both companies.


2012 Year in Review Much like the fourth quarter, 2012 was driven by the idiosyncratic performance of individual investments. The Fund generated positive P&L in each strategy category, with Special Situations Equity and Credit leading the way. Our hit-rate4 was 63% for investments contributing +/-25bps or more to returns, on par with results for the Fund since inception. Moreover, for those individual investments contributing +/-50bps or more to returns, our hit-rate improved to 89% (excluding portfolio-level hedges). In aggregate, we got our most important individual bets right in 2012 while limiting outsized losses. The following table details the most meaningful drivers of 2012 Fund performance.
2012 Attribution: Positions Contributing +/- 50bps YTD (excludes Portfolio Level Hedge)
Sorted by Absolute Value YTD

Strategy (TICKER)
Reader's Digest Catalina Marketing

Special Situation Credit Special Situation Credit

Attrib % 2
-1.29 1.28

Brief Notes
Underperformed due to operating weakness and delayed sales process of European business unit a) Posted strong operating results; b) refinancing of debt structure expected in 2013 Completed IPO in September 2012. As part of debt-for-equity swap, term loan position was converted to equity at a premium. Subsequently, Spirit equity gained 18%, as investors rotated into Spirit relative to richer REIT comps Correctly anticipated that in combination with an acquisition of Grupo Modelo, Anheuser-Busch InBEV would divest Modelo's 50% stake in Crown Imports to Constellation on very attractive terms. Exited in 3Q12. Re-entered in 1Q13. Strong performance following completion of dual tracking stock split in August 2012. Completed Archstone sale, continued resolution of intra-creditor issues. Stock rallied substantially following successful outcome of spectrum legislative debate and S&P 500 index inclusion. Exited in 1Q12 Capitalized on price weakness following market reaction to mine closure and the resetting of operating expectations at the end of 2011. Exited 3Q12 Exposure to franchise restaurant and sub prime ABS; continued tightening in ABS market a) Completed break-up of company in September 2012; b) Sold Flow Control Business (one of three spun pieces) to Pentair; c) ADT shares appreciated following activist moves. Empyrean exited ADT in 4Q12, but maintain TYC position Stock benefitted from transactional activity in the genetic sequencing market and new product introductions. Reduced position substantially in 4Q12 Merger approval led to spread compression. Exited in March-April 2012 Rumored sale process/LBO interest. Exited in 2Q12 Rallied substantially following the restructuring of Alibaba Holdings and announcement of substantial stock buyback Additional uncertainty around timing of liability settlement led us to exit RIG in 3Q12 Finalized acquisition of Actavis Pharmaceuticals. Exited in 2Q12 Sourced favorable term loan allocation at issuance, which traded well in secondary market. Exited in 1Q13. Exited in 3Q12 following favorable pay down in combination with price appreciation

Spirit Finance (SRC)

Special Situation Credit


Constellation Brands (STZ) Special Situation Equity


Liberty Interactive (LINTA) Special Situation Credit Lehman Brothers Structured Special Situation Credit Finance Claims ("LBSF") Crown Castle (CCI) Special Situation Equity



0.89 0.83 0.80

Agnico Eagle Mines (AEM) Special Situation Equity Structured Credit Special Situation Credit

Tyco (TYC)

Special Situation Equity


Life Technologies (LIFE) Express Scripts / Medco Charles River (CRL) Yahoo! (YHOO) Transocean (RIG) Watson Pharmaceuticals (WPI) Asurion Madoff Claims

Special Situation Equity Merger Arbitrage Special Situation Equity Merger Arbitrage Special Situation Equity Special Situation Equity Special Situation Credit Special Situation Credit

0.75 0.74 0.67 0.65 -0.64 0.60 0.57 0.53


The positive profitability skew in 2012 was a function of strong security selection, rather than directional equity or credit market gains in a rising market. The following graph depicts our beta profile over the past four years (based on daily Fund returns relative to the S&P 500) and reflects the impact of our rigorous hedging program.
0.50 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30
2 1 0 9 2 0 1 9 2 1 0 9 3 1 2 9 0 -1 ul-1 ct-1 -1 ul-1 ct-1 -1 ul-1 ct-1 -0 ul-0 ct-0 -1 -1 -1 -1 -0 an Apr an an Apr an Apr an Apr J J J J J J J J J O O O O
\ -0.08

(Daily Gross Series)

The Funds positioning evolved in three distinct phases over the course of 2012. In the beginning of the year, our stance reflected a challenging back-half of 2011, during which many of our largest equity investments underperformed and lagged positive developments in their event lifecycles. In evaluating the portfolio at the end of 2011 (a process summarized in our 4Q11 letter), we felt our core equity book embedded high base-case returns and we chose to maintain full positions in names such as Charles River Labs, Liberty Interactive, Life Technologies, TFS Financial, Liberty Capital, Crown Castle, Tyco and Banco Popular. We also built several new investments in name such as Agnico Eagle, Yahoo! and Medco. We spent the first four months of the year running nearly fully invested, with LMV in the 170-180% range, and roughly half of the portfolio in equities. As a group, these specific investments represented the bulk of our equity exposure during that period and drove strong first quarter results. In early May, however, we materially reduced risk in the portfolio given rapid market appreciation and our sense of investor complacency in the face of substantial macro issues (the following table details Fund exposure by quarter). The reduction was disproportionately concentrated in equity investments (especially those we felt had a greater degree of hedge fund ownership) and investments more exposed to a cyclical or European slowdown. This re-shaping of our book, which in aggregate reduced risk by 25%, proved well-timed as the market pulled back nearly 10% peak-to-trough in May to early June. Our exposure profile, combined with the positive impact of our portfolio-level hedges, allowed the Fund to remain profitable throughout this period.


Gross Long Market Value (LMV %) 5, 6

Strategy Special Situation Equity Special Situation Credit Convertible Strategies Merger Arbitrage Capital Structure Arbitrage Portfolio Hedge LMV % 3/31/2012 6/30/2012 9/30/2012 56% 41% 35% 60% 55% 64% 17% 17% 21% 32% 12% 16% 2% 2% 1% 6% 3% 14% 174% 129% 152% 12/31/2012 39% 68% 25% 11% 1% 9% 153%

Heading into the latter part of the year (especially post-U.S. election), we maintained an elevated level of concern that the market was not appropriately discounting risks to the U.S. economy from various election scenarios and the fiscal cliff. This view influenced the Fund's overall level of exposure and the level of equity risk we were willing to assume, despite an increasingly interesting idea pipeline. Over this period, we ran with ample dry powder (e.g., LMV was in the 150% range) and a slightly net short beta-adjusted position (reflecting our full portfolio hedges). In retrospect, our positioning proved too conservative in the last few months of the year. While our individual investments performed well into year-end, portfolio-level hedges weighed on results given our cautious stance (costing the Fund -140bps in the fourth quarter and -280bps for the year). Equity market index puts and sovereign CDS credit shorts accounted for the majority of hedging losses. While this cost is on the high end of what the Fund has realized in recent years, it is not out of the range of our articulated budget or what we might expect in a period during which markets appreciated steadily, realized volatility ground to cycle lows and opportunities to monetize option premium were few. Ultimately, hedging costs need to be considered in conjunction with the return potential of the portfolio they are designed to protect, and we are generally pleased with the package of returns and volatility produced in 2012. Moreover, a consistent approach to market-neutrality has served us well over the longer cycle, and it is an essential element of our portfolio construction.

Business Update The fourth quarter was a busy one for the Firm. As you know, we published new offering memoranda for the Funds, making a number of important updates to our terms. We eliminated the 4% early redemption fee for redemptions in the first twelve months following subscription. We also now offer additional classes of shares with lower management fees to investors who meet certain investment amount thresholds. We believe these changes will be positive long-term both for our business and our investors. As always, thank you for your ongoing support. We look forward to our continued dialogue and welcome any questions. Empyrean Capital Partners, LP


DISCLOSURES All information presented herein ("Information") is confidential and as of the date indicated, has not been audited, is intended solely for your informational purposes, and may not be relied upon in evaluating the merits of investing in the Funds. The Information, including, but not limited to, investment experience/views, benchmarks, market opportunity, strategy assets, exposures, portfolio construction, capitalizations, positions, Fund characteristics, guidelines, returns or performance, may involve our views, estimates, assumptions, facts and information from other sources that are believed to be accurate and reliable as of the date noted - any of which may change without notice. We have no obligation (express or implied) to update any or all of the Information or to advise you of any changes; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. This is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading or investment strategy. No such offer or solicitation will be made prior to the delivery of a definitive offering memorandum and other materials ("Offering Documents") that contain material information not set forth herein and supersede this Information in its entirety. In the event of conflict between this Information and the Offering Documents, the Offering Documents prevail. Assets are managed by Empyrean Capital Partners, LP ("ECP"). Note that the performance returns shown herein may vary from the performance returns on your investment(s). These contents are proprietary information and products of ECP and may not be reproduced or otherwise disseminated in whole or in part without the prior written consent of ECP. This letter is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulations. Please refer to the Offering Documents for more information on fees including early withdrawal charges and other important information. The investments discussed herein, including ECP's Funds, may be speculative and involve a high degree of risk; could involve possible loss of your entire principal; and not suitable for all investors. Past performance and historical trends of the Funds do not imply, forecast or predict future results. The securities discussed herein were chosen based on their applicability to the particular theme being discussed, and may not represent all securities which may or may not benefit from a particular theme. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities transactions or holdings discussed was or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. There is no assurance that any securities discussed herein will remain in an accounts portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. This document contains forward-looking statements, including observations about markets and industry and regulatory trends as of the date hereof. Forward-looking statements may be identified by, among other things, the use of words such as "expects," "anticipates," "believes," or "estimates," or the negatives of these terms, and similar expressions. Forward-looking statements reflect the views of the investment team as of such date with respect to possible future events. Actual results could differ materially from those in the forward-looking statements as a result of factors beyond the control of ECP, the Fund, the investment team or their respective affiliates. Investors are cautioned not to place undue reliance on such statements. No party has an obligation to update any of the forward-looking statements in this Investor Letter. Investing in financial markets involves a substantial degree of risk. There can be no assurance that the investment objectives described herein will be achieved. Investment losses may occur, and investors could lose some or all of their investment. No guarantee or representation is made that the Funds' investment program, including without limitation, its investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Additional information about individual holdings is available upon request. Investment losses may occur from time to time. Nothing herein is intended to imply that the Funds investment methodology may be considered conservative, safe, risk free or risk averse". Economic market and other conditions could also cause the Funds to alter their investment objectives, guidelines, and restrictions. _____________________________________________________________ 1 Empyrean Capital Overseas Fund, Ltd.'s ("ECOF") inception date was July 1, 2004. Empyrean Capital Overseas ERISA Fund, Ltd.'s ("ECOEF") inception date was February 1, 2011. Empyrean Capital Fund, LP's ("ECF") inception date was July 1, 2004. ECOF, ECOEF and ECF are collectively referred to herein as the Funds. Net Fund Performance information was calculated assuming that a hypothetical investor made an investment into such tranche at the beginning of the indicated period and held such investment during that period, without any additional subscriptions or redemptions. This performance calculation assumes that each hypothetical investor's account participated fully, on an applicable pro rata basis, in all investments (excluding Special Investments (as defined in the Offering Documents)), was eligible to participate in new issues, include the reinvestment of all dividends, interest and profits if invested during the periods shown, and was assessed all applicable management fees, incentive allocations and expenses, for such class in full. Estimate net performance returns which include Special Investments may vary substantially from the performance shown above. The rate of return for an investor admitted after inception or which has subscribed or redeemed interests since such date or which has different terms could differ from the returns reflected herein. A hypothetical investor in Class A was used for ECOF and ECOEF. 2 Gross Performance Attribution information was calculated assuming that a hypothetical investor of Class A Shares in ECOF made an initial investment at the beginning of the indicated period and held such investment during that period, without any additional subscriptions or redemptions. This performance calculation assumes that each hypothetical investor's account participated fully, on an applicable pro rata basis, in all investments (excluding Special Investments), was eligible to participate in new issues, and include the reinvestment of all dividends, interest and profits if invested during the periods shown. However, gross performance return information does not reflect the deduction of any fees or expenses including, but not limited to, investment advisory fees (i.e., management and incentive fees), brokerage and trading fees, custodial expenses, and any other fees or expenses. Returns will be reduced by the investment advisory fees and any other expenses incurred by the Fund. Investment advisory fees generally are described in the Offering Documents and ECP's ADV Part IIA. Gross performance returns which include Special Investments may vary substantially from the performance shown above. The rate of return for an investor admitted after inception or which has subscribed or redeemed interests since such date or which has different terms could differ from the returns reflected herein. While ECOF, ECOEF and ECF generally invest on a pari passu basis, performance returns may vary for reasons including, but not limited to, differences in expense ratios, portfolio composition, regulatory and tax considerations. Representative Example for Presentation of Gross Performance: The Funds' returns, IRRs, cash flows and yields will be reduced by investment advisory fees (i.e., management and incentive fees), and all other of the Funds' fees and expenses. For example, if $1 million were invested into one of the Funds and experienced a 3% annual return for ten years, its ending dollar value, without giving effect to the deduction of investment advisory fees and all other fees and expenses, would be $1.34 million. If a management fee of 2% of average net assets per year were deducted annually for the ten-year period, the annualized compounded return would be 0.97% and the ending dollar value would be $1.1 million. 3 The S&P Composite Index of 500 stocks (S&P 500) is a group of unmanaged securities widely regarded by investors to be representative of large-cap U.S. stock market performance. The index is unmanaged, and the figures for the index include reinvestment of dividends and capital gains distributions and do not reflect any fees or expenses. 4 Hit Rate is defined as the percentage of investments which were profitable relative to total investments at the threshold of 25 and 50 basis points of performance attribution across the Funds. Hit Rates are calculated for each fiscal year and include realized and unrealized performance. Attribution data in this section is inclusive of all Funds. 5 Investment Strategy is determined by Empyrean Capital Partners, LP based on the nature of underlying positions. Empyrean typically defines Investment Strategy Categories as follows: Merger Arbitrage reflects deal-oriented, binary situations; Special Situation Equity and Special Situation Credit tend to reflect multi-stage, longer-term situations; Capital Structure Arbitrage reflect rate-of-return spread or intra-capital structure investments. Convertible Strategies reflect convertible bonds and all associated hedges, including equity and equity options hedges. The Portfolio Level Hedge represents a series of predominately long-volatility hedges carried at the portfolio level. 6 Exposure data is estimated and unaudited as of the date hereof. All data is shown for the strategy level and reflects the combined holdings of ECF, ECOF and ECOF ERISA. All exposures are shown on a delta-adjusted basis. Options are delta-adjusted and other derivatives (e.g., forwards and swaps) are shown on a notional basis. Constant maturity swaps are reflected on a premium at-risk basis. Delta adjusted option exposure is netted against the underlying security, as applicable. 7 Daily gross series represents the daily returns for all securities for the strategy level and reflects the combined holdings of ECF, ECOF and ECOF ERISA. Returns are inclusive of interest and dividend income, but exclude fund expenses. Daily gross returns are estimated and unaudited and should be used for directional purposes only.