Euromoney High Yield Bond Conference

How are the Eurozone climate and global economic uncertainties affecting the high yield bond market?

March 7th 2013

The end of the beginning?

Clear reduction of stresses in financial markets (due to cumulative effects of the policy response and institutional development) Some adjustment and structural reform in periphery (rather significant, in some cases) A significant amount achieved, but a lot still necessary Implementation risks still very significant (political/social tensions, EU leaders dithering)

Fundamentally, underlying constraints (low growth, etc.) are all still there
Our central point estimates for growth in 2013 and 2014 are respectively 0% and 1%

Gross Domestic Product (y.o.y %)

United States ($13.5 tln) France ($2.2 tln) 6% 4% 2% 0% -2% -4% -6% -8% Germany ($3.1 tln) Italy ($1.7 tln) United Kingdom ($2.4 tln) Spain ($1.2 tln)
Forecasts

Downside risks diminished fiscal cliff, China hard landing, euro area financing stresses However, European economies continue to lag the US Risks have not disappeared US sequestration, European politics.
Source: Moodys

85

90

110

100

105

Crisis could have some way to run

Source: HAVER

Pre-Crisis Quarter, T-19

Pre-Crisis Quarter, T-18

Pre-Crisis Quarter, T-17 Pre-Crisis Quarter, T-16

Pre-Crisis Quarter, T-15

Pre-Crisis Quarter, T-14 Pre-Crisis Quarter, T-13

Sweden
Pre-Crisis Quarter, T-12 Pre-Crisis Quarter, T-11
Pre-Crisis Quarter, T-10 Pre-Crisis Quarter, T-9

Pre-Crisis Quarter, T-8

Pre-Crisis Quarter, T-7 Pre-Crisis Quarter, T-6

75

80

95

In-Crisis GDP dynamics in the periphery and in the Nordic countries

Finland
Pre-Crisis Quarter, T-5 Pre-Crisis Quarter, T-4
Pre-Crisis Quarter, T-3 Pre-Crisis Quarter, T-2

Crisis began

Pre-Crisis Quarter, T-1

Pre-Crisis Quarter, T Crisis Quarter, T

Portugal
Crisis Quarter, T+1 Crisis Quarter, T+2
Crisis Quarter, T+3 Crisis Quarter, T+4

Crisis Quarter, T+5

Crisis Quarter, T+6 Crisis Quarter, T+7

Ireland
Crisis Quarter, T+8
Crisis Quarter, T+9 Crisis Quarter, T+10 Crisis Quarter, T+11

Sweden regains pre-crisis GDP level (in 17 quarters)

Greece Spain Italy

Crisis Quarter, T+12

Crisis Quarter, T+13 Crisis Quarter, T+14

Crisis Quarter, T+15

Crisis Quarter, T+16 Crisis Quarter, T+17 Crisis Quarter, T+18

Crisis Quarter, T+19

Crisis Quarter, T+20 Crisis Quarter, T+21

Crisis Quarter, T+22

Crisis Quarter, T+23 Crisis Quarter, T+24

Finland regains pre-crisis GDP level (in 27 quarters)

Crisis Quarter, T+25 Crisis Quarter, T+26

Crisis Quarter, T+27

Lets not lose sight of Greece

Despite largest sovereign exchange in history (c.206bn of debt in March plus 32bn December buyback), Greek Debt/GDP continues to rise Debt/GDP will remain above 170% until at least 2016. Further default, and exit, remains a threat. Exit would be an existential moment for the euro. Single currency would be seen to be divisible.
Private sector 400 IMF Euro area

300

Greek General Government Debt by Creditor ( bn)

200

100

0
Source: IMF and Moodys

2009

2010

2011

2012

2013

2014

2015

2016

Sovereign funding strains have eased

Per cent
18 16

Germany

Spain

Italy

Ireland

Portugal

14 12 10
8 6

4 2
0 Jan-07 Jul-07

Jan-08 Jul-08

Jan-09 Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Source: Reuters.

Average Moodys rating and bond implied MIR for European high-yield corporate issuers
Ba2 September 2007: Run on Northern Rock February 2009: US $790 billion Recovery Plan January 2013: Fresenius (Ba1, stable) issues 500 million notes at 2.875%, reportedly the lowest yield ever for a European high-yield company

Ba3

March 2008: Bear Sterns Rescue

B1

July 2011: Greece downgraded to Ca B2 September 2012: ECB announces OMTs programme

Moody's CFR MIR B3

September 2008: Lehman Bankruptcy

2007

2008

2009

2010

2011

2012

2013

Source: Moodys

Economic outlook remains challenging

Weak economic growth High unemployment rates Continued private sector deleveraging Constrained credit growth

Fiscal drag
Weak consumer and business confidence Credit spreads have improved over Q4 2012 but real economic indicators show continued deterioration

Rating downgrade trend continues

Speculative-Grade Downgrade and Upgrade Trends
Downgrade 35 30 25 20 15 10 5 0 Upgrade Down-/Upgrades Ratio (rhs) 11x 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x

Steady downgrade trend from mid-2011 reflecting operational weaknesses across Europe

Source: Moodys

Credit weakening, but default rates still low

Liquidity Stress-Index (rhs) 1,200bp 1,000bp 800bp 600bp 400bp 200bp 0bp CDS Spread (lhs) Default Rate (rhs) % B3 Neg or Lower (rhs) 24% 20% 16% 12% 8% 4% 0%

Forecasts

Strong focus on liquidity management, helped by receptive high-yield markets and ultra-low interest rates, keeping default rate low
Source: Moodys

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Strong ongoing high-yield issuance

Bond Issuance by Instrument Rating
Ba B Caa-C % of EUR issuance * % of Ba issuance

30 US$ Billion 25 20 15 10 5 0

100%

67%

33%

0%

*Quarterly trailing % of EUR issuance (rhs)

Greater issuance at lowest end of ratings spectrum since ECB policy statements
Source: Moodys

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Increased issuance by the Euro area periphery

Greece 8 7 6 5 US$ Billion 4 1.27 3 2 3.03 1 0 0.60 Q1 11 0.44 0.29 0.61 Q2 11 Q3 11 1.58 4.49 2.33 20% 1.29 15% Ireland Italy Spain Portugal % of total issuance 30%

25%

1.69
0.31 0.73

0.97 2.80

10%

1.44
0.00 Q4 11 0.42 Q1 12 0.88 0.09 Q2 12 Q3 12

1.80 0.25 Q4 12

5%

0% Jan 13

Corporates in periphery have also taken advantage of renewed appetite for risk
Source: Moodys

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Looking forward in 2013

Prospects for additional CLO issuance following Cairn? Renewed M&A activity? Rate risk? Refinancing wall and default rates? Ongoing euro area political events

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